Chapter 16 – Managerial Ethics

Moral Justification of Corporate Outcomes

Ozzie Mascarenhas, S.J., Ph.D.
JRD Tata Chair Professor of Business Ethics
September 1, 2018

"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
1
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

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.

2
 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 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.

3
 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

4
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 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?

5
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 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’
6
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 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.

7
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

8
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.

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?

9
 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

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
10
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 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

11
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?
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

12
 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.

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

13
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.

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
14
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).

15
  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). Anothe r
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].

16
 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

17
 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.

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
18
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
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

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).

19
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
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,

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).

20
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).

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
21
(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.

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
22
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.

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.
23
 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,
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

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 dis similar
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).

24
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).

Exhibit 16.1: A Schema of Distributive Business Justice Canons

Entitlement Relevant Relevant Major Business Justice Problems: How do
Based on Justice Canon you reward or punish based on this canon of
Stakeholder: distribution?
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 Canon 3 of What is objective versus subjective merit among employees or
justice Merit executives? Is it contingent on circumstances? How do you assess
it?
Ability Naturalist Canon 4 of What is ability in a firm? Is it inherited, innate or DNA based?
Justice 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 or public utility? Who determines it and how? What is common
Justice Good good by the doctrine of Eminent Domain?
Market Individual Canon 8 of Is one’s market exchange value based on luck or serendipity? Then
Exchange Value Libertarian Supply- why reward it? What is a just system of supply or demand in a
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
25
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

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

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.

26
 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
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".

27
 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.

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.

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.

28
 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

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;

29
 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].

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

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
30
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
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.

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].

31
 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.
32
 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.

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.
33
 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
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
34
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).

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

35
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).

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

36
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-
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):

37
 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
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
38
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
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?

39
 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).

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

40
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
(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.

41
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
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
42
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.

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.

43
 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
44
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.

45
 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, R14 to R20, R24, RA and
R28 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,
46
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.

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).

47
 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
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.

48
 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.

49
 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

50
 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: Causal,
Technology Ends, goals, Brand Image
Conceptual Management Objectives, Brand Quality Agent,
Reasoning Skills Ideologies, Brand Value
Principles and Satisfaction Attributional,
Skills Appropriational
Priorities Brand Delight
Emotional
intelligence Moral:
Moral: Moral: Moral: Rights Upheld Moral:
Will power Corporate Rights-Duties Duties Fulfilled Teleological,
Willingness Conscience Costs-benefits Justice Realized Deontological
Commitment Corporate Justice-injustice Distributive
Morale Justice
Personality:
Personality: Personality: Personality: Corporate Growth Personality:
Ego-Strengths@ Organizational Decisions Corporate Renown Corporate Social
Field- Design, Roles# Strategies Corporate Success Responsibility,
Dependencies@ 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).

51
 Table 16.1: A Taxonomy of Ethical-Moral Theories
Applicable to Assessing Corporate Executive Strategies

Morality of Major Ethical Ethical Further Ethical Theory

the corporate Theory Sub-theories Developments
Executive Act
Judged by:
Neither the Individual Nihilism
Emotivism Absolute relativism
Act or the Logical Group Emotivism Consensualism
Consequences Positivism Social Emotivism Postmodernism
Emotivism National Emotivism
Act Situationalism Existence precedes essence; Life precedes law;
Existentialism Life defines nature
Deontology
Only the Act Formalism Essence precedes and defines existence;
Contractualism Nature defines life
Rule Legalism
Deontology
Only the Act Teleology Egoism Hedonism: Pleasure defines acts
Consequences Rule Enlightened Egoism Utilitarianism: Cost/benefit ratio defines acts
Eudemonism: Happiness defines acts
Teleology
Act Intuitionism Intuitions define acts
Situationism Situations define acts
Distributive
Justice
Retributive Justice
Non-Comparative Compensatory Justice
Justice Non-malfeasance
Strict Liability
Both the Formalist Justice
Egalitarian Justice
Act and the Socialist Justice
Consequences Rule Naturalist Justice
Distributive Capitalist Justice
Fair Opportunity Justice
Justice Comparative Justice Libertarian Justice
Preventive Justice
Protective Justice
Procedural Justice
Corrective justice
Beneficent Justice

52
 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.

53
 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 Principles of Act inasmuch as your

Formalism Universalizability and act is motivated by a
Reversibility law that can apply to
all.
R02 Kantian Principles of Act inasmuch as your
Formalism Universalizability and act is grounded on
Reversibility moral reasons that
convince all.
R03 Deontological Deontological rights of all Act inasmuch as your
Justice stakeholders, especially the act safeguards personal
poor. and social rights of all
stakeholders.
R04 Deontological Deontological rights of Act inasmuch as your
Justice corporate Executives act upholds the rights
and duties of corporate
executives
R05 Situationalism (J. When rights/duties When rights/duties
P. Sartre) conflict, the actual conflict, act freely but
situation should determine own responsibility for
the response-act. the consequences
R06 Existentialism (R. When right or wrong, Act amidst uncertainty,
Niebuhr; D. truth or falsehood, and risk and ambiguity, but
Bonhoeffer) good or evil are not clearly own the consequences.
distinguishable, act in the
midst of doubt.
R07 Legalism Legitimacy of government Obey legitimate laws
laws and industry and ordinances
ordinances
R08 Contractualism Binding capacity of freely Honor mutually agreed
agreed on contracts. upon contracts.
R09 Parenesis: A Code Credibility and validity of Comply with agreed
of ethics that industry and corporate upon codes of conduct.
counsels and ethical code of conduct The obligation is
exhorts action. hortatory.
Teleological Rules
54
R10 Hedonism (Jeremy Satisfaction of the majority Maximize satisfaction of
Bentham) all.

R11a Utilitarianism (J. Utility of the maximum Maximize net benefits

S. Mill) to all.

R11b Consequentialism Utility of the Minimize harm of the

(E. Anscombe Consequences. Some consequences to all
1920-2001) things should (or cannot) innocent stakeholders
be done no matter what the
consequences.
R12 Eudemonism Happiness of the maximum Maximize happiness of
(Aristotle) all.

55
 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 One’s level of equality

Egalitarianism Equality
R14 Socialist Justice The Canon of Need One’s level of need

R15 Naturalist Justice The Canon of Natural One’s level of innate

Ability merit or ability
R16 Retributive Justice The Canon of Effort One’s level of effort

R17 Capitalist Justice The Canon of One’s level of

Productivity contribution

R18 Libertarian Justice The Canon of Social One’s level of social value
Utility
R19 Libertarian Justice The Canon of Supply- One’s level of market-
demand exchange value

R20 Individual Justice Rescher’s Canon of One’s level of legitimate

Legitimate Claims claims

R21 Fair Opportunist Rawls’ Equality Principle Offering equal

Justice opportunity

R22 Libertarian Rawls’ Difference Nullifying undeserved

Egalitarian Justice Principle 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 Doing no harm or evil

Justice Liability
R25 Preemptive Justice Principle of Preventive Preventing all evil
Justice
R26 Protective Justice Principle of Protective Protecting all from evil
Justice
R27 Procedural Justice; Principle of Procedural Setting up just

56
 Corrective Justice Justice and Corrective procedures for equitable
Justice distribution of benefits or
correcting current
structured injustice
systems

R28 Beneficent Justice Principle of Beneficent Doing and promoting

Justice good

57
 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 Principles of Universalizability? Principles of Universalizability? NO:

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
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
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

58
action. The obligation is corporate ethical codes of conduct? includes a social contract with the country to
parenetic or hortatory. NO: Most of wealth maximization circulate wealth for the development of more
occurs despite such codes of conduct. jobs, wealth and prosperity to all.

59
 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: Principle of Universal
Satisfaction and Hedonism: Did wealth
Pleasure of all maximization promote
(Jeremy Bentham) happiness and satisfaction of
all? NO: Most facts prove
the contrary.
R11a Utilitarianism (J. S. Principle of utility-
Mill): Maximize maximization of the greatest
utility of all number fulfilled? 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- Consequences to all? NO:
2001): Maximally unless wealth maximization
reduce harmful occurs in tandem with
consequences to all. reduction of harm of all.
Some things should (or
cannot) be done no matter
what the consequences.
R12 Eudemonism Principle of happiness of the
(Aristotle): Principle maximum fulfilled? NO:
of happiness of the Unless wealth maximization
maximum of the superrich
automatically is geared for
promoting happiness of the
maximum
60
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.
61
 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 Did Wealth Maximization
Justice Distributive markets treat India’s Superrich by: Outcomes of India’s Superrich
Rules Justice (DJ) treat others by:
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 Their level of innate merit or ability? No: Merit
Justice merit or ability among the superrich? YES. and 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 The level of contribution of the non-superrich?
Justice of 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 NO: Until wealth maximization of the few
beyond. 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 Preventing all evil to the non-superrich? Yes, as
Justice the super rich? YES. long maximized wealth among the few prevented
harm to all others.
R26 Protective Principle of Protective Justice: Protecting the Protecting the non-superrich from evil? Yes, as
Justice superrich 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 procedures for wealth maximization for the others
Corrective of 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
Justice in doing or promoting good to others? Yes, if they to do or promote good in India? Yes, if maximized
willed to do so. wealth was invested in developmental projects in
India.

62
Managerial Ethics:
Contemporary Challenges and Imperatives
Course Syllabus: Weekend - PGDBM 2019-2022
June - September 2019 – XLRI, Jamshedpur

Instructor:
Fr. Ozzie Mascarenhas S.J., Ph.D.
JRD Tata Chair Professor of Business Ethics, XLRI Jamshedpur
June 15, 2019

Course Outline & Structural Objectives:

In a morally perplexed world wrought with market turbulence, economic chaos and
ambiguity, global financial crisis, corporate greed and fraud, organized lobby and bribery, and
gross income, social and opportunity inequalities among the billions, this course in managerial or
corporate ethics examines under Part One the general market context of current ethical and moral
challenges and imperatives of business management as a governance system of CEOs as moral
agents. Under Part Two, the course will cover 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 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 course.

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.

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 Course in each Session.
Concretely, the planned four-module Course on Corporate Ethics for Turbulent Markets
of Today is designed as follows:i

63
 Volume I: Corporate Ethics for Turbulent Markets: The Market Context of Executive Decisions

Module 01:
 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.
 Chapter 04: The Success of Free Enterprise Capitalist System (FECS) when Designed and
Deployed Rightly.

Module 02:
 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: Executive Response to Market Challenges
Module 03:
 Prologue: Corporate Ethical Response to Turbulent Markets
 Chapter 09: The Ethics of Dignity of the Human Person
 Chapter 10: The Ethics of Corporate Executive Virtues
 Chapter 11: The Ethics of Corporate Trusting Relations
 Chapter 12: The Ethics of Corporate Ethical and Moral Charismatic Leadership
Module 04:
 Chapter 13: The Ethics of Corporate Critical Thinking
 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 for Today

For a schedule 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 moral principled corporate executive behavior based on
specific ethical skills such as:

Module 01:

64
 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).

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 Volume 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 a course method and pedagogy are dependent upon the specific subject matter of
managerial ethics: Human persons 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 models deal with the domain of defining and resolving management problems that
have an ethical and moral content, but deploy different approaches for formulating and resolving
the starting problem. All seven models are premised on a systems 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.

65
 AOL1 explores a current market problem (e.g., Global Indo-China Trade War; Ten
years after the 2008 Global Financial Crisis – What have we Learnt? Thoothukudi
massacre; Nirav Modi and possible PNB Scam; Jet Airways Debacle; BREXIT
2019, and the like) from its constituent variables that are either controllable (X) or
uncontrollable (Y) to 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, and so
forth) for further understanding.
 AOL3 explores the same AOL1 and AOL2 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 studied under AOL1 and
AOL2.
 AOL4: Given Chapter 15 on Moral Reasoning and Moral Judgments, AOL4 is an
exercise in making a judgment call on the problem under investigation under AOL1
to AOL3. The moral judgment seeks to understand who was right, who was wrong,
who was fair or unfair. 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 15 and Tables 15.4A and 15.4B on Ethics of Moral
Justification, the same problem studied under AOL1 to AOL4 is now explored
under the lens 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 Chapter 15, you
frame at least five ethical and moral questions regarding the market event chosen
and answer them. For illustrations on types of questions, see under Cases in
Chapter 15.

 AOL7: Given your approach in AOL1 to AOL6, you now frame at least five ethical
and moral questions regarding the market event chosen based on distributive justice
(Chapter 16) and answer them. For illustrations on types of questions, see under
Cases in Chapter 16.
66
 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 industry, national or international in scope.

Measurement of Assurance of Learning

In general, learning refers to listening, understanding, mastering, applying and retaining
knowledge (e.g., concepts, theories, models, paradigms, 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 self-monitoring.”

Using the “directives” received from the Academic Dean’s Office on “learning goals,” we
use six measures for assessing learning goals and two for learning outcomes as follows, and
strive to verify them via AOL1 to AOL7.

Learning Goals Operational Definitions of Learning Goals or Outcomes

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

 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.
67
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- 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 great many
current business cases proposed in each Chapter together with several connected Corporate
Ethics Exercises. Appendix 1 provides a framework for such assessment.

Student Evaluation:

Class Participation = 25% broken as follows:

 10% for class attendance and class participation: Content Review, Current Market Events Review,
Readings Review;
 15% Student Viva: Case Analysis and presentation cum intergroup debate:
 Each student with one’s group (of 5) with three other groups will be called on stage at least twice during
the course (see Course Learning Objectives above), with up to 7.5 marks attached to each stage-outcome
 Total 25% = 15% for class viva + 10% for attendance & participation.

Assignments and Final Exam Evaluation:

 First Group Take Home Exercise in Managerial Ethics for 20%: (Prologue, Chapters 01-08; Sessions 1-7)
– delivered by due date and time (TBA) two weeks from First Take-home exam-delivery.
 Second Group Take Home Exercise in Managerial Ethics for 20%: (Chapter 09-16, Epilogue; Sessions 9-
12), delivered by due date and time two weeks from Second Take-home exam-delivery.
 End of the Course Final Exam (MCQs, Individual) for 35%: (Chapters 00-16; Sessions 1-12); Date and
time to be announced (TBA).

Office Hours:
Saturday: 9:00 am – 5:00 pm
Sunday: 10:30 am - 12:30 pm and 3:00 – 4:30 pm
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; mascao37@gmail.com

Course Readings:
Mascarenhas, Oswald A. J. (2018), Volume I: Corporate Ethics for Turbulent Markets:
The Market Context of Executive Decisions, Emerald Publishing Limited, UK;
68
 Mascarenhas, Oswald A. J. (2019), Volume II: Corporate Ethics for Turbulent
Markets: Executive Response to Market Challenges, Emerald Publishing Limited, UK.

Supplementary (optional) Textbooks:

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.

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.

Venkatesan, Ravi (2013), Conquering the Chaos: Win in Indi, Win Everywhere. Harvard Business Review
Press, Boston, MA.

Weybrecht, Giselle (2014), The Sustainable MBA: A Business Guide to Sustainability, 2nd edition, John Wiley
& Sons Ltd., UK.

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.
69
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. 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.
14. Fleming, John H., Curt Coffman and James K. Harter (2005), “Manage Your Human Sigma,” Harvard Business
Review, (July-August), 106-114.
15. Garvin, David A. (2006), “All the Wrong Moves,” Harvard Business Review (January), 18-32.
16. Garvin, David A. Michael A. Roberto (2005), “Change Through Persuasion,” Harvard Business Review
(February), 104-112.
17. 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.
18. Gottfredson, Mark and Keith Aspinall (2005), “Innovation versus Complexity: What is too much of a Good
Thing?” Harvard Business Review, (November), 62-73.
19. Guiltinan, Joseph P. and Gregory T. Gundlach (1996), "Aggressive and Predatory Pricing," Journal of
Marketing 60:3 (July), 87-102.
20. Hammond, John S., Ralph L. Keeney and Howard Raiffa (2006), “The Hidden Traps In Decision Making,”
Harvard Business Review (January), 118-126.
21. 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.
22. Iansiti, Marco and Roy Levien (2004), “Strategy as Ecology,” Harvard Business Review, (March),
69-78.
23. Jackman, Jay M. and Myra H. Strober (2003), “Fear of Feedback,” Harvard Business Review (April),
101-9.
24. 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.
25. Joni, Saj-nicole, A. (2004), “The Geography of Trust,” Harvard Business Review, (March), 82-89.
26. 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.
27. 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.
28. 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.
29. 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.
30. 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.
31. 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.
32. 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.
70
33. Mascarenhas, Oswald A. J. (1990b), "Towards a Macromarketing Analysis of Buyer-Seller Value
Exchanges “Detroit Business Journal, 1:1, December 1989, 56-78.
34. Mascarenhas, Oswald A. J. (1991), "Spousal Ethical Justifications of Casino Gambling," Journal of Consumer
Affairs, 25:1, (Summer), 122-143.
35. Mascarenhas, Oswald A. J. (1995), "Exonerating Unethical Marketing Executive Behaviors: A
Diagnostic Approach," Journal of Marketing, 59:2 (April), 43-57.
36. 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.
37. 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.
38. 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, 2003).
39. 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, 2003.
40. 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).
41. 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.
42. 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.
43. 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.
44. 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.
45. 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.
46. 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.
47. 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.
48. 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.
49. 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.
50. 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.
51. 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.
52. 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).
53. 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.
71
54. Mascarenhas, Oswald A. (2014a), “Theory-Building versus Theory Testing Approaches to Joint Ethics
Collaborative Research,” Presented to Tata-Hitachi Executives, December 28, 2014.
55. Mascarenhas, Oswald A. (2014b), “Constructing Research Instrument for Measuring ‘Ethics for Corporate
Advantage’,” Presentation to Tata-Hitachi Executives, December 9, 2014.
56. 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.
57. 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.
58. Mascarenhas, Oswald A. (2014e), “Critical Thinking and Critical Pedagogy,” Presentation to XLRI
FPM Students – September 20, 2014, XLRI, Jamshedpur.
59. Mascarenhas, Oswald A. (2014f), “Ethics for Corporate Strategic Advantage,” Module 01: Session 01:
XLRI/XLBang Ethics Conference, Hotel Atria, Bangalore, September 5, 2014.
60. Mascarenhas, Oswald A. (2014g), “Ethics of Capitalism for Corporate Advantage,” Module 02:
XLRI/XLBang Ethics Conference, September 5, 2014, The Atria Hotel, Bangalore.
61. Mascarenhas, Oswald A. (2014h), “Challenging Ethical Imperatives for Businesses Today,” Keynote
address at the Confederation of Indian Industries (CII) National Seminar, Beldih Club, Jamshedpur,
August 24, 2014.
62. 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.
63. Mascarenhas, Oswald A. (2015b), “Shades of Grey: 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.
64. 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.
65. Mascarenhas, Oswald A. (2015d), “Servant Leadership Today: Ethical and Moral Imperatives,” MRF
Management Training Workshop, May 1, 2015; 9:00 am – 12:30 pm, International Centre, XLRI.
66. Mascarenhas, Oswald A. (2016a), “Ethical Leadership: Public Health Management in India,” Industry Training
Workshop, Public Health Management, India, January 11, 2016 International Centre, XLRI.
67. 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, 2016, pp. 1-18..
68. Mascarenhas, Oswald, A. (2019), “Ethical Challenges of the 21 st Century: The Legality, Ethicality, Morality
and Spirituality (LEMS) Response,” Keynote Address to the Indo-German Chamber of Commerce Annual
Management Assembly, Nariman Point, Mumbai, May 10, 2119.
69. O’Brien, Louise (2004), “Eliot Spitzer: How to Restore the Fiduciary Relationship,” The HBR Interview,
Harvard Business Review (May), 70-78.
70. 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.
71. 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).
72. Schoemaker, Paul J. H. and Robert E. Gunther (2006), “The Wisdom of Deliberate Mistakes,” Harvard
Business Review, (June), 108-116.
73. Silverstein, Michael J. and Neil Fiske (2003), “Luxury for the Masses,” Harvard Business Review (April), 48-
58.
74. Sirdeshmukh, Deepak, Jagdip Singh, and Barry Sabol (2002), “Consumer Trust, Value, and Loyalty
in Relational Exchanges,” Journal of Marketing, 66 (January), 15-37.
75. Sull, Donald N. and Charles Spinosa (2007), “Promised-Based Management: The Essence of
Execution,” Harvard Business Review, (April), 78-86.
76. Van Buren Mark E. and Todd Safferstone (2009), “The Quick Wins Paradox,” Harvard Business
Review, (January), 54-61.
77. Wagner, Stephen and Lee Dittmar (2006), “The Unexpected Benefits of Sarbanes-Oxley,” Harvard
Business Review (April), 133-140.
78. Weiss, Jeff and Jonathan Hughes (2005), “Want Collaboration? Accept – and actively Manage

72
Conflict,” Harvard Business Review, (March), 92-101.

73
 Appendix 1:
Managerial Ethics: Contemporary Challenges and Imperatives
Course Structure & Schedule: Sessions and Content

Part Sub-Part Chapter and Topic Session Day/Time

Prologue: Corporate Ethics for Turbulent 1 Saturday, June 15:
Markets of Today. 4:20 pm
Module One: Chapter 01: Characterizing Market Turbulence 1
Current General Today as a Source of Market Opportunity.
Market Challenges Chapter 02: The Domain and Context of 2 Sunday, June 16:
and Imperatives of Corporate Ethics - Introducing Concepts and 10:30 am
Corporate Ethics Directions.
Chapter 03: A Systems-Thinking Approach to 3 Saturday, June 29:
Understand the Challenge of Corporate Ethics 4:20 pm
Part One: in the Turbulent Markets of Today.
Chapter 04: The Success of Free Enterprise 4 Sunday, June 30:
Market Capitalist System (FECS) when Designed and 10:30 am
Context of Deployed Rightly.
Corporate Chapter 05: The Destruction of Free Enterprise 5 Saturday, July 6:
Capitalist System when Infected by Fraud, 4:20 pm
Executive Corruption and Bribery.
Ethics (CEE) Chapter 06: The Turbulent Market of Modern 6 Saturday, July 27:
Module Two: Debt-Overleveraged and Promoter Dominated 4:20 pm
Current Specific Corporation.
Market Challenges Chapter 07: Artificial Intelligence and the 6 Saturday, July 27:
and Imperatives of Emergent Turbulent Markets - New Challenges 4:20 pm
Corporate Ethics to Corporate Ethics Today.
Chapter 08: The Ethics of Reinventing the 6 Saturday, July 27:
Morally Embattled Corporation. 4:20 pm
Epilogue to Volume I - The 21st Century Legal, 6
Ethical, Moral and Spiritual (LEMS)
Challenges of Corporate Governance

Module Prologue: Corporate Ethical Response to

Turbulent Markets
Three: General Chapter 09: The Ethics of Dignity of the 7 Sunday, July 28:
Ethical and Moral Human Person 10:30 am
Part Two: Theories and Chapter 10: The Ethics of Corporate Executive 8 Saturday, Aug 3:
The Moral Principles to Virtues 4:20 pm
Respond to
Response of Current Market
Chapter 11: The Ethics of Corporate Trusting 9 Sunday, Aug 4:
CEE to Challenges and
Relations 10:30 am
Chapter 12: The Ethics of Corporate Ethical 9 Sunday, Aug 4:
Current Imperatives
and Moral Charismatic Leadership 10:30 am
Market Module Four: Chapter 13: The Ethics of Corporate Critical 10 Saturday, Aug 10:
Challenges Specific Ethical and Thinking 4:20 pm
Moral Theories, Chapter 14: The Ethics of Corporate 10 Saturday, Aug 10:
and Stakeholder Rights and Duties 4:20 pm
Rules and
Imperatives Standards to Chapter 15: The Ethics of Corporate Moral 11 Saturday, Aug 24:
Respond to Reasoning, Moral Judgment, and Moral 4:20 pm
Current Market Justification.
Challenges and Chapter 16: Ethics of Distributive Justice 12 Sunday, Aug 25:
Imperatives Epilogue to Volume II: Corporate Cosmic 10:30 am
Executive Spirituality for Today

Group Presentation of First and 13 Saturday, Aug 31:

4:20 pm
Second 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.

74
 Appendix II: An 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 from problem by problem by
applying applying applying 10 moral Rules of framing and framing and
11 Laws of new Laws Archetypes judgments of deontological, addressing at addressing at
least 5 ethical least 5 ethical
Systems of Systems of Systems forward and teleological and moral and moral
Thinking Thinking Thinking reverse and questions questions based
you justification. distributive based on moral on moral
formulated justice reasoning. assessment 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 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 “self”
conditions.”
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 “self”
conditions.”

75
 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

76
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 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.ii 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

77
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.

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
78
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 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

79
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
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.iii

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.

80
 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 two-volume Book on Corporate Ethics for Turbulent Markets of Today is
designed as follows: iv

Volume I: Corporate Ethics for Turbulent Markets: The Market Context of Executive Decisions

 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.
 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: Executive Response to Market Challenges

 Prologue: Corporate Ethical Response to Turbulent Markets

 Chapter 09: The Ethics of Dignity of the Human Person
 Chapter 10: The Ethics of Corporate Executive Virtues
 Chapter 11: The Ethics of Corporate Trusting Relations
 Chapter 12: The Ethics of Corporate Ethical and Moral Charismatic Leadership
 Chapter 13: The Ethics of Corporate Critical Thinking
 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 for 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

81
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
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.

82
Endnotes

83
 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.

84
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.v 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 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).vi 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

85
 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, 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

86
 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 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.

87
 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 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

88
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 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.vii

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).
89
 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. 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).

90
 A referendum was held in UK on June 23, 2016 invoking the Article 50 of the Treaty of
Lisbon.viii 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.

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.ix

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-

91
terrorism initiatives and a political resolution to Syria’s war, said Amnesty International. x “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.
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?

92
 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. 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

93
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.

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

94
 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%. xi The biggest hit was taken by small
players in industries like textiles, 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

95
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

96
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, 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.

97
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).

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.

98
  “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.

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

99
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

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

100
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 cost/quality/convenience trade-offs before undertaking purchase
decisions.

101
 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.

102
 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, 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

103
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 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.

104
 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.

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?

105
 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 river/water development;
and meats, , fruits and vegetables, flowers, gardens commodity cartels; mafia; animal husbandry; dairy
and orchards, cotton and textiles, clothing and droughts and famine; river dams cooperatives; credit
apparel, silk and linens, precious metals and and villages displacement; various cooperative
jewelry. protective legislations unions; rural and urban
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, oil and gas pipelines;
cement, concrete, steel long products for energy, oil and gas, electricity, electricity grids and
turing commercial construction, heavy earth movers, steel, autos, commercial vehicles, switchyards; mechanization of
boats, trawlers, cargo and passenger ships, steel airports and aircraft, rail engines, agriculture; Engineering
and steel products, autos, buses, trucks, airports, cars, railway lines and railway education in automotive,
aircraft, fertilizers, telegraph, typewriters, stations; price and wage inflation; aeronautics, electronics, …
semiconductors, processors, computers automation 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, e-advertising, e-recruiting, e-supplies businesses, online taxes, marketing, e-advertising, e-
Businesses chain management, e-computing, e-companies transparency, cyber-security, governance, e-auctions, e-
amazon.com, eBay; e-books, e-music, e-albums, e- hacking and counterfeiting, courses, e-schools, e-colleges, e-
movies, e-films, e-banks, e-payments, smart cities, merchant and consumer cyber universities; e- courses
… fraud (Coursera, MOOCs)
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

106
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 energy sources consumption, CSR, responsible
nature luxury.

107
 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

108
 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
109
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, restaurants
mowing) sold Formal and designer apparel
Garage or block sale Commercial dry cleaning and
winterization
Telemarketing and catalog-
Low based buying
knowledge–
intensive Domestic mail and International mail and package
industries package delivery delivery
Local newspapers National and international
Local cultural traditions media Seasonal fashions and
Intangibles and fashion goods trendy goods
Consumer feedback and
complaints Producer/distributor redress
Consumer social ecology
Industrial ecology and EPA
systems
Homemade brews and Commercial beer, wines, and
wines spirits
Routine car maintenance Auto mechanics and technician
Tangibles services services
Consumer home remedies Commercial drugs and
Owner selling home/estate medicine Commercial homes
High– Donating or selling one’s and estates Commercial
knowledge– organs transplant organs and
intensive prostheses
industries
Local gangs and National and global terrorist
gangsterism systems
Consumer theft and fraud Merchant and corporate fraud
Intangibles Home-based safety and Legal liability recovery services
protection
Home-based medical Hospital and medical
diagnostics diagnostics care
Home school educational Community colleges and
services universities

110
NOTE: EPA = Environmental Protection Agency

End Notes

111
 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,

112
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.

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.

113
 We need strong corporate ethics at all levels. Luk Bouckaert (2015) forcefully argues that a
spiritual approach to business ethics is badly needed. xii 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.

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.”

114
 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.
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

115
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). xiii 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. xiv

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.
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.

116
 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 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 Steffensxv 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.

117
 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 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?

118
 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 Law reverence; Imbibe the Spirit of the
Law adherence; mindfulness; Law Law;
Legal game play; Law abidance; internalization; Law defiance may be
Law legitimacy Law due Law reflection; mandatory when the law is
check; update; Law conscience; unjust;
Law interpretation; Law research; Law morality. Reformulate the law to
Law manipulation; Legal Ethics restore and reassure
Law lobbying human dignity.
(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). xvi

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.

119
  Legally, values are rights to life, liberty and pursuit of happiness endorsed by the
Preamble, the 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.

120
 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.

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

121
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, 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

122
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 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 Foucault xvii 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

123
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.

[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

124
 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 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,

125
 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 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

126
(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

127
 xviii
the initial equality by depriving 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.xix 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

128
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; 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).

129
 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.

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:

130
 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,
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.

131
  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 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
132
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.

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

133
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.

134
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 Business or Market
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 Compassion;

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

135
 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
(IPO)
the 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
Virtue least the four cardinal virtues of
(Inputs and
prudence, temperance, justice, and
Processes (IP)) fortitude, and in 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.
136
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?

137
 Table 2.2: Distinguishing Legality, Ethicality, Morality and Spirituality
(LEMS Analysis)
Dimension of Legality: Ethicality: Morality: Spirituality:
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

professional codes moral rules, standards high levels of virtues such as
Definition 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
benefits and duties on trust and wisdom
Ethics Theory
Legal dilemma: Ethical dilemma: Moral dilemma: Spiritual dilemma: conflicting
Conflicting laws conflicting ethical Conflicting moral demands of virtues, drives and
Dilemma codes and pacts principles and duties habits

Mandate Do not just ask what Ask what is the Ask further how to do Go further, and do the right
is the legal thing to right thing to do? the right thing rightly? thing rightly for the right
do. 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,
Acts, Bills, Codes of conduct; Moral convictions; wisdom, courage and fortitude;
Source of 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
Frugality- Transparency Wisdom Compassion & trust
virtue Temperance Accountability Moral courage Unconditional love
challenge Fortitude-courage

Legal responsibility Social Moral responsibility Spiritual responsibility

Do not harm. responsibility; Protect from harm Do good unto others;
Responsibility 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:
Fair or unfair? codes: True or Right or wrong? Virtue or vice?
Assessment 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
compliance and compliances of of and adherence to living and witness of great
equation or greening of America pacts, codes and universally binding virtues and moral values that
formula agreements for moral principles, flow from an abiding moral and
global sustainability especially, the golden spiritual character.

138
 rule

139
Endnotes:

140
 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.
141
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 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). xx

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
142
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 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 yi (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.
143
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.

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
144
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.

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

145
 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).
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

146
 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

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

147
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. xxi

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.

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

148
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

149
 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:

 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:
150
  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?
 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:

151
 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.
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. xxii

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.
152
  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 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). xxiii

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
153
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!
 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. xxiv

154
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.
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.

155
 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 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.
156
 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 interact with other departments or
157
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

158
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.
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.
159
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:

 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
160
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, 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.

161
 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 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

162
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
163
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
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.

164
  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 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

165
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.
 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;
166
 • 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. 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

167
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 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
168
 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,
169
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 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)]
170
 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 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
171
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).

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)].

172
Table 3.1: A Framework of Interrelationships for Identifying the Structure of
Corporate Morality
Corporation Constituents of Corporate
SOPE Morality
Key Chairman and Board of Directors
CEO or MD or CMD or CXO
Subjects 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;
Core patents and technologies;
Properties 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.
Endnotes
173
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.
 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)xxv

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

174
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
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

175
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
“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.

176
 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.

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

177
 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 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. xxvi

Capitalism is an economic system and an ideology based on private ownership of the means
of production and their operation for profit.xxvii 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
178
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).xxviii He adds that it is lawful for man to possess property
because this is a necessary element in human life for 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. xxix 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. xxx

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. xxxi

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

179
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.
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 17 th 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.” xxxii

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

180
 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." xxxiii 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;
 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.xxxiv 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

181
embroiled in recession or stagflation, some timely government interventions in terms of
appropriate monetary and fiscal policies are needed.xxxv

But like any socio-economic and political institution, American capitalism has its own
strengths and weaknesses. xxxvi 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.” xxxvii “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
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

182
 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.xxxviii 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.

183
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.

184
 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 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.

185
 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.
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

186
 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?
 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

187
 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 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).xxxix

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

188
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, 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 &

189
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.” xl

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.
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

190
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 hands of a few, mostly focused on the
accumulation of profits, leading to major conflicts, and cyclical crises.”

191
 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.

192
 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 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-

193
made, of greed, envy, immediate gratification, wanton consumption, overspending and chronic
indebtedness, and the like that have shown the darker side of capitalism. xli

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. xlii

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

194
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.” 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,

195
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.

196
 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.
197
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
198
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
game-changing
Laws breakthroughs that will
transform FECS
“Today’s Problems Yesterday’s product
come from solutions should not create
1 yesterday’s problems for FECS’s today
Solutions.” or 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 Offer holistic innovative
Elephant in half product solutions that keep
10 does not produce FECS united despite diverse
two 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
199
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

200
 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

201
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 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.
xliii
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).xliv

202
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.

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

203
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.xlv

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?
7. How does whistle blowing help society, especially, shareholders, employees,
customers and local communities?

204
 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

205
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.

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. xlvi

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

206
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
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:

207
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.
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. xlvii 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

208
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
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”. xlviii 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.

209
 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.

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

210
(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). xlix

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
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

211
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;
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

212
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
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?

213
 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.l

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
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

214
 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 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

215
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
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

216
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.

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 Ambiguity that breeds Conspiracy
Misrepresentation Deception and Covert Joint-Action
that thrives on
Ambiguity in:
Corruption as Deception: Corruption as Accounting Bribery:
Past Data, Facts, Deceptive accounting; Kickbacks;
Income smoothing; Wash Trading or Round Trip sales;
Figures and Padding expenses and skimming; Accounting abuses (e.g., over-invoicing, under-

217
 History Ghost or shell companies; invoicing, dumping, understating debts,
Ghost employees or accounts; overstating earnings; tax write-offs)
Restating annual financial statements 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
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

218
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.

219
 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
Fair products and full awareness and fair trade with bilateral exchange
physical services motivation to act; no mutual gain. in the standard
non-violent physical inducements There is much microeconomic
persuasions 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
unfair noticed small items from the sizeable amount compensation for
Pilfering organization over many and one’s low wages
frequent
occurrences
Theft by Unam- One-sided The victim is Theft by stealth: The thief is
biguously intervention to physically absent or the victim suffers cunning, contriving,
Stealth 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,
ambiguous asymmetry; the but misinterpreted. The victim suffers corruption and
Fraud 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
biguously mental or reason why Transaction for more than others in
Force 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.

220
 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
moderate consensus. The logic of the prevailing given enough persuasive in this sense.
Persuasion value of the consensus, and prior consensus PR is also persuasive
transaction can defines no new between buyer when you fit news
be established symbols or signs. and seller. 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 deceiving others. wiles of victim is drawn into a
consensus. advertising 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 subterfuge, especially, brochures; victim is drawn into a
consensus. 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 persuasion of cheating freebies and victim is drawn into a
consensus. 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 whereby consumers consumer into an moved in stages from
a new are induced to exchange where old agreements to new.
consensus, a tolerate or overlook ambiguity is
deliberate and unsustainability, or resolved by a
stepwise deny it. In this sense, private social
process. 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,

moderately construction of influenced by non- consumers change consumers are
high a new substantial attributes their behavior for influenced by non-
consensus, a and features of a reasons not substantials of a
deliberate and product or service. objective but on product at the expense
stepwise beliefs and of disregarding its
process. impressions made intrinsic aspects
on them by (Gardner 1975).
promotions.

Cheating Ambiguity is No pre-existing Cheating is Cheating is Consumers,

high for social buyer-
trickery + seller often fraudulent trickery + customers, clients
deception consensus. and dishonest deception and buyers get
exchanges towards one’s often tricked via
clients ambiguous
marketing
promotions.

221
 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,
such as CEO, aggressive Investors, brand equity, supplier goodwill and
Fraud 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
with insider trading do not have access to trading laws with litigation losses
Fraud information inside information
Investment Any individual Tricking or conning Unsuspecting False prizes/sweepstakes
involved in such into worthless investors, especially Unnecessary magazine sales
Scams scams investments the elderly, Worthless buyer club fees
Telemarketing teenagers, the Unrealized advance fee-loans
fraud marginalized 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 Vendors Significant over- Government with Shipment of inferior or fake goods
Suppliers charging either defense contracts; Overcharge for purchased goods
Fraud 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-
At all non- Cheating on time, Shareholders, efficiency, sales and performance due to
fraud or executive levels money, quality of Customers, occupational fraud
embezzlement work Other employees
Computer Computer Illegal access to a The public, defense, Violates Title 18, US Code # 1030
hackers, code- protected computer national security and
Fraud breakers, and vaulting or all governments
classified data classified data; affected by classified
destroyers hacking data
Bribery and All those Bribery & Suppliers Bribery violates Title 18, US Code # 201,
engaged in kickbacks; Prime contractors of and the Foreign Corrupt Practices ACT
Kickbacks bribery, strategies government projects (FCPA), Title 15, US Code # 78.
kickbacks, and Kickbacks violate Title 41, US Code #s
foreign corrupt 51-58.
practices
Customer Some customers Not paying for The vendors Consumer theft costs
Some borrowers goods purchased; Retailers Bad debts; consumer credit abuse;
Fraud Angered getting something Banks tricked into Violated loan covenants
customers for nothing; granting loans or Free rider costs; Unpaid interest
getting even with conning banks to funds transfers Non-amortized capital
employers make loans or

222
 transfer funds

Table 5.4: The Supply and Demand Side of Fraud and Corruption:
An Input, Process and Output Analysis

Source of Sub-Source Structure of Corruption

Corruption in of Corruption Structured Inputs Structured Processes Structured Outputs of
B-G to 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
People Ministers with key G2B chicanery; Deception;
G2B portfolios; G2B subtle bribery demand; GEB Blackmail and beguile
Unfair G2B lawyers and set-up;
Supply Side judges G2B Structured deception;
(Laws & G2B Excessive bribery or
robbery;
Governments) Excessive industry/market Overbearing G2B Government market opacity;
regulation; bureaucracy; Structured market injustices;
Corrupt Complicated industry Ambiguous law Loss to the government ex-
Instruments excise/tax haven laws; interpretation; checker;
Complex mining licensing Many G2B authorization Lost business opportunities;
or Means systems; requirements; Tax Losses – govt. deficit
Complex Public bidding Ambiguous G2B bid budgets;
tenders; process/selection; 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;
Instruments Financial analyst (e.g., Deceiving financial analyst by Loss in sustainable
Houses) BSE) pressurized demand; fraud; competitive advantage (SCA)
or Means Institutional Shareholder Silencing institutional to governments and
demands; shareholders by promises; businesses;
Customer Buying business licenses and Consequent loss in market
demands/complaints; project approvals via B2G share;
bribes; Loss in RE & corporate
growth for the nation and
industries;
Loss in GDP, EBIT, EPS,
ROI;

223
Endnotes

224
 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.

225
 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
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.

226
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

227
mitigate unless all the stakeholders (i.e., policy-makers, banks and promoters) are willing to end the charade. The
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 wil l
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?

228
9. To what extent would this referral by banks to NCLT lead the Indian
steel sector to emerge strong in the long run?

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.

229
 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.
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.

230
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.

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

231
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 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

232
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 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

233
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 Top 1% Next 9% Bottom 90%
Type
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 Top 1% Next 9% Bottom 90%
Type
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%
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

234
 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 Western European countries such as Belgium, Italy, Netherlands, Spain,
Switzerland and all four Nordic states of Denmark, Norway, Sweden and Finland); b) interest

235
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

236
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 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.

237
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).

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

238
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 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. li 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

239
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. lii 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 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

240
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. liii

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-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

241
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.liv

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.

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

242
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?

243
End Notes

244
 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.

245
 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
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. lv 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

246
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 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. lvi

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

247
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.

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,

248
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.

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.lvii

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.

249
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.
 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.
250
  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.

 2010
s: 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.

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

251
 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.

252
  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.
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.lviii
 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

253
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.lix

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 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.lx 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,

254
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.

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
255
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.

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

256
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. lxi

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.

 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,

257
 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.

258
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

259
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.

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
260
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.

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.

261
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
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.” lxii

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.”lxiii

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

262
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.

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

263
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.

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. lxiv 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. lxv

264
 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. lxvi

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 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.

265
 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.

266
 Table 7.1: Assessing the potential impact of AI on various industries

Basic Target Computing Impact on Human Potential Impact on Actual

Dimensions or derived domains Skills Specific Industries Impact on
& Domains of AI Specific
of AI 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
Processing Information Extraction High-level Inferential Strategic problem-solving Strong
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

267
End Notes

268
 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

269
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)
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. lxvii 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

270
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

271
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 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.

272
 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
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

273
 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 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.

274
 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.

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

275
 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. 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

276
 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 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

277
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

278
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).lxviii

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

279
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., 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. lxix 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

280
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 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].

281
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.” lxx 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 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.

282
 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, 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

283
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

284
goals and motivations of an organization. The purpose 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,

285
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 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.lxxi

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

286
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.lxxii

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-
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.lxxiii

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

287
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 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

288
 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.
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

289
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

290
 Chapter 9
The Ethics of Corporate Human Dignity
More than at any other period in human history, humankind is currently at the cross-roads of war or peace,
growth or decline, progress or regress, life or death, hell or heaven. We cannot leave these opposite polarities and
possibilities to chance. We must design and invent, plan and predict, monitor and control our future and that of
our posterity. In this regard, the concept of human personhood cum human dignity and responsibility is a
fundamental part of this new self-understanding and undertaking. Ethics and morality are a critical component
on this creative journey to destiny. This Chapter explores the basic foundation of corporate ethics: the human
person in all its dignity and mystery, its corporeality and emotionality, its cognitive and volitive capacities of
moral development. Four fundamental characteristics of the human person, namely, individuality, sociality,
immanence, and transcendence, will be examined for their potential to live and witness corporate ethics and
morals. We explore the profound meaning and mystery of human personhood in three parts: The Ethics of the
Human Person, the Ethics of the Human Act, and the Ethics of the Human Judgment. Several contemporary
cases of great human personhood are presented: Nelson Mandela of South Africa, Captain Lakshmi Sahgal a
freedom fighter in India, and Gopal Amar Bose, who founded acoustic engineering and products from MIT,
USA.

“We are not human beings having a spiritual experience. We are spiritual beings having a
human experience.”
“We are not physical beings having a spiritual experience; we are spiritual beings having a
physical experience.”
― Pierre Teilhard de Chardin
“In violence, a person is violated—there is harm done to his person, his psyche, his body,
his dignity, his ability to govern himself.” (Dr. Alexander Liazos)

Case 9.1: A Giant Passes:

Nelson Mandela and his Great Human Personhood

291
 Nelson Mandela, the freedom fighter who led the emancipation of South Africa from white minority rule, who
emerged from 27 years in prison to become South Africa’s first elected black president and a global symbol of
reconciliation, died, age 95, on Thursday, December 5, 2013, at 8:50 pm at his home in Houghton, Johannesburg,
South Africa, after a protracted illness. As flags flew at half-mast across South Africa, a sense of loss, blended with
memories of inspiration, spread from President Obama in Washington, DC to the members of the British royal
family and on to those who saw Mandela as an exemplar of a broader struggle for peace, harmony and equality.

Pope Francis praised “the steadfast commitment shown by Mandela in promoting human dignity of all the
nation’s citizens and in forging a new South Africa.” USA President Barack Obama eulogized thus: “He achieved
more than could be expected of any man. I am one of the countless millions who drew inspiration from Nelson
Mandela’s life. My very first political action, the first thing I ever did that involved an issue or a policy or politics,
was a protest against apartheid.” Paying a tribute to Nelson Mandela, India’s Prime Minister Manmohan Singh
said, “A giant among men has passed away. This is as much India’s loss as South Africa’s. He was a true
Gandhian. His life and work will remain a source of eternal inspiration for generations to come.” As other public
figures competed for superlatives to describe Mandela, British Prime Minister David Cameron declared in London:
“A great light has gone out in the world.” Russian President Vladimir V Putin added: Mandela was “committed to
the end of his days to the ideals of humanism and justice.” The French mourned differently: they bathed the Eiffel
Tower in Paris in green, red, yellow and blue – the colors of the South African flag. This is a testimony to the
immense love, admiration, respect and inspiration Mandela evoked across continents.

Mandela’s Struggle against Apartheid

Nelson Mandela struggled against apartheid for more than half a century. He was a cofounder and leader of the
African National Congress (ANC). Mandela rose to prominence within the ANC at several critical junctures. In
1961, he founded the party’s armed wing, transforming the movement with inspiration he drew from Mahatma
Gandhi’s peaceful resistance in India to one that had used bombs.

Mandela’s quest for freedom and emancipation of South Africa from white minority rule took him from the
court of tribal loyalty to the liberation underground to a prison rock quarry to the president’s suite of Africa’s richest
country (Keller 2013: 11). 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, but declined a second term. While stepping down
voluntarily, unlike so many of the successful revolutionaries he regarded as kindred spirits, he cheerfully handed
over power to an elected successor, Thabo Mbeki. Nelson was and became an international emblem of human
dignity and forbearance.

There was a memorial at the huge World Cup soccer stadium in Soweto on December 10, 2013. Thereafter, he
was buried on December 15 after three days lying in state (December 11-13) where more than 90 sovereign
dignitaries paid him tribute, besides millions of other people of good will from all over the world. After a state
funeral, he was laid to rest, following his own wishes, in his own native village Qunu, in the Eastern Cape region,
where he grew up. After a service in Cape Town, Archbishop Desmond Tutu, also a towering figure in the struggle
against apartheid that defined much of Mandela’s life, expressed the hopes and fears of many of his compatriots
when he told his congregation at St. George’s Anglican Cathedral early on Friday, December 6, “Let us give him the
gift of a South Africa united, one.”

Nelson Mandela’s Life

He was born on July 18, 1918 in a royal family of the Xhosa-speaking Thembu tribe in the South African
village of Mvezo. Mvezo was a remote hilltop village, a tiny hamlet of cows, corn and mud huts in the rolling hills
of the Transkei that still is snaked around by Mbashe River in the southeast of South Africa. His mother spent most
of her working day drawing and hauling gallons of fresh water using a pair of donkeys to the white master she
worked for in the nearest town. His father, Gadia Henry Mphakanyiswa, was a chief of the Thembu people, a
subdivision of the Xhosa nation. Mandela was named Rolihlahla, meaning “troublemaker,” until his first day at
school, when at age 7 his teacher, Miss Mdingane, unceremoniously renamed him Nelson to conform to the British
bias in education.

292
 Mandela was drawn to politics in his teens while listening to elders talk about the freedom they had before
white rule. He was educated at a Methodist missionary school and the University College of Fort Hare, then the
only residential college for blacks in South Africa, where two years later he was expelled for leading a student
protest. While in college Nelson fell in love with Oliver Tambo, another leader-to-be of the liberation movement.
On returning to his home village, however, Nelson learnt that his family had chosen a bride for him. Finding the
woman unappealing and the prospect of a career in tribal government even more so, Nelson fled home at 23 to the
black metropolis of Soweto. There he was directed to Walter Sisulu, who ran a real estate business and was a spark
plug in the African National Congress. Sisulu was charmed by the tall young man with his aristocratic bearing and
confident gaze. Impressed by Mandela’s legal skills and his persuasive powers, Sisulu immediately felt that ANC
had the right type of hero.

In the 1940s, he became an enthusiastic boxer, exercising everyday at 4:30 am each morning, a routine habit
that lasted most of his life. Later in 1944, while a still young lawyer in Soweto, Mandela married a nurse, Evelyn
NtokoMase who gave him four children, including a daughter who died at nine months. But the demands of his
political life kept him from his family, and the marriage ended with an abrupt divorce - Evelyn got the house and the
custody of the children in settlement. Not long afterward, a friend introduced Nelson to Nomzamo Winifred
Madikizela, a stunning and strong-willed medical social worker 16 years his junior. Mandela was smitten, declaring
on their first date that he would marry her. He did so in 1958, while he and other activists were in the midst of a
marathon trial on treason charges.

Though, allegedly, Mandela never completed his law degree, he opened and established the first black law
partnership firm in South Africa with Tambo in 1952. Impatient with the seeming impotence of the black elders in
the ANC, Mandela, Sisulu, Tambo and a few militants soon reorganized and converted the dormant ANC from an
organization of teachers, preachers and intellectuals into a mass movement backed by labor unions. Later in 1961,
the patience of the ANC liberation movement was stretched to the snapping point – it was triggered by the police
killing 69 peaceful black demonstrators in Sharpeville Township the previous year, who were protesting laws
requiring non-whites to carry internal passports.

Mandela even advocated armed struggle and became the first commander of the ANC’s armed wing named
Umkhonto we Sizwe, Zulu for “Spear of the Nation.” He even studied guerilla warfare in Algeria, and helped set up
training camps in Tanzania before being arrested on his return to South Africa. Mr. Mandela and his colleagues
were acquitted of treason in 1961. Mr. Mandela went underground and formed a military wing called Umkhonto we
Sizwe. Mr. Mandela becomes the first commander in chief of the guerrilla army. Nelson led the ANC onto a new
road of armed insurrection – almost a 360 degree shift from the nonviolence stand he swore not many weeks ago.
Nelson then had proclaimed nonviolence as an inviolable principle of the ANC. He later explained why he changed
so abruptly: “forswearing nonviolence was not a moral principle but a strategy; there is no moral goodness in using
an ineffective weapon” (Keller 2013: 11).

Nelson got arrested again in 1962 on the charges of leaving the country illegally and incitement to strike -
sentenced to five years in prison. In 1963, the police raided a farm in Rivonia where the A.N.C. had set up its
headquarters. The raiding police found a few documents disclosing that Mandela and his members were planning a
conspiracy to overthrow the government. Consequently, the South African white rulers were determined to put
Mandela and his comrades out of action. That same year in 1963, Mandela and eight other ANC leaders were
charged with sabotage and conspiracy to overthrow the state capital. It was called the Rivonia Trial – named after
the farm the defendants had conspired.

At Mandela’s suggestion, his comrades, certain of conviction, set out to turn the trial into a moral drama that
would vindicate them in the court of world opinion. They admitted they had engaged in sabotage and tried to spell
out its political justification. The four-hour speech with which Mandela opened the defense’s case was one of the
most eloquent of his life. Conducting his own defense in 1963, Mandela spelt out a dream of racial equality.
Mandela said in court: “I have fought against white domination, and I have fought against black domination. I have
cherished the ideal of a democratic and free society in which all persons will live together in harmony and with
equal opportunities. It is an ideal which I hope to live for and to see realized. But, my lord, if it needs be, it is an
ideal for which I am prepared to die.” (Bloomberg News 2013; Keller 2013: 11). The Rivonia trial seemingly
established Mr. Mandela’s central role in the struggle against apartheid. He was sentenced to Life in Prison in 1964.

293
 Under considerable pressure from liberals at home and abroad, including a nearly unanimous vote of the United
Nations General Assembly to spare the defendants, the judge acquitted one and sentenced Mandela and the others to
life in prison. P. W. Botha, then South Africa’s president, refused pardon. He offered to release Mr. Mandela if he
renounced violence. Mr. Mandela refused saying that government should abandon apartheid first. Mandela was 44
when he was escorted on a ferry to the Robben Island prison in July 1963. Robben Island was shark-infected water
shed seven miles off Cape Town. Over the centuries the island was a naval garrison, a mental hospital, and a leper
colony. But for Mandela and his comrades, the Island was a university. Mandela honed his skills as a leader,
negotiator and a proselytizer. Both black and white prison administrators found his charm and iron will irresistible.
Perhaps because Mandela was so much revered, he was singled out for gratuitous cruelties by the authorities. Still
Mandela asserted that the prison had tempered any desire for vengeance by exposing him to sympathetic white
guards.

He left the Victor Verster Prison, on Robben Island, near Cape Town, on February 11, 1990, after spending 27
years in apartheid jails. Nelson was now 71. He walked to an inevitable moral and political victory cheered by
much of the then world. Mandela called it the “Long Walk to Freedom” in his 1994 Autobiography.

In 1990, when released from prison, Mandela persuaded the ANC to renounce violence in favor of peaceful
negotiation. He won the trust of Frederick Willem de Klerk, the last president of South Africa in a Whites-only
election, in their first meeting. This relationship helped to keep the negotiation on course for the next four years as
violence raged on the streets of South Africa’s townships. Aside from de Klerk, Mandela won most white South
Africans, who were reassured by his words of reconciliation. Mandela and de Klerk shared Nobel Prize for peace in
1993. The A.N.C. wins majority in election – Mandela assumed the role of the president of South Africa in 1994.

Mandela even established a Truth and Reconciliation Commission that granted amnesty to soldiers, policemen
and even assassins, provided they confessed to what they had done. “Our goal was general amnesty in exchange for
the truth,” said Bishop Desmond Tutu (who chaired the Truth and Reconciliation Commission) to Bloomberg News
in a 1999 interview. Tutu was also awarded the Nobel Peace Prize.

The level of endurance, persistence and altruism displayed by Nelson Mandela was exceptional and brought a
major change in human thinking that all men and women are equal in each respect and all persons should live
together in harmony and with equal opportunities. For all purposes it was a lonely and apparently hopeless struggle.
First and second generation successors to Nelson have been few and far between. Other lions of the struggle,
contemporaneous to Nelson, like Oliver Tambo, Walter and Albertina Sisulu, and Joe Salvo, had been dead for
years.

The governance he formed as the first black elected president of South Africa was an improbable fusion of races
and beliefs, including many of his former oppressors. When he became president, he invited one of his white
wardens to the inauguration. As a president from 1994 to 1999, Mandela devoted much energy to moderating the
bitterness of his black electorate and to reassuring whites against fears of vengeance. “Mandela overcame a personal
mistrust bordering on loathing to share both power and a Nobel Peace Prize with the white president who preceded
him, F. W. de Klerk” (Keller 2013: 11).

The next generations of leaders struggled to live up to their legacy. Thabo Mbeki, Nelson Mandela’s successor
as president of South Africa, was roundly criticized for his resistance to broadly accepted methods of treating and
preventing AIDS, a stance that contributed to the nation’s death toll from the disease. South Africa’s current
president, Jacob Zuma, has been under a cloud for years, investigated for corruption and rape cases. Younger leaders
like the firebrand Julius Malema have attracted a following among the disgruntled and jobless youth, but his radical
views and harsh criticism of ANC’s veteran leaders got him expelled from the party (Polgreen 2013).

Awards in Memory of Nelson Mandela:

2009: Nelson Mandela International Day, or Mandela Day, was adopted by the United Nations, Motto: "Take
Action. Inspire Change."

294
2013: The Nelson Rolihlahla Mandela Prize is announced. The first two laureates of the Prize are Dr. Helena
Ndume of Namibia and Jorge Fernando Branco Sampaio of Portugal.
2014: Ahmed Kathrada, South Africa's freedom struggle veteran and confidante of Nelson Mandela along with
whom he spent 26 years behind the bars, was knighted by the French government.
2015: The United Nations launched in 2015 the Revised Standard Minimum Rules for the Treatment of Prisoners
which is dubbed as the Nelson Mandela Rules.

A book written by South African author Ellie Crowe Tokyo Sexwale, a South African anti-apartheid
campaigner jailed alongside Nelson Mandela, with the title: “Nelson Mandela: the Boy Called Troublemaker” is
based on the childhood and early formative years and sheds light on Mandela’s boyhood days, the lessons he learnt
and how he learnt to overcome enormous difficulties to achieve success.

Nelson Mandela embodies the spirit of Ethics of Human personhood. Bearing no grudge even after being
imprisoned unfairly for 27 years, he championed the Gandhian way of fighting for freedom. Millennial have voted
for the leader that they admire the most, with Nelson Mandela, Pope Francis and Elon Musk coming out on top.
Nelson Mandela took the first spot with greater than 20% of the votes, almost 4% more than second placed Pope
Francis. Mandela’s humanity, leadership, commitment and forgiveness are a source of learning for the entire
world. He inspired millions of people, from school students to world leaders, to adopt a more peaceful approach,
and to practice forbearance and forgiveness. He fought against not only white domination but also black
domination, a champion of gender equality

Newspaper References
Bloomberg News (2013), “Long Walk Ends: Mandela Passes Away,” The Financial Express, Saturday, December 7, 2013, p. 12.
Keller, Bill (2013), “A Rarity among Revolutionaries and Moral Dissidents,” Deccan Herald, Saturday, December 7, 2013, p.11.
Polgreen, Lydia (2013), “Disappointment in Successors to Mandela,” Sunday Business Standard, Kolkata, Dec. 8, 2013, p. 8.
The Financial Express (2013): Editorial, “A Giant Passes: The Greatness of Nelson Mandela Challenges us all,” Saturday,
December 7, 2013, p. 7.

Assignment:
1. Nelson explained why he changed his non-violence stance so abruptly to an armed one: “Forswearing nonviolence
was not a moral principle but a strategy; there is no moral goodness in using an ineffective weapon.” Do you agree
or not with this ethic, and why?
2. Before he would be sentenced for life imprisonment in 1963, Mandela said in court closing a four-hour long speech,
the best of his life: “I have fought against white domination, and I have fought against black domination. I have
cherished the ideal of a democratic and free society in which all persons will live together in harmony and with equal
opportunities. It is an ideal which I hope to live for and to see realized. But, my lord, if it needs be, it is an ideal f or
which I am prepared to die.” How do you see the depth of Mandela’s human person from this statement?
3. In 2007, when Bill Keller asked Mandela, “After such barbarous torment, how do you keep hatred in check?”
Mandela answered: “Hating clouds the mind. It gets in the way of strategy. Leaders cannot afford to hate.” How do
you read Mandela’s compassionate human personhood in this statement that he lived and witnessed during his entire
life?
4. Describe, analyze and illustrate the simple “individuality” of Nelson Mandela as a human person.
5. Describe, analyze and exemplify the unique “sociality” of Nelson Mandela as a human person.
6. Describe, analyze and assess the profound “immanence” of Nelson Mandela as a human person.
7. Describe, analyze and unfold the awesome “transcendence” of Nelson Mandela as a human person.
8. Hence, unravel the deep mystery of the Human Person of Nelson Mandela as a dynamic interaction of individuality,
sociality, immanence, and transcendence.
9. How can Nelson Mandela be a beacon of light, encouragement and empowerment in the complex and fraudulent
world of today?

Case 9.2: A Life of Struggle: Freedom Fighter, Doctor,

Communist, Lakshmi Sahgal is no more

295
The case is about the life of an Indian freedom fighter and doctor Captain Lakshmi Sahgal who devoted her entire
life to India’s freedom struggle and human service with utter selflessness. The life of Lakshmi Sahgal is an
inspiration for all which teaches us to rise above the petty issues of gender, caste, creed, culture etc. and do
something for the betterment of society without any vested interests. The case is highly relevant to understand the
ethical values that she believed in throughout her life and try to adopt as many of them as possible. The case serves
as a motivation and guiding principles for those who want to contribute positively to the society and to the nation.

Her Life in Brief:

 October 24, 1914: Lakshmi was born in Madras (Chennai), India

 1928: She first met Netaji Subhas Chandra Bose in Calcutta
 1938: Graduated MBBS from Madras Medical College
 1940: Went to Singapore.
 1943, December: Met again Netaji Subhash Chandra Bose
 At the famous battle of Imphal in 1945, the two thousand strong Rani of Jhansi regiment led by Lakshmi
Sahgal defeated a British force.
 March 1943-45: INA Action & Capture by British
 Up to March 1946: Capt. Lakshmi was prisoner in Burma Jungle.
 March 1947: Set free in India, married INA Capt.
 1971: Joined CPI(M)
 1981: Founding member of All India Democratic Women’s Association (AIDWA).
 1998: Padma Vibhushan
 2002: Contested for President’s post and lost to APJ Kalam.
 Died: 23-7-2012, Kanpur

Her Early Years

Lakshmi Sahgal was born as Lakshmi Swaminathan in Madras Presidency on 24 October 1914 to S. Swaminathan, a
talented lawyer who practiced criminal law at the Madras High Court, and to A.V. Ammukutty, better known as
Ammu Swaminathan, a social worker and freedom fighter (and who would later be a member of independent India’s
Constituent Assembly). She was also a social worker and independence activist from the Vadakkath family of
Anakkara in Palghat, Kerala. Lakshmi Sahgal was a revolutionary of the Indian independence movement, an officer
of the Indian National Army, and the Minister of Women's Affairs in the Azad Hind government. Sahgal is
commonly referred to in India as "Captain Lakshmi," a reference to her rank when she had been taken prisoner in
Burma during the Second World War.

From her grandmother’s house, she would often hear the calls and hollers from the surrounding jungles and hills, of
the people who in her grandmother’s words were those “whose very shadows are polluting.” The young Lakshmi
one day walked up to a young tribal girl, held her hand and led her to play. Lakshmi and her grandmother were
furious with each other, but Lakshmi was the one triumphant.

Ammukutty (Lakshmi’s Mother) had a very constrained childhood as her father had died and her mother struggled
to raise and marry off her daughters. Resultantly, when Ammu was 13, her mother arranged an alliance for her
which conformed to the Sambandam system. Her consort was Dr. Subbarama Swaminadhan, an educated Tamil
Brahmin gentleman who was more than twenty years older than Ammu. Both of Ammu's daughters, Capt. Lakshmi
and Mrinalni, were to recount in their memoirs that while their paternal family acknowledged them (as was
traditional) by including them at family events such as weddings, they would be served their food separately from
other family members and subtle distinctions would be evident in the way they were treated.

296
 Ammukutty was a socialite, nationalist, social activist, and an ardent supporter of Indian National Congress
(INC), and a freedom fighter (and who would later be a member of independent India’s Constituent Assembly).
Lakshmi’s mother instilled the nationalist fervour in Lakshmi by taking her to meet Netaji, harbouring or hiding
freedom fighters, burning imported clothes, etc… She instilled egalitarian values, independence of thought in
Lakshmi by setting an example due to her own deprived childhood. Dr Lakshmi was another rich tomboy who had
married too young, a rider of horses and driver of cars and a very good singer.

After high school in Madras, she studied at Madras Medical College, from where she obtained MBBS in 1938.
The intervening years saw Lakshmi and her family drawn into the on going freedom struggle. She saw the
transformation of her mother from a Madras socialite to an ardent congress supporter, who one day walked into her
daughter’s room and took away all the child’s pretty dresses to burn in a bonfire of foreign goods. Looking back
years later, Lakshmi would observe how in the south, the fight for political freedom was fought alongside the
struggle for social reform. Campaigns for political independence were waged together for struggles for temple entry
for dalits and against child marriage and dowry. Her first introduction to communism was through Suhasini
Nambiar, Sarojini Naidu’s sister, a radical who had spent many years in Germany. Another early influence was the
first book on the communist movement she read, Edgar Snow’s Red Star over China. Lakshmi was born in Madras
to parents who had an inter-caste marriage that instilled the idea of caste equality at an early age. Most of the
servants were Dalits and they shared food with them much to the surprise of others. Lakshmi studied in vernacular
Government schools. Her first rebellion as a child was against the demeaning institution of caste.

She challenged the evil of caste based oppression by befriending a tribal girl against Grandmother’s wish.
Inspired by her mother who took Lakshmi to meet Netaji Subhash Chandra Bose for the first time to stir nationalist
fervor in her, she travelled the length and breadth of the country and was able to collect huge funds for the INA

297
soldiers and also mobilize people against the colonial power.

Lakshmi was passionate about fighting for freedom but did not respond to Gandhi’s call to students to leave
their studies and join the Civil Disobedience Movement. She felt that India needed well-educated and trained
professionals once freedom came. She qualified for the MBBS degree in 1938 and obtained her diploma in
gynaecology and obstetrics a year later. Later she worked as a doctor in the Government Kasturba Gandhi Hospital
located at Triplicane, Chennai. She felt the whole freedom struggle had gone wrong. Partition had been a disaster,
and the modern pursuit of money had ruined all. Her dream of free women: she hoped to abolish child marriage,
dowries and the ban on remarriage of widows. She wanted women to have chances like hers: to be educated, self-
supporting if they cared to be, and able to make their own choices about marriage.

She was married to P K N Rao, a pilot with Tata Airlines, while she was studying for the MBBS degree. Within
three months she felt it was a mistake, and returned from Bombay to Madras to continue with her studies. Rao did
not forgive her nor give her a divorce. So, when she fell in love with a classmate at Madras Medical College, unable
to marry and live together, the couple left for Singapore. But that friend, who also joined the INA, did not like her
getting involved in it, and even that relationship did not survive.

As a young doctor of 26, Lakshmi left for Singapore in 1940. Three years later she would meet Subhas Chandra
Bose, a meeting that would change the course of her life. “In Singapore,” Lakshmi remembered, “there were a lot of
nationalist Indians like K.P. Kesava Menon, S. C. Guha, N. Raghavan, and others, who formed a Council of Action.
The Japanese, however, would not give any firm commitment to the Indian National Army (INA), nor would they
say how the movement was to be expanded, how they would go to Burma, or how the fighting would take place.
People naturally got fed up.” Subhas Chandra Bose’s arrival broke this log-jam.

Lakshmi, who had thus far been on the fringes of the INA, had heard that Bose was keen to draft women into
the organization. She requested a meeting with him when he arrived in Singapore, and emerged from a five-hour
interview with a mandate to set up a women’s regiment, which was to be called the Rani of Jhansi Regiment. There
was a tremendous response from women to join the all-women brigade. Dr. Lakshmi Swaminathan became captain
Lakshmi, a name and identity that would stay with her for life.

During her stay at Singapore, she met some members of the Indian National Army and joined them along.
Lakshmi established a clinic for the poor, most of whom were migrant workers from India. She was taken prisoner
in the Karen Hills (eastern Burma) in early1945. The region was in war chaos and the British commander decided
to send the prisoners of war and refugees to Toungo, a 100-mile journey by foot, which took 10 days. Lakshmi's
description of this walk captures the horrors of the war, how difficult it was for her to not bathe and change clothes
for 10 days. The march to Burma began in December 1944, and by March 1945, the decision to retreat was taken by
the INA leadership, just before the entry of their armies into Imphal. Captain Lakshmi was arrested by the British
army in May 1945. She remained under house arrest in the jungles of Burma until March1946, when she was sent to
India –at a time when the INA trials in Delhi were intensifying the popular hatred of colonial rule.

Upon her return to India in March 1946, she became disillusioned with the Congress and the political
environment, and she decided not to be drawn into the public arena "come what may." Lakshmi was upset at the
journalists who glamorized Netaji, and INA officials like her, instead of trying to understand the movement that
Netaji had built. She continued her medical work and got involved with the welfare of the returning troops, and
after Independence, with refugees' rehabilitation.

Captain Lakshmi married Col. Prem Kumar Sahgal, whom she met at Singapore, a leading figure of the INA, in
March 1947. The couple moved from Lahore to Kanpur, where she plunged into medical service, working among
the flood of refugees who had come from Pakistan, and earning the trust and gratitude of both Hindus and Muslims.
Colonel Prem Sahgal had accepted a job as a junior executive in a textile mill in Kanpur. Lakshmi settled down in
Kanpur to a non-political life. Their house was always open to progressive, non-communal people.

She opened her own clinic when after the Independence she was turned down the offer of honorary medical
service at Government Hospital Kanpur by the Minister of Health, Vijay Lakshmi Pandit. She used to open and
clean her clinic herself in the last 60 years of practice. Was a very good and caring medical doctor whose sole aim
was to serve the poor without any prejudice, and she loved her profession.

298
 Lakshmi began her medical work to serve underprivileged women and children. She also started working in a
municipal dispensary, which, for several years, had not been able to get a woman doctor. She also trained several
women as medical aides and midwives. For a while she also tried her hand at farming in the foothills of Nainital,
and became an expert in driving a tractor, and supervising sowing and other operations. She chose to live in a
working class district in Kanpur since independence. During college days Lakshmi was critical of Gandhi’s
insistence of non-violence and close collaboration with Indian Capitalists. She had strong feelings on Nationality
and freedom of women. She was put on house arrest after her release post Imphal, held INA meeting and hoisted the
flag. She was a strong opponent of the partition and proposed India –Pakistan unity.

The couple unhappily watched the INA disintegrate and became restless politically, unsatisfied with the way
things were going and said, "The fruits of independence were benefiting only a few — the white rulers had been
replaced by darker ones." When her daughter Subhashini (Ali, now a prominent labour activist) joined the
Communist Party of India (Marxist), Lakshmi got involved with the Party's activities, and later opened a clinic for
families of workers. She was one of the founding members of the All India Democratic Women's Association
(AIDWA), set up by the Party. She subsequently led many of its activities and campaigns.

By the early 1970s, Captain Lakshmi’s daughter Subhashini had joined the CPI (M). She brought to her
mother’s attention an appeal from Jyoti Basu for doctors and medical supplies for Bangladeshi refugee camps.
Captain Lakshmi left for Calcutta, carrying clothes and medicines, to work for the next five weeks in the border
areas. After her return she applied for membership in CPI (M). For the 57-year-old doctor, joining the party was
“like coming home.” “My way of thinking was already communist, and I never wanted to earn a lot of money, or
acquire a lot of property or wealth,” she said.

After the Bhopal gas tragedy in December 1984, she led a medical team to the city; years later she wrote a
report on the long-term effects of the gas on pregnant women. During the anti-Sikh riots that followed Prime
Minister Indira Gandhi’s assassination in 1984, she was out on the streets in Kanpur, confronting anti-Sikh mobs
and ensuring that no Sikh or Sikh establishment in the crowded area near her clinic was attacked. She was arrested
for her participation in a campaign by AIDWA against the Miss World competition held in Bangalore in 1996.

Captain Lakshmi was an atheist by religious profession. She was also an active member of the Rajya Sabha.
She pledged that her body was donated for medical research at Kanpur. She was nominated as the sole opponent in
2002 for the coveted honor of President of India election against Dr. A. P. J. Abdul Kalam. Captain Lakshmi was the
presidential candidate of the Left in 2002, an election that A. P .J. Abdul Kalam would win. She ran a whirlwind
campaign across the country, addressing packed public meetings. While frankly admitting that she did not stand a
chance of winning, she used her platform to publicly scrutinize a political system that allowed poverty and injustice
to grow, and that fed new irrational and divisive ideologies.

Captain Lakshmi had the quality of awakening a sense of joy and possibility in all who met her-her co-workers,
activists of her organization, her patients, family and friends. Her life was an inextricable part of the 20 th century
India- of the struggle against colonial rule, the attainment of freedom and nation-building over 65 tumultuous years.
In this great historical transition, she always positioned herself firmly on the side of the poor and the underpowered.
Freedom fighter, dedicated medical practitioner, and an outstanding leader of the women’s movement in India, she
leaves the country and its people a fine and enduring legacy.

She had sustained her clinic for decades. She spoke of how her clinic that did not contain a surgical unit, which
she wished she could have had. There was a shortage of space and she could only admit a few patients. "It is not
doing so well since the last two years," she agreed. Every day of the week she would be at the clinic by 9 am. Until
her death on July 23, 2012, it was reported that she saw patients until the end.

At 11.20 am on July 23, Captain Lakshmi Sahgal died in Kanpur at the age of 97. There was no cremation
ceremony as her body had been donated to Ganesh Shankar Vidyarthi Medical College, Kanpur.

She is survived by Subhashini Ali and Anisa Puri, grandchildren Shaad Ali, Neha and Nishant Puri and Sister
Mrinalini Sarabhai. Lakshmi’s sister Mrinalini Sarabhai was an eminent Indian classical dancer schooled at
Switzerland and USA and also educated at Shantiniketan; she was married to Vikram Sarabhai.

299
References:

Parwathi Menon, The Hindu, – Tuesday, July 24th 2012, pp. 1, 13]
Reference from site www.winentrance.com.
Reference from site rediff.com.
Reference from Laxmi Sahgal profile at www.cpim.org.
Reference from source sussle.org/Ravi Shankar
Reference from Source boloji.com
Reference from source counterpunch.org
http://en.wikipedia.org/wiki/Ammu_Swaminathan
http://www.mainstreamweekly.net/article3644.html
http://www.economist.com/node/21559891
http://www.cpim.org/elections/president/lakshmi_sehagal_profile.htm
http://www.winentrance.com/general_knowledge/lakshmi-sahgal.html
http://www.thehindu.com/news/cities/chennai/a-fulfilling-journey-that-began-in-madras/article3675707.ece?ref=relatedNews
http://www.thehindu.com/features/metroplus/a-revolutionary-and-a-singer/article3682419.ece?ref=relatedNews

Assignment:
1. Describe the unique individuality of Captain Lakshmi.
2. Describe the unique immanence of Captain Lakshmi.
3. Describe the unique sociality of Captain Lakshmi.
4. Describe the unique transcendence of Captain Lakshmi.
5. Study the major leadership decisions of her life, and investigate their phenomenology.
6. Describe her life of executive freedom despite the constraints she faced.
7. Study her Theory of Action as an example of the Volitionalist Tradition
8. What do you learn from her life in being a person for others?

Case 9.3: Dr. Amar Gopal Bose, Acoustics Pioneer and

Inventor
Amar Gopal Bose, the visionary MIT engineer, professor, inventor, billionaire entrepreneur, and
founder and CEO, Bose Corporation, dies peacefully at his home in Wayland, Massachusetts, Friday, July 12,
2013. He was 83. Vanu G. Bose, his son confirmed his death. Dr. Amar Gopal Bose (1929-2013), Acoustic
Pioneer was the inventor of many acoustic products, among them: a) Bose 901 Direct/Reflecting audio
speakers systems; b) Bose Wave Radio and, and c) Bose noise-cancelling headphones. Amar Gopal Bose a
pioneer in modern acoustic and founder of the Bose corporation which is known as the high end audio
products bearing his last name, was inducted in the National Inventors Hall of Fame in the U.S, which
previously honored the likes of Thomas Edison, Graham bell, and Wright Brothers.

Key Events:

1929: Amar Bose was born November 2, 1929 in Philadelphia of a Bengali father and American mother.
1947: Soon after graduating from high school in Philadelphia, Amar won admission in the prestigious
Massachusetts Institute of Technology (MIT) where he completed his bachelors, masters and doctorate
degrees in electrical engineering.
1950s: He was deeply disappointed by the inferior sound of high-priced systems. Hence his urge to reinvent
sound reproduction.
1956: Obtains PhD from MIT, and wins a faculty position at MIT.
1960s: Early 1960s, Bose invented a new type of stereo speaker based on psychoacoustics, the study of sound
perception.
1960s: His design incorporated multiple small speakers directed towards the surrounding walls of concert
hall such that the reflected sound reaches the listener rather than directly facing the listener. Hence, larger
sound is heard in concert halls.

300
1964: At the urging of his mentor and advisor at MIT, Professor Y. W. Lee, Bose founded his company to
pursue long-term research in acoustics. Bose founded his company “The Bose Corporation”.
1968: Amar used the concept of blending the direct and reflect sound instead of the conventional concept
wherein loud speakers radiated sound only forward. Thus he invented “Bose 901 Direct/Reflecting audio
speakers systems.”
1982: Bose audio systems found its way in vehicles of world’s top automakers including Mercedes and
Porsche
1983: Introduced industry’s first custom-engineered, factory-installed sound system.
1988: Bose became the first company to pay for the title of official Olympics sound system supplier.
1993: Opened its first store in Kittery, Maine. Since then Bose has opened 190 stores in the U.S and numerous
locations worldwide.
2004: Unveiled a prototype application of the technology after more than 20 years of research.
2007: Won International Telematics Award for the “Best Storage solution for In-Car Environment.”
2010: Introduced Bose Ride, an active system that reduces road-induced vibration in the driver’s seat.
2011: Having taught at MIT for more than 45 years, Amar Bose donated a majority of his company’s (The
Bose Corporation) shares to his alma mater MIT.

His name and company became synonymous with high quality audio systems and speakers for home users,
auditoriums and automobiles. He was born of Noni Gopal Bose, a Bengali freedom fighter who had fled to the USA
in 1920, who later married an American school teacher. Noni was studying physics at Calcutta University when he
was arrested and imprisoned for his opposition to British rule in India. Amar Gopal Bose was born in Philadelphia,
Pennsylvania, USA on November 2, 1929. At 13, junior Bose was engaged in repairing radio sets for pocket money
for repair shops in Philadelphia. During World War II, when his father’s import business struggled, Bose’s
electronic repairs helped support the family.

In 1947, soon after graduating from high school in Philadelphia, Amar won admission in the prestigious
Massachusetts Institute of Technology (MIT) where he completed his bachelors, masters and doctorate degrees in
electrical engineering. While at MIT, Bose studied under the mathematician Norbert Weiner and along with Lee

301
Oppenheim. An avid badminton player and swimmer, Bose spent several weeks each year at his vacation home in
Hawaii. Bose married Prema and had two children, Vanu, now the head of his own company, Vanu Inc. in
Cambridge, MA, and Maya Bose.

In 1950s, while still an engineering student at MIT, Amar bought a high-priced stereo system, and quickly
unhappy with its performance, dismantled it and studied how it should be built. A perfectionist and an ardent
devotee of classical music, Bose was disappointed by the inferior sound of the high-priced stereo system. His
interest in acoustic engineering piqued. He quickly realized that 80% of the sound experienced in a concert hall
bounced off walls and ceilings before reaching the audience. This realization and using basic concepts of physics,
Bose began developing interest in acoustic engineering systems and started making speakers.

In 1956, fortified with PhD from MIT, Amar won a faculty position at MIT. By early 1960s, Bose invented a
new type of stereo speaker based on psychoacoustics, the study of sound perception. His design incorporated
multiple small speakers aimed at the surrounding walls, rather than directly at the listener, to reflect the sound, and
in essence, recreate the larger sound heard in concert halls. As founder and chairman of the privately held company,
Dr. Amar Bose focused relentlessly on acoustic engineering creativity and innovation. His fabled speakers, even
though steeply expensive, earned him a reputation for bringing concert-hall quality audio in homes and vehicles.

In 1964, at the urging of his mentor and advisor at MIT, Professor Y. W. Lee, Bose founded his company to
pursue long-term research in acoustics. The Bose Corporation initially pursued military contracts. But Bose’s
vision was to produce a new generation of stereo speakers. His first generation speakers fell short of his
expectation. But Bose kept at it.

In 1968, Bose created and launched his own speaker systems, the Bose 901 Direct/Reflecting audio speakers
system, which became a best seller for more than 25 years. This early success firmly entrenched Bose in
Framingham, MA, as a leader in the highly competitive radio components market. Unlike conventional loud
speakers that radiated sound only forward, the Bose 901s used a blend of direct and reflected sound.

Today, the Bose Corporation specializes in audio equipment and sells its products throughout the world and
employs more than 10,500 people. Bose is best known for its home audio systems and speakers, noise cancelling
headphones, professional audio system and automobile sound system. The Company has also conducted research
into suspension technologies for cars and heavy- duty trucks. Mr. Bob Maresca is the president of Bose Corporation.

Later inventions included the popular Bose Wave radio and the Bose noise-cancelling headphones, which were
so effective that they were adopted by the military and commercial pilots. A Bose software program enabled
acoustic engineers to simulate the sound from any seat in a large hall, even before the site was built. The system
was deployed to create sound systems for such diverse spaces as Staples Centre in Los Angeles, the Sistine Chapel
in the Vatican, and the Masjid al-Haram, the grand mosque in Mecca. By 1982, some of the world’s top
automakers, including Mercedes and Porsche, began to install Bose audio systems in their vehicles, and the brand
still commands loyalty in that luxury market segment.

Bose taught at MIT for more than 45 years, and in 2011, he donated a majority of his company’s shares to his
alma mater MIT. The gift provides MIT with annual cash dividends. By mutual agreement, MIT cannot sell the
Bose Corporation shares and does not participate in the company’s management.

He persistently refused to offer stock to the public so that he could freely pursue risky long-term research such
as noise-cancelling headphones and innovative suspension systems for cars, without the pressure of quarterly
earnings and annual financial statements and announcements. In a 2004 interview in Popular Science magazine,
Amar said: “I would have been fired a hundred times at a company run by MBAs. But I never went into business to
make money. I went into business so that I could do interesting things that hadn’t been done before.”

More recent achievements and awards of Bose Systems include:

 In 2007 the Bose media system won the International Telematics Award for the "Best Storage
Solution for In-Car Environment."

302
  Audio systems manufacturer, Bose Corporation, 30th September, 2009 launched its Sound Dock 10
digital music system for iPod. The new system has been designed to reset the standard for how good
an iPod can sound from a single enclosure using advanced engineering and new technologies.
 In 2010, Bose introduced Bose Ride, an active system that reduces road-induced vibration in the
driver's seat. Bose claims as much as a 90% reduction in driver's seat vibration.
 With respect to sales in the U.S. for home-audio retail home theater systems (speaker and receiver
combination systems) and portable audio sales, Bose was respectively ranked first and third in 2012.
 In 2018, the 901's will celebrate 50 years of continuous production.
 Bose has not been certified by THX for its home entertainment products even though its more
expensive home theater products compete at price-points where THX certification is common.
 2013: Launch of the Sound link Mini which goes on to become the fastest selling product of Bose. The
Bluetooth product fits the palm of the user’s hand and gives a great experience for loud music.
 2013: Presence in 15 global auto brands to become one of the leaders of the premium automotive
sound industry.
 2014: Voted among five most innovative brands during the Plus X award ceremony for the 7th
consecutive time.

Concluding Thoughts:
The inspiration one can gain from Dr. Amar Gopal Bose is that he loved solving problems rather than looking at
them as deterrents to get the job done. "The future isn't in solving the problems to which we already know the
answers. It's in learning how to work through the problems you'll experience in life." One of the problems faced by
innovators today is the lack of time as per Bose. Having the patience to continue a speculative project for more than
20 years is not feasible for a CEO whose average job is around 5 years thus making the possibility of long term
research impossible. Bose used to say that his best ideas always came as a flash rather than a series of rational
thoughts, though later, he applied rational methodologies to his flash idea. "These innovations are not the result of
rational thought; it's an intuitive idea.”

References:
Sunday Business Standard, 14 July 2013, Kolkata city, pp. 1, 4.
http://www.business-standard.com/article/companies/bose-launches-sounddock-10-digital-music-system-for-ipod-
109093000178_1.html
http://en.wikipedia.org/wiki/Bose_Corporation
http://www.popsci.com/science/article/2013-07/curious-genius-amar-bose
http://www.iloveindia.com/indian-heroes/amar-bose.html
http://www.nytimes.com/2013/07/13/business/amar-g-bose-acoustic-engineer-and-inventor-dies-at-83.html?_r=0
http://worldwide.bose.com/com/en_us/web/our_achievements/page.html

Ethical Analysis:

1. Describe and discus the unique individuality of Amar Gopal Bose and his life’s achievements.
2. Describe and discuss the unique immanence of A G Bose and his life’s achievements.
3. Describe and discuss the unique sociality of A G Bose and his life’s achievements.
4. Describe and analyze the unique transcendence of A G Bose and his life’s achievements.
5. Study the major scientific leadership experiences and decisions of his life, and investigate their phenomenology.
6. Describe A G Bose’s life of executive freedom despite the major constraints he faced.
7. Study his Theory of Action as an example of the Volitionalist Tradition.
8. What do you learn from his life in being a scientist and person for humanity?

The Ethics of the Human Personhood

More than at any other period in human history, humankind is currently at the cross-roads of
war or peace, growth or decline, progress or regress, life or death, hell or heaven. We cannot

303
leave these opposite polarities and possibilities to chance. We must design and invent, plan and
predict, monitor and control our future and that of our posterity. In this regard, the concept of
human personhood cum human responsibility is a fundamental part of this new self-
understanding and undertaking. Ethics and morality are a critical component on this creative
journey to destiny. Corporate ethics, in particular, requires the development of a clear
understanding of the relationship between executive autonomy and freedom, between human
creativity and market innovation, and between human culture and corporate social responsibility.
In this chapter we explore three crucial concepts in this endeavor: the corporate human
personhood, the corporate human act, and the corporate human judgment. Other critical concepts
such as accountability and responsibility, the ethics of rights and duties, the executive virtue of
moral and ethical reasoning, the building of trusting and caring relationships, and the like will be
discussed in subsequent chapters.

Recent advances in the physical, social, biological, neurological and anthropological sciences
have not only spawned radical technological and market breakthroughs, but have, more
importantly, unearthed tremendous human potentiality for design, creativity and innovation, for
invention, discovery, venture and entrepreneurship, for capital accumulation and wealth creation,
for individual self-actualization and collective common good. We are experiencing a growing
consciousness of the increased power that human beings have over nature, and over the future
development of the human race. This power can be both a blessing and a curse: it is a blessing if
harnessed to do good, to preserve and respect human dignity, to bring about justice, and to
promote peace and human solidarity; it can be a curse if the same power is abused to do evil,
destroy human worth, generate unjust structures, and provoke war and terrorism, global
destruction and disintegration. We can make or mar our destiny.

Why Ethics of Human Personhood?

Martin Heidegger claimed that modern technology, with its violent metaphysics, destroys
being (Heidegger 1978). It is not modern technology itself, however, that is dangerous but its
wanton and wide-scale implementation by modern-day un-eco-sensitive businesses. With its
exclusive focus on profitability bottom line, businesses today tend to violate the integrity and
diversity of natural ecosystems, human systems, the autonomy and culture of local communities
and the chance that future generations will lead a decent life (Zsolnai2015: 3).

The metaphysics of modern-day business can be described by the following statements: (i)
Being or ‘to be’ is to be a marketable resource; (ii) Being or ‘to be’ involves being either an
object available for productive activity on the market, or else a subject who makes use of such
objects; and, (iii) the only mode of thinking is calculative thinking: the consideration and
measurement of every being as a marketable resource (Young 2002). Such metaphysics destroys
human personhood. Hence, we need ethics of human personhood to counteract the modern-day
metaphysics. Such market metaphysics—what George Soros (1998) rightly calls “market
fundamentalism”—necessarily lead to the violation of natural and human beings. In many cases
violent business practices result in ‘essential’ harms such as the exploitation of forests for timber
or the commoditization of women as mere sex objects (Zsolnai 2015).

304
 Psychology as a science started with two distinct approaches: a) one emerged as the study of
human internal processes that are often difficult to observe directly; b) single-minded focus on
observable behaviors. The former began with the psychoanalytic tradition of Sigmund Freud
who believed that the reasons why people act and feel as they do are deep within them; hence
change can be promoted only when people probe their psychic depths and bring to surface and
awareness those inner, often unconscious, dynamics. The latter approach (b) began with the
empirical tradition of B. F. Skinner, its best exponent, called behaviorism, and assumed that the
causes of people’s actions are the rewards or punishments, they called reinforcements, they have
received; hence, a person’s life can be dramatically changed by precise adjustments in the
administration of reinforcements.

From the psychoanalytic tradition of Freud emerged two other approaches: a) humanistic
person-centered psychology that included the work of Carl Rogers who pioneered client-centered
therapy; and b) humanistic projective psychology that includes the work of Fritz Perls, who
pioneered Gestalt therapy. Both psychoanalytic and humanistic traditions, even though much
different, understand human behavior in terms of motivational and emotional dynamics, both
focus on promoting awareness as the basis for change, and both build theory using observations
and direct experience. Both build their theories on clinical experience.

On the other hand, behaviorism focused on observable behaviors and the environmental
conditions or contingencies that reinforce them. Citing the rules of science, Behaviorism argued
that before a phenomenon is accepted as a fact, it must be independently investigated by other
scientists and replicated by them. This empirical tradition has evolved through many decades
now. During the last three decades or so, the empirical tradition has employed statistical analysis
of data collected from scientific experiments to analyze observable behaviors.

Many so called cognitive theorists now focus on individual’s thoughts and emotions rather
than just observable behaviors via environmental reinforcements. They explain behaviors in
terms of people’s thoughts, attitudes, expectations and interpretations about reinforcements. The
cognitive psychology theorist seemed to have moved “inside the person” to search for the causes
of behavior. Other volitional psychology theorists (e.g., Harry Farlow, Abraham Maslow,
Douglas McGregor, Frederick Herzberg) have gone deeper to probe into human “motivations.”

Many so called deterministic psychology theorists (e.g., Frederick Taylor, BF Skinner) have
continued to view the person in observable mechanistic terms. The latter assert that humans are
information processing machines that work like computers to solve problems, make decisions,
and behave accordingly. By this view, human beings are machines waiting to be programmed by
society through homes and schools, workplaces and worship places. Sociologist Talcott Parsons
proposed yet another view. He portrayed the birth of each infant as the invasion of a barbarian;
children are savages who need to be tamed. This infant-as-barbarian view is not too dissimilar to
the view of the human person is a passive information-processing machine waiting to be
programmed and tamed by society. Both views assert that society must shape and mold the
person; both suggest that socializing agents and agencies like parents, home, teachers, school,
and managers and the workplace should create the human self. Both view human development
as something done by the social world to children, adolescents and adults at various stages of
their life.

305
 Another approach considers humans as vital organisms, who, by their nature, explore,
develop, and take challenges, and thus develop themselves, of course, supported by parents,
teachers and workplace superiors. Richard Ryan and Edward Deci follow this approach in
understanding intrinsic motivation. Their central thesis is that people develop through the
process of organismic integration as they proactively engage their world. They believe that there
is a basic tendency within people to move toward greater coherence and integrity in the
organization of their inner world. Inherent in the nature of human development is the intrinsic
tendency toward greater consistency and harmony within; that is, people are intrinsically
motivated to integration and harmony (Deci 1996: 80).

Even other psychologists have hinted at human organismic integration. Freud spoke of the
synthetic function of the ego that suggested that throughout life people work to bring coherence
to their experience, and thus to the development of their own personality. Child psychologist
Jean Piaget hypothesized a similar organizational principle in children whereby they imbued
everything with life. Carl Rogers and fellow humanistic psychologist Abraham Maslow spoke of
the self-actualization principle within people leading them toward greater internal harmony and
integrity. In a similar way, argue Deci and Ryan, people’s perceived sense of competence and
perceived sense of autonomy enhance intrinsic motivation that empowers organismic integration.
The development of integration in personality reveals who you truly are and indicates becoming
all you are capable of – these ground and empower the concept of human authenticity.

A further and deeper question is: what grounds intrinsic motivation and organismic
integration in us whereby we discover, develop and enjoy ourselves as a human integrated
personality that is truly individual and social, immanent and transcendent at the same time?
When Deci (1996: 82) rightfully asserts “that intrinsic motivation and the inherent integrative
tendency are natural,” my question is what make them natural and what grounds this nature? The
answers to these questions are beyond psychology and empirical measurement, as empirical
methods or cognitive theories cannot stretch their horizons too far. Hence we have recourse to
philosophy.

It is the philosophy of the human person we discuss trans-empirical concepts like the human
nature, human dignity, fundamental human rights, the human soul and human destiny. We
examine such concepts in this chapter so as to enrich our understanding of intrinsic motivation
and the inherent integrative tendency that are so natural to us but one that are least lived and
experienced. It is the human person (richly created and even more designfully engineered and
architectured by God) that grounds our unique human nature, human personality, human dignity
and authenticity, and human development and potential. Table 9.1 summarizes the taxonomy of
research methodologies in psychology, arguing for the necessary complement of a philosophical
approach to the human person.

Fundamental Questions of Corporate Ethics

Our common ground, regardless of our religion and religious beliefs, ethnic and national
composition or persuasion, is our recognition of the value of the human person and human
personhood. The centrality of the question of human personhood is common to theology and

306
philosophy, religion, morals and ethics, and even laws and values. Corporate ethics and morals
deal not only with executive decisions and actions, but even raise the more fundamental
questions:

 What ought I to do as a corporate executive?

 What kind of executive person do I want to become?
 What kind of corporate executive ought I to be?

These questions deal with the fundamental operations that define us as humans: doing,
becoming, and being. Even those who consider basing ethics on a set of universal and absolute
values presuppose the necessity of the human personhood. We can never predicate moral
goodness or moral badness of beings that are not human persons (Häring1978: 85; Hildebrand
1953: 167).

Before we become educated, executives, managers and bosses, brothers and sisters, lovers,
husbands and fathers, beloved, wives and mothers, we are first and foremost a person, a human
person, one who needs to be acknowledged and affirmed by all of us (Shetty 2012: 136). We are
human persons every moment of our being (this is the fixed nature of human personhood); yet
human personhood means that we go beyond or transcend what we are at a given moment (this is
the dynamic nature of human personhood). Both aspects of human personhood are necessary;
they make us what we are – human, personal, ethical, moral, accountable and responsible
persons and personalities.

What is Human Personhood?

What is man? What is being human? What is human personhood? What is corporate
human personhood? A related philosophical and more fundamental question is: what is human?
And what is being good? Aristotle’s balanced formula for man was: man is a rational animal.

Within ancient Greek philosophical thought and categorization this definition meant that the
human being is endowed with the highest of three types of souls:

1. As a vegetative soul, the human is capable of nutrition, growth, and reproduction;

2. As an animal soul, the human is capable of movement, sensations, emotions and experiences;
3. As a rational soul that unites the other two, the human is capable of knowledge and choice. That is,
this rational soul expresses itself in the twofold activity of thinking and willing.

We are even more: our knowledge is reflective (i.e., we know that we know) and our choices
are informed and reflective (i.e., we know what we are choosing, and we know why we are
choosing it). Our skills and potential for knowledge and choice empower us to be “causes” or
“authors” of our own actions, and hence, to be accountable and responsible for the consequences
of our actions. Thus, being and action are intrinsically linked in the rational and voluntary
nature of our human being. [See Corporate Ethics Exercise 9.1].

On the surface, human behavior is basically a set of actions that are governed by one's
feelings, emotions, attitudes and beliefs regarding proposed ends, ideals, goals and objectives. In
general, most decisions and actions stem from and are affected by one's personality or character.
To the extent that these decisions and actions are human, they are usually assessed by several
307
dyadic qualifications such as right or wrong, good or bad, ethical or unethical, moral or immoral,
just or unjust, and fair or unfair. In general, actions are praiseworthy if good, and blameworthy,
if bad. If good, one should be credited for them; if bad, one must accept blame and
responsibility for the intended and unintended consequences.

Ethics is concerned with responsible human behavior. Corporate ethics is concerned with
responsible human behavior in relation to executive decisions, actions and their outcomes. Good
business executives execute good decisions and actions that generate good outcomes, and avoid
bad decisions and actions that result in bad or harmful consequences.

What is being Good?

According to Aristotle, “Every art and every inquiry, every action and choice, seems to aim
at some good; whence the good has rightly been defined as that which all things aim” (Aristotle
1985; NE 1094, a 1-3). There are different goods, however, corresponding to different arts and
sciences. For the doctor’s art it is health, for the economy it is wealth, and for business ethics it is,
presumably, the happiness or fulfillment of all stakeholders. However, this happiness is
multidimensional and longitudinal, and thus, should include both the present (e.g., Fournier and
Mick 1999; Oliver 1997) and the future (e.g., Lemon, White and Winer 2002). In fact, Aristotle’s
concept of eudemonia or happiness that is the end result of virtue includes “human flourishing”
(Cooper 1986: 89) that lasts throughout one’s adult life (Sherman 1987).

Some ends are subordinate to other more ultimate ends. The end of prescribing a certain
medicine may be to induce sleep, but this immediate end is subordinate to the wider and more
comprehensive end of health. But if there is an end which we desire for its own sake and for the
sake of which we desire all other subordinate ends or goods, then this ultimate good will be the
best good, in fact, the good. According to Aristotle (1985), this ultimate good for human beings is
the subject matter of ethics and as such cannot be deductively derived from any first principles
with some mathematical exactitude but inductively derived from the conclusions of actual moral
judgments of good people (NE 1094, b 11-27). Ethical inquiry should start from the actual moral
judgments of good people that by comparing, contrasting, and sifting can help formulate general
principles. This view presupposes that human beings have some natural tendencies for good, and
Aristotle founded his ethic on the universal characteristics of human nature.

Analyzing Nelson Mandela: His Corporate Ethics and Basic Goodness

In all of the great liberation movements, said William Gumede, an analyst who has written
extensively on Mandela, there is the problem of producing succession-leaders. In the case of
Mandela, there has really been a failure to pass the torch. Even the lives and leadership of his
former wife, Winnie Madikizela-Mandela and her children and grandchildren have been too
sordid to pass the Mandela banner (Polgreen 2013). Tragedy and turmoil marked Nelson’s
private life. While he was still incarcerated, one of his sons died; another succumbed to AIDS in
2005. Mandela divorced his second wife Winnie in 1996 for “brazen infidelity.” She was earlier
convicted in 1991 for kidnapping an alleged police informant while Mandela was still in prison.

308
“Mandela was no ordinary leader; he was a leader of leaders. His life was remarkable for its
achievements. … During his 27 years in jail, Mandela attained renown for his uncompromising
commitment to fighting injustice. This made him an icon of the oppressed. His fight against
apartheid was all the more laudable in that he engaged in principled negotiations with the white
rulers to end it. … When he walked out of jail in 1990, many believed that long decades in jail
would have made him bitter and angry with his oppressors and that he would seek retribution.
He showed the world there was another way to reach out and forgive one’s tormentors,” thus
said the Deccan Herald Editorial (Saturday, December 7, 2013, p.10). During the brutal years of
his imprisonment on Robben Island, thanks to his own patience, humor and capacity for
forgiveness, he seemed freer behind bars than those who kept him there, locked up in their own
self-demeaning prejudices (The Financial Express: Editorial, Saturday, December 7, 2013, p. 7).

Mandela founded the Truth and Reconciliation Commission (TRC) aimed at providing victims of
the apartheid years with closure. The TRC did help uncover the truth about violence unleashed
by the apartheid regime as well as its opponents, but it was only partially helpful in healing
wounds or ending racial hatred. Mandela never hesitated to speak truth to power. He was
uncompromising in expressing his anguish, even anger, over injustice. In 2003, Mandela lashed
the United States for committing “unspeakable atrocities” and for risking a “holocaust” by
invading Iraq. His words were prophetic and appealed to the conscience of millions, compelling
even warring groups to lay down their guns to build peace. It will not be easy for the post-
Mandela world to accept the challenge of his death – his moral authority will be sorely missed
(Deccan Herald editorial, Saturday, December 7, 2013, p.10). Ever since Mandela voluntarily
left the presidency of South Africa in 1999, he has brought his moral stature to bear elsewhere
around the continents of the world – he was a broker of peace.

The question most often asked about Mandela was how, after South African whites had
systematically crushed and humiliated his people, tortured and murdered many of his friends,
and incarcerated him into prison for 27 long years, he could be so evidently free of spite and
retribution. When preparing for the Mandela obituary in 2007, Bill Keller, columnist of
International New York Times, asked Mandela, “After such barbarous torment, how do you keep
hatred in check?” Mandela’s answer was almost dismissive: “Hating clouds the mind. It gets in
the way of strategy. Leaders cannot afford to hate.” He was an apostle against apartheid – a
word that literally means “apartness” in the African language, but in reality means a system of
racial gerrymandering that stripped blacks of their citizenship in the country of their origin and
relegated them to USA-template “reservation” of so-called homelands and townships, a system
that denied 80% of South Africans any voice in their own affairs.

Some South African blacks, including Winnie Madikizela-Mandela, Mandela’s former wife, who
cultivated a following among the most disaffected blacks, complained that Nelson Mandela had
moved too slowly to narrow the vast gulf between the impoverished black majority and the more
prosperous white minority. Even some whites contended that Mandela had failed to control
crime, corruption and cronyism. Undoubtedly, Mandela had become less attentive to the details
of governance, and had turned over the daily responsibilities to the deputy, Thabo Mbeki, who
would one day succeed him. But wherever and whenever it was necessary, Mandela did exercise
his patriarchal authority and political shrewdness without which the country could have
descended into civil war by now (Keller 2013: 11).

309
Among Mandela’s many achievements, two stand out: 1) he was the world’s most inspiring
example of fortitude, magnanimity and human dignity in the face of oppression and opposition,
serving over 27 years in prison for his belief that all men and women are equal. 2) Little short of
the miraculous was the way he engineered and oversaw South Africa’s transformation from a
byword for nastiness and narrowness into, at least in intent, a rainbow nation in which people,
regardless of caste or color, were entitled to be treated with respect and human dignity. Nelson
Mandela was awarded the Bharat Ratna, the highest Indian civilian award, in the year 1990.

His charisma was evident from his youth. He was a born leader who feared nobody, debased
himself before no one, and never lost his sense of humor. He was handsome and comfortable in
his own skin. In a country in which the myth of racial superiority was enshrined in law, he never
for a moment doubted his right to equal treatment, and that of all his compatriots. For all the
humiliation he suffered at the hands of white racists before he was released in 1990, he was
never animated by feelings of revenge. He was himself utterly without prejudice, which is why
he became a symbol of tolerance and justice across the globe. He was quite simply, a wonderful
man (The Financial Express: Editorial, Saturday, December 7, 2013, p. 7).

His persistent struggle against apartheid teaches us that if we are determined to achieve
something, if we have true willingness to change something for humanity, it is never impossible
to strike hard and win the battle. A right path could be difficult, long and full of obstacles but it
will definitely lead to success. His message of reconciliation, not vengeance, reaffirmed
Mahatma Gandhi’s philosophy that fighting violence with violence is never a good idea. The
way he handled the South Africa’s affairs after he assumed the presidential powers demonstrates
the highest human values with regard to forgiveness, truth and altruism and social justice.

Nelson Mandela led a struggle against apartheid authorizing equal rights, equity, and fairness for
all regardless of the color of the skin, and built a placid, amalgamated, and democratic South
Africa. Nelson Mandela was a man with vigorous conviction to stand by his values through the
toughest periods of his life; a man whose integrity, humility and commitment to the cause of
gregarious equity is un-paralleled; a man who voluntarily stepped down from power at a time
when his popularity was at peak. Mandela was of course a human being and hence, not perfect.
He was a man of complexities. There were many controversies surrounding him like instances of
armed rebellion which he had organized. At times, he also made controversial statements. But
the political landscape of his time justified controversy - political discourse from the emergence
of apartheid, to emergence of ANC, ANC rebellion against Apartheid and then negotiation of
Apartheid.

Humanity, Leadership, commitment to fight injustice, forgiveness, fierce determination, and

conviction – these were the virtue of Mandela. He stood up for fight against the apartheid,
standing up for the rights of millions of people. His strong leadership qualities, determination,
and commitment to fight injustice made him stand strong in all the ups and downs of his life.
The conviction to give up one’s entire life for the betterment of the community requires fierce
resolve and persistence. The ethical quotient was definitely high in the cause and process that
Mandela followed.

310
In 2007, Bill Keller, columnist of International New York Times, asked Mandela, “After such
barbarous torment, how do you keep hatred in check?” Mandela’s answer was almost
dismissive: “Hating clouds the mind. It gets in the way of strategy. Leaders cannot afford to
hate.”

The end state solution to the long standing social issues in South Africa was a vibrant democracy
with equal rights and opportunities to all citizens irrespective of the race or the skin color. Only
the path to reach there could have been violent and non-co-operative movements or non- violent
and co-operative process of a negotiated settlement. Mandela often chose the better course of
peace and harmony. The solution in this context can be optimal when it is supported by the
general populace at large and supported by the principles of universal justice and respect for
human dignity. Nelson Mandela chose this path which was a continuous and arduous process
that lasted more than four years. The outcome was a new constitution that defines South Africa
as one undivided nation with equal rights for all and which has become the benchmark of the
country’s democracy

The Value and Function of Executive Personhood

Human behavior, however, cannot be reduced to a set of decisions and
actions. There is a profound unity and interrelatedness that affects
four basic characteristics of what it means to be human:

 We are uniquely sensitive or sense human beings fed by our

five senses that are nuanced by observation, perception,
internalization and pleasure;
 We are affective and feeling human beings also fed by our
five senses, empowered and reinforced by our attitudes,
beliefs, instincts and drives, needs and wants, desires and
aspirations, ambitions and dreams;
 We are cognitive or knowing human beings with unique
capacities for thinking, reasoning, explanation,
experimentation, creativity and innovation, imagination and
intuition, hindsight and foresight, judgment and decisions;
and
 We are volitive, voluntary and intentional human beings who
can deliberate, determine, use free will, choose, select or
“elect” among competing courses of alternative actions,
subjects, objects, properties and events.

The unity of these activities (i.e., sensitive, cognitive, affective, and volitive) has been
identified by many scientists as the nexus of human personhood, the fundamental unity of us as
persons. Contemporary science insists on the transcending unity of the human being brought
about by different powers. Our thinking is an activity that is highly dependent upon choice and
intimately affected by our emotional state (Strawson 1959). According to Lopez Ibor (1964:
157ff), feeling is the bridge which enables biological data of sensory perception to reach the
mind of evaluation, classification, and choice of a response. I choose to accept or reject ideas
based upon how I feel about them, about their source, and about their relationship to my

311
experience and manner of thinking. That is, I feel something, I quickly interpret my feelings
intellectually, and react to both by choosing a course of action. We are publicly identified by the
possession of a cluster of different attributes, some bodily, some behavioral, and some mental
and some volitional, and we call them our “character” or “personality.”[See Corporate Ethics
Exercise 9.2].

In the Greek classic tradition, this human personhood is represented

by the “soul” that unifies the body and spirit, the physical and the
mental, the understanding and the will, the voluntary and the
involuntary, and human instincts and human drives (Harré and Shorter
1983; Strawson 1959). Whether one holds with Socrates that all
knowledge is innate ready to be drawn out through education (e-ducere
in Latin), or with Plato that all knowledge is fundamentally
remembering, or with Aristotle that all knowledge begins with
sensation, in any case, the raw data for our reasoning is given
through our sensory organs of the body working in harmony with the
soul (Thomas Aquinas: Summa Theologiae, Ia: 77-78, 84-85). The
unifying principle and power is the human person.

While on the one hand, our human personhood is fed and molded by the
internal stimuli of our sensitive, cognitive, affective, and volitive
lives, on the other, it is also influenced by external stimuli such
as:

 Our family and school stimuli: our childhood experiences of

our parents, nursery school, siblings, grandparents and
relatives, our adolescent experiences of peers and teachers
at middle- and high- schools, colleges and universities.

 Our ergonomic Stimuli: experiences of the workplace in

relation to gainful work, meaningful work, co-workers and
labor unions, native talent perfected, new skills picked up,
new sources of income and rewards merited, and the like.

 Our market stimuli: the whole world of supply and demand,

consumer buying power and shopping, an expanding world of
thousands of brands, products, services, newspapers,
magazines, radio, television, movies, music, stores, malls,
supermarkets, transportation, logistics, brick-and-mortar
markets, internet markets, www, blogs, e-bulletins, and
Facebook.

 Our ideological stimuli: our unique value-experiences

derived from our society, art and poetry, language and
literature, science and fiction, textbooks and novels,
libraries and art galleries, local, national and global
governments, law and order systems, religion and religious
institutions, politics and political agenda, history and
culture, philosophy and theology.
312
 Our human personhood receives, internalizes, filters, sorts, unifies, blends, lives and relives
all the internal and external stimuli in a mysterious, transcending synthesis and unity that really
defines us. Given the internal and external stimuli, that is, our physical, spatial and temporal
worlds, our human personhood develops certain personality characteristics, behavior patterns,
cultivates certain virtues (or vices), capacities or limitations, needs and wants, desires and
dreams, habits and passions of heart, ethics and morals, and transforms us into responsible (or
irresponsible) persons. These phenomena of internal and external stimuli make and mold us as
“human resources” ready for contributing back to society and the world [See Corporate Ethics
Exercise 9.3].

How this mysterious unity or self-attribution is done is still

debated. Various religions attribute this to a superior power in us
that some call the soul, the spirit, the mind, the atman, the
transcendent, the immanent, or the divine in us. Others trace this
power to our genes and chromosomes, or the mysterious neural-physical
body that we are endowed and engineered with. It is because of this
unity that we say: I feel, I speak, I did this, and not that our body
feels, our body speaks or that our body does something. More
importantly, we say: I own certain actions and their consequences, and
hence we assert: I did this, I chose this, I am accountable for this
choice and the deed that follows, and I am responsible for the effects
or outcomes. It is because of this superior power in us that we can
formulate a mission (personal, corporate, social or political) for
ourselves that is beyond ourselves, a vision to realize this mission,
and accordingly, we can spell ideals, ends, goals, objectives and the
means to achieve this mission. It is because of this body-spirit,
matter-mind unity, the body becomes the home of the soul, the home of
our intelligence, the home of our virtue or vice, the home of ethics
and morals, and the home of our responsibility. Hence, the body
becomes human, is humanized, and is sacred.

Figure 9.1 is a rudimentary attempt to sketch this great phenomenon

of human personhood formed by the internal (organic) and external
(environmental) stimuli or influences of our daily life. As indicated
by the two-way arrows linking all the stimuli, the internal and
external stimuli influence and reinforce each other circularly (not
necessarily linearly), and systematically impact and mold our human
personhood. Ethics and morals, and therefore, corporate ethics and
corporate morals, deal with both internal and external stimuli that
affect the human person.

What Constitutes our Human Personhood?

Obviously, the human person is not a simple or random byproduct of
the internal and external stimuli, such as those depicted in Figure
6.1. Our human personhood is a unique combination of four internal-
external forces that unify, interpret, internalize and respond to the
internal-external stimuli: our immanence, our individuality, our
sociality, and our transcendence. We explore each of these four human

313
vectors from the view point of corporate executive ethical decisions,
actions and duties.

Our Unique Immanence

Etymologically, immanence (in + manere in Latin) means to remain

in, or to be operating and living within something. We are living
within our state that is within our country that is within this earth,
which is within the solar system that is within the universe. We are
immanent in the world and in the universe. The human person dwells in
immanence. That is we are incarnated in a world that is physical;
both humans and the world are characterized as dwelling in the
universe that is in a unique intersection of time, space, motion and
gravitation. Our immanence is unique and irrevocable: we were birthed
into this world at the unique interaction of sun, galaxies and
constellations, stars and zodiacs, earth and planets, moon and the
seasons, time, space, gravitation and motion. Oriental philosophies
(e.g., China, India) have explored this aspect of our unique
immanence. We are uniquely individualized and personalized by the
unique intersection of time, space, motion (of the planets), gravity
and vector (of the velocities of the sun, moon, planets, stars, and
constellations) associated with our unique birth. Hence, we are
unique, non-imitable, non- substitutable, non-replaceable, non-
replicable, non-repeatable and non-transferable. Each of us has a
unique role and responsibility for the universe that only we can
fulfill.

Our immanence has two aspects: a) we are corporeal-material in

nature; b) we are living physical organisms made up of flesh and
blood. Because of our immanence we have needs, wants and desires; we
have also, thereby, capacities and limitations. Our needs and
limitations are sourced in the interactions and unity that exist
between each human being and its environment. We are bound by the
physical laws of the universe, and we are limited by the physical
capabilities of our muscular and skeletal structure. Needs and
limitations change and differ depending upon our age, gender,
education, occupation, culture, religion, and where we are at any
given moment.

Needs and limitations, however, do not define us. There is a unity

between our corporeality and the flesh and blood living organism that
we are. The body is the way in which the person is; it is the source
of our being in the world. The body is the foundation for feeling and
the place where feelings are experienced. It is the home of the
intelligence. Without the body there cannot be a human person. On the
other hand, our body cannot be the sole source and locus of our human
personhood. There is a unity between the human person and the body,
but also a distinction. The body needs a principle to vivify it and
provide a source of unity for the body with its corporeal function,
activities and processes of human nature. The Greeks and several
religions call this principle of unity the soul (atman in Sanskrit,

314
pneuma in Greek, anima in Latin). Without the soul as the unifying
principle we cannot be human persons, and without the body we cannot
be human persons either; we need and are a unique combination of the
two. Only human beings composed of spirit and body, mind and matter
can be human persons; to be human beings is to be both spiritual and
corporeal.

Over against the quantitative theory that held all economic actions
were driven by mathematical expectations of benefits, John Maynard
Keynes, the famed economist, coined and introduced the term “animal
spirits” into economics, with which he meant our souls that animate
us, or consequently, our spontaneous urges that give meaning and
energy to our acts. “Most of our decisions to do something positive,
the full consequences of which will be drawn out over many days to
come, can only be taken as a result of animal spirits – of a
spontaneous urge to action rather than inaction, and not the outcome
of a weighted average of quantitative benefits multiplied by
quantitative probabilities. An enterprise only pretends to itself to
be mainly actuated by the statements of its own prospectus, however
candid and sincere. Only a little more than an expedition to the
South Pole could be based on an exact calculation of benefits to come.
Thus, if the animal spirits are dimmed and the spontaneous optimism
falters, leaving us to depend on nothing but a mathematical
expectation, enterprise will fade and die” (Keynes 1936: 161-162).
Similar was the position of Ackerlof and Schiller (2009).

The soul when joined to the body becomes the unifying principle of all activities, and
becomes the seat of intelligence and will. Because of this soul or spirit we are immanent in the
world in a unique way: we can sense the world, feel the world, love the world, explore, study and
know the world, experiment, change and manipulate the world, and control, forecast and predict
the world. It is precisely this interconnectedness between the spiritual principle of the soul and
the unique corporeality of our body that gives rise to the unique “individuality” by which we
identify the presence of the human person, and that we own our actions as not performed by the
body or by the soul in isolation, but as an unity and immanent combination of the body and the
soul whereby we say “I did it” or “we did it.” In the unique joining of the soul and the body
something new comes into being that is greater than the mere sum of the parts (soul and body)
added together – this is the unique human person.

This is systems thinking applied to the human person: we are more than the efficiency of the
body or the spirit, taken individually; we are an interactive whole that has energy, direction,
drive, power and passion far beyond the power of the body and soul taken individually. Ethics
must see the human person not only in our universal aspects but in our unique combination of
mind and matter, body and soul, time and eternity, and unique immanence.

The discussion on our unique immanence as body and soul as human persons can be applied,
mutatis mutandis, to the corporation as a whole, since it is composed of real human persons.
Thus, we need to understand, interpret and apply the concept and construct of corporate
immanence as body and soul to the corporate body and soul, reflecting on various propositions

315
that can describe the corporation as an immanent body and an immanent soul. [See Corporate
Ethics Exercises 9.4 and 9.5].

Our Unique Individuality

Writing about his deep personal convictions that he picked up from
many years of client-centered therapy, the great founder Carl R.
Rogers in his best-seller On Becoming a Person (1961/1989: 21) wrote,
“It has come tome that the separateness of individuals, the right of
each individual to utilize his experience in his own way and discover
his meanings in it, – this is one of the most priceless potentialities
of life. Each person is an island unto himself, in a very real sense;
and he can only build bridges to other islands if he is first of all
willing to be himself and permitted to be himself.”

We are a unique combination of body and soul, mind and matter,

faculties and powers, the conscious and the unconscious, the physical
and the emotional, the intellectual and the spiritual, the individual
and the social, and the ethical and moral parts of our human
personality.11 Such a unique combination makes knowledge, thought,
talent and skills, choice and freedom possible. Such a unique process
of individuation is not a simple or random byproduct of our body and
genes, or a victim of biological and economic exigencies of our human
world. All these (including our genes and genetic compositions) will
not determine and control who we are and what we become. Nor will our
talents and skills, knowledge and thoughts, willed actions and
behaviors totally determine the outcome of our individual development.
They all contribute to our specific personality and uniqueness.

Our unique, non-repeatable, irreducible and irreplaceable

individuality cannot be fully understood and explained unless we
accept that our uniqueness comes from being uniquely shaped and molded
into the image of God (or some such superior being) who crafted us
into this unique and historical (i.e., originated in a specific
combination of space, time, motion and gravitation) composition of the
body and soul, mind and matter, family, social and historical
environments. We are a unique meeting point between soul and body,
the corporeal and the spiritual, the physical and the social that we

11Iprefer to speak of “individuality” than the equivocal word “personality.” There is

hardly any convergence among psychological or human resources (HR) theories and
theorists in relation to the precise meaning behind words such as ego, self,
personality, character, and the like. Solomon Asch (1946: 276-289) defines ego as
the psychophysical organization of the organism that refers to the individual, and
defines the self as the phenomenal representation of the ego (i.e., the ego become
conscious). William James, Sigmund Freud, and William McDougal, among many others,
define character to represent a pattern of acts, rather consistent through time that
may be said to “characterize” and define the human individual. This definition is
obviously tautological; moreover, it does not explain what makes these actions and
behavior consistent through time. These scholars, in general, emphasize the inward
elements of motivation and intent as the major determinants of character (See Peck, R.
and R. Havighurst (1960: 1), The Psychology of Character Development, New York: John
Wiley & Sons).

316
call the human personality or individuality. Each of us, accordingly,
is born with a unique destiny that forges and converges each one of us
into a unique transcendent openness of possibility that translates
(from a near infinite number of possibilities) into a unique
combination of talents and skills, knowledge and ideologies, thoughts
and actions, moral qualities and events, virtues and values. That is,
we are a limited but immanent and transcendent expression of unique
human personhood we claim as our personal mission, vision, character
and self-identity. This particular course of our growth and change,
consciously or unconsciously, leads to the development of our
personality, and within the structure of this personality will
eventually emerge a certain “character” by which we designate
ourselves as “I,” “Ego,” “Me” and experience consciously, express and
project externally in society as “self.”

As Raymond Niebuhr (1964: 55) expressed it compactly, “every impulse

of nature in man can be modified, extended, repressed and combined
with other impulses in countless variations. In consequence, no human
individual is like another, no matter how similar their heredity and
environment.” To apply systems thinking, the interactions of the
various parts of the human person reflect and reveal the structure of
the whole. The nature of one’s personality is greater that its
expression in the ego; the human person is greater than its individual
expression at any given moment12 – this is because human personhood
transcends both, a point we will discuss shortly. Like the body and
the soul, the individual personality with its ego, self, and character
can be a locus or the revelation of personhood, but it cannot be its
only source (Rehrauer 1996: 34-36).

Our human personhood characterizes this profound unity between all

our powers - bodily, mental, emotional and spiritual – this unity
defines us (Covey 2004). For instance, perception is a combination
of sense perception, intellectual abstraction and evaluation, and
affective attraction. That is, choice, thought, and feelings combine
to move the will to action. A human being functions as a unity
whenever it acts as a human being (Rehrauer 1996). Human personhood,
therefore, entails a dynamic unity of the activities of affection,
cognition, and choice (Thomas Aquinas). The particular forms and
patterns of interaction of these three activities congeal over time
into certain more or less integrated self-structure of habits or
virtues (or vices) which in turn generate or manifest as a combination

12Eysenck (1947: 27) provides a rather comprehensive description of elements that

construct human “personality” – it is a sum total of the actual and potential behavior
patterns of the organism as determined by heredity and environment; personality
originates and develops through the functional interaction of the four main sectors
into which these behavior patterns are organized: the cognitive (intelligence), the
conative (character), the affective (temperament) and the somatic (physical
constitution) sectors. All these definitions of personality or character describe
behavioral elements that compose them without explaining how these disparate elements
get organized into the individual unity that defines one’s personality, character or
“individuality.”

317
we call our personality characteristics such as attitudes, beliefs,
tendencies, motivations or psychological traits (Allport 1955). These
behavior patterns are tested and reified over time and space and
stored in human memory to form a part of the personal infrastructure
for future activity within the unity of the human person. This
personal infrastructure provides the foundation of an individuated
personal disposition that in turn provides a source of integration for
all future activity (Rehrauer 1996: 25-27). This process is
individuation, the formation of an individual style of life that is
self-aware, self-critical and self-enhancing (Allport 1955: 27-28).

The discussion on our unique human individuality as a unique image of God can be applied,
mutatis mutandis, to the corporation as a whole, since it is composed of real human persons, all
made in the image of God. This is the foundation for corporate executive ethicality, morality and
spirituality. Thus, we can understand, interpret and apply the concept and construct of unique
individuality made in the image of God to define and live our corporate ethical, moral and
spiritual individuality and personality. [See Corporate Ethics Exercises 9.6 and 9 .8].

Captain Lakshmi Sahgal: Her Unique Individuality and Sociaity

Even though Captain Lakshmi faced a lot of constraints, she led a life of executive freedom. Her hard work and
sacrifice made her an integral part of the freedom struggle, and her undying devotion towards medical uplift helped
the nation immensely. Her example is a source of learning and inspiration for generations to come. She was truly
great as she gave her life for a larger cause, and her resolve never diminished. There is much to learn from her
example, such as the importance of striving towards attaining the greater good. She inspired and continues to inspire
millions to help others and gain true happiness by living a life for the betterment of others. Her clinic in Kanpur was
open to those of all religious backgrounds, holding fast to the best traditions of Indian religious pluralism.

Great people sacrifice their life for a larger cause and their antecedents become inspiration for future
generations. Lakshmi herself was influenced by Subhas Chandra Bose. Her father was a well-known lawyer. Her
mother was socially active. The national movement during her formative years also had a great influence on her life.
She was also influenced by her daughter Subhasini, and both had leftist leanings. Whether it was her association
with INA or protesting against Miss World Pageant, we clearly see a continuation of her resolve to fight for women
emancipation. Her life can be best described as a culmination of a great social career and political affiliations.

Birth, genetics, ancestry, gender, race, nationality and culture are innate and humans do not have much control
on them. This domain of a person is referred to as immanence. Transcendence enables one to go beyond these
constraints to exercise freedom and to create a meaningful existence. Each of us seeks respect for immanence and
should not forget that respect is mutual and mostly given before received. Giving respect is not a pre-requisite, but
such a behavior adds to the immanence and will command more respect in future. We are expected to respect the
sociality of others as well as transcendence of others. This ensures respect for our sociality and transcendence from
others.

“The fight will go on,” said Captain Lakshmi Sahgal one day in 2006, sitting in her crowded Kanpur clinic
where, at 92, she still saw patients every morning. She was speaking on camera to Singeli Agnew, a young
filmmaker from the graduate school of Journalism, Berkeley, who was making a documentary on her life. Each
stage of the life of this extraordinary Indian lady represented a new stage of her political evolution - as a young
medical student drawn to the freedom struggle; as the leader of the all-woman Rani of Jhansi regiment of the Indian
National Army; as a doctor, immediately after Independence, who restarted her practice in Kanpur among refugees
and the most marginalized sections of society, and finally, in Post-Independence India, her life as a member of the
communist Party of India (Marxist) and the All India Democratic Women’s Association (AIDWA), years that saw
her in campaigns for political, economic and social justice.

318
 “Freedom comes in three forms,” the diminutive doctor goes on to say on camera in her unadorned and direct
manner. “The first is political emancipation from the conqueror, the second is economic (emancipation) and the
third is social…..India has only achieved the first.” With Captain Lakshmi’s passing, India has lost an indefatigable
fighter for the emancipations of which she spoke.

Our Unique Sociality

We do not live, move and have our being in isolation. Because of our unique immanence
and individuality we are social creatures, members of a common human species. We can sense,
feel and manipulate the world around as animals do. But far more than animals we have
“knowledge,” because the activity of knowing is dependent upon a deeper reality, that of sharing.
Knowledge by its very essence is relational. Psychologists, philosophers, and sociologists are all
in agreement that our immanence and individuality are inseparable from our sociality. That is,
unless there is another who is like me yet distinct from me, I can never come to a full
understanding of who I am and what I am. Our very existence is dependent upon this social
quality of human personhood.13 This principle can be the foundation for human resources
management, especially as recruitment, development and retention (RDR), and as team work and
spirit.

As human beings we have two major sources of information: genetic and cultural. These two
sources come together for us because of a highly specialized central nervous system. Our human
nature has evolved in a unique way such that we can and must communicate in a special way
with other human beings. We develop language of signs and symbols, concepts and constructs,
meanings and metaphors, pictography and hieroglyphics, and all these can only happen within a
social nexus (Asch 1987). Language enables us to share and communicate knowledge with each
other, and also to externalize our personality and our own personal experiences. Language
makes interpersonal sharing of meaning possible, and so also a sharing of being in deeper human
relationships. The fact that man is a speaking animal determines that we will be culturally
shaped distinctly different from the animals. The rational animal (of Aristotle) can be rational
precisely because he is an animal that invents and uses words.

We are individuals precisely because we are social beings. By our very nature we are
gregarious beings. We need contact with other beings like ourselves in order to understand that
we are human and what this means. Without sociality there is no individuality. We are born and
inserted into society. We cannot be personalized human persons in isolation. It is through our
social contacts that we activate and develop the ability to be individual and social, to be ethical
and moral. The child becomes aware as a person, as a human being of a particular individuality,
as a function of its relations with other human beings. Social action precedes the self and

13Even at the biological level, the physical structure of our body or corporeality is
fundamentally social. Thus, our genes exist in strands of DNA that form pairs of
chromosomes; our birth is conditioned on two individuals coming together; the basic
genetic material of our corporeality comes to us from others. Human reproduction,
unlike animal reproduction, is not merely instinctual, but a profound social
experience of courting, conceiving, nesting, birthing, parenting, nurturing, and other
family activities, each of which contributes to our sociality of nurturance and
dependence. From the first moment of human existence until the last, human life is
profoundly social (Rehrauer 1996: 37-38).

319
provides the materials for it (Asch 1987: 286; Flanagan 1991: 122). In this sense, our sociality
precedes and grounds our individuality.

Human personhood is more than our personality. We primarily develop our human
personalities precisely because all human beings share a common social being. Our fundamental
nature of human personhood (expressed as being sensitive, affective, cognitive and volitive)
becomes alive through our sociality. The nature and development of our individuality is a social
product of both the social nature of our genetic heritage and the quality of our social interactions
with others and with our cultural heritage as a whole. We carry in our bones and in our minds, in
our genetic and cultural sources, something of all of those who have gone ahead of us and those
who have been part of our lives. Our basic sociality takes us from the nuclear family we are born
into broader groups such as ethnic, cultural, linguistic, national, religious, ergonomic, political,
and other group affiliations. We learn to be a member of a given society by coming to know and
practice the norms, rules, conventions and mores of that society. Societies and social regulations
develop, pattern and shape our thinking, action and behavior. We not only learn about social
regulations, but also learn to live within the framework and under the guidance of these social
regulations (Heller 1988: 19).

Social contact is necessary for our very survival as a species. Without social contact and
interactions, be they physical, emotional, intellectual and spiritual, we cannot develop our
personality and our individuality, our community and society, and our culture and civilization.
The rudiments of language, signs and symbols, expressed in data, facts, figures, subjects and
objects, properties, events, knowledge and skills, virtues and vices, conversations and conflicts -
are all very necessary for the development of our self-identity and self-expression, our egoism
and altruism, our ethical and moral values, our leadership and followership, our personal and
executive behavior. To us to be human beings is to be social beings. Our individuality and
sociality are grounded on and thrive upon our shared commonality of nature and lives, our
inherent and constant need for social interactions and exchanges. Our distinctiveness and
individuation come into being when we are perceived by the other. As individuals we make
ourselves known against the background of our sociality and universality. Without human
beings around us with whom to compare ourselves, who perceive us and interact with us, our
individuality really has no meaning. Our ego is fundamentally other-directed. It needs and
wants to be connected, to be concerned with its surroundings, to bind itself to others, and to work
with them (Asch 1987: 320).

This is the metaphysical and transcendent foundation of our individuality and immanence,
our parenthood and sociality. Our family and society, our history and culture, our values and
religion, our interpersonal networking with others around us, all of these contribute to the make-
up of who we are, what we are, and who we are becoming, of how ethical and moral we are and
can become (Flanagan 1991). In particular, social systems of language, tradition, technology and
communication, signs and symbols, leaders, values and history, culture and civilization, morals
and mores form an important part of our social and individual world. It is within the context of
this specific community that our individuality and sociality, immanence and transcendence are
situated and contextualized.

320
 The discussion on our unique and essential human sociality can be applied, mutatis mutandis,
to the corporation as a whole, since it is composed of real human persons, all of whom are
radically social in being and becoming. Sociality can be built into our otherwise competitive and
anti-social corporate personality and strategy. This is the foundation for corporate executive
social spirituality. Thus, we can understand, interpret and apply the construct of our unique and
necessary sociality to define and live our corporate spiritual individuality and sociality. [See
Corporate Ethics Exercise 9.9 to 9.11].

Our Unique Transcendence

Etymologically (from Latin ascendere = to climb; transcendere = to go beyond, to surpass),

transcendence implies going beyond one’s sense and experience, emotions and feelings,
knowledge and skills, capacities and limitations, in order to achieve excellence, moral integrity,
and extraordinary heights of self-actualization. In Kantian philosophy, transcendence means
going beyond sense data and hypothetical imperatives to categorical moral imperatives inherent
in the organizing function of the mind and the will, and which are necessary conditions for
human knowledge. Accordingly, transcendentalism is a philosophy (attributed to 18 th century
German philosophers Kant, Hegel and Fichte) that proposes to discover the nature of reality by
investigating the process of thought rather than the objects of sense experience. By extension,
Emerson and other 19th century New England philosophers, defined transcendentalism as a
search for reality through spiritual intuition.

Human transcendence is founded on our nature as human beings, the inherent nature of our
self-awareness as “I am” and as distinct from others, the transpersonal nature of human
personhood, the externalizing expression of underlying personhood through the process of
character formation, and with a world in which we are immersed yet which is totally other than
us – all these reveal the foundational reality or human transcendence. Human transcendence is
rooted in several dichotomies that relate to our human personhood: mind-matter, soul-body,
conscious-unconscious, subject-object, self-other, subjectivity-objectivity, subjectification-
objectification, personal-transpersonal, individual-social, internal-external, temporal-eternal,
spatial-universal, hypothetical-categorical, and the like. Our self-awareness makes us subjects;
others observing us make us objects. When others study us it makes us objects, events or
properties. Even when I treat myself as an object in self-reflection, I do not cease to be a subject;
but it is only through my objectification that I self-reflect and understand myself – that I
understand my subjectification. Our self-understanding is not purely individualistic; it is
relational; that is, in contact with other persons and with the world of other human beings do I
begin to understand myself (Fuchs 1983: 177). As Erich Fromm (1955: 62) notes, it is only after
we have conceived of the outer world as being separate and different from ourselves that we
come to self-awareness as a distinct being from others.

Our self-awareness and self-identity are beyond the sum total of our experiences. We do not
identify ourselves with our experiences, even though they may be engaging and memorable;
neither do we define ourselves by what we see since we see, understand and identify ourselves
beyond and beneath our day-to-day experiences. That is, we transcend our experiences; our self-
awareness and self-identity are beyond the totality of our experiences of sensing, feeling,
perceiving, observing, believing, choosing, acting and accomplishing. This is because our

321
human being-ness and our human personhood underlie our experiences and unify them. This
underlying personal being is transcendence even of our own personal identity. Our personhood
as personhood is often inaccessible even to us because it is a creative reality with continuous
possibility for change. But our immanence and transcendence unify all our changes and
experiences into a meaningful whole which we call our character or personality or self-identity.

Our transcendence also grounds our ability to hope, to dream, to design, to create, to invent, to
innovate, to discover and venture – all these we do for what is not yet accomplished. Our
transcendence also empowers us to plan our future, to make plans not only for what we will do,
but for what we will not do, and for what we want to become and not become. We are
transcendent because we are temporal beings who are aware of our temporality. Our very nature
as temporal beings leads to define and plan our lives in terms of meaningful past, present, and
future. Our capacity for the future is the recognition of the reality of our transcendence. It is
because of our transcendence we have a future, or better, we are a future, or that we can reinvent
our future. In our actions we extend ourselves over a span of time from past into the future. But
in our moral act and behavior we transcend even the mere span of time, as we touch on the
divine and eternal in us. All the above statements apply to organizations and corporations: our
organizational transcendence makes us surpass ourselves, our constraints, our competition, and
drives us to seek the impossible dream.

We can also think of "the transcendent" in the theological sense as God (that being prior to
and exalted above the universe) or in the philosophical (specifically, Kantian) sense as that
which is beyond the limits of all possible experience and knowledge (i.e., that which is a priori
and a necessary condition of human experience as determined by the constitution of the mind).
Likewise, "the immanent" may refer to either the theological indwelling presence of God in the
world and each individual (God among us) or that which operates within the subject (our life
force). Finally, "vital agent" may refer to either the Holy Spirit (the divine life-giver) or that
which gives the agent his or her conscious functions (the animating source of the independent
conscience (Moberg and Calkins 2001: fn 4, p. 267).

All human acts and actions, activities and planned actions are stemming from our human
person as individuality, sociality, immanence and transcendence. How do our individuality,
sociality, immanence and transcendence ground corporate ethical and moral decisions actions?

 Our human individuality as corporate executives makes our actions (decisions and strategies)
personal, with obligations of due ownership of the choices of inputs, processes and outputs we
make.
 Our human sociality as corporate executives makes our acts and actions (decisions and strategies)
social and society-oriented or common-good-oriented, with summons for social due diligence of the
choices of inputs, processes and outputs we make.
 Our human immanence as corporate executives makes our decisions and strategies, acts, actions
and activities concrete, historical, geographical, contextual, bounded by concrete space (spatiality)
and time (temporality), and hence, uniquely situational, irreversible, existential, and accountable
for their consequences.
 Our human transcendence as corporate executives makes our decisions and strategies, actions,
activities, acts and planned actions meta-individual, trans-social and trans-organizational in
relation to the choices of inputs, processes and outputs we make, such that transcendent
organizations are empowered to surpass themselves, their goals and objectives.

322
 As temporal beings we are capable of many actions and choose many alternatives; we have
within our grasp an enormous range of events with their specific inputs, processes and outputs.
We choose some of these, and reject other competing alternatives. In the search, deliberation,
choice, and subsequent actions lies our transcendence – the power to bring unity, consistency
and continuity in our thoughts, desires and actions, to bring forth order in otherwise chaotic
choices and environments, and correspondingly, into our relationships with others (Asch 1987:
122-123). As subjects who are temporal, we transcend our activity, and this demands of us that
we actively integrate every moment of our existence into a broader pattern of self-conscious
awareness (Rehrauer 1996: 45-47).

We often argue: “I am not a bad person; I only did a bad thing.” This excuse and distinction
will not take us far. Most of our activities center around feeling, thinking, and choosing, and all
three are connected. In every act of reason, in every act of affect or experience, and in every act
of choice there is a link between the activities and the one who performs them and owns them.
We are more than our thoughts, experiences and choices, even though all three activities are
ours. Our transcendence unites them, owns them, and takes responsibility for them. There is an
intimate connection between what we do and what we are. We transcend our actions while they
still remain “our” actions (Flanagan 1991: 134-136). There is a unity between the person who
acts and the actions performed that lasts over time and integrates them all into the context of
what we have been before, what now, and what we will be in the future. The condition for the
possibility of this abiding unity between us and all that we do over time is the transcendent
principle of human personhood. This principle brings unity to our life and actions, and gives
coherence and meaning to what we do and what we become. Personhood as transcendence is an
existential condition for the possibility and interpretation of our personal unity, individuality,
sociality, ethicality and morality (Hildebrand and Hildebrand 1966: 88).

The discussion on our unique and essential experience of transcendence, in conjunction with
our immanence, individuality and sociality, can be applied, mutatis mutandis, to the corporation
as a whole, since it is composed of real human persons, all of whom are radically individual,
immanent and social in being and becoming. Transcendence can be experienced and
incorporated into our otherwise mundane and materialistic, competitive and aggressive corporate
personality and strategy. This is the foundation for corporate executive transcendent spirituality.
Thus, we can understand, interpret and apply the construct of our unique and necessary
transcendence to define and live our corporate spiritual individuality and immanence,
individuality and sociality. [See Corporate Ethics Exercises 9.12 to 9.14].

Amar Gopal Bose’s unique Immanence, Individuality,

Sociality and Transcendence

The personality of Dr. Amar Gopal Bose consists of unique immanence, sociality, and transcendence. He was
an incredible teacher, an inspiring mentor, a deep and insightful researcher. His life was full with major scientific
leadership decisions. He spent his life of executive freedom despite the constraints he faced. His uncompromising
commitment and dedication towards idea generation and innovation culminated in world class inventions like Bose
901 Direct/Reflecting audio speakers systems, Bose Wave Radio and Bose noise-cancelling headphones. All these
unique traits provide a challenging learning input for all of us to surpass ourselves and reach the sky.

Bose persistently refused to offer stock to the public so that he could freely pursue risky long-term research
such as noise-cancelling headphones and innovative suspension systems for cars, without the pressure of quarterly

323
earnings and annual financial statements and announcements of publicly listed corporations. When he formed the
company, he laid down a policy on day one that 100 per cent of our earnings would be ploughed back into R&D.
We are not a public company precisely for that reason. So much time and energy goes into preparing quarterly
statements and that sort of thing. The company’s products today enjoy an impeccable reputation that, true to its
founder’s spirit, reflects its penchant for innovation and creativity.

Bose’s devotion to acoustic research was matched by his passion for teaching. He earned a Fulbright
scholarship to work at the National Physics Laboratory in New Delhi, at the completion of which he joined the MIT
faculty in 1956. Bose made a lasting impression in the classroom as well as in his company. His popular course on
acoustics was as much about life as about electronics, said Alan V. Oppenheim, an MIT engineering professor and a
long-time colleague of Bose. He was somebody with extraordinary standards, added Professor Oppenheim.

Contrary Positions: The Decentered Subject in

Modernism and Postmodernism
Structuralism had already implicitly shifted focus from the self or the subject. Marxism,
existentialism, phenomenology and psychoanalysis were characterized by investiture of a central
place to the human self. For these movements the human subject was a free and purposive agent
who was the center of operative initiative and control. Structuralisms instead focused in the
supra-individual structures of language, ritual, and kinship which make the individual what he or
she is. For the structuralists it is not the self that creates culture but culture that creates the self.
The study of abstract relations within systems or “codes” of cultural signs is the key to the
understanding of the human existence. In this sense, it dislodged the subject from the center and
divested it of all operative initiative and originary nature.

Poststructuralism radicalized this theme. They directed this theme against the scientific
pretensions of structuralism itself. In the absence of any “centre” language has become for them
an unregulatable play of purely relational elements. The subject, author or narrator of a text
becomes itself a purely linguistic product. In the words of Paul de Man we reduce the subject to
the status of “a mere grammatical pronoun.” Thus Barthes proclaimed the “death of the author”
in an article he published in 1968, with the same title. And Michel Foucault in a 1969 article
“What is an Author,” announced the “disappearance of the author.” By such pronouncements
they did not mean to deny that a human individual is a necessary link in the chain of events that
results in a parole or text. What they denied was the validity of the “function,” or “role” hitherto
assigned in Western thought to a uniquely individual and purposive author, who is conceived as
the originator, purposive planner (by his or her intentions) the determiner of the form and
meaning of a text. Author is in a sense the construct of the culture. He is a “site” traversed by the
“cultural constructs” and the “discursive formations” engendered by the conceptual and power
configurations in a given era.

A characteristic of post-structuralism is that the author is dead or no more important. His book
or work is just reduced to a “text” that he reader must understand in his own way. That is, the
poststructuralist view about the text is that it does not have a fixed meaning. The death of the
author frees the reader to enter the literary text in whatever way he or she chooses. The intensity
of pleasure yielded by the text becomes proportionate to the reader’s abandonment of limits on
its signifying possibilities.

Case Reflections:
324
 The concept of unique Human Personhood can be applied for Nelson Mandela:

 Unique Individuality - Being born in a royal family, Nelson Mandela had the required confidence
and leadership abilities.
 Unique Sociality – Mandela was affected by social oppression, he fought not only for racial
equality but also gender quality
 Unique Immanence – The objective of non-discrimination was achieved and Mandela was
unanimously elected as the President of the nation. He took care of his country, his people and his
followers.
 Unique Transcendence –Mandela rose above hatred and vengeance, even after being cruelly
oppressed in prison. He included colored and non-colored, men and women in his dream of a
perfect apartheid free nation. He mentioned that hatred clouds the mind and leader cannot afford
to hate.

Women Discrimination: The Violation of Human Personhood

[“Jesuits and the Situation of women …,” General Congregation 34; Decree 14, #s 361-384].

Male dominance has expressed relationships with women in different countries in different
ways down the centuries. The deep prejudice against women assumes different forms in
different cultures. For instance, the second oldest institution in the world is prostitution. Girl
babies have been less than welcome in certain societies even to this day. Female feticide is over
95% among infanticides. Other atrocities in certain societies include female circumcision,
female child labor, females being deprived of education beyond elementary level, dowry deaths,
overworked home keepers, baby producing machines, women trafficking, women paid a lesser
wage for the same work, and more recently, gang rape, murder, and brutal domestic violence
against women. Women are commonly treated as sex objects in advertising and in the media,
and are used as mistresses in promoting international sex tourism. Moreover, there is systematic
discrimination against women in economic, social, educational, ergonomic, political, religious,
and even linguistic structures of our society; it is often part of an even deeper cultural prejudice
and stereotype. Many women feel that men have been slow to recognize and honor the full
humanity and dignity of women.

This situation, however, has begun to change, chiefly because of the critical awakening and
courageous protest of women themselves. Men too have joined hands with women in fighting
such attitudes which offend against the dignity of men and women alike. Nevertheless, the
systematic legacy of discrimination and alienation of women continues unabated. In many parts
of the world, women already disadvantaged because of civil war, poverty, religious intolerance
and bigotry, persecution, poverty, economic migration and ethnic cleansing, suffer a double
disadvantage precisely because they are women. There is a distinctive feminine face of
oppression. Unwittingly, men have often invoked a form of clericalism which has reinforced
male domination with an ostensibly divine sanction.

In recognizing and restoring equality and dignity of men and women, there is no one model of
male-female relationship that one can drum up or recommend. But all of us must first admit the
dedication, sacrifice, generosity, and joy that women bring to home, schools and colleges where
they teach, to places where they work, and other social, technological, and political fields where
they have made significant contributions. Any men-women equalizing model will have to be

325
very delicate and sensitive, and avoid unnecessary interference that could alienate women in
their own culture; rather we must endeavor to facilitate a more organic process of change. Some
men-women opportunity equalizing processes would include: a) explicit teaching of the essential
equality of women and men in our educational and religious institutions; b) supporting women
liberation movements that oppose the exploitation of women; c) specific attention to the cruel
phenomenon of violence against women; d) use of inclusive language in speech and official
documents; e) promote the education of women among the rural poor and the marginalized; f)
respectful cooperation with female colleagues at work, and g) proportionate number of qualified
women in faculty, research, and administrative positions.

Concluding Remarks:
Executive Freedom and Transcendence
The central claim of The Spiritual Dimension of Business Ethics and Sustainability
Management, (Laszlo Zsolnai, ed. 2015), is that both business ethics and sustainability
management require spirituality as a foundation. Without spiritually-motivated actors, ethical
business initiatives and pro-environmental activities can become ineffective and meaningless,
and sometimes even counter-productive and destructive. That is, we need spirituality.
Spirituality cannot be captured in one standardized definition. Spirituality is a rich, intercultural
and multilayered concept. As a guideline, Zsolnai (2015: 4) proposes a working definition
(developed by the European SPES Forum): spirituality is people’s multiform search for the deep
meaning of life that interconnects them to all living beings and to ‘God’ or Ultimate Reality
(European SPES Forum 2014).Most definitions of spirituality share a number of common
elements: reconnection to the inner self; a search for universal values that lifts the individual
above egocentric strivings; deep empathy with all living beings; and, finally, a desire to
somehow keep in touch with the source of life (whatever name we choose to give this). In other
words, spirituality is the search for inner identity, connectedness and transcendence (Bouckaert
and Zsolnai 2012).

An important aspect of our transcendence and our nature as executive human persons is our
free will or the realm of our freedom. Our executive freedom is twofold: a) we are free to make
choices; b) we are thereby free to determine the direction and meaning of our existence. When
we categorically exercise this twofold freedom, we exercise the basic transcendental freedom,
which is the freedom to create ourselves. Freedom of choice is largely dependent upon the
domain and situation of choices – it is situational. Our transcendental freedom whereby we
determine the meaning and direction of our existence is the autonomy of character which
expresses the person behind the character. My choices may be limited, but I can still be free in
the autonomy of personhood that makes the choices. As Agnes Heller (1988: 54) puts it: the
referent of liberty (liberum arbitrium) is action; the referent of autonomy is character. A
completely autonomous person may have no choices whatever owing to circumstances, but still
be totally autonomous. Often, there might be no external (e.g., market or economic or political)
choices whatsoever; but there are real choices from within: to do or not to do, to become or not
to become, to be or not to be. This is autonomy at its best.

326
 Personal executive autonomy is our transcendence over situations; it is mind over matter, soul
over body, the absolute over relative, the eternal over temporal, and life over death. We cannot
choose our birth, our genetics, our parents, our gender, our race, our nationality and culture –
they are the “givens” of our immanence. But still our transcendence enables us to go beyond
these constraints to exercise our autonomous freedom to create a meaningful existence and
personal history. Human transcendence may not be absolute transcendence, but it is
transcendence nevertheless (John Paul II: Veritatis Splendor, 35-53). Nelson Mandela exercised
his transcendent freedom while he was jailed for 27 years; he used all his apartheid prison years
to learn, form and transform himself. He was more free and transforming than the people who
imprisoned him.

All these are aspects or dimensions of our individuality and sociality, transcendence and
immanence. But, in the final analysis, human transcendence is grounded primarily in its
openness to the absolute transcendence of God. The human person possesses a dignity precisely
in that it is a created reality which is able to open itself to the One who creates. That is, our
human transcendence is properly understood only in relationship to God’s absolute
transcendence (John Paul II: Veritatis Splendor: pp. 28, 67, 72, 73, and 87). Thus, our human
personhood as a reality is individual and social, immanent and transcendent. This is the theology
of executive spirituality.

Hence, given our individuality, sociality, immanence and transcendence, major values and
responsibilities accrue. There is a multidirectional responsibility involved in being human.
There is, additionally, a multidirectional responsibility involved in being an executive. We are
responsible not only for what we are (immanence), but who we are (individuality), what we do
(sociality), and what we have become (transcendence). That is, we are responsible for our
individuality, sociality, immanence and transcendence, individually and collectively; that is, we
are responsible to ourselves (individuality), to others, our community, society and culture
(sociality), to the world and the universe we are immersed and living in (immanence), and to
God who created us and whose absolute transcendence we share, and to something beyond
ourselves, society and the universe (transcendence).

Given our individuality and sociality, immanence and transcendence, several rights and
duties, obligations and responsibilities follow, such as:

 As corporate executives, we are responsible to our unique immanence, the way we are uniquely
structured and engineered, our genetics and demographics, our psychographics (consumer
lifestyles) and ergographics (work-styles), our geographics (our unique position on the planet) and
cosmographics (our unique position in the solar system or the universe). While we expect others
to respect our unique immanence and particularity, we must also learn to respect the unique
immanence, individualization and personalization of those whom we serve as an organization and
of those whom we chose to be served.

 As corporate executives, we are responsible to our unique individuality of talents and skills,
passions and drives, attitudes and perceptions, feelings and emotions, and that is specifically
individuated about us. While we expect others to respect our individuality, we must also learn to
respect the unique individuality of our employees, customers, distributors, creditors, suppliers,
local and national communities, and even our competitors.

327
  As corporate executives, we are responsible to our unique sociality, our social talents and skills,
and our unique capacity to interact, network, bargain, negotiate, argue, persuade, and lead
people. While we expect others to respect our sociality, we must also learn to respect the unique
sociality of our subjects and reports, customers and partners, competitors and regulators,
shareholders and all stakeholders alike.

 Lastly, as corporate executives, we are responsible to our unique transcendence, our unique
mystique and philosophy, our unique vision and mission, our unique ideals and ideologies, our
unique values and virtues, our unique brand of inspiring and moral leadership, and our unique
ministry of servant leadership. While we expect others to respect our unique transcendence, we
must also learn to respect the unique and inaccessible transcendence of others, our subjects and
reports, our customers and partners, our employees and their families, our local and global
stakeholders alike.

Figure 9.2 captures this dynamic quadric-directional moral responsibility of our human
personhood. The challenge of Figure 6.1 is Figure 6.2 – given our lives influenced by multiple
internal and external stimuli, how do we humanize and divinize ourselves for others? All five
major constituents of executive human personhood and responsibility have starry borders or
boundaries to indicate ever widening scope, scale and domain of responsibilities under
individuality, sociality, immanence and transcendence, and therefore, under executive human
personhood. [See Corporate Ethics Exercise 9.15 to 9.16].

Case 9.2 portrays the life of struggle of freedom fighter, doctor, and communist, Lakshmi
Sahgal who died on July 23, 2012, age 98, after a long life of transcendence, immanence,
individuality and sociality. Lakshmi realized her human personhood to the full. She beckons us:
we have a responsibility to actualize human personhood in a truly human way, to be truly
creative and innovative, to be value-driven, be free but empowered by moral and ethical
imperatives, and in sum, to be truly human.

Martin Heidegger once wrote that caring for things demands immanence in God (Heidegger
1985). The ethics of human personhood suggests that we too may try to see the world as the face
of God and organize our business accordingly. (Heidegger, M. 1985).

Heidegger, M. (1985). Schelling’s treatise on the essence of human freedom. Columbus: Ohio
University Press
Soros, G. (1998), The crisis of global capitalism. New York: Public Affairs.
Zsolnai (2015), “Spirituality, Ethics and Sustainability,” in The Spiritual Dimension of Business
Ethics and Sustainability Management, ed. Laszlo Zsolnai, Springer Cham Heidelberg, New
York, Dordrecht London, p. 3).

328
 Figure 9.1: The Human Personhood as the Foundation for Executive Ethics

Internal Stimuli External Stimuli

Sensitive Stimuli: Family & School

Via five senses, Stimuli:
Observation, perception Parents, Siblings, Peers,
Relatives, Teachers

Affective Stimuli: Ergonomic

Emotions, feelings, Stimuli:
Attitudes, Beliefs, Work, Meaning, Unions;
Anxiety, Vigilance Talents, Skills, Earnings,
Instincts &Drives Risk &Rewards
Dreams
Human
Personhood:
Personality Traits;
Vision, Mission,
Cognitive Stimuli: Market Stimuli:
Perception, Thinking, Ends, Products & Services;
Reasoning, Explanation, Ideals, Goals, Supply & Demand;
Offline & Online,
Experimentation,
Imagination, Intuition Means, Objectives; Local & Global
Markets
Soul, Spirit, Virtues,
Habits; Morals,
Ethics;
Responsibility;
Transcendence;
Volitive Stimuli: Synthesis, Unity
Ideological Stimuli:
Deliberation, Society, Lifestyles,
Determination; Unity, Governments; Law & Order;
Free will, Freedom; Religion, Politics, History,
Decision; Choice, Philosophy, Theology;
Selection, Election God and Heaven

329
Figure 9.2: The Quadri-Directional Responsibility of Human Personhood:
The Challenge of Executive Ethics
[See also Rehrauer 1996: 57]

Executive Executive Sociality:

Language, love, knowledge,
Transcendence: customs, communication,
Body-soul, mind-matter culture & civilization
spatiality, temporality,
freedom, will, &
immortality

Executive
Personhood:
Self-actualization in
terms of values, wisdom,
ethics, morality,
spirituality and destiny

Executive Executive
Individuality: Immanence:
Corporeality, Self as a Flesh & blood
project, personality, immersion in time,
drives & passions space, society, culture,
history and civilization

330
 Table 9.1: A Taxonomy of Psychological Investigations into Human
Identity
Investigation Method of Methodology of Data Criteria for Major truths
Domain Investigation Investigation Analysis truth about Man

Empirical Experimentation & Statistical Independent Man is a repertoire

Observation & Replication of Analysis: scientific of behaviors that can
Measurement reinforced behaviors ANOVA investigation and be conditioned.
(Skinner et al; (Thorndike, Pavlov, replication of
Wolfgang) findings
Behaviorism)

Observable Speculative Deterministic Inductive Long standing Man is a machine

deductions on Hypothesis of Analysis; from tradition of programmed by the
Behaviors mechanistic semi- deterministic factors of
deterministic
human behaviors (Frederick deterministic behaviorism production, history
Taylor) behaviors to the and society
behavior theory of total
(David Hume, mechanism
Karl Marx)
Cognitive Multiple scholars Man is an outcome of
Psychology within the School his thoughts and
Humanistic Person- Theories to of thought con- expectations and
Centered or understand firm or improve interpretations
Personality-centered thoughts, findings (Jeremy Bentham,
Theoretical Psychology - Client- expectations and JS Mill)
Understanding centered therapy interpretations
of non- (Moritime Adler; Cognitive Multiple scholars Man is
observable Carl Rogers) Psychology within the School organismically
behaviors (e.g., Theories to of thought con- motivated by a
Psychoanalysis understand inner firm or improve hierarchy of needs,
of unconscious organismic findings wants and desires
behaviors ruled motivations of (Farlow, Maslow,
by ego, behavior (Deci, McGregor,
Ryan) Herzberg)
Non- superego and
Humanistic Individual and Multiple scholars Man is a reflection of
Id (Sigmund
observable Freud)
Projective analysis: social structures within the School individual and social
Structural or Gestalt of thought con- structures expressed
Behaviors Psychology of Carl psychology: firm or improve in architectures and
Jung; Gestalt man’s inner life findings civilizations; or one’s
Therapy (Fritz Perls) is unraveled via gestalt projections
pictures and their
interpretations
Philosophical Transcendentalism is Metaphysical Principle of Man is made unto
Deductions of a philosophy that deductions of universalizability the likeness of God,
the human seeks to discover the human (what is truth for endowed with
nature of reality by understanding me should be sensitive, appetitive,
spirit, nature,
investigating the and pursuit of truth for all); cognitive and volitive
dignity and process of thought truth (Descartes; Principle of faculties that
destiny rather than the Spinoza); a reversibility empower human
(Plato, objects of sense search for reality (what is truth for nature, dignity,
Aristotle, experience (Kant, through spiritual all others should intrinsic motivation
Aquinas) Hegel and Fichte). intuition be truth for me) and human behavior.
(Emerson).

331
Case 9.4: Veterans, Baby Boomers, Gen X and Gen Y in the
US

As a practical application or verification of social immanence, consider the four generations

of veterans, baby-boomers, Gen X and Gen Y as described in the United States of America.
Briefly, they may be characterized as in the following Exhibit.

Exhibit 9.1: Social Immanence of Veterans, Baby Boomers, Gen X and Gen Y in the
US

Generation Time: Social Immanent Characteristics

Born in:
Veterans Before 1946 They have a silent nature, self-control, self-esteem; they believe in faithful work, commitment,
team work, and harmony in the workplace; they expect peer respect, and their decisions are
primarily based on experience. Their world is their bond; paying dues is an important duty;
they prefer to be “formal” always, and they love and define themselves by their possessions.
Their values are primarily determined by involvement in World Wars I and II. They are good
readers and self-taught (Tolbize 2008).
Baby-Boomers 1946-1964 They are competitive, hopeful, open-minded, have a positive attitude to change, accept
change, build consensus and thereby effect change, they want to leave footprints of change,
and have good relationships. They trust in paying dues, expect peer respect, respect others and
their feelings, and want to be socially responsible; they want positions of authority, are self-
conceited, are nervous about finances, play by rules, and build careers for themselves. Possibly
GI in World War II, their values were determined by Vietnam war and civil rights activism.
Learns in school and notebook learning (Putre 2003, AMA 2014).
Gen X 1965-1980 They are individualistic, technologically adept, have good technical skills, and value work-life
balance (Gavatorta 2012) They look for better opportunities for personal growth. They dislike
micro-management and prefer a malleable workplace atmosphere; they enjoy multi-tasking
and comprehensive occupations; committed effort at work, and concentrate on professional
growth, and prefer bonding work-relationships (Keene and Handrich 2015). They are
competitive; prefer reverse-mentoring with retiring baby-boomers. Goals and end are more
important than means or rules; they question authority (AMA 2011).
Gen Y 1980-2000 They are tech-savvy milennials, family-centric and group focused; they are training-oriented
and a more transparent working environment; hey love flexible working schedules and are
more concerned making a positive effect on society. They want to make their contributions to
the world and be heard. If they want advance in the workplace (Burk, Olsen and Messerli
2011). They like education being coached; are trained to speak-up and often speak. Giving
back to society is more important than higher wages; they want to generate competitive
advantage to their company; are more unselfish than Boomers or Gen Xers (Keene and
Handrich 2015). They seek work-satisfaction, seek career advancement through hard work,
and expect feedback from supervisors on a weekly basis; they welcome cultural diversity; they
are not afraid of age discrimination as they believe they have better work-skills than previous
generations; they are efficient learners; they are more imaginative, creative contributors to
work and society (Keene and Handrich 2015).
Gen Z 2000- Computer, laptop, Internet, electronic devices and social media addicted. Love fun, play and
freedom. Are materialistic in values such as money, fashions, TVs, DVDs, outdoor dining,
wealth-accumulation, comfortable life and luxury. Seek education, grades, skills, and
competencies for focused careers in softer sciences such as arts, music, athletics, sports,
entertainment, electronic games, information technology (IT), e-marketing and e-advertising
than in harder sciences such as math, physics, chemistry, engineering, manufacturing,
medicine, nursing, pharmaceuticals, law and government. Enjoy working for investment
firms, start-ups and small entrepreneurs rather than for old and large hierarchical corporations
and organizations. They are getting fed up with violence, terrorism, fraud, corruption, bribery,
and bad governments, but still love money, big spending, and conspicuous consumption. They
are more fitness and wellness oriented, do gym regularly, and love awesome looks.

332
 Most entries in Exhibit 5.1 are those of social, time, space, job and market, geographic and
cultural immanence. Individuality and sociality follow immanence. Manifestations of
transcendence seem to be decreasing from veterans to baby-boomers to generations X, Y and Z.
Ideological victimization, commoditization, monetization and mundane materialism have also
increased since the veterans and baby-boomers.

References:
American Management Association (AMA), 2011, 2014; http/ www.amanet.org/training articles/ leading the four generations at
work.aspx).
Gavatorta, S. (2012), “It’s a Millennial Thing,” T+D, 66:3, 58-65.
Keene, D. L. and R. R. Handrich (2015), “Loyalty, Longevity and Leadership: A Multigenerational Workforce Update,” Jury
Expert, 27: 2, 34-41.
Olsen, Burk B. and E. Messerli (2011), “Navigating the Generation Gap in the Workplace from the Perspective of Generation Y,”
Parks and Recreation, 46:5, 35-36.
Putre, L. (2013), “Generations in the Workplace,” (cover story), H&HN: Hospitals & Health Networks, 87:1, 26-31.
Tolbize, Anick (2008), http://rtc.umn.edu/docs/2_18_Gen_diff_workplace.pdf.
Wall Street Journal (US Edition),http://guides.wsj.com/management/managing-your-people/how-to-manage- different-
generations/

333
 Appendix 9.1: Sexual Harassment at the Workplace:
A Violation of Human Personhood

Tarun Tejpal, founder editor of Tehelka, was accused of

sexually assaulting a junior woman colleague in a lift of a five
star hotel in Panaji, Goa, November 28, 2013. Tejpal was
arrested on November 30 following the rejection of his
anticipatory bail. Justice UV Bakre of the Goa bench court
refused the bail and Tejpal was confined at Sada sub-jail in
Vasco, 35 kms from Panaji. He appealed, but the Bombay High
Court rejected the bail plea on Friday, March 14, 2014. Earlier
during Friday, Tejpal was granted permission by a Goa court to
meet his ailing mother, Shantkuntala suffering from a brain
tumor and who is allegedly in the last stages of her life. She
is admitted in a hospital at Mapusa town.

A session court in Cuttack convicted three people on Friday,

March 14, 2014 for a nun’s gang rape during communal violence in
Kandhamal district in August 2008. All three convicts will
serve prison sentence ranging from two to eleven years. The
prime accused was Santosh Patnaik, alias Mitu. The court
acquitted six others due to lack of evidence. The communal
violence killed more than 35 people while rendering thousands
homeless. The gang rape of the young nun triggered a nationwide
uproar. The killing of the Hindu religious leader Swami
Laxmanananda Saraswati by suspected Maoists had ignited the
communal riots. Mitu is facing multiple charges including rape
and is sentenced for eleven years and will be penalized Rs
10,000. The other two, Gajendra Digal and Saroj Bahdei, were
charged with outraging the modesty of a woman and other crimes,
and will serve a prison sentence of two years and two months
each. The nun victim alleged that she was beaten, raped and
paraded naked in a village near Baliguda in the backward
Kandhamal district on the night of August 25, 2008, during the
peak of anti-Christian violence in Odisha. The Odisha High
Court had shifted the trial from Kandhamal to Cuttack at the
victim’s request. The trial began in August 2010, and the last
hearing of the case was held on March 4, 2014. All except Mitu
were granted bail during the trial.

Both cases of sexual harassment appeared in Deccan Herald,

Saturday, March 15, 2014 (p. 7). They represent the tip of the
iceberg. All forms of violence towards women and men, including
sexual harassment (SH), harm and prevent human equality and
human personhood, deny personal dignity and privacy, and violate

334
human safety and security. They violate Articles 1, 2 and 3 of
the Universal Declaration of Human Rights. Sexual harassment of
women in the workplace is an extension of home violence and is
discriminatory, exploitation, and thrives in an atmosphere of
threat, terror and reprisal. For women, SH at work remains an
impediment to equal opportunity, dignity and security. Studies
on SH of women at work indicate that it is endemic, often hidden
and present in all types of organizations and all functional and
divisional levels within organizations.

Politics of Rape in India

In 2013, Indian media started scripting a documentary on the

politics of rape in India. “Silent Screams – India’s Activism
against Rape” captured the national mood in the aftermath of the
tragic Nirbhaya incident of December 2012. The film portrayed
and analyzed three rapes committed in India, across class,
caste, and age. The film won there awards at the 2014 New York
Film Festival and the 2013 Perspective Award at the Asia Pacific
Broadcasting Union. Later, then Prime Minister Manmohan Singh
appointed a High Level Committee (HLC) to investigate the status
of women in India with a key objective of carrying out a
comprehensive study of women since 1989 and to recommend
appropriate interventions based on assessment of women’s
economic, legal, educational, health and socio-cultural status.14
Around 2013, over one-third of India’s female population was
below 15 years and 23% were married before 20 – both statistics
risking them to be sexually vulnerable and harassment-prone.
The HLC was also required to prepare a forward looking vision
statement for 2030 for the 630 million female population of
India, a group with great diversity of religion, caste,
language, education, work status, health and freedom. The
Report was submitted by the HLC to the Government of India in
July 2015 for review and implementation.

The Convention on the Elimination of All Forms of

14 Manira Alva-Pinto, a friend of mine from Bangalore, was appointed by the Prime
Minister and the Cabinet Secretariat as a member of the HLC of the Status of Women,
Government of India in 2012. She was reappointed in 2013 for a total period of three
years (http://pib.nic.in/newsite/PrintRelease.aspx?relid=87060). In this group, Alva-
Pinto led all consultations on the Media chapter, on how the media impacts the status
of women in India (http://www.business-standard.com/article/government-press-
release/recommendations-of-high-level-committee-hlc-on-status-of-women-discussed-
115072000810_1.html). In February 2014, partnering with UNDP, she organized a National
Consultation of Women and the Media, wherein over 200 media owners, practitioners,
professionals, academicians, activists and students from across India convened to
discuss issues that affected and inspired them. Conference themes ranged from women’s
working-conditions, maternity leave, to reporting from conflict zones and the need for
gender sensitivity in media studies.

335
Discrimination against Women (CEDAW) adopted by the UN General
Assembly in 1979 is often considered as an international Bill of
Rights of Women. It consists of a preamble and 30 articles; it
defines what constitutes discrimination against women, and sets
up an agenda for national action to fight such discrimination.
It was only 20 years later in 1999, that following CEDAW
(General Recommendation No 19), the Indian Supreme Court in the
Vishaka vs. State of Rajasthan case recognized for the first
time that SH was a violation of human rights and gender-based
systemic discrimination that affects women’s right to life and
livelihood (Vishaka 1999). The Court defined SH very clearly as
well as provided guidelines for employers to redress and prevent
SH in the workplace. The Court also recognized that equality in
employment can be seriously impaired when women are subjected to
gender specific violence, such as SH at workplace.

The significance of the Supreme Court ruling on Vishaka was

that CEDAW, though not a domestic law, was used by Indian courts
to shape national laws on SH. In fact, fifteen years after the
landmark Vishaka judgment, the Government of India introduced a
bill – The Sexual Harassment of Women at Workplace (Prevention,
Prohibition and Redress) Act, 2013, a legislative act in India
“to provide protection against sexual harassment of women at
workplace and for the prevention and redress of complaints of
sexual harassment.” The Act became law on December 9, 2013.

What is Sexual Harassment?

According to the Supreme Court definition of 2013, sexual

harassment is any unwelcome sexually determined behavior. SH
behaviors include: physical contact, demand or request for
sexual favors, sexually colored remarks, showing pornography,
and any other physical, verbal or non-verbal conduct of a sexual
nature. According to the Law of 2013, SH takes place if a
person:

 Subjects another person to an unwelcome act of physical

intimacy (e.g., grabbing, brushing, touching, pinching);
 Makes an unwelcome demand or request (directly or by
implication) for sexual favors from another person, and
further, makes it a condition for employment/payment of
wages/increment/promotion etc.;
 Makes an unwelcome remark with sexual connotations (e.g.,
sexually explicit compliments, cracking loud jokes with
sexual connotations, making sexist remarks);
 Shows a person any sexually explicit visual material in the
form of pictures, cartoon, pinups, calendars, screen savers
336
 on computers, or any offensive written material such as
pornographic emails, and
 Engages in any other unwelcome conduct of a sexual nature,
verbal or even non-verbal, like whistling, staring to make
the other person uncomfortable, making offensive gestures,
and the like.

Hence, according to the SH Law, behavior that qualifies to be

SH could be physical (violence, touching, unnecessary close
proximity), verbal (comments and questions about appearance,
life-style, sexual orientation, offensive phone calls) or non-
verbal (whistling, sexually suggestive gestures, display of
sexual materials).

From a sociological viewpoint, SH relates to power

relationships and victimization than it does to sex itself. It
reflects a disparity in power between the perpetrator and the
victim, which may also mirror the power differentials between
men and women in society (ILO 2001). It “results from a misuse
of power – not from sexual attraction” (Petrocelli and Kate Repa
1992). In fact, in most cases, victims of SH are women while
the perpetrators are men. SH does not result, however, from
male biological proclivity to sexually harass women, but speaks
to the unequal structuring of society along gender lines (ILO
2004). In certain countries like India, social and cultural
norms may serve to validate or even encourage SH.

Incidence of Sexual Harassment in India

Hence, women are more likely to suffer from SH because they

lack power, are in vulnerable and insecure positions, lack self-
confidence to deal with it, and have been socialized to suffer
in silence. According to a recent survey of the major cities of
India, conducted by Oxfam India and the Social and Rural
Research Institute, and reported by The Times of India, November
2012, about 17% of working women in India admit to some form of
SH at workplace, in both organized and unorganized sectors.
Most acts of SH were non-physical. Maximum incidence of SH
(29%) was reported among laborers, followed by (23%) among
domestic helps, and small scale manufacturing units (16%). This
may seriously under-represent facts as over 90% of women who
experienced SH did not register a police complaint. Those who
experienced SH declared it was so humiliating and demeaning an
episode that the victims often avoided taking action against the
harasser, not only for fear of reprisal but also to avoid
remembering and reliving the trauma.

337
 Statistics from the National Crime Record Bureau 2012record
the following SH facts: Andhra Pradesh reported 3,658 cases
(42.7%) and Maharashtra 1,071 cases (12.5%) of total reported
incidences of SH during 2011. Incidentally, Andhra Pradesh
records the highest crime rate (4.3%) compared to the national
average of 0.714. The National Crime Record Bureau 2012 also
details the percentage distribution of crimes against women by
types: 43.4% relate to cruelty by husband and relatives, 18.8%
to molestation, 10.6% to rape, 15.6% to kidnapping and
abduction, 3.7% to sexual harassment, 3.8% to deaths due to
dowry disputes, 1.1% immoral traffic, and 2.9% crimes due to
Dowry Prohibition Act.

SH and Its Impact on the Organization

The effects of SH at work go beyond individual damage to

social and organizational consequences. Research affirms that
workplaces in which SH prevails tend to be sharply unproductive.
Women workers who were bullied and victimized, who felt afraid
and resentful, tended to be very unproductive. Moreover, sexual
favors create discrimination, distraction, antagonisms and
jealousies that hamper corporate growth and profits.

ILO (2001, 2004) and CEDAW (1992) list several negative

consequences of SH on workers such as:

a) Physiological Effects: victims of SH suffer from nausea,

loss of appetite, fatigue, headaches, … all of which can
lead to absenteeism, chronic illness, and reduced quality
of life. Pregnant women affected by SH can suffer from
miscarriage or other prenatal and neonatal complications.
b) Psychological Effects: SH victims experience humiliation,
shame, anger, debilitating fear, anxiety, depression and
decreased motivation. In extreme cases, the SH related
trauma may lead to willed solitude and/or suicide.
c) Socioeconomic Effects: SH victims may experience loss of
concentration, loss of productivity, loss of earnings
capacity, loss of commitment – all of which may negatively
affect promotions and opportunities for advancement.
Societies that tolerate SH may compromise equality, dignity
and rights of women
d) Sociological Effects: The worst of all is the social stigma
attached to victims of SH. They are considered as “marked”
products with significant losses in marriage careers; if
married, SH victims may face family-based “neglect, hatred,
violence, or divorce” (ILO Nepal, 2004).

338
SH-related Law Enforcement in India

The Indian Constitution provides equal rights and

opportunities for women. In practice, however, workplaces and
societies where SH is tolerated or neglected, women may serious
problems of safety, security, privacy and human dignity.
Theoretically, SH complaints and redress could have recourse to
constitutional law, criminal law, civil law, and tort. In
reality, prior to Vishaka vs. the State of Rajasthan (1999)
decision, there was no law preventing SH in the workplace. SH
was not regulated by any labor law or employment legislation.
To some extent, however, traditional criminal law provisions
under the Indian Penal Code (IPC) criminalized some forms of SH
with the aim to preserve women’s modesty. Under IPC, Section
209 forbids obscene acts and songs that cause social annoyance;
Section 354 indicts assault or use of criminal force on a woman
with intent to outrage her modesty; Section 376 criminalizes
rape; Section 509 prohibits uttering any word or making any
gesture intended to insult the modesty of a woman. The Sexual
Harassment of Women at Workplace (Prevention, Prohibition and
Redress) Act, 2013now makes SH a criminal offence. The Criminal
Law (Amendment) Act 2013, Section 354 (A) was added to the
Indian Penal Code stipulates what consists of a SH offence and
its corresponding penalties on the perpetrator. With recent
incidences of gang rape, the Supreme Court of India has stepped
up its law enforcement to prevent, prohibit and punish SH.

Indian Law now not only prohibits SH but prescribes an

affirmative duty to prevent it in the workplace. The Supreme
Court decision in Vishaka vs. State of Rajasthan (1999) insists
on affirmative action by the employer to prevent SH via strong
preventive measures. This ordinance provides employers
significant incentives to take preventive measures against SH in
workplaces. For instance, since the employer can have the best
resources and corporate policies to prevent and control SH in
his workplace, the law holds both the employer and the
perpetrator liable for SH when it happens within workplaces.
The victim can sue the employer for damages that result from SH
that occur within corporate premises. But the intent of the SH
Law is not to punish the employer or the perpetrator, but to
stop SH from occurring. Of course, everybody within the
organization must be committed to prevent, prohibit and
eradicate every semblance of SH anywhere in the firm and in the
industry.

Assignment:

339
 1. As a manager, how will you combat sexual harassment (SH) in your company’s workplaces with old
and new laws that are not yet effectively enforced?
2. How would you use the new directions in SH law, jurisprudence and enforcement to formulate
effective SH eradication policies in your company?

Some suggestions in this direction:

Figure 9.1A: A input-process-output analytic frameworks to understand the

Indian SH Law System:

SH
Process:
Causes,
D SH Inputs: A Concomitants, B SH Outputs:
Antecedents Circumstances Effects,
Determinants Outcomes,
Consequences

3. Hence, discuss typical inputs of SH in the Indian workplace, socially and legally.
4. Hence, discuss typical processes of SH in the Indian workplace, socially and legally.
5. Hence, discuss typical outcomes of SH in the Indian workplace, socially and legally.
6. How do SH inputs influence SH processes and why? [See Arrow A]. How can you combat them?
7. How do SH processes impact SH outcomes and why? [See Arrow B]. How can you combat them?
8. How do SH outputs, in turn, influence SH processes and why? [See Arrow C]. How can you combat
them?
9. How do SH outputs, in turn, impact SH inputs to reinforce SH inputs and processes and why? [See
Arrow D]. How can you combat them?
10. At which arrow [A, B, C, or D] will your SH combative policies and strategies be most effective at the
Indian workplace, and why?

340
 Appendix 9.2:
Case 9.2: The Personhood of Captain Lakshmi Sahgal (1914-2012):
AOL1-3 Applied and Illustrated

AOL1: An Inputs-Based Problem Resolution Model

Domain Search Inputs based Analysis
Key facts, Key  Lakshmi Sahgal’s father was a criminal lawyer and mother a social worker & freedom fighter
figures, Key data,  Lakshmi Sahgal was an officer in INA and Minister of Women’s Affairs in Azad Hind govt.
Key information  She strongly felt that India needs well educated and trained professionals after independence
 Lakshmi Sahgal’s mother instilled egalitarian values and independence of thought in her
 She set up the Rani of Jhansi Regiment to incorporate women in freedom struggle
 She was critical of Gandhiji’s insistence on non-violence
 After 1946 she withdrew herself from public arena and devoted herself to medical practice.

Key subjects, Key Subjects:

objects, Key  Lakshmi Sahgal, A.V. Ammukutty (Lakshmi Sahgal’s mother), Subhash Chandra Bose, The
properties and Key  British personnel, Subhashini Sahgal
events (SOPE Objects:
analysis)  India’s independence movement, social activism, medical clinic, INA, Rani of Jhansi
 Regiment, AIDWA, CPI(M)
Key Properties:
 India was struggling with its independence and INA was formed as a part of independence
movement
 The partition had been a disaster and pursuit of money had ruined all
 Lakshmi Sahgal contributed in freedom struggle by forming Rani of Jhansi regiment
 She later opened her own medical clinic in Kanpur
Events:
 Lakshmi Sahgal obtained a MBBS degree in 1938 and later went to Singapore to be a part of
INA and formed a Rani of Jhansi regiment to include women in the freedom movement
 She was house arrested by the British army in Singapore and later sent back to India
 Upon return to India in 1946, she started her own medical clinic
 She became active in CPI(M) party politics and also formed AIDWA

Timeline of key 1914: Birth of Lakshmi Sahgal

Events 1928: Met Subhash Chandra Bose in Calcutta
1938: Graduated MBBS from Madras Medical College
1940: Went to Singapore
1943: Met Subhash Chandra Bose again in December
1943-46: Became a part of INA, captured by the British, Married Col. Prem Sahgal
1947 onwards: Rendered her services in medical profession
1970: Became a member of CPI(M)
1981: Founded AIDWA
1998: Awarded Padma Vibhushan
2002: Contested for president’s post against APJ Abdul Kalam
2012: Died in Kanpur

Explanations of The key personalities that influenced the life of Lakshmi Sahgal are her mother and Subhash
SOPE? Key Chandra Bose who instilled nationalist feeling in her. She joined INA with S.C. Bose to fight
explanation? against the British. She was an ardent supporter of education and later withdrew herself from
politics to devote her life to medical profession.

Analyze SOPE  Lakshmi Sahgal’s mother was a freedom fighter and social activist. She instilled the nationalist fervor
in Lakshmi Sahgal to fight for India’s Independence
 She fought as a freedom fighter in INA against the British army for which she was also put under

341
 house arrest
 She graduated from the Madras College in MBBS and upon return from Singapore opened her own
clinic in Kanpur to provide medical facilities to poor people

Classify SOPE SOPE can be classified into two categories:

Categorize SOPE 1. Those SOPE which influenced Lakshmi Sahgal to indulge in freedom struggle and
Characterize SOPE fight for India’s Independence like S.C. Bose, INA and Rani of Jhansi Regiment
2. Those SOPE which influenced her to devote her life to Public service and society’s
uplift like AIDWA, CPI (M) and her clinic in Kanpur.

Problem Controllable Variables:

Identification; Channelize the Indian freedom movement by involving all sections of the society
Key problems? Training several women as medical aides and midwives
Underlying Key Uncontrollable Variables:
problems? Prevalent vices in the Indian society like child marriage, dowries, ban on remarriage of
widows
Low levels of education and medical facilities in the Indian society
X dominates Y

Problem The controllable variables are easy to control and manipulate to address the problem whereas there is little
Formulation control over uncontrollable variables and they are not easy to manipulate or change.

Problem The main challenge for Lakshmi Sahgal was to spread the importance of education in the Indian Society so
Specification as to overcome the prevalent social vices. Other problem that she faced was how to incorporate and
empower women to fight in freedom struggle.

Problem Solutions Solutions:

alternatives Trying to abolish anti-women social practices through law.
Adequate training of the masses to make them self-reliant, self-supporting and be able to make their own
choices about marriage
Spreading awareness about the tangible social and economic benefits of education
corporate women also in the struggle for independence by forming a women’s regiment

Optimal Problem Optimal solution would be to form a separate freedom fighter wing for women and to emphasize on the
Solutions importance of education in the society. The trade off in this strategy is that this solution will be difficult to
implement but once implemented it would be highly effective.

Optimal Strategy The optimal strategy is to coordinate the efforts between the main freedom fighter regiment and the
women regiment and to give vocational training to the people that will change their mindset about
education and prevalent anti-women practices.

Optimal The implementation of the above solutions was timely. The strategy was implemented at the right time that
Implementation made a difference. Women freedom fighter wing gave a tough fight to British Army and the society as a
whole became more self-reliant and rational through education.

Consequences The implementation will lead to a chain reaction where one educated person will educate others and will
make efforts to abolish socially unacceptable practices. This way we will witness an educated and
prosperous society over a period of time.

Learning The learning from this case is that if someone wants to make a difference and do something for the society
then he/she will have to transcend his/her personal interest for the betterment of society as Lakshmi Sahgal
did throughout her life.

AOL 2: A Process-Based Problem Resolution Model

342
 Process Analysis: Under process analysis we would mainly discuss Lakshmi Sahgal’s transformation from a rich socialite to a
freedom fighter and then to a social activist and the events and personality traits which were responsible for her transformation.

Problem Process Type and Level of Ethical Analysis of Problem Processes

Who are the key Dr. Lakshmi Sahgal despite being a high born was against the social evil of casteism and poverty, a trait
subjects? which she showed in her childhood itself when despite her grandmother’s foreboding she played with a
What are the key tribal child. After becoming a distinguished doctor she dedicated her life serving the poor. She provided
objects? free medical services to the needy. She also worked for welfare of Bhopal gas tragedy victims and anti-
What are the key Sikh riots victims. Her caring nature can be traced back to her childhood. Dr. Sahgal’s mother was from a
properties and poor household and was married in a rich household to a man 20 years older than her. Because of this,
events (SOPE) in subtle distinctions were made in the way Dr. Sahgal was treated. She was served food separately from
the problem other family members. Hence she understood the pain of segregation and she spent her life working for
Process domain? uplift of the people who were rejected by the elite of the society.

Dr. Lakshmi Sahgal was a doctor at a time when only very few were literate. She was married to a pilot
and could have spent her life in utmost luxury. But she renounced all this to take part in freedom struggle
and was a leading member of Indian National Army. She was responsible for starting a women regiment
and was given the title of captain. Captain Sahgal’s mother was a
freedom fighter and ardent supporter of Indian National Congress. She fulfilled her duties by hiding
freedom fighters, burning imported clothes and ensures that Dr. Sahgal meet the top freedom fighters of
the country. She was a huge influence on Dr. Sahgal and Dr. Sahgal followed her footsteps to become a
freedom fighter.

What are the basic Dr. Sahgal was a member of Indian National Army which was a banned outfit and as a result she was
legal, social, ethical & arrested in Burma. She never considered the British as the true rulers of the land and hence any law
moral issues involved in imposed by them was inconsequential for her. But at the same time she did not allow her hatred for the
the SOPE processes? British to cloud her judgment. Realizing that the country would require educated doctors she did not leave
the college and join Civil Disobedience Movement but completed her education.
She strongly protested against miss world competition as according to her it demeaned women. She
always dreamed for free women and wanted them to be forward looking.

History or narrative Dr. Lakshmi Sahgal’s childhood was a major influencing factor on her life and shaped the person she
of key SOPE became. She faced discrimination in her childhood and she wanted to emancipate the world from evils of
process elements poverty and casteism. She followed her mother’s footstep to become a freedom fighter.

Explanation of the SOPE India has always been in grips of different social evils and people can never be free unless they break these
problem binders. Dr. Sahgal spent her life fighting these evils. She was a highly qualified doctor and came from a
narrative and processes rich family. But she sacrificed all her luxuries for the service of masses.
from an economic, social,
and legal perspective
Analyze SOPE problem- Ethics and moral are often inter-related and unethical acts are invariably immoral. However there were
processes certain event in Lakshmi Sahgal’s life where there was a conflict between moral and ethics which are
from an ethical and moral numerated in the next point.
perspective
Characterize SOPE Although it is not unethical for a doctor to refuse his services to poor but morally it is a crime as every life
problem-processes has equal value. Realizing that poor due to their inability to pay doctors die an untimely death, she
from an ethical and engaged herself in providing medical services to poor. Beauty pageants are not ethically wrong but
moral viewpoint morally they downgrade women. Hence she spearheaded a movement against them.
Learning We learnt that every event is backed by long drawn out process and not a big bang impact. Dr. Lakshmi
Sahgal was heavily influenced by her mother and her childhood memories left a big impact on her. Further
Dr. Sahgal had to often face conflict between ethics and morals but she always sided with moral. Even in
our life we would face conflict between right decisions and legal decisions and the decisions that we make
at this point would shape your destiny.

AOL3: An Outcomes-Based Problem Resolution Model

Under Outcome Analysis we would try to analyze the impact Dr. Lakshmi Sahgal had on her family and society at large.

343
 Domain Analysis
Key outcome Lakshmi Sahgal in her youth was a prominent member of Indian National army and started a women
consequences regiment. Her efforts were instrumental in success of Indian National Army and she was imprisoned for
To subjects, objects, her activities. Trial of Indian National Army members intensified the hatred for British rulers. However
properties and she could not have a family because of her involvement in freedom movement. Her first marriage failed
events (SOPE) due to her wishes to study further. Her next relationship also ended because she did not want to leave
Indian National Army.
After India attained freedom she became disillusioned with politics and gave her life for service of poor.
Her free medical service ensured healthy lives for many. During Bhopal gas tragedy, anti-Sikh riots her
efforts were responsible for saving the lives of many victims. She not only provided medical services but
also placated anti-Sikh mobs and ensured that no Sikh living near her establishment was hurt. She also
trained several women as medical aides and ensured her clinic which served poor continues even after her
death.
Her principles of economic equality development of poor harmonized with ideology of Communist party
of India (Marxist) and she joined it. She was a Rajya Sabha Member and she was nominated as the
President of India.

Key subjects, Key Stakeholders – Captain Sahgal gave prominence to country’s freedom over her happiness and her
objects, properties family. Hence she was not able to have a family till 1947 and had two unsuccessful relationships. Even
and events (SOPE) after her second marriage she was mainly focused on service for poor and may not have able to spend the
in relation to amount of time that she desired to spend with her family.
problem outcomes? Key events – Failure of her first marriage and breakup with her college friend were key negative events
that affected Dr. Sahgal.

Timeline of key 1914 - Lakshmi Sahgal Born in Madras

outcome-events that 1943 – Lakshmi Sahgal meets Subhash Chandra Bose and joins Indian National Army
led to beneficial or 1945 – Arrest of Captain Sahgal
harmful 1946 – Engaged herself in service of poor
consequences 1971 – Joined CPI(M) and later became a Rajya Sabha member for CPI(M)
2012 – Death at age of 97

Explanations of Why harm - Captain Lakshmi’s dedication and beliefs had a toll on her family life and she had a failed
harmful first marriage. She always put India before herself and the family, so this was bound to happen.
consequences with Major Antecedents - Her marriage was decided when she was merely 13, so she didn’t get a chance to
respect to SOPE? meet her husband and understand his thought process. He probably wanted a wife who could be home-
maker whereas she wanted to work for the country

Teleological Although in a bid to improve the country, for Captain Lakshmi family took a backseat, however this is
analysis of the incomparable in front of the good she did for the downtrodden. Initially her efforts paved way for setting
consequences of Rani of Jhansi regiment which was instrumental for India’s freedom. Further medical service provided
to poor and riot victims saved lives of many. Her efforts helped in improvement of women’s lives in
India.

Distributive justice Dr. Lakshmi Sahgal’s efforts benefitted many. As a freedom fighter she worked for the freedom of entire
based analysis of country. She also treated the needy free of cost and hence was a beacon of hope for several people.
the consequences Comparatively Lakshmi Sahgal herself along with her family was the only one to suffer because of her
efforts.

Virtue-ethics based Dr. Lakshmi Sahgal’s first husband had a bitter experience. Also her children might have not been very
analysis of the well cared off. However these downsides are to be faced by family members of social workers. Only
consequences precaution is that social workers can focus on their children more when they are young because this is the
time when they need maximum support.

Assurance of AOL 3 helped us understand the positive as well as negative impact that Captain Lakshmi had on
Learning different people from different angles.

AOL4: A concept and Theory based -Based Problem Resolution Model

344
 Dimensions of Executive Virtue
We grow in virtue only if we exercise right acts
in relation to that virtue. If we do not exercise
right or virtuous acts, we do not become rightly
ordered or virtuous. Exercise needs both
encouragement to execute the act and the
wisdom to know which act to execute, in which
case exercise follows reason.
Moral goodness as a striving is not simply
wishing; it is actual self-motivation willing to
consider all the factors necessary to moral living,
to deliberate about them, and to execute the
decision. That is, moral goodness is found in the
exercise of the will to do and be good – this is
virtue ethics
Dimensions of Executive Virtue
Aristotle argued that a proper control of our
reason and passions should not just repress them
completely nor indulge in them
freely. Rather a good virtue is to seek the mean
between two extremes, both of which are vices.
Prudence is the virtue that enables us to know the
mean in a given situation (p.10).
The end of life that all human beings should aim
is happiness (eudemonia). The virtues are not
merely means to happiness, but constitute it; that
is, happiness does not merely consist of what we
get in life but also includes who we are (p. 13).
Dimensions of Executive Virtue
There may be a strategic virtue in doing things
rightly, but there is a moral virtue in doing right
things rightly (Aristotle 1985) (p. 19).
Individuals are embedded in communities and
that business is essentially a community activity
in which we work together for a
common good, and excellence for a corporation
consists of making the good life possible for
everyone in society (Solomon 1992a: 209)
(p.17).
Dimensions of Executive Virtue
Contemporary understanding of moral goodness
is fundamentally related to the concept of human
freedom. Due to nature, nurture, economics,
luck, and other external causes, some people are
more capable of realizing right activity and
goodness. Some have a ready disposition to be
temperate, or just or prudent (p.21).
One could improve upon one’s strengths and
reduce one’s weaknesses – this is the exercise of
virtue by which one orders oneself. The more a
person enjoys personal freedom, the more is that
person rightly ordered, and vice versa (p.21).
(Preliminary Check) Instances from case 3.2
Capt. Lakshmi fought for women’s emancipation throughout her life. She
grew in her role as a leader of gender based justice over the course of time
by active participation in various movements including her recent initiative
in which she had protested against the Miss World competition
Capt. Lakshmi like so many other could have just chosen to sit back and sulk
about the prevalent problems in our society. She instead went out and waged
a battle against caste and gender based discrimination. The moral goodness
as evident in her case came from actions born off self-motivation
(Second Check) Instances from case 3.2
Capt. Lakshmi wasn’t supportive of Gandhiji’s non-violent movement but
did not espouse senseless violence as well.
She stood in the face of communal onslaughts during sensitive times in the
city of Kanpur
Capt. Lakshmi continued to practice medicine even in the twilight of her life.
Her social work wasn’t a tool to delivering gratification but one that defined
who she was.
(Third Check) Instances from case 3.2 (Third Check)
Capt. Lakshmi was against the capitalist orientation the independence
movement was gaining. She was a left leaning activist. Hence she saw moral
virtue in pursuing the just cause of independence in a right manner
Capt. Lakshmi instead of fighting the battle for independence in isolation
fought it alongside with that of Social justice. She was well aware of the
shortcomings and the problems faced by her society.
(Fourth Check) Instances from case 3.2
Capt. Lakshmi can be said to have an innate disposition towards free
thinking. Despite being brought up in a conservative culture
where cast discrimination, deprivation of women’s right etc. was prevalent;
she held her own. This can be seen when she fought against her own
grandmother who was perpetrating caste based discrimination
Capt. Lakshmi was a strong individual, a strong woman in hugely
paternalistic times. She moved out of the country when her
husband refused to grant her a divorce. The tremendous amount of personal
freedom she allowed herself to enjoy perhaps complemented her spirit for
freedom and social justice
345
 Dimensions of Executive Virtue
We grow in virtue only if we exercise right acts
in relation to that virtue. If we do not exercise
right or virtuous acts, we do not become rightly
ordered or virtuous. Exercise needs both
encouragement to execute the act and the
wisdom to know which act to execute, in which
case exercise follows reason.
(Fifth Check) Instances from case 3.2
Capt. Lakshmi fought for women’s emancipation throughout her life. She
grew in her role as a leader of gender based justice
over the course of time by active participation in various movements
including her recent initiative in which she had protested against the Miss
World competition

Moral goodness as a striving is not simply
wishing; it is actual self-motivation willing to
consider all the factors necessary to moral living.
Moral goodness is found in the exercise of the
will to do and be good and this is virtue ethics.
Capt. Lakshmi like so many other could have just chosen to sit back and sulk
about the prevalent problems in our society. She instead went out and waged
a battle against caste and gender based discrimination. The moral goodness
as evident in her case came from actions born off self-motivation

Synthesis:
One thing that one understands from all the four AOLs is to critically analyze a problem from inputs approach, the process
approach and the output approach. It helps to understand the relationship between different variables and then attack a case. But
in whatever way you try to understand and analyze the problem you would appreciate that great personalities like Lakshmi
Sahgal who sacrificed their lives for a larger cause would become inspiration for future generations. In this particular case the
problems that Lakshmi Sahgal faced were complex and multifold but it didn’t deter her resolve to contribute to the society’s
greater good. She rose above the distinctions of gender, genetics, race or culture and went beyond these constraints to exercise
freedom and create a meaningful existence. She believed in social equality and respected the sociality and transcendence of
others. Great personalities like Lakshmi Sahgal never longed for national recognition or award. In fact she distanced herself from
the public arena to devote herself completely in the medical profession as she felt that India was in dearth of good doctors and
clinics. All in all, the multifaceted contribution of Lakshmi Sahgal to the India’s independence movement as a women soldier and
later to the society as a doctor cannot be expressed in words. We all should follow the values she believed in to pay our sincere
tribute to Captain Lakshmi Sahgal.

346
 Chapter 10
The Ethics of Corporate Executive Virtues
In the wake of the extraordinary scandals described in Chapters Four to Six, discussions about the executive
virtues of honesty and integrity are no longer academic or esoteric, but critically urgent and challenging. As
representatives of the corporation, its products and services, corporate executives in general, and production,
accounting, finance, and marketing executives in particular, must be the frontline public relations and good
will ambassadors for their firms, products and services. As academicians of business education, we must also
analyze these corporate wrongdoings as objectively and ethically as possible. What is wrong must be
declared and condemned as wrong, what is right must be affirmed and acknowledged as right. We owe it to
our students, our profession, and to the business world. Contemporary American philosopher Alasdair
MacIntyre (1981) proposes the issue of morality in a three-fold question: Who am I? Who ought I to
become? How ought I to get there? The answer to each question refers to the virtues, especially to corporate
executive virtues. This Chapter explores corporate executive virtue, especially the classical cardinal virtues of
prudence, temperance, fortitude and justice as defining and enhancing corporate executive life. As Case
studies, this Chapter will also discuss the corporate virtues of Mahatma Gandhi who founded India as a New
Nation, Jehangir Ratanji Dadabhoy Tata who was chairman of the largest industrial group in India, the Tata
House, for 54 years, and Sharron Watkins who blew the whistle at Enron.

Case 10.1: Panama Nature Fresh Pvt. Ltd.

India, a developing nation, is primarily an agricultural country. It ranks second worldwide in
farm output. Agriculture (along with allied sectors like fisheries and forests) accounts for
approximately 16.6 % of the GDP and about 50% of the total workforce. It is demographically the
broadest economic sector and plays a significant role in the overall socio-economic fabric of India.

Panama Nature Fresh Pvt. Ltd was founded by Mr. Vivek Raj (Founder & Chairman of the
board, Panama Corporation Ltd). He is a pioneer in mineral trading, mining and organic farming
that works with passion to discover and transform resources and essential commodity to peoples’
daily lives. His areas of industrial focus are: Trading of minerals, Organic farming and very soon
diversifying into the glamour and entertainment industry. The company is headquartered in the
World's financial capital New York, USA Regional Offices in London and India, and in India, the
company operates from Mangalore. In 2013, the company was formally incorporated as Panama
Nature Fresh Pvt. Ltd. Currently, the company is India’s largest ginger farming company. It also
grows potato, lettuce, pomegranate, tomato, green peas and green beans. Its future five year plans
include: increasing farming area to 12000 hectares, and produce some 48 farm products in Asia

Panama Nature Fresh Pvt. Ltd. was formally incorporated in India in 2013 with a mission of
revolutionizing farming in India. The company has been trading in agricultural produce as early as
2011. But it soon encountered difficulties in procuring the produce from the farmers. This was
primarily because the farmer producers were badly organized and/or were much controlled and
exploited by crony middlemen. Hence the company decided to revolutionize this collection-
distribution sector and thereby empower the bondaged farmers. To this effect, Panama Nature
Fresh Pvt. Ltd. introduced professionalism and scientific knowhow to every activity of the value
chain of farming: e.g., furrowing, fertilizing, seeding, irrigating, disinfecting, harvesting, and post-
harvest handling, trying to render the entire agricultural value chain not only expeditious but also
hygienic. The company collected the farm produce directly from the farms and transported it to the
markets via climate controlled trucks, thereby reducing wastage by nearly 48%. The saved
benefits were transferred to the farmers who were so long deprived of them. Moreover, Panama
347
Nature Fresh Pvt. Ltd. assured that the produce met with every international standard in vogue both
with respect to farming, harvesting, and post-harvest handling of produce.
Revolutionizing farming also meant using all high-end farming equipment and products from
internationally reputed companies such as John Deere tractors and harvesters, Mahindra Tractors,
Kirloskar power generators, CRI Pumps, Honda support generators for bore wells, Aspee medicine
sprayers, Jain Pipes from Jain Irrigation Systems Ltd. Currently, the company has 630 full time
workers. In this connection, Panama Nature Fresh Pvt. Ltd. gratefully acknowledges the
unconditional support provided by Dr. M. N. Rajendra Kumar, president of SCDCC Bank Ltd and
president of Novodaya Charitable Trust.

With this mission in mind, in 2011, the first year of its production, Panama Nature Fresh Pvt.
Ltd. did some backward integration by leasing out 480 hectares (1,186 acres) of farmland in the
fertile farmland of Chikmangalur and Shimoga districts of Karnataka, specifically to grow ginger,
potato, lettuce, pomegranate, tomato, green peas and green beans. The results were astounding.
Panama Nature Fresh Pvt. Ltd. is already the country’s largest ginger farming company. The farms
looked after by Panama Nature Fresh yields close to 15000 metric tons of ginger, 12000 tons of
chili and 5000 tons of potatoes every year. They have plans to increase these numbers manifold in
near future.

Panama is also planning to start the farming of sheep, hogs and cattle. 50,000 sheep have
already been ordered by suppliers from Maharashtra and Karnataka. The company is in talks with
breeders of hogs from Germany, cattle from Switzerland, and sheep for export for high-end
clientele in New Zealand. Panama Corporation is planning to set up a new company very soon to
do this.

Future expansionary plans of the company include increasing farming area to 1100 hectares
(2,718 acres) and to produce some 14 farm products. In five years, Panama Nature Fresh Pvt. Ltd
plans to expand farming operations to 12,000 hectares (29,652 acres), hoping thereby to be the
largest farming company in Asia with 48 different crops in its portfolio. With corporate office in
Bangalore, regional office in Mumbai, and international offices in USA and London, Panama
Nature Fresh Pvt. Ltd is well positioned to be a global leader in modernized farming.

Whatever PNFPL was doing, allegedly, it did within proper bounds of the law. It tried to
empower farmers not by conning or scamming, but by a legitimate use of technology. PNFPL
has aimed to bring happiness to all stakeholders, especially rural farmers. PNFPL could next
consider its business as a village community activity in which all work together for a common
good as well as for profitability, ecology and sustainability. It has tried to root out the
middlemen by providing financial independence to farmers and because of its profitability it has
also tried to pay off its own debts. But PNFPL should not exclusively focus on wealth creation,
but make it a sustainable model that enables them to live well, share with others, and be proud of
themselves as an exemplary village.

PNFPL seems to be emotionally engaged in village farming activities; these emotions

should shape their moral response that help determine what is relevant and required in the
villages they work. PNFPL is morally good if it consistently strives to be good before launching
into action. What matters for moral predication is that PNFPL consistently seeks to do well and

348
avoid evil consequences. Since PNFPL has a different set of strengths and weaknesses, it is
differently inclined to right or wrong. Any judgment call should take this into account.

The Panama Nature Fresh Private Ltd. case is unique in terms of the results it might show in
coming past, present and the future. There are several benefits of removing the middlemen but
we need to be sure that all the farmers really reap any benefits from this intervention. It surely is
a virtuous act to use processes which reduce the wastage of the farmer’s produce. The short term
effects of something like Panama Nature Fresh might help the farmers but in the long term the
company might end up owning too much land. While cash crops are good, they may totally
alienate village cultures used to traditional and seasonal crops that defined the Chikmangalur and
Shimoga districts of Karnataka for ages. Agricultural Produce, High end equipment, Climate
Controlled Trucks.
Ethical Concerns

Revolutionizing Indian farming by introducing scientific knowledge and professionalism to

every activity of the farming value-chain ( e.g., seeding, fertilizing, irrigating, pesticides,
harvesting, storing, distributing, etc.), and using high end equipment from internationally
renowned suppliers and adhering to international quality standards, backward integration by
leasing out farmland, are complementary strategies of good industrialization. But
industrialization is not everything in a village context. Training of full time workers,
maintaining quality of products and equipment, expanding portfolio of agricultural crops, and
geographical expansion into states with rich and fertile farmlands are equally laudable. But do
the farmers participate in the benefits? Have village life, education, infrastructure, health,
sanitation, safety, security, privacy and overall human development kept pace?

Other issues are:

 The organization is not a non-profit one in any way and seems to be making profit. They have utilized the
opportunity of removing the middleman and replaced themselves. Is this activity written off as CSR?
 Long-term leasing of thousands of hectares of village farm land can deprive the farmers of their right to
ownership of their own lands and its free use for developing and maintaining their cultures. Will it deprive
the farmer ownership of his land and the use thereof?
 Though, from the first outlook, the process employed by the company has been beneficial for both partners,
yet by leasing out, the farmers have become dependent on the company. Apparently, the farmers had to give
up the full rights of their own land.
 What happens to the small farmers? Were they consulted? Will mass industrialization of villages marginalize
the small farmers?

 What is the basic role of the company? Though it is agreed that the company is
benefitting the farmers by providing it with latest state-of-the-art farm equipment,
but eventually is the organization playing the role of middleman?
 Is the land being excessively used? Since the land is very fertile, it remains to be
seen whether the land is excessively used or not. What will happen to the farmers
when the land becomes unfertile?
 What is the role of South Canara District Central Cooperative (SCDCC) Bank Ltd?
And Navodaya Charitable trust? Is there any profit motive involved? Is there a
case that the three organizations have formed a coalition and tried to exploit the
farmers?
 Since, we do not have information about the actions taken up by the middlemen
349
 against the organization, how did they acquiesce to this intrusion on their
commissions as middlemen? Or, have they been part of the industrialization loop?

Ethical Questions:
1 The company decided to revolutionize the farm-produce collection-distribution sector and thereby
empower the bondaged farmers. To what extent did the company free the farmers from oppressive
middlemen? Were the middlemen replaced by the organization itself?
2 Is this a virtuous act? If so, what type of virtue is it, and why?
3 Is this greed under the guise of virtue ethics? Why or why not? Explain.
4 Is this corporate social responsibility in the real sense, and why?
5 Is this ecology and sustainability in every sense of the terms, and why?
6 The company grew so much so quickly. Did the farmers grow proportionately, and by how much?
7 Leasing thousands of hectares of village farming land and modernizing its farming, even though very
productive, may encroach on farmers’ rights and may eventually deprive the farmers of ownership and
use of their land – hence argue and develop an ethics of modernized expansionary farming for India.
8 Would you suggest this corporate farming model for the rest of rural India, and why?

References:
See the PNFPL Ad in the Deccan Herald, Friday, May 9, 2014, p. 2. Other online sources
include:
1. http://panamacorporationltd.com/#!productservices;
2. http://companyinfoz.com/company/panama-nature-fresh-private-limited
3. http://panamacorporationltd.com
4. http://www.worldbox.net/company/panama-nature-fresh-private-limited_IN0011790902

Case 10.2: The Horrors of U. S. Chicken Farms

A typical supermarket chicken today contains more than twice the fat, and about a third
less protein than 40 years ago. Two in three farm animals in the world are now factory farmed.
Confining so many animals in one place produces much more waste than the surrounding land
can handle. As a result, factory farms are associated with various environmental hazards, such as
water, land and air pollution. The pollution from animal waste causes respiratory problems, skin
infections, nausea, depression and even death for people who live near factory farms. Dairy cows
typically live to their third lactation before being culled. Naturally, a cow can live for 20 years.
Egg-laying hens are sometimes starved for up to 14 days, exposed to changing light patterns and
given no water in order to shock their bodies into molting. It’s common for 5-10% of hens to die
during the forced molting process. Worldwide, about 70 billion farm animals are now reared for
food each year.

Factory farming started with chickens and first appeared on the scene in 1926. It wasn't by
design but rather the result of an over delivery of 450 chicks to a small farm on the Delmarva
Peninsula. Instead of returning the overage, the farmer’s wife decided to keep them indoors
through the winter. The chicks survived and almost ten years later, she had increased her flock to
250,000. The first giant animal factories appeared for egg production by 1970. Since then,
350
massive use of antibiotics has enabled farm owners to put more and more chicken into less and
less space. In California, a farm began keeping 3 million hens in one locale. By the early 2000's,
some 62 companies were keeping over 1 million or more hens and Cal-Maine had 20 million
chickens, the largest by far.

Most American chicken farms display truly reprehensible practices. On the same day they
hatch, these chickens, referred to as “broilers” by the industry, arrive at the grow-out facility
where they will spend the next few weeks of their short lives. As is standard industry practice,
these birds are genetically manipulated to rapidly grow from tiny hatchlings into obese, adult-
sized chickens in a matter of a few weeks. This abnormally fast growth commonly causes birds
to collapse under their own weight. They suffer from painful and debilitating leg deformities that
make it nearly impossible for them to access food or water. Other birds may suffer from sudden
heart attacks, which the industry casually calls “flip-over disease.” Unable to escape their own
nauseating waste, virtually all of these birds endure severe ammonia burns on their chests.

For instance, millions of chickens destined for one of the more than 1,600 Chick-fil-A
outlets will spend the day packed wing-to-wing in dark, stifling warehouses, wallowing in their
own excrement and bred to grow so fast that some of them can’t even support their own weight.
Of course that’s part for the course in America’s factory farms—hell holes of mass consumerism
that produce more than 90 percent of the beef, pork and poultry we eat.

Chicken facilities, in particular, are harrowing places. The People for the Ethical Treatment
of Animals (PETA) declared chickens “arguably the most abused animal on the planet.” Upwards
of six billion meat chickens—known as broilers—are produced for slaughter each year in the
hundreds of factory farms that dot the southern United States and California. That’s nearly as
many as the entire human population of the earth. If they don’t die as chicks on the way to the
farm, and hundreds of thousands of birds each year do, they can look forward to a short
miserable life followed by a grim death at the hands of low-paid workers who have little
incentive to mollify their suffering. And since poultry are excluded from the 1958 Federal
Humane Methods of Slaughter Act, there is currently no government oversight of killing
practices in broiler facilities. Still, death—which is typically delivered via a combination of
electrocution and throat cutting while the bird is hanging by its feet—is better than life for the
average factory-farmed broiler chicken. Each year hundreds of thousands of birds die of disease
or neglect directly related to the conditions of their captivity.

In a 2003 article for The New Yorker, journalist Michael Specter described his first visit to
an industrial chicken shed: “I was almost knocked to the ground by the overpowering smell of
feces and ammonia. My eyes burned and so did my lungs and I could neither see nor breathe ….
There must have been 30,000 chickens sitting silently on the floor in front of me. They didn’t
move, didn’t cluck. They were almost like statues of chickens, living in nearly total darkness,
and they would spend every minute of their six-week lives that way.

According to a history of the practice published by the group In Defense of Animals,

factory farming took root in the 1920s, shortly after the vitamins A and D were first isolated,
which made it possible to raise animals that required little exercise or sunlight. But a funny thing
happens to living creatures when they are deprived of the ability to breathe fresh air and move

351
about freely: They get sick. So, agricultural veterinarians began pumping the birds full of
antibiotics to keep them alive, a practice that continues today.

The Natural Resources Defense Council estimates that the average American chicken
consumes four different antibiotics daily; and while the effects of so-called sub-therapeutic levels
of drugs in meat on humans is thought to be low, no one is really sure. The overuse of
antibiotics in livestock production is proven to create drug-resistant strains of bacteria. In 2005,
the Food and Drug Administration (FDA) banned the use of fluoroquinolone antibiotics like
Cipro in poultry based on findings that it created drug resistance in Campylobacter bacteria,
which causes dysentery, cramps and fever in humans. However, reports suggest the industry is
still surreptitiously using the drug.

Earlier this year, a pair of studies reported finding trace amounts of arsenic—along with
acetaminophen and the active ingredient in Benadryl—in feather meal samples taken from large-
scale poultry farms. (Feather meal is used as a component of animal feed and in fertilizers). Why
would a farmer poison their own animals? It turns out that in small doses arsenic helps fight
infection and keeps meat looking unnaturally pink. Since the studies only looked at feathers, it’s
not clear how much arsenic actually makes its way into the meat supply, but even a small amount
of arsenic in feed eventually makes its way into humans.

According to the abstract of one report published by Johns Hopkins University’s Center for
a Livable Future: “Feather meal products represent a previously unrecognized source of arsenic
in the food system, and may pose additional risks to humans as a result of its use as an organic
fertilizer and when animal waste is managed.”

Most non-vegetarians favor chicken among meats. So what can these people do to avoid
supporting a system that mistreats livestock and funnels poison and antibiotics into the human
food supply? The food supply may be Chick-fil-A, KFC, McDonald’s, or Burger King. Or
when we shop for meat, how can we avoid mass-marketed products from brands like Perdue or
Tyson chicken that presumably come from factory farms.

In Philadelphia, USA you don’t have to look hard to find alternatives to factory-farmed
meat, but you might have to pay a little more for them. I call that the price of peace of mind and
it’s well worth it. But even if you are not ready to change your eating habits, at the very least be
conscious of what you’re supporting when you plunk down your money for a chicken sandwich.

According to PETA, on today’s factory farms, animals are crammed by the thousands into
filthy, windowless sheds and confined to wire cages, gestation crates, barren dirt lots, and other
cruel confinement systems. These animals will never raise their families, root around in the soil,
build nests, or do anything that is natural and important to them. Most will not even feel the sun
on their backs or breathe fresh air until the day they are loaded onto trucks bound for slaughter.
The green pastures and idyllic barnyard scenes of years past are now distant memories. The
factory farming industry strives to maximize output while minimizing costs—always at the
animals’ expense. The giant corporations that run most factory farms have found that they can
make more money by cramming animals into tiny spaces, even though many of the animals get
sick and some die. The industry journal National Hog Farmer explains, “Crowding pigs pays,”

352
and egg-industry expert Bernard Rollins writes that “chickens are cheap; cages are expensive.”
Source: http://www.peta.org/issues/animals-used-for-food/factory-farming/#ixzz38sLNHY2t

Obvious ethical issues involved in this case include:

 The substandard treatment meted out to chickens which are reared for
consumption purposes;
 Use of chemicals and drugs to alter the appearance and weight of these chickens;
 The use of these chemicals is threatening humans who inadvertently consume these
chemicals;
 The harrowing conditions for workers in these chicken facilities; working for long
hours in such places can have a very adverse effect on a person’s health.

Larger ethical and moral problems are:

 The chicken farms facilities are harrowing places which store tens of thousands of chickens living in
the dark & its own defecation.
 Due to the short life span of these chickens (about 6 weeks) the ones which face a swift death through
farming are the lucky ones. Due to the unhygienic conditions, disease and sickness is rampant
amongst the remaining ones.
 In order to increase the life of these chickens in storage and augment their breeding process the
chickens are pumped full of antibiotics, an age old practice. This places a further threat to humans as
when consumed in large quantities these chemicals can enter humans’ bodies and deposit there,
possibly leading to health complications.
 Such is the nature of the industry that once banned drugs which have proven to cause ill effects to
humans are still being surreptitiously administered to the chickens.
 How can consumers of these goods avoid mass-marketed products from popular brands without
paying a premium for the healthier alternatives?
 What can consumers do to avoid supporting a system that mistreats livestock and funnels poison and
antibiotics into the human food supply?
 The chicken farms and non-vegetarianism in general is a dilemma and clear rights and wrongs
cannot be established that easily.
 Animals are fed and sprayed with huge amounts of pesticides and antibiotics, which can remain in
their bodies and are passed on to the people who eat them, creating serious health hazards in
humans.
 The beaks of chickens, turkeys and ducks are often removed in factory farms to reduce the excessive
feather pecking and cannibalism seen among stressed, overcrowded birds.
 Confining so many animals in one place produces much more waste than the surrounding land can
handle. As a result, factory farms are associated with various environmental hazards, such as water,
land and air pollution.
 The pollution from animal waste causes respiratory problems, skin infections, nausea, depression
and even death for people who live near factory farms.
 As human beings we have a responsibility to ensure that our actions do not cause harm to other
living creatures. By the existing conditions in chicken farms this moral duty has been grossly
violated.

In the mad rush for money and profits, the farm owners over fill their capacities and force the
chickens in un-inhabitable environment, depriving the chickens of any animal rights. If the same were to
be done to horses, or dogs this would have been severely punished in America. Chicken Farming can be
radically changed by using a lot of methods like open farming, larger areas for the chicken to live in, and
killing chicken mercifully. The imperative is here to focus less on profits and more on ecology and being
compassionate to animals.
353
 As individual consumers we may have no choices whatever owing to circumstances, but still be
totally autonomous. That is not the case for companies. Often there can be external conditions that might
influence companies (market, economic, political, competition), but there are real choices that a company
can follow within itself. It can set itself on the path of virtue by looking at its actions, the relationships it
has with various stakeholders and decide for itself what it wants to be. It is not only important to have
profits, it is also important to exist in a meaningful way, creating goodwill and taking pride in what a
company does. A company has several duties and responsibilities to execute and it is the duty of us
managers who have to ensure that a company does this in the right way.

Various solution alternatives proposed are:

 Government incentives such as tax benefits and subsidies to organic farming of poultry.
 Extra duties levied on factory farming to nullify the price gap between factory farmed chicken and
organically farmed chicken.
 Enforcement of FDA restrictions on usage of antibiotics and arsenic on chickens.
 Heavy fines and embargoes applied on non-compliance.
 Large corporations that are non-compliant should be subject to public scrutiny and loss of face.
 PETA and other such organizations must highlight the non-inclusion of poultry in the 1958 Federal
Humane Methods of Slaughter Act and push for the inclusion of the same.
 Public awareness needs to be increased regarding the conditions of the birds held in captivity. Rise in
awareness and general consciousness will force large corporations to revamp their facilities and
adopt more humane methods of raising these birds.
 Stronger legislation is the need of the hour to protect these birds. Unless the government takes a
stand, there is very little that will change and the vicious cycle will continue unabated.
 There has to be some amount of restraint from us, humans. As we are the most
evolved species, it is our ethical and moral responsibility that this suffering stops for
others.

Critical Ethical Questions:

1. How different is the situation in Indian chicken farms?

2. Is cruelty to animals an ethical or moral or legal or human issue and vice, and why?
3. Should ahimsa - the doctrine of nonviolence – include farm animals too, and why?
4. How do you analyze the horror of chicken farms from an ecological and sustainability perspective?
5. How can you justify the long-term harmful effects of chicken farms on human food supply chains in
the world?
6. As a virtuous (compassion for all) critical thinker, how would you alleviate the suffering of chicken
from farms to slaughter?
References:
For details see “If you think the fast-food chain hates gays, just wait until you hear what they do to chickens,”
by Christopher Moraff, shared email, August 2, 2012 at 9:36 am; The publishing of articles by Cristopher Moraff
and Michael Specter led to widespread awareness of the issue. There has also been a video which was secretly
filmed in a chicken farm in UK which caused widespread outrage.
See also, https://www.dosomething.org/facts/11-facts-about-animals-and-factory-farms.

Case 10.3: Dividend Payments via Debt

[See “Dividend Payments via Debt a Concern,” Business Standard, Weekend Markets 1, Kolkata, May 24, 2014].

354
 Based on past dividend paying record, India Ratings analyzed 419 (excluding banks and
financial services companies) of the Bombay Stock Exchange (BSE) 500 companies in 2013 and
found that a significant number had adopted aggressive dividend payment strategies despite
reduction in profits. Of the 419 companies investigated, 42 were public sector units (PSU) and 377
were private firms. Of these 419 companies, 37 public sector units (PSU) and 302 private firms
paid dividends in FY13. Of the 339 companies that paid dividends in FY13, 221 paid dividends
from their adequate cash flow from operations (CFO), 81 paid dividends from inadequate CFO,
while 49 paid via debt. The total aggregate debt paid for paying dividends was estimated at Rs
18,000- 20,000 crore for dividend payouts, worth Rs 1-1.2 lakh crore for FY14. India Ratings said
that despite corporate deteriorating business performance, aggregate dividend payments steadily
increased during FY09-FY13. While typical dividends are paid from CFO, if the dividends paid
exceed CFO, then they are funded from free cash reserves, investments or non-recurring income.
Companies that do not fund dividends from these cash components resort to debt financing.

In FY13, total debt raised by these companies for paying dividends stood at Rs 19,176 crore,
against the estimated Rs 4,000-7,000 crore through FY09 to FY12. In FY13, these companies paid
an aggregate dividend and dividend tax of Rs 1.04 lakh crore. Public Sector companies were the
main culprits in this regard, with eight such companies accounting for 67% of the debt raised in
FY13. A significant portion of this debt was raised through government-owned banks. Among the
49 private companies that raised debt to pay dividends in FY13, 14 were large companies with
debt/equity leverage more than 5.0.

This case discusses the rationale behind doling out dividends to shareholders at the cost of
liquidity and financial robustness. It has always been hotly discussed in financial circles what the
ideal strategy is for a firm that is facing cash crunch. Dividend payout, on the one hand, is an
indirect indicator of performance for most of the stakeholders in a firm. But paying them via
borrowing indicates cash flow crisis or poor performance. High growth firms rarely pay dividends
or pay very little. They want to use idle cash or free cash to invest in more profitable ventures.
However, a mature organization with few high return projects streamlined, likes to offer handsome
dividends.

However, as mentioned in the case, the last few years have witnessed too many aberrations to
the rule. The companies are not following the ideal strategy of handing out dividend only when
idle cash is mounted in the firm’s books. Instead, they are more concerned over projecting a rosy
picture to shareholders. Dividends are paid from cash reserves of the firms. When a firm is facing
loss its retained earnings go down which impacts its CFO. But many firms would like to boast of
being a consistent dividend payer and do not wish to upset the momentum by restraining from
issuing dividends. This makes the less informed investors feel cheated at times. They gain in short
term by getting dividends. But in long run, the capital gains forgone hurt their total holdings.

The case is a good example of “shades of grey” in companies, where analysis of ethical
aspects is not black and white. Legally, there is no harm in paying out dividends even if the
company is facing losses. More so, payment of dividends by a cash starved firm is also allowed in
the Companies Act (with consent from all Board of directors as well as financial institutions which
has granted loans to the firm).

355
 The Companies Act 2009 states out the following guidelines for declaration of dividends:
Section 205 of the Act provides that a company can declare dividend out of the profits of the
previous years. But, Clause 110 of the Companies Bill, 2009 stipulates further conditions to
declare dividend in such cases. It stipulates that if owing to inadequacy or absence of profits in any
Financial Year, the Company proposes to declare dividend out of the profits of the previous
financial year or years and transferred to its reserves, such declaration shall be passed by a
resolution at the Board Meeting with the consent of all the directors and approval of the financial
institution whose term loans are subsisting and also to be passed by the shareholders by a special
resolution at the Annual General Meeting.

The above mentioned clause makes an important revelation. Financial institutions such as
banks who loan money to loss-making firms to grant dividends are also playing on thin ice.
Already the net Non-Performing Assets (NPA) as percentage of loans is soaring in case of banks.
The banks are also fully aware of the facts that the money they are lending to a cash crunch
business might result into a non performing loan. But the pressure for increasing advances and
high rivalry among the banks have forced them to go along this path. Since they have a proper say
in dividend payout decisions of a loss making firm, they should make a thorough analysis of the
future profitability of the firm as well as the chances of revival of the business. This way they
would be able to save huge amount of tax-payers money as well as save the investors from future
losses. The credit risk mitigation will be a shot in the arm in an ailing economy.

So, the point of discussion is whether it is in the interests of shareholders to get dividends out
of a lossmaking firm or they should not get dividends in order that they judge the current
profitability of business better. Many firms like to hide their sorry state of operation by hiding
behind the camouflage of hefty dividend payments. Many investors are not well informed that
raising debt to pay dividends would augment interest charge which, in turn, may affect the
debt/equity ratio, and often, even impact one’s bond ratings from financial analysts.

Further, banks are often less potent in influencing the Board of big Blue chip firms with
renowned management and Board of directors. Most of the firms in India which display the
dividend payout problem are not small market cap firms but the larger ones. In fact, since banks
loan mostly to bog firms, smaller companies have been among the worst hit as they face liquidity
issues. Banks became more cautious in lending and reduce their credit growth to smaller firms.
Due to relationship issues, banks also generally prefer to lend to the top names
(http://indianexpress.com/article/ business/ companies/Indian-blue-chips-turn-to-debt-to-pay-
dividends/2/).

Bankers should be concerned about the debt to equity ratio of the leverage of the firms while
granting the loans for dividends. But firms like Hindalco and DLF have leverage ratio above 5 and
are considered as big-shots in the financial arena. So, it is imperative for banks to look for financial
ratios rather than promoter’s personality before granting risky loans. It is also very much a lesson
for investors not to look for big players but better books.

In fiscal 2014, around Rs 180 billion - Rs 200 billion debt is likely to be borrowed to support
dividend payments, the rating agency estimates (http://www.anirudhsethireport.com/top-500-cos-
raise-rs-20000-cr-debt-for-dividend-payouts-in-fy14/). The modification in Companies Act in last
fiscal hasn’t provided much headroom to SEBI to disallow companies from their current practices.
356
As long as Board and financial lenders agree, it becomes almost impossible to avoid a firm
handing out handsome dividends to shareholders. However, with increased transparency laws and
regulations regarding reduction of promoter holding, better decision-making is expected in the
future that would benefit the shareholders in long run.

Dividend should be driven by profits of the concern. The effects of dividend payment should not be
limited to its immediate owners but all stakeholders that extend to the sustainability and environment.
Wealth maximization with the dividend payment should not be the ultimate concern. Indian companies
not paying heed to the dropping profits and still being very aggressive in dividend payments should know
that this strategy is not a viable option in the long run.

Dividend payments are purely the prerogative of the management. There are no legal issues
regarding the amount or time of dividend payments. But there are ethical and moral issues involved. The
owners know their company best. Honesty and transparency towards the external stakeholders, especially
the shareholders, should drive the company’s dividend decisions. This will lead to corporate
sustainability and advantage in the long run.

Other moral issues that need to be addressed are:

a) How to decide upon the upon the ratio of profits and dividends that best reflects the reality of the
company to the stakeholders;
b) Should there be a regulation of not profit making companies.
c) There has to be a benchmarking other than dividends for judging a company’s net worth.
d) How else can a company keep growing without paying regular dividends?

Ethical Questions:

1. Is it legally right and virtuous to pay dividends when the company records losses?
2. Is it ethically and morally right to pay dividends when the company records losses?
3. Under what accounting conditions and legal provisions could paying dividends by raising debt be
legitimate, and why?
4. Is paying dividends via debt tantamount to aggressive accounting that can lead to stakeholder and
investor-market deception?
5. Is this strategy tantamount to borrowing Peter to pay Paul with domino chain effects?
6. Hence, argue for an ethic of dividend payments via debt financing.

Additional References:
http://www.taxmann.com/taxmannflashes/articles/flashart23-12-10_1.htm
http://indianexpress.com/article/business/companies/indian-blue-chips-turn-to-debt-to-pay-dividends/2/
http://www.anirudhsethireport.com/top-500-cos-raise-rs-20000-cr-debt-for-dividend-payouts-in-fy14/

The Ethics of Executive Virtue

In the wake of the extraordinary scandals described in Chapter Two, discussions about the
executive virtues of honesty and integrity are no longer academic or esoteric, but critically urgent
and challenging. As representatives of the corporation, its products and services, corporate
executives in general, and production, accounting, finance, and marketing executives in
particular, must be the frontline public relations and good will ambassadors for their firms,
products and services. As academicians of business education, we must analyze these corporate
357
wrongdoings as objectively and ethically as possible. What is wrong must be declared and
condemned as wrong, what is right must be affirmed and acknowledged as right. We owe it to
our students, our profession, and to the business world.

Contemporary American philosopher Alasdair MacIntyre, in his publication After Virtue

(1981), has ignited new enthusiasm for virtue theory and its attendant concerns with issues of
character. MacIntyre proposes the issue of morality in a three-fold question: Who am I? Who
ought I to become? How ought I to get there? The answer to each question refers to the virtues.
Responding to this three-fold question, Waddell (1989: 136) wrote: “The project of the moral life
is to become a certain kind of person.” That person is a virtuous one.

Who am I? It’s a tough and rough question. How do I define myself? How do I find myself?
How do I discover myself? How do I reinvent myself? How do I rate myself? These are
equivalent, albeit different, questions. Most of us adults would like to define ourselves by our
academic accomplishments of grades and years in school, the prestigious school, grades and years
in college, the prestigious college, and the graduate degrees that I have picked up along. But it
may be just a small part of my self-definition. Next, we reflect on our genetic heritage - my
parents and grandparents, my siblings, and the genetic impact they have left on me. I may even
add my neighbors, neighborhoods, my playmates, my hangout generations, and our great
adventures – they add quite a bit to my self-definition. Next, I gather supplementary self-
definitions from my school teachers, college lecturers, university professors, my peers in school,
college and the university. More recent additions to my self-definition may come from my work
experience, industry experience, executive experience, in different corporations or organizations,
different cities or states or countries, different job challenges and accomplishments, successes or
failures, and from making strategic mistakes. All these put together may just about describe 50
percent of what I am.

Finally, what really defines me is how virtuous I am: my honesty and integrity, prudence and
moral wisdom, moral audacity and courage, my sense of justice and fairness, my kindness and
compassion, how caring and forgiving I am. What I am is primarily a set of attitudes, perceptions,
beliefs and moral principles that enrich my virtuous life – together they make my character, mold
my personality, and characterize my leadership. Finally, what I am is also my set of friends whom
I believe in and greatly trust. The domain, quality and depth of my belief and trust are how
virtuous I am. The test of my virtue is peace, contentment and happiness and the ways to get there.
Freedom to what you want to do, wealth, health, fame and recognition, power and popularity are
all good reasons to be happy about, but they are mere achievements. Every level of achievement
makes you strive for the next and the quest goes on until you run of time and stamina.

Unless I know myself, I cannot know others. Unless I believe in myself, I cannot believe
others. Unless I trust myself, I cannot trust others. In short, unless I know who I am, I will not
know others – who they are. The journey to my unique self-knowledge and self-discovery is life-
long; it is often an unbeaten path, a road less travelled, and an uncharted sea. As long as our self-
definitions center round us we have reached nowhere. Our best self-discovery is outside us, the
larger things of life, goals and objectives beyond our comfort zones – the others, the society, the
powerless and the marginalized – what we do to uplift and humanize the environment around us.
The real what am I may be outside me. The greatest source of my inner glow that also shows on

358
my outer being is my contribution to making the world a better place (Vineet Bhatt (2015), The
Rear-View Mirror, p. xi). This is virtuous life.

Applied to business professionals, the three questions raised by Alasdair MacIntyre are:

 Am I a virtuous (e.g., prudent, temperate, brave, and just) business executive?

 What sort of a virtuous business person should I become?
 Which virtues specific to the business or corporate profession or practice should
I pursue in order to be the exemplary virtuous person I ought to be?

In the wake of the Enron and related scandals (see Appendices 01 and 02), these questions
are no more casuistic or irrelevant, but very connected, cogent, urgent, and challenging. Virtue is
its own reward. Retrieving Aristotelian doctrine on the ethics of virtue, MacIntyre (1981: 178)
defined virtue as “an acquired human quality the possession and exercise of which tends to enable
us to achieve those goods which are internal to practices and the lack of which effectively prevents
us from achieving any such good.” While acting virtuously may indeed yield good results,
virtuous business executives act primarily to be true to themselves. They recognize a range of
goods internal to business practices within the company not because of their utilitarian
significance, but primarily because of their capacity to shape and mould them to be a person they
want to be for humanity (Bollier 1997; Peters and Austin 1985; Williams and Murphy 1990).

By its renewing influence, virtue is becoming once again the language of ethics (Keenan
2006: 111). The language of virtue builds in a kind of flexibility, even ambiguity, which is not so
evident in the languages of law and duty. That ambiguity and flexibility are what allow virtue to
be the medium of comparative ethics (Porter 2005: 219, 206). The interest in personal
transformation permeates much of the contemporary writings on virtue ethics. Virtue ethics
summons business executives to become better people. The best practices of personal formation
stem from virtue ethics – the latter believes that we need to awaken from a slumber of moral
complacency (Stalnaker 2006: 386-391). We must re-envision what it means to be moral – virtue
ethics empowers us to do so (Flescher 2003: 11).

A pioneer of value investing in India, Chandrakant Sampat (an Indian counterpart of Warren
Buffett?) passed away recently leaving a legacy of virtue-based life of integrity, simplicity,
wisdom and discipline. His definition of integrity was humility + courage, said Rohan Shah,
Partner, Kroma Advisors &Traders LLP. “Integrity, simplicity, transparency and humility were
central to his value system. He also defined integrity as complete congruity between thought,
speech and action – they formed the bedrock of Sampat’s personal ethics. He focused on values –
in investing, in society, in institutions, in ecology, and most importantly, in the conduct of one’s
life. He lived and practiced the first and the last with dedication, discipline, devotion and
detachment, said Chetan Parikh, Director, Jeetay Investments. Whilst he decried the perils of
unrestrained technology, he also looked for innovation capabilities in companies that he chose to
invest in. Like Peter Drucker, he sought a balance between continuity and change. He found that
balance missing when confronted with a world of excessive consumption, excessive debts,
excessive government, excessive money-printing, excessive inequalities, and an excessive focus on
the short term. Chandrakant’s mental models and metaphors came from a broad spectrum of
disciplines such as sociology, biology, ecology, history, psychology, literature and physics.
Sampat’s concern for the past few years was about the unsustainable credit-driven global asset
359
bubble that was being formed, and which will bust with disastrous consequences for economies
and societies. [The first bust already took place during the September-October financial market
crisis in the USA!] Leo Tolstoy wrote of a “supremacy” expressed altogether in “moral power and
in the greatness of character,” and Chandrakant Sampat was an embodiment of this supremacy (see
Parikh, Chetan (2015), “In a Class of His own,” Outlook Business, March 6, 2015, p. 67; Shah,
Rohan (2015), “A Man of Value and Wit,” Outlook Business, March 6, 2015, pp. 68-69).
Chandrakant Sampat exemplifies an excellent icon of executive virtuous life that this Chapter
writes about.

The Primacy of Virtue Ethics

Virtue-based ethics is a new method of ethics: from action-based ethics (deontological

ethics, teleological ethics, and justice ethics) to person-based ethics. Principles, rules and
guidelines tend to concern the action in question and its objective moral character. Virtue ethics,
by contrast, governs the interior life of the agent who performs the action – one’s subjective moral
character. Both are needed in business executions in general, and in corporate management, in
particular. Right actions with evil intentions are no good; rules and principles unless interiorized
and lived in virtue will not effectively motivate in the long-run (Pellegrino and Thomasma 1996:
15).

While the ethics of principles (deontology, teleology) and the ethics of consequences
(distributive justice, corrective justice) are valid and relevant, they are subordinate to the ethics of
character (virtue ethics). Unlike deontology, teleology, and distributive justice and corrective
justice theories of ethics that deal with human actions and their moral content, virtue ethics deals
with the very person who acts. Virtue ethics looks primarily on the type of persons we ought to be
and become. That concern is expanded to three questions – Who are we? Who ought we to
become? How do we get there? Virtue ethics is, therefore, proactive. It invites us to see ourselves
as we are, to assess ourselves, and to see what we can become. It not only beckons us to become
something, but also indicates the means (virtues) that can help us get there (Keenan 2006).

To the corporate virtue ethics practitioner, the first question (Who are we?) is the same as
“Are we virtuous?” Such a question focuses on: a) the standards against which we measure
ourselves, and b) how we know whether we are measuring ourselves fairly.

Aristotle (1965) proposed some basic virtues as standards – friendship, magnanimity, and
practical wisdom. Thomas Aquinas (1964) borrowed and proposed four other complementary
(cardinal) virtues: prudence, justice, temperance and fortitude, to which he later added the three
theological virtues of faith hope and love. The question of self-understanding (Who am I?) then,
translates to, Are we just, prudent, temperate, fortitudinous, friendly, magnanimous and wise?
How do we know we are not deceiving ourselves? Aristotle (1965) suggested that we could know
ourselves by how we act in spontaneous situations. For instance, if I acted bravely in unanticipated
situations, then I am brave. If I acted cowardly under such circumstances, then I am a coward.

If we can develop ourselves physically by regular exercises, we can also develop ourselves
morally by exercising virtues regularly. The virtues are therefore teleological guides that aim for
the right realization of the human person. In Latin terminology, pagan Rome espoused the four
cardinal virtues as follows:
360
  Prudentia (or sapientia): prudence, wisdom, foresight, planning ahead for
emergencies, seeing the good of the whole community;
 Fortitudo: fortitude, toughness, bravery, enduring pain in stoic silence,
willingness to sacrifice or suffer for the good of the whole community;
 Moderatio (or temperentia): moderation, avoiding extremes of appetite and
enthusiasm, seeking balance;
 Iustitia: justice, the preservation of the good and the punishment of the wicked.

For Thomas Aquinas (ST I-II, 61) the cardinal virtues correspond to and perfect four powers:

 Prudence is related to the power of practical reason,

 Justice to the will-power,
 Temperance to the concupiscible power, and
 Fortitude to the irascible power.

According to Aquinas, the virtue of justice is “a habit whereby a man renders to each one his
due by a constant and perpetual will” (ST II-II, q 58, a 8). Thus, justice as a particular type of
virtue is an external virtue. It does not primarily focus on regulating the internal character of the
agent by ordering the passions (as do the virtues of temperance and fortitude); instead, it focuses on
the results of the agent’s actions in the external world, the concrete effect they have upon the lives,
property and interests of other people (Kaveny 2009: 119). Temperance and fortitude are
predominantly at the service of justice, and prudence determines the nature and choices of justice.

Thus, in analyzing our cases: Panama Nature Fresh Pvt. Ltd, or The Horror of Chicken
Farms, or Dividend Payments via Debt, we not only reflect on what we do, but also reflect to
foresee as what our current decisions and actions will empower us to become and what they will
enable us to be as companies and its stakeholders. To the extent all executive actions are
humanized by the executive virtues of prudence, fortitude, temperance, and justice we should
expect to do the right things rightly, to become all that we can, and be where we ought to be.

The Importance of Virtue Ethics in Executive Life

Utilitarian utility calculus is not enough to live up to the challenges and standards of moral
life. A utilitarian defense of conduct is also subject to criticisms about the appropriateness of the
accounting stance and time horizon used in the utility calculus. As there is no principle determining
their scope, accounting stances and time horizons are arbitrarily determined. Consequently, every
decision may constitute a moral dilemma (Norcross 1995), a state of affairs that produces perpetual
moral ambivalence. Utilitarian administrators can never be confident they are making the right
decision because they can never be sure that their choices actually increase net average happiness.
Arbitrary accounting stances and time horizons only conspire to provide the utilitarian
administrator a clear conscience, not direction for moral conduct.

In light of these difficulties, when it is adopted as the primary theory guiding conduct, we
should view utilitarianism as unsatisfying. The characterization of moral imperatives as
suggestions to guide behavior toward utility maximization offers administrators large degrees of
361
moral flexibility. However, with this flexibility comes a frame of mind to approach situations
formalistically; administrators need to be only armed with the proper tool -- a utility calculus -- in
order to determine the moral course of action. Utilitarianism implies that that which is moral is that
which maximizes average utility, but what good is a moral theory in practice if the end result is that
one is left, at best, unsatisfied, or, at worst, ambivalent, about the outcomes? Hence, we need an
ethics of virtue.

Deontological ethics argues that certain actions are wrong if they violate duties we owe to
others or they violate rights that others have. Many deontologists hold that dignity and respect are
behaviors that all humans deserve simply by virtue of them being human and that these mandates
are not contingent upon circumstances, the exigencies of position, or how much social utility is at
stake. Likewise, some writers argue that ethical administration is best achieved by adhering to a set
of moral guidelines (Blanchard & Peale, 1996; Campbell, 1999), not because of what adherence to
these guidelines might bring about but because we are obligated to adhere to them on principle.

The foremost deontologist, Immanuel Kant (1785/1998), argued that moral imperatives are
binding on conduct because they are ruled by a universal principle of morality, the categorical
imperative, which requires us to act only on those moral principles that we reason as universal. In
considering whether we should obey the imperative, "Don't steal," then, we imagine what it would
be like to live in a world where everyone condoned stealing, reason that we would not want to live
there, and conclude that we should adhere to the imperative, "Don't steal." Could our scandalous
administrators defend their behavior on Kantian grounds? It is not likely, because one would need
to show that a rational person would enjoy living in a world where everyone, say, pilfered public
funds for personal gain. Diverting funds away from the company or customers reasonably falls
under the category of stealing, and, therefore, the administrators' behavior violates the "Don't steal"
moral rule that more obviously holds according to the categorical imperative.
Nevertheless, Kant's insistence that reason and duty are the keys to the moral life poses
problems for the executives. For instance, consider two moral rules that an administrator might
reasonably face: support students to succeed academically and support faculty academic freedom.
Consider that recently a professor was relieved of her teaching duties mid-semester because
students complained she graded too hard; the instructor replacing her raised students' previous test
scores 25% (Jaschik, 2010). The administrator charged with deciding how to handle the students'
complaints faced a situation where two rules conflicted and where both passed the categorical
imperative. Kantian ethics does not provide the administrator much assistance for determining
which imperative should take precedence. Hence, we need an ethics of virtue.

Propheter and Jez (2012) reject the notion that detachment is the appropriate administrative
stance. Though they acknowledge that operating efficiently and producing social equity are
important organizational goals for the community college (Orr & Bragg, 2001), they hold these to
be secondary to the goals of developing human capital and adding value to students' lives. Thus, a
different theory articulating what constitutes ethical administration is required -- one that does not
encourage detachment of personal and professional roles. The authors, accordingly, argue that
virtue ethics is up to the task. Contrary to utilitarianism and deontology, virtue ethics asserts that
evaluating conduct requires assessing actions and actors jointly. The utilitarian and deontological
frameworks are largely insensitive to the crucial elements driving moral conduct -- namely,
motives, intentions, beliefs, and the like -- that when accounted for tend to mitigate moral
assessments. For virtue ethics, individuals in a holistic sense, rather than actions alone, are the
362
appropriate unit of analysis. By implication, the question one should ask when confronted with a
moral quandary is not "What should I do?" but "What kind of person do I want to be?" or in more
Aristotelian terms, "How do I want to live?" Asking and responding to such questions requires
virtue ethics, especially the four cardinal virtues of prudence, temperance, fortitude and justice, and
virtue ethics should give people the required prudence and fortitude to avoid scandals.

The heroic examples of business management practices [e.g., Johnson & Johnson’s timely
withdrawal of Tylenol, the Rely decision by Proctor & Gamble (see Williams and Murphy 1990),
Levy & Strauss’s exemplary business management strategies (see Bollier 1997: 339-51), the heroic
investments of Merck & Co. in inventing and distributing cure for river blindness disease that
plagued millions in the Third World (see Donaldson and Gini 1996: 299-308) and hundreds of
other business management heroisms cannot be adequately explained by ethical theories of
deontology, teleological, or distributive justice theories. The heroic lives of Nelson Mandela,
Captain Lakshmi and Amar Gopal Bose that we reflected in Chapter 03 are examples of heroic
virtue. These exemplary business management strategies and practices are outcomes of acquired
executive virtue.

With over 25 million dead because of HIV+ AIDS, and another 42 million people infected,
why is there a universal hesitancy to recognize the moral summons that this fatal disease confronts
us? Maria Cimperman15 asks this haunting question, and develops a basic profile for the type of
people we must become if we are to be disciples in a time of AIDS. After reflecting on the need to
be historical realists, she proposes five virtues as constitutive of contemporary discipleship: justice,
prudence, fidelity, self-care, and mercy. Cimperman calls us to change now and offers us the
virtues as the medium for such transformation (Cimperman 2005). Virtue, being transformative,
leads inevitably to action. By realizing the here and now as the moment for transformative change
and action, we actually become happier (Keenan 2006: 114).

The ethics of care derives from “feminist ethics” in general and the work of Gilligan (1982)
in particular. This perspective focuses on personal relationships and the traits of personal
character that create and sustain them—friendship, compassion, sympathy, empathy,
faithfulness, and loyalty, for example. The focus on these human traits, which certainly qualify
as virtues, deliberately eschews the emphasis on rules and calculations that characterize Kantian
and utilitarian thought. Also absent are notions of universality and impartiality; the ethics of care
regards actual relationships and the social contexts in which they are embedded as valid and
important elements of ethical decision making (Jones, Felps, and Bigley 2007: 139).

To the questions, “who ought we to become?” and “how to get there?” the answer is the
theory of “ends.” For the honest person, virtues are not what one acquires, but what one pursues as
ends. The ends of virtue is to be prudent, just, temperate and fortitudinous. Hence, we examine

15
Maria Cimperman RSCJ is a Religious of the Sacred Heart of Jesus. Her work is at the intersection of moral theology, social
ethics and spirituality. Maria's first book, When God's People Have HIV/AIDS: An Approach to Ethics, received a Catholic Press
Association Award. The Reverend Mark R. Francis, CSV, president of Catholic Theological Union (CTU), Chicago, announced
that Maria Cimperman, RSCJ, has been appointed the first director of the Center for the Study of Consecrated Life. Maria
Cimperman is an Ursuline Sister; she teaches moral theology and social justice at the Oblate School of Theology in San Antonio,
Texas.

363
our ways of acting and ask if these ways are making us more prudent, more just, more temperate
and brave. These are executive virtuous exercises.

Dorothy Day, a Christian political activist of early 19th century America, believed that her
moral task was to combat poverty by assuming poverty, by living its challenges. Her invitation,
argues Andrew Flesher, is a real explication of our call to be moral. Virtue ethics maintains that if
we do not work on our character development, and thereby fail to dispose ourselves to love the
neighbor and subsequently act on behalf of the neighbor to a much larger degree than we currently
do, then we can be found to be morally blameworthy. While living virtuously is not synonymous
with living altruistically, living altruistically is the kernel of living virtuously (Flescher 2003: 11).

Business management as a human activity is a social community

of individuals or stakeholders: customers, producers, suppliers,
distributors, creditors, bankers, media, governments and the local
communities. Business management in general and corporate
management in particular, is a public and moral community activity
by membership and function, goals and objectives. Business
management is a moral enterprise because it deals with human
(stakeholder) problems. Hence, the ethics of business management
derives from business as a human activity. The art and science of
business management and the way it functions is exchange
relationship implied in the executive-stakeholder or producer-
consumer relationship, and what is primarily at stake is the
personhood of the vulnerable stakeholder.

The stakeholder and the management executive, as rational

beings, each play a part in realizing the end of business
management, which primarily is the good of the stakeholder
communities. In this relationship, the management executive is the
embodiment of the business management art, whose end is the
stakeholders’ good, and the dignity and happiness of the human
person grounding the good. Beneficence and benevolence are both a
moral obligation that should inform and transform the art of
business management, and both are crucial virtues for management
executives. A management executive who does harm to stakeholders
violates the art; an executive who is not benevolent to his customers
compromises the art (see Sirdeshmukh, Singh and Sabol 2002).
Thus, the art and science of business management should establish
364
the way in which the management executives and the stakeholders
relate to each other – this is the internal morality of business
management, or to cite Macintyre (1981), it is the “internal
practices” of the virtue of business management.

While rules and guidelines may offer rational criteria for public
agreement and public moral policy, the latter also rest on public’s
presuppositions of what is good life and what is happiness for the
community. The latter come from virtue and virtue ethics, and not
necessarily from social construction or political accommodation
(Foot 1978). Without a theory of good life and the good society,
there is no check on political expediency, market opportunism, and
business management malpractice. In a secular society, if moral
rules and injunctions were to derive their binding force, they must
have such either 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: 30).

Since, according to MacIntyre (1981), the authority of moral law

is best when it is theological (i.e., based on divine law and
revelation), the latter (i.e., the virtues of virtuous people) is the only
place to turn – 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 management situation constitutes a
moral community in which the debate about common good for
society can take place, and an account of the virtues is required
therein.
Opportunism is "seeking self-interest with guile" (Williamson
1985) or seeking "self-interest unconstrained by morality" (Milgrom
and Roberts 1992). Opportunism is rampant in every area of
business (e.g., Murry and Heide 1998; Wathne and Heide 2000;
Wilkie, Mela, and Gundlach 1998), including business management.
Opportunism is a strategic behavior whereby one makes false or
empty "threats and promises in the expectation that individual
365
advantage will thereby be realized" (Williamson 1975: 26).
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). However, for opportunism, "most forms of
complex contracting and hierarchy would vanish," and markets
alone would be sufficient for handling most transactions through
autonomous contracting (Williamson 1993: 97). The risk of
opportunism can be very high, and considerable resources might
have to be spent in controlling and monitoring it, resources that
could have been deployed more productively elsewhere in the
company. In a world of unbridled opportunism in the marketplace,
what can make all of us honest and moral is virtue ethics.

Opportunism is hard to detect owing to information asymmetry

between the party engaging in opportunistic behavior and the other
exchange partner. It is even harder to control, and strategies for
suppressing opportunistic behavior may undermine existing
exchange relationships (Murry and Heide 1998) as well as forfeit
valuable deals in the process (Calfee and Rubin 1993). While
several strategies of “external” control of opportunism have been
devised, tried, and often failed (e.g. reduction of information
asymmetry, closer monitoring, higher monetary incentives not to
engage in opportunism, higher contracted penalties for
opportunistic behavior), very few “internal” control mechanisms
have been tried. A major internal control such as selecting and
contracting business management managers whose virtue of
honesty, prudence, commitment and fiduciary responsibility has
been tested and proven may help to control opportunism far more
effectively than external monitors.

When deciding to hire top business management executives, one

looks over and above academic and technical qualifications to their
366
virtuous dispositions: Are they honest or dishonest, sincere or
insincere, greedy or selfish, reliable or unreliable, trustworthy or
untrustworthy, dependable or undependable? Employee resumes
do not necessarily feature or reflect these virtues, and yet we all
know that a successful and lasting encounter between an employee
and the employer is the life of virtue that supports the character and
judgment of the person on both sides of the hiring equation. Moral
virtues are those dispositions that are generally desirable for people
to have in the kinds of situations they typically encounter in living or
working together (Pickoffs 1986). Hence, without specifically
referring to virtues per se, Sirdeshmukh, Singh, and Sabol (2002)
advocated three management policies and practices for building
long-term trustworthy relationships among frontline service
employees and customers: operational competence and problem
solving competence (both intellectual virtues) and operational
benevolence (moral virtue).

In the sessions that follow our focus is on virtues and virtue-

based ethics for corporate executives. This Chapter has two parts:

Part I: Toward a Theory of Virtue-Based Ethics for Corporate Executives

Part II: Virtue-Based Ethics Applications for Corporate Executives

Part I: Toward a Theory of Virtue-Based

Ethics for
Corporate Executives
Virtue (from "Areté" in Greek that stands for excellence) is difficult to define. Hence, the
definition of virtue, the virtues, and the virtuous person has occupied philosophers since Plato
(1985) first raised the question of virtue, its nature, number, and teachability. Despite numerous
efforts since then, no one has improved upon Aristotle’s imperfect but still useful definition
(Pellegrino and Thomasma 1996: 7). In general, however, most agree that “a virtue is a disposition
to act, desire, and feel that involves the exercise of judgment and leads to a recognizable human
excellence, an instance of human flourishing ” (Yearley 1990: 2).

Understanding Virtue: A Historical Perspective

367
 Socrates (c. 470-399 BC) began the discussion by identifying virtue with knowledge, and
held that one could not know the good without likewise willing it. Plato (c. 428-347 BC)
contributed an extensive and subtle analysis of four virtues: wisdom, courage, temperance, and
justice. Aristotle (384-322 BC) in his Nicomachean Ethics (NE) described virtue as an acquired
character trait that manifests itself in habitual action. He identified moral virtues as a state of
character; that is, “the things in virtue of which we stand well or badly with reference to the
passions” (NE 1105 b 25-6). Honesty, for example, does not consist in telling the truth
occasionally but habitually. A person must become honest by proper upbringing and self-training.
That is, virtues suppose a good character. One hardly admires courage in a villain, or charity in
a thief who donates stolen goods, or fortitude in a murderer – these dispositions are not virtues.
Cowardice can be someone’s reason for not committing murder; vanity and boastfulness can on
occasion lead someone to tell truth – these actions are not virtues (MacIntyre 1984: 152).

Following Aristotle, Aquinas (1963) defined moral virtues as dispositions for the formation
of passions and/or habits; moral virtues enable us to follow reason in dealing with our desires,
emotions, and actions and in accepting that the four pivotal or cardinal virtues are courage,
temperance, justice and prudence. Aquinas also held that the purpose of a person is not merely the
exercise of reason in this world, but union with God in the next. Hence, to Plato’s moral virtues he
added the “theological” virtues of faith, hope and charity – the virtues that enable persons to
achieve union with God. He also maintained that “charity” (or self-giving love – “agape” in
Greek) is the virtue of virtues that forms all other virtues. Aquinas also held that humility is a
Christian virtue and pride is a vice. Whereas Aristotle, who predominantly wrote to an Athenian
aristocratic society, argued that for the Greeks, aristocrat pride is a virtue and humility is a vice.

Like Aristotle, Aquinas distinguished between intellectual and moral virtues; both are human
and acquired virtues as opposed to faith, hope and charity, which are supra-human and infused
virtues. The end of the human virtues is proximate, a level of happiness that is imperfect that is
attainable through human nature. The end of the supra-human or theological virtues is the last end,
God, and therefore supreme happiness, attainable only through the infused virtues and grace.
While the object of theological virtues is God, that of the intellectual and moral virtues is
“something comprehensible to human reason” (ST I.II 62, 2c). The good or the perfection to
which the human virtues are directed is defined according to the rule of reason, from which their
objects are derived. The good or the perfection of the theological or infused virtues is the good as
defined by divine law (ST I.II 63.2c; 63.4c; 65.3c). Moral and intellectual virtues are produced in
us by humanly reasoned acts, and they perfect us through the doing of “good” deeds; that which
perfects the intellect is an intellectual virtue, and that which perfect the appetite or will is a moral
virtue (ST I.II 58.3c; 68.1c and 8c). By human virtues, “we live a good life,” but the “good life”
refers only to the “rectitude of life measured by the rule of reason” (ST I.II 68.1 ad3). In contrast,
the theological virtues, being beyond our capabilities, are produced in us by God. Through these
infused virtues God enables us to live a “good life” of union with God.

Immanuel Kant (1772-1804) related virtue to those categorical duties that are firmly settled in
our character. It does not concern directly with our happiness, but our worthiness to be happy.
Hence, virtue is its own end and reward. However, Kant did banish “virtuous dispositions” from
morality since they are strictly “hypothetical” and not “categorical” imperatives (Spohn 1992: 65).
According to Foot (1978), virtues are specific dispositions determined by the need to correct
certain deficiencies. For MacIntyre (1981), virtues are skills internal to activities or practices that
368
are necessary for the performance of certain roles or offices in society. Thus, virtue is the most
ancient, perdurable, and ubiquitous concept in the history of ethical theory, especially given the
inseparability of the moral agent from the events and acts of moral life (Pellegrino 1995).

Exhibit 10.1 checks the three Cases (10.1, 10.2 and 10.3) against major definitions of
executive virtue. [See Corporate Ethics Exercise 10.1]

Intellectual and Moral Virtues

Aristotle (1985) was the first to distinguish between intellectual and moral virtues, relating
the former to the theoretical life and the latter to the practical life. Intellectual virtues are acquired
through teaching, while moral virtues of character are acquired by habitual exercise. We become
just or courageous by performing just or courageous acts; we become theoretically or practically
wise because of systematic instruction. Intellectual virtues, highest of which is wisdom, result
from the proper use and functioning of our higher intellectual aspects (e.g., reasoning, judging,
analyzing) as “rational animals.” Since reasoning is the capacity that distinguishes humans from
sub-humans, the proper development of reason constitutes the highest excellence we can achieve,
and wisdom is the highest intellectual virtue of human reasoning. Moral virtues, on the other hand,
result from control of reason over our body’s natural and proper appetites and inclinations.

Further, according to Aristotle (1985), a moral virtue is a habit that enables a human being to
act in accordance with a specific purpose of human beings, and the distinguishing purpose of
human beings that sets them apart from animals is to exercise reason in all their activities. Hence,
moral virtues are habits that enable a human person to live according to reason. A person lives
according to reason, Aristotle (1985) continues, when the person knows and chooses the
reasonable middle ground between two extremes: one of going too far and the other of not going
far enough in one’s actions, emotions and desires. A proper control of our reason and passions
should not just repress them completely nor indulge in them freely. Rather a good virtue is to seek
the mean between two extremes, both of which are vices. Finally, Aristotle (1985) maintained that
prudence is the virtue that enables one to know what is reasonable (or the mean) in a given
situation.

According to Thomas Aquinas, Intellectual and moral virtues are distinguished by their
subjects. The subject of the moral virtue is the appetite: justice is in the will; temperance and
fortitude are in the concupiscible and irascible powers. As an intellectual virtue, prudence is in the
reason. In addition, as the habit of an immanent operation, an acquired virtue perfects the subject
in which it dwells as its matter. Thus, while a moral virtue perfects the appetite, an intellectual
virtue perfects the reason. That is, justice perfects the will; temperance perfects the concupiscible
powers; fortitude perfects the irascible powers, and prudence perfects reason (Keenan 1992: 100).

Some virtues are corrective or remedial of human passions. Human passions incite us to
something against reason and so we need the curb called temperance; or passions may make us
shirk a dangerous or risky course of action dictated by reason, and then we need the virtue of
courage to pursue the action nevertheless. Similarly, industriousness corrects the inclination to
be idle, humility corrects our proclivity to overrate ourselves, and hope corrects the tendency to
despair.

369
Executive Virtue as Practical Reason or Phronēsis

According to Aristotle (1985), moral virtue is a “disposition to choose, consisting essentially

in a mean relatively to us determined by a rule, i.e., the rule by which a practically wise man would
determine it” (NE 1106 b36 – 1107 a2). Aristotle regarded this virtue-mean as a possession of
practical wisdom (phronesis); he held that the ability to see what is the right thing to do in the
circumstances, as essential to the truly virtuous person. Accordingly, Aristotle (1985) attached
much more value to the moral judgments of the enlightened conscience than to any a priori and
merely theoretical principles (Copleston 1963: 336). Phronēsis is an intellectual virtue; it is a
central virtue; it is that virtue without which none of the virtues of character can be exercised
(MacIntyre 1984: 154).

Ethical perception is an exercise of practical reason (Phronēsis) preliminary to choice.

Ethical perception is a registering of the ethical features of a situation in response to which action
may be required. It comes to mean someone who knows how to exercise judgment in particular
cases. It is the Phronēsis or practical reason that concerns itself and the ultimate (to eschaton),
the latter is the object not of discursive knowledge but of perception, not the perception of the
special senses or sense-objects, but the perception of the ultimate in actual situations (NE 1142 a
23-30).

Phronēsis integrates the different ends of character, refining

and assessing them, and ultimately results in all considered
judgments of what is best and finest to do. In this context, political
wisdom and practical intelligence (Phronēsis) are same skills but, in
effect, put to use in different relations. Phronēsis shows itself in the
ability to judge well about one’s own well-being and how to achieve
it in one’s own private life; political wisdom is the knowledge of the
same thing essentially, but aims at its realization in whole
communities (e.g., as legislative wisdom, as day-to-day
administrative wisdom) (Cooper 1987: 33-7). The practical
intelligent person (Phronimos) is someone who knows what the
correct end of human life is (NE VI 1140a28; 1142 b33) and,
accordingly, organizes his or her life and makes the relevant
practical decisions.

The exercise of practical reason involves various aspects:

perceptual, deliberative and collaborative. With Aristotle (1985),
the descriptions of the virtues of character are in all cases
descriptions of character states that are at once modes of affect,
370
choice and perception. To have virtue is to be able to make the
choices characteristic of the person of practical wisdom. According
to Aristotle (1985: NE 1107 a1) “virtue is a character state
concerned with choice, lying in the mean relative to us, being
determined by reason and the way the person of practical reason
would determine it.” It is not possible to be fully good without
having practical wisdom, nor practically wise without having
excellence of character (NE 1144 b31-2).

Executive Virtue of Practical Reason that Assesses Contingency

The effective moral agent must be exposed to a wealth of diverse

contingencies and circumstances. It is not enough to have the right
states of character, but one must have the capacities for knowing
when and how to exhibit them. An agent is praised not merely for
the possession of virtue, but for its exercise and exemplification in
concrete circumstances. In this sense, virtue is a capacity to choose
(NE 1107 a1) and reason correctly. The virtuous person is one who
knows how to act and feel in ways appropriate to the circumstances.
This entails not only that efforts are well intentioned and
appropriate, but that subsequent actions are correct and successful
(Sherman 1987: 51). Aristotle’s point, therefore, is not that a good
and virtuous action requires the achievement of causal
consequences, but that it requires knowing how to exemplify virtue
here and now. Thus, decisions are clearly right or correct may
nonetheless lead to unforeseeable ill consequences (NE 1135 a25;
1136 a5-10).

Practical reason does not start with a mere practical syllogism -

start with some end, and then decide how to act. On Aristotle’s
view, an ethical theory that begins with the justification of a decision
begins far too down the road. The process begins with the
perception and assessment of circumstances and recognition of its
morally salient features. Before we can know how to act, we must
assess the necessity of that action, and this reaction to circumstances
371
is itself part of the virtuous response - all these stages, perception,
reaction and assessment, are ethical considerations expressive of the
agent’s virtue (Sherman 1987: 29).
Perception informed by ethical considerations is the product of
experience and habituation. Through such education, we come to
recognize and care about the ethical consideration (Sherman 1987:
31). Moral habituation is not a mindless drill but a cognitive
shaping of desires through perception, belief, and intention –
capacities that involve character and emerge from acquiring
character. Thus, moral education will itself cultivate the perceptual
and deliberative capacities requisite for moral character (Sherman
1987: 7). It is not enough to know about virtue, but we must also try
to possess and exercise it, or become good in any other way (NE:
1179 a33-b4).
All perceptions, reactions and assessments are contextual. The
virtuous act that hits the mean is directed toward the right persons,
for the right reasons, on the right occasions, and in the right manner
(NE 1106 b21). Thus, the overwhelming sense is that virtue must fit
the case (Sherman 1987: 35). Determining the mean will presuppose
critical and self-reflective ways for accurately reading the ethically
relevant features of the case. Ethical perception requires methods
by which we can correct and expand our point of view.
Conscientious discernment will entail adjusting one’s perception to
correct for biases and pleasures towards which one naturally tends,
but which are likely to distort (NE 1109 b1-12).
Our ethical perceptions reflect our character; but so also do our
deliberations about and responses to particular situations. Aristotle
asserts that the ends of our actions correspond to our character:
“For we ourselves are somehow part causes of our states of
character, and in being person of a certain kind we posit the
particular end” (NE: 1114 b24). Aristotle also maintained that how
an end appears also corresponds to character: “Some might say that
everyone aims at the apparent good, but does not control its
appearance; but the end appears to each person in a way that
372
corresponds to his character. For if each person is somehow
responsible for his own state of character, he will also be himself
somehow responsible for the end‘s specific appearance” (NE 1114
b1-3, b17). It seems in Aristotle’s view this ascription of
responsibility is tentative as judged by the word “somehow” or
“part causes” meaning thereby we are partially responsible for our
character (Sherman 1987: 32, fn 36).
Corporate Executive Virtues and Moral Education
Even though intellectual virtues are taught and moral virtues
are exercised, the two kinds of moral education are intimately
related. As we transform our initial naturally given dispositions
into virtues of character, we do so by gradually exercising those
dispositions according to one’s reason. The exercise of intelligence is
what makes the crucial difference between a natural disposition of a
certain kind and the corresponding virtue. Conversely, the exercise
of phronēsis or practical reason requires the presence of the virtues
of character; otherwise, it degenerates into some cunning capacity
for linking means to any end rather than to those ends that are
genuine goods for humanity (MacIntyre 1984: 154). Thus for
Aristotle, excellence of character and intelligence cannot be
separated; genuine practical reason requires knowledge of the good
and goodness of the agent; one cannot have practical intelligence
unless one is good (NE 1144 a37). Hence, Aristotle maintained that
one cannot possess any of the virtues of character in a developed
form without possessing all others (NE 1145a); that is, central
virtues are intimately related to each other. In this belief of unity of
the virtues, Aristotle followed Plato. According to both Plato and
Aristotle, virtues are all in harmony with each other and the
harmony of individual character is reproduced in the harmony of
the state (MacIntyre 1984: 157). Any conflict between virtues is evil,
and as such is eliminable either by practical reason at the individual
level, or by the polis at the collective level. Conflicts in one’s virtues
result either of flaws of character in individuals or of unintelligent

373
political arrangements.16
Thus, Aristotle’s (1985) position on moral virtue implies five logically sequential steps:
 A moral virtue is a habit that enables us to act in accordance with the specific
purpose of human beings.
 The specific purpose of human beings that distinguishes us from animals is to
exercise reason in all our activities.
 Hence, moral virtues are habits that enable us to live according to reason; that is, to
exercise reason in all our activities.
 We live according to reason when we know and choose the reasonable middle
ground between two excesses: one going too far and the other not going far enough
in one’s actions, emotions and desires.
 Finally, prudence is the virtue that enables us to know what a reasonable middle
ground in a given situation is.

The eighteenth-century Scottish philosopher, David Hume (1711- 1776), agreed with Plato
and Aristotle that virtue is the central moral concept, but refuted the Greek view that reason was
the final guide to moral action. Hume (1988) argued that "feelings" motivate action, not reason;
feelings are the foundation of morality. A. J. Ayer (1936) relegated virtues to the realm of
emotions. 17

According to Aristotle (1985), the end of life that all human beings should aim is happiness
(eudemonia). The virtues are not merely means to happiness, but constitute it. However,
happiness does not merely consist of what we get in life but also includes who we are. Even Plato
maintained that a despot with all wealth and power would not be really happy because that
person’s personality would be disordered in the process. The distinction between happiness and
pleasure is usually blurred. In ordinary language, happiness is frequently used to indicate a more
stable, less intense state than pleasure. Yet one could hardly predicate happiness of life that was
altogether without pleasure. Some teleological moralists who favor utilitarian conception of moral
obligation have adopted a hedonist conception of the end of moral action (GE Moore and his
associated opposed this tradition), but those moralists who combine teleological ideas with the
rejection of utilitarianism have adopted a conception of happy life as the end of human beings,
happiness being found in, and sometimes identified with, a life of fulfillment and harmony both
within the individual and in that individual’s relation to others – this position is often called
Eudemonism.

Executive Virtue and Virtuous Character

16 In this context, Aristotle argued that virtues are unavailable for slaves or to
barbarians, precisely because both lack social political structure and/or the liberty
required pursuing virtue. Freedom is the presupposition of the exercise of virtues
and the achievement of the good (MacIntyre 1984, pp. 160-61).
17
For other modern views on primacy of virtues see, for example, Foot 1978; Geach 1977; MacIntyre 1981; Pense 1984; Slote
1983; and Von Wright 1963.

374
 Virtue, according to Aristotle, is a particular state of character, one that “both brings into
good condition the thing of which it is the excellence and makes the work of that thing be done
well” (NE 1106 a16-7). The virtue of a person will also “be the state of character which makes a
man good and which makes him to do his work well” (NE 1106 a-224). Thus for Aristotle, a
“moral virtue is an acquired disposition that is valued as part of the character of a morally good
human being and that is exhibited in the person’s habitual behavior. A person has a moral virtue
when the person is disposed to behave habitually in the way and with reasons, feelings and desires
that are characteristic of a morally good person” (Velasquez, 2002: 135).
Defined thus, Aristotle makes several crucial points:

 Virtues are, as they were for Socrates, excellences (aretai).

 They have a functional and teleological character, since they make things or persons
do their work well.
 Thus, virtues make the thing itself or the person himself good.
 The virtues are intellectual when their end is truth and they are moral when their
end is the good life, and
 The good person learns virtues by practice and is guided in their use by practical
reason (Phronēsis) (Pellegrino and Thomasma 1996: 7).

As to the goodness of human character in general, Aristotle says that we start by having a
capacity for it, but that we need to develop it by practice of doing virtuous acts. We become
virtuous by doing virtuous acts. This argument may sound circular, since how can we do virtuous
acts unless we are already virtuous? Aristotle (NE B1, 1103 a 14-b; B4, 1105 a 17-b 18) responds
that we begin by doing acts that are objectively virtuous, without having a reflex knowledge of the
acts and the deliberate choice of the acts as good, a choice resulting from an habitual disposition.
For instance, a child obeys its parents when told not to lie but without perhaps realizing the
inherent goodness of telling the truth, and without having yet formed a habit of telling the truth.
The acts of telling truth, however, gradually form the habit and as the process of education goes on,
the child comes to realize that telling truth is right in itself, and eventually chooses to tell truth for
its own sake. The child is then virtuous as far as telling truth is concerned. The circularity is thus
resolved by the distinction between the acts that create the good disposition and the acts that flow
from the good disposition once it has been created (Copleston 1963: 335). That is, virtue itself is a
disposition that has been developed out of a capacity by the proper exercise of that capacity.
Incidentally, some individuals may have an inherited a natural disposition to do good on occasion
what a particular virtue requires. Nevertheless, this happy gift or fortune is not to be confused with
the possession of the corresponding virtue; for just because it is not informed by systematic
training and by principle even such fortunate individuals will be the prey of their own emotions
and desires.

Exhibit 10.2 is a second check on company cases against major developments of executive
virtue.

Corporate Executive Virtue as a Perfection of Power

According to Thomas Aquinas (1984: 50-4), virtue designates a certain kind of perfection of
a power. Now the perfection of a thing is considered especially in relation to its end. Hence, virtue
375
is a perfection of a power in relation to its end. Some powers are determined to their acts, such as
active natural powers. Hence, these natural powers are in themselves called virtues. But rational
powers, proper to humans, are not determined to some one thing, but are indeterminately related to
many, and they are determined to their acts by habits, and therefore, these human habits are virtues.
Also, power is twofold: power in regard to being and power in regard to acting. Virtue is power in
regard to acting - it is an operative habit. If virtue implies a perfection of power, then virtue of
anything is determined by the maximum of which power is capable, and as a maximum of any
power, it must be good. Hence, virtue as an operative habit is a good habit productive of good
works.

Aristotle’s theory of the virtues presupposes a crucial distinction between what any particular
individual at any particular time takes to be good for one self and what is really good for one’s self
as a human being. It is for the sake of achieving the latter good that we practice the virtues and we
do so making right choices about means to achieve that end. Such choices demand judgment and
the exercise of virtues requires therefore a capacity to judge and to do the right thing in the right
place at the right time in the right way. This exercise is not a routinizable application of rules.
Hence, perhaps the most obvious and astonishing absence from Aristotelian thinking: there is
relatively little mention of rules anywhere in his Nichomachaen Ethics (MacIntyre 1984: 150).

Corporate Executive Virtue as a Golden Mean between Extremes

It is a common characteristic of all good actions that they have a certain order or proportion.
Accordingly, Aristotle declares virtue is a mean between two extremes, the extremes being vices,
one being a vice of excess of feeling or action, the other being a vice of defect thereof (NE B6ff).
Thus, in relation to the feeling of confidence or fear, the excess vice is rashness, and the defect is
cowardice. The mean is courage and is the virtue in respect to the feeling of confidence.
Similarly, the virtue of the action of giving money is liberality that stands between prodigality
(excess) and illeberality (defect). The action-virtue of claiming honor on a large scale is self-
respect that lies between vanity (excess) and humility (defect). The action-virtue of telling truth is
truthfulness that lies between boastfulness and self-depreciation. Relative to the action of building
relationships, virtue is friendliness that ranges between obsequiousness (excess) and sulkiness
(defect). In relation to the feeling of anger, virtue is gentleness that lies between irascibility and
unirascibility. Relative to the feeling of shame, virtue is modesty that lies between bashfulness and
shamelessness. Concerning the feeling of pain at the good or bad fortune of competitors, the
executive virtue will be righteous indignation that poses between envy (excess) and malevolence
(defect).

In defending virtue, an important question is why should one live according to reason and
choose the golden mean between excesses? For instance, if our conception of a good and
successful life were amassing wealth and power, then would not ruthlessness be a virtue? If as
business executives, our corporate mission were to grow, expand, make profits, and dominate the
market, then would not ruthless cutthroat competition and price wars be a virtue? If as business
management executives our success was defined by higher sales, higher revenues, higher market
share, and higher profits, then would not ruthless undercutting competition, blocking market entry,
price dumping, predatory pricing, exorbitant pricing, price gouging, and the like be executive
business virtues than vices? Thus in defending both intellectual and moral virtues, we cannot

376
consider merely their contribution to some end, but must also inquire into the morality of the end
itself (Boatright 2000, p. 64). [See Corporate Ethics Exercise 10.4]

Corporate Executive Virtue as Eudemonia or Happiness

The classical quest of ethics was to find and teach the good life and how to live it. This was
the common task of philosophers as diverse as Plato, Aristotle, Augustine, Aquinas, the Stoics,
Confucius, the Hindu sages, and Lao-tsu. Despite their different reasoning, all these philosophers
shared the conviction that it is in the nature of human beings to seek the good and that happiness
and a good moral life are somehow synonymous (Pellegrino and Thomasma 1996: 7). To be a
good person and to live a good life are considered human aspirations in tandem. Such aspirations
were not imposed on human beings but rose from their very nature as individual and social human
beings.

Aristotle postulated happiness (eudemonia) as the ultimate good for human beings, and
carefully defined it as something specific to human beings alone: an activity of virtue in
accordance with reason. This 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). The virtues are
precisely those qualities the possession of which will enable us to achieve happiness and the lack
of which will frustrate our movement toward happiness. Activity of growth and reproduction
cannot be the ultimate happiness for humankind, since we share this happiness with the animal
world.

Happiness as an ethical end cannot consist simply in virtues as such: it consists rather in
activity according to virtue or in virtuous activity, understanding by virtue both intellectual and
moral virtues. Moreover, if it really deserves the name of happiness, then we must manifest over a
whole life and not merely for brief periods (NE 1100, a 4ff; 1101 a 14-20). Moreover, the virtuous
activity of pursuing happiness may be itself pleasurable, since pleasure is the natural
accompaniment of an unimpeded and free activity. “Virtues are dispositions not only to act in
particular ways but also to feel in particular ways” (MacIntyre 1984: 149). This makes virtuous
activity worthwhile and endurable – this shows the common sense (or non-transcendental)
character of Aristotelian ethic of virtue (Copleston 1963: 335).

Corporate Executive Virtue as “Human Flourishing”

The traditional English translation of eudemonia is happiness,
possibly stemming from its Latin translation, felicitas. Cooper
(1985: 89, footnote 1) finds this inadequate, since happiness is
predominantly a subjective psychological state that is temporal and
recurrent. Much of what Aristotle says about eudemonia is not fully
captured by “happiness” since eudemonia implies a full, long lasting
adult life of fulfillment (NE 17 1098 a18-20; EE 1219b5). Cooper
(1985: 89), following Anscombe (1958), suggests instead the
postmodernist term “human flourishing” as an adequate rendering of
eudemonia: flourishing implies the possession, use and fulfillment of
one’s mature powers or natural capacities over a long period of time
(NE I 10 1100 a22-30, 1101a22ff). Eudemonia is central to
Aristotelian ethics. Even though Aristotle treats it only in the
377
Fourth Book of Nichomachean Ethics, yet the first two chapters prepare
for it by seeking answer to the question: “What is at the most extreme
limit of all good things achievable in action?” (NE I 2 1094a18-9; EE
I 2 1214b7-9). Eudemonia is this “ultimate end” of all human
yearning. This ultimate end has three important properties (Cooper
1986: 92):

 It is sought for its own sake;

 Everything else is sought for this ultimate end, and
 It is not desired for the sake of anything else.

Everyone’s desires must be thus structured toward this ultimate

end. In reality they may not always be, but ideally they ought to (EE
I 2 1214b6-14).

One’s conception of what happiness or human flourishing is should determine what it means
to flourish in one’s life, and what kind of life one regards as flourishing now (Cooper 1986: 96).
Human flourishing as an ultimate end belongs to a different order from any of the concrete ends
one might adopt in one’s life – ends like the exercise of one’s physical, intellectual or social
capacities. Thus to aim at having a flourishing life is to pursue a “second order end” towards
which other first-order ends are subordinated (Rawls 1971).

Virtue is critical for corporate executives functioning in a management situation. The virtue
of virtues, eudemonia or “human flourishing,” bears additional implications to management
executives. Each of the above eight propositions has different challenges for management
executives. Each proposition implies different legal, ethical and moral obligations in a management
situation. [See Corporate Ethics Exercise 10.5]
We may characterize the current debate on ethical assessment of executive behavior as
polarized along three behavior aspects: the person acting, the act itself, and the consequences. The
first, person-based ethics, popularly known as virtue ethics, is advocated by many moral
philosophers such as Aristotle (1985), Aquinas (1971), Carney (1973), Frankena (1973, 1975),
Hauerwas (1975), and MacIntyre (1981), and among marketing scholars, by Morgan and Hunt
(1994) and Williams and Murphy (1990). The second, act-based ethics is basically deontological
ethics, while the third consequences-based ethics is teleological ethics. After Alasdair MacIntyre's
(1981) most influential work After Virtue, virtue or person based ethics is gathering momentum
and advocates.18

Part II: Virtue-Based Ethics Applications for

Corporate Executives
Analogous to MacIntyre’s (1981) threefold question posed earlier, there are complementary
questions such as:

18
For a review see Donahue 1990; Kruschwitz and Roberts 1987; Pence 1984, Trianosky 1990, and Yearley 1990.

378
 1. Why should Corporations be Moral?
2. Why should Competitive Management Activities be Moral?
3. Why should Management Executives be Moral?

Many scholars have posed the first question under varied forms (e.g., Goodpaster and
Matthews 1982; Hosmer 1994; MacIntyre 1988; Stark 1993; Velasquez 1983). Answering the first
question convincingly should answer the second and third questions. Apparently, the
conventional ethical theories of deontology and teleology have not adequately responded to the
first question (MacIntyre 1984; Solomon 1992a) and hence, are now looking for better answers in
virtue-based ethics (e.g., Bowie 1991; Dobson 1998; Dunfee 1995; Lambeth 1990; MacIntyre
1984; O’Meara 1997; Solomon 1992; Spohn 1992). In this section, we deal with questions two
and three.

Frankena (1973, 1975) maintains that virtue ethics cannot be an independent method of
moral reasoning. For him, virtues merely augment an existing method; they do not supply specific
directives for determining right or wrong conduct. Principles and rules direct, while virtues merely
enable us to perform what the principles command. But Nussbaum (1986, 1988) counter-argues
that the Greeks used virtues precisely to judge moral conduct. That is, virtues can provide the
standards of morally right conduct, and hence, virtues, not moral principles, are the source for
understanding normative conduct. In fact, principles and rules are derived from virtues: they are
directives that obtain their content from the virtuous activity which humanity enjoins (Nussbaum
1988). Dunfee (1995: 167), on the other hand, considers virtue-ethics theory as an alternative to
the stakeholder theory or the social-contracts theory.

Developing a virtue-based ethics for business, Solomon (1992a: 104) argues that mere wealth
creation should not be the purpose of any business. “We have to get away from “bottom line”
thinking and conceive of business as an essential part of the good life, living well, getting along
with others, having a sense of self-respect, and being part of something one can be proud of.”
Individuals are embedded in communities and that business is essentially a community activity in
which we work together for a common good, and excellence for a corporation consists of making
the good life possible for everyone in society (Solomon 1992a: 209).

Some argue that a true understanding and living the virtue concept will be antithetical to
competitive economic activity. Thus, corporate executives fundamentally engaged by their
profession in the competitive acquisition of wealth, opportunity and growth could only exercise
simulacra of the true virtues (Dobson 1998). According to MacIntyre (1984: 254), “the tradition of
the virtues is at variance with central features of the economic order.” According to MacIntyre
(1984: 187), a necessary condition for a business person to be “virtuous” is cooperative or
communal business activity within the firm that qualifies for “internal practice.” The concept of
“internal practice” involves that “any coherent and complex form of socially established
cooperative human activity through goods internal to that form of activity are realized in the course
of trying to achieve those standards of excellence which are appropriate to, and partially definitive
of, that form of activity, with the result that human powers to achieve excellence, and human
conceptions of the ends and goods involved, are systematically extended” (1984: 187).

379
 Stated thus and as applied to the corporation, MacIntyre’s concept of “internal practices”
(that presumably are a necessary condition for executive virtue) imply three points (Schwartz
1993):

1. Internal practices of a firm define their own standards through ethical codes and
organizational culture, and corporate executives thereby define themselves by these
standards.

2. These internal practices are goal-oriented, each practice being directed by a set of
“goods” or ends intrinsic to the practice, such that engaging oneself in such
practices is to pursue corresponding goals.

3. These internal practices are organic: they are “systematically extended” by the
executive powers, and by the ever-changing human conception of goals and end.

Internal practices with goals and results can change, expand, diminish, but not at the expense
or gain of another. These “internal goods” are not competitive, not objects but “outcomes” of
competition to excel; they are unique to the internal practices; they are fairly non-exhaustive; the
more one has them, the better off is the corporation and the community thereof (MacIntyre 1984:
188-91). “External goods” on the other hand, are properties, possessions, profits, sales and market
shares; they are objects of competition; they are competitive. In relation to external goods, winners
imply losers, the pie is fixed, and benefits imply costs. This is the teleological aspect of virtues.
This is the virtue-zone of hypothetical imperatives.

Virtue, therefore, is incompatible with “external goods” and the cutthroat competition they
imply. But virtue is possible and expected in relation to “internal practices” and “internal goods”
they generate - these are not competitive but invite cooperative human activity – a necessary
condition for virtue. “It is of the character of a virtue that in order that it be effective in producing
the internal goods which are the rewards of the virtues it should be exercised without regard to
consequences” (MacIntyre 1984: 198). This is the deontological aspect of virtues. This is the
virtue-zone of categorical imperative.

Hence, according to MacIntyre (1984, 1988), corporate and executive virtue belongs to the
realm of internal practices and internal goods. These should be nurtured, expanded, and shared
throughout the organization for their own sake without specific “external goods” in mind. The
latter can contaminate them, just as Kantian “hypothetical imperatives” can diminish the force of
“categorical imperatives.” The more the internal practices and integral goods are nurtured, the
more will the company be disposed for betterment of its external goods.

The distinction between “internal practices” where virtue should abound and “external
goods” where virtue is incompatible seems to be based on a false dichotomy. If internal practices
feed into external goods, why should virtue, which is compatible with internal practices, be
incompatible with external goods? In fact, it becomes more challenging and demanding in the
zone of “external goods”. We illustrate this argument in Table 10.1. We described the “internal
practices” in relation to the traditional upstream, middle-stream and downstream aspects of value
chain activities each of which can generate its own specific “external goods” where much virtue
can be predicated. In fact, as indicated in Table 10.1, there is no area in business, internal or
380
external, where virtue is incompatible. Specifically in business managements, a good and virtuous
management executive will and should encounter challenges of virtue everywhere. [See Corporate
Ethics Exercise 10.9]

The Nature of Virtue-Based Ethics in the Corporate World

“To act rightly is to act rightly in affect and conduct. It is to be

emotionally engaged and not merely to have the affect as
accompaniment or instrument” (Sherman 1989: 2). Emotions
themselves are modes of moral response that determine what is
morally relevant and, in some cases, what is required. Business
management executive moral behavior is not a mere impartial
application and observance of ethical and moral rules. These rules
fail to account for the executive virtue or disposition for caring,
serving and developing long-term human relationships with various
stakeholders, chief among whom are customers and employees.
That is, over and above the ethics of deontology, teleology and
distributive justice, we need an engaging ethic of the virtue of
caring, serving, and of building stakeholder communities - in short,
an ethic of virtue.

Currently applying the Aristotelian approach of virtue to

business, some recent authors (e.g., Gadamer 1975; Morris 1997;
Solomon 1992a) have developed the notion of business as a human
endeavor in which executives ought to find fulfillment, and
therefore, emphasize the need for virtue in business. Corporations
are wherein many executives spend most of their adult life. If
executives must achieve happiness and develop as full human
beings, then corporations should nurture a corporate climate or
culture that will facilitate this development. “The virtue approach
to business is a valuable reminder that business is part of human life
and so part of moral life” (De George 1999: 125).
Similarly, when thinking about a moral business management decision, one often thinks not
so much of what one is obliged to do, but instead of the kind of person one would be by doing it
(Hauerwas 1981, 1983; Pickoffs 1986). To act rightly is to act rightly in affect and conduct.
Discerning the morally salient features of a situation is part of expressing virtue and part of the
morally appropriate response. Pursing the ends of virtue does not begin with making choices, but
381
with recognizing the circumstances relevant to specific ends. In this sense, character is expressed
in what one sees as much as what one does (Sherman 1987: 4). Knowing how to discern the
particulars is a mark of virtue (Aristotle 1985). Thus, in executing the business management
decision, besides asking the question whether the decision is morally good or bad, right or wrong,
fair or unfair, one should also ask more important questions such as - would I be honest or
dishonest, sincere or insincere, selfish or unselfish, in deciding and acting so?

Virtue ethics addresses these questions. While moral rules and principles (e.g.,
deontological, teleological) are clearly essential to guide ethical executive choices, principles
without virtuous character traits are impotent (Anscombe 1958; Francine 1974: 65), and “ethics
without virtue is an illusion” (Kreeft 1992). Principles by themselves do not provide the vision of
moral good life and character that virtue ethics emphasizes (Keenan 1995; Porter 1991, 1997;
Spohn 1992; Williams and Murphy 1990). “An action motivated by the right principle but lacking
in the right gesture or feeling falls short of the mean: it does not express virtue” (Sherman 1987: 2).

We must distinguish and contrast wisdom from cleverness, shrewdness, cunningness and
other manipulative capacities in business managements and transformations. The latter are often
invoked in the pursuit of overstating sales, revenue, market-share and profit; these so-called
“creative accounting” skills may often imply taking right steps but to wrong ends or wrong steps
to defensible ends (Alderson 1964; Bollier 1997; Galbraith 1971). Real business management-
transformation wisdom or prudence takes right steps to right ends, especially those that serve the
common good of all stakeholder communities and society.

There may be a strategic virtue in doing things rightly, but there is a moral virtue in doing
right things rightly (Aristotle 1985). In a similar sense, vices such as vanity, avarice, greed and
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
and greed seek money and other money equivalents (such as land, investments, businesses,
wealth) as supreme values. Virtues strike a golden mean between the excesses of too much or
too little of the kind.

Exhibit 10.3 is a third check of our three case companies against major processes of an
ethic of executive virtue. . [See Corporate Ethics Exercise 10.2]

Realizing Good in Corporate Executives

Democritus (460-370 BC) held that to call a person “good” one had not only to do the good
but also want to do it because it was good. As mentioned before, Aristotle maintained that a
virtuous person is not one who does virtuous acts once in a while, but one who does them regularly
over long periods of time and does them as “second nature.” That is, just doing good or being
occasionally virtuous is not sufficient ground for characterizing a person as good. 19

19
During the Middle Ages, related questions discussed were such as, was one bad if the person followed an erroneous conscience?
For instance, if one broke the law not knowing anything about the law, was he bad? Some declared that the person was bad on the
grounds that breaking the law, knowingly or not, was sufficient grounds for calling the person bad. Others denied and maintained
that any person who acted conscientiously (i.e., followed one’s conscience) was always good. Aquinas turned the debate right side
382
 Until very recently, moral philosophers, following Aristotle and Aquinas, had only one
source for moral description: the act. If a bad action was performed, mitigating circumstances
were investigated to see if the agent was partially or fully exonerated of moral guilt (Mascarenhas
1995). The question of subjective goodness was rarely raised, and if so, almost exclusively in the
context of “imputability” (Keenan 1992: 4). That is, philosophers did not examine cases on the
other side of the distinction: they did not discuss people who do objectively good acts but on
selfish grounds. The question of the good person was rarely examined. The presupposition was:
we are what we do. Thus, the person who did good was good and the one who did bad was bad.
Obvious other combinations, such as a good person who did bad, or a bad person who did good,
were not explored. Reinforcing the presupposition, the word “good” primarily described acts.
Goodness was not used, as it is today, primarily and principally to describe persons (Keenan 1992:
4-5).

Table 10.2 characterizes this way of dichotomous thinking. The vectors are good versus bad
motives that result in good versus bad actions. This table makes room for people with good
motives doing bad things and for people with bad motives doing good. [See Corporate Ethics
Exercise 10.10]

Kant argued that good was descriptive only of the human will: that is, not acts but willing
persons are good. His presupposition was not that we are what we do, but that we may not be as
good as our actions appear to convey. He distinguished a person who acts out of duty from any act
in accord with duty. An act in accord with duty, e.g., executing a prisoner, could not itself be
called good. Rather, good acts were those done by persons acting out of duty. A mother acting out
of duty to parent a child is doing good. But Kant did not examine the distinction whether persons
were good who acted out of duty but who performed acts not in accord with duty. Though Kant
examined acts in accord with duty performed by people not acting out of duty, he did not explore
the converse (Keenan 1992: 5). For instance, a parent acting out of duty to taking care of her child
may act not in accord with duty and err through too much leniency or rigidity.

Twentieth century philosophers asked a different question: they did not ask questions about
goodness, but about rightness. Moore (1912) asked whether we could describe actions as right or
wrong without considering the motives of the agent. Moore’s answer to this question establishes
the distinction between goodness and rightness. Moore (1912: 80) sought to determine the
objective notion of right. His definition is utilitarian: the act that produces a maximum pleasure
will always be called right, for an act can only be wrong “if it produces less than maximum.”
Moore (1912: 187-9) distinguished the agent’s motives from the act: whether an agent deserves
praise or blame depends upon the agent’s motives, and not on whether one’s action is right or
wrong. Secondly, Moore distinguished a person’s perception of the right from what in fact is
objectively right; even with the best of intentions a person may not perceive the right.20 With these

up and asked whether a person who refused to follow the conscience was bad, and answered in the affirmative. He then asked,
whether a person who followed an erroneous conscience was good, and argued that person who both could not have known the law
and tried to do the good was “excused” from any moral blame for the bad action (Aquinas 1963, Summa Theologiae I-II 19 5c, 6c).
20On the other hand, a person motivated by selfishness may nevertheless calculate what
the right act is and do it. Thus, Moore (1912) concluded with a paradox (later called
the Moore’s Paradox) regarding the act of an agent with bad motivations: ”A man may
really deserve the strongest moral condemnation for choosing an action which actually
383
two distinctions, Moore provided a fresh insight: persons are “good,” while actions are “right.”
However, like Democritus and Kant, Moore did not call a person good who with good motives
performed a wrong act. He also presumed that a right act was a necessary condition for calling an
agent good. Over against the presumption, we are what we do, Moore made it clear that right
actions can be done by good and by bad people. Hare (1952: 185) refined this distinction by
identifying good acting with good motives.

Realizing Goodness in Corporate Executives

Contemporary moral philosophers argue that executed acts are not necessary for the moral
description of persons. That is, goodness (or badness) is not consequent to questions of rightness or
wrongness but antecedent to it, distinct from it, and determinative of it. Persons are good who
strive to realize the right, and actions are right when they satisfactorily fulfill the demands of
protecting and promoting values. They hold a new presupposition concerning moral description:
good and bad people behave rightly and wrongly. With this new presupposition, a person who
performs a wrong action can be called good for performing the action, as long he strives to do the
right. Thus, we no longer call people good if they do good actions, rather we call them good when
they strive to realize rightness. Conversely, people are bad not when they perform “bad” actions
but when they fail to strive to perform the right. Badness, then, is not simply acting out of
selfishness or malice; prior to act, badness pertains to the failure to strive for rightness (Keenan
1992: 6-7).

Goodness, then is striving for rightness, and badness, its contradictory, is failure to strive for
rightness. Thus, goodness is distinct from rightness but not independent of it. Thus, parents who
simply dote on their children without seeking the right cannot claim to love their children. A claim
may be made, but the claim remains empty. Similarly, parents who strive to raise their children
well but err through extreme severity or leniency truly love; that is, such parents are good, but their
parenting is wrong. Since goodness is antecedent to rightness, good parents are those who strive
for right parenting, and all of them may not succeed. Good business management executives,
accordingly, are those who strive for right business management. Goodness in business
managements simply asks whether one strives out of love or duty to realize right business
management activity. Rightness asks whether the activity itself protects and promotes values.
Goodness is not a term of acquittal. If good executives perform wrong actions, their primary
concern should be to remedy the situation in which harm has been done, because being good, they
want to do the right. Compared to Table 10.2, Table 10.3 characterizes a more comprehensive way
of multilevel of dichotomous thinking in understanding virtuous versus non-virtuous behavior and
its consequences. There are four vectors in Table 10.3:

a) Good versus bad executive motives – this is the zone of morality ethics;
b) People striving to be right and wanting to do right versus those who do not strive
nor want to be right – this is the zone of goodness versus badness – a virtue-ethics
domain;
c) People doing the right versus wrong action – this is the zone of deontological
ethics, and

is right” (1912: 193-5). But Moore came off with a new insight: that a person is bad
does not affect the rightness of an action.
384
 d) The resulting consequences being good versus bad – this is the teleological
question.

Thus, Table 10.3 is sufficient to characterize people as “good” versus “bad” not based on
actions alone or their consequences, but also on what precedes these actions, namely, executive
motives and striving-efforts. This table makes room for “good” people with good motives and
good striving to do both right or wrong with good or bad consequences. It also includes the “bad”
people with bad motives and bad striving to do both right or wrong with good or bad
consequences.

Contemporary understanding of moral goodness is fundamentally related to the concept of

human freedom (Schüller 1979; Fuchs 1983). Each individual enjoys a distinct degree of personal
freedom. Due to nature, nurture, economics, luck, and other external causes, some people are more
capable of realizing right activity; that is, realizing goodness. Some have a ready disposition to be
temperate; others have a ready disposition to be chaste; some can never be racist; some are timid
by nature, while others are innately brave. Personal strengths and weaknesses arise from a variety
of formative forces (Keenan 1992: 8). In general, people perform right activity based on their
strengths, and wrong activity from their weaknesses. Since each person has a different set of
strengths and weaknesses, each person is differently inclined to right or wrong. One could
improve upon one’s strengths and reduce one’s weaknesses – this is the exercise of virtue by which
one orders oneself. The more a person enjoys personal freedom, the more is that person rightly
ordered, and vice versa.

Conversely, the more a person is rightly ordered, the more is that person predisposed to
realize right activities, and this is goodness. The reason that some people behave more rightly
than others is not necessarily due to striving; rather, those who behave rightly tend to be persons
that are rightly ordered, and those who behave wrongly tend to be persons that are disordered
(wrongly ordered) people. They (e.g., those who are inclined to excessive drinking, dishonesty, or
opportunism) are less likely to behave rightly (Keenan 1992: 9).

Rightness concerns two dimensions of human living: a) that the agent is rightly ordered; b)
that the act is rightly ordered. One does not follow from the other: temperate people may
occasionally fall, and not all alcoholics always drink excessively. Consider, prudence, the most
important of the virtues: the selfish and the amoral are as capable as the saints of giving right
advice. Similarly, one can imagine the loving and the selfish to be temperate, or the wicked to be
brave (MacIntyre 1981: 166-7).

No one, no matter how well ordered, is perfect; no one, no matter how disordered, is an
absolute failure. Hence the need to distinguish whether a person is actually living a rightly ordered
life and whether a person’s action is right; neither description, however, depends upon goodness.
Goodness asks whether one strives through right action to make oneself rightly ordered. The good
person consistently looks for opportunities that better one’s strengths and reduce one’s weaknesses
that order oneself, and that make one more free.

Exhibit 10.4 is a fourth check of case companies against major antecedents of executive
virtue that we have discussed thus far. . [See Corporate Ethics Exercise 10.3]

385
Goodness and Virtue for Corporate Executives
Something is called good insofar as it is perfect. Perfect signifies what is good, since the
perfection of anything is its goodness. The perfection of a thing is called good because the
perfect is that which all of us seek. Good perfects because it is perfect. Goodness is, then, the
completion or fulfillment of some entity, i.e., its perfection. Should a being lack something that
it ought to have, it would be imperfect. The identity of the good with the perfect is continuous
throughout Aquinas’ writings (Keenan 1992: 96). In his Summa Contra Gentiles Aquinas writes:
“the good for each thing is its action and perfection“(SCG 1.37.307).

According to Aquinas, virtue is an operative habit: it does something. Virtue perfects a

power for its operations: it perfects the intellect in intellectual virtues, and it perfects the will and
the appetitive powers (will, emotions, and passions) in moral virtues. As a form, virtue perfects
the power in which it resides. Thus, virtue perfects the person, making the agent good and the
operations also good (ST I.II 55.3c; 56.1, ob2; 58.3c; 68.1c; II.II 47.4c).

We generally call a person virtuous who is both rightly ordered and therefore, predictably
good. When we attribute a specific virtue to someone, we imply that we can predict a specific
behavior relative to that virtue. For instance, a temperate person will enjoy a party without getting
drunk; a brave person with neither shun nor search for danger; a just person will take delight in
respecting the rights of all people; a prudent person will always assess the costs and benefits before
deciding on a value-balanced activity. Each attribution of virtue describes someone as rightly
ordered in a specific area of human activity. Often goodness is not even presumed. And in
general, we call someone virtuous, if that person demonstrates striving to right activity in all the
dimensions of his or her personality. To remark that a person is virtuous is to predict that the
person will consistently perform rightly ordered behavior (Keenan 1992: 10). In practice, that
person is temperate, brave, just and prudent. People who are rightly ordered are persons with
virtues: their will, reason, and passions are ordered. As habits of living or conduct, virtues belong
to those who live rightly (Fagothey 1959). In turn, virtues enable persons to act rightly. The
virtues are acquired not by repeatedly performing the same types of actions but by intending and
executing the same types of actions: the virtues are acquired willfully and not accidentally (Keenan
1992: 13). [See Corporate Ethics Exercise 10.13]

From a “practice” point of view, MacIntyre (1999: 66-98) speaks of a threefold classification
of ascription of good:

1. Ascription of good by which we evaluate something only as means; for instance, to

possess certain skills, to afford certain opportunities, to be at certain places at certain
times is a good insofar as it enables one to be or do or have some further good; these
things are good only as means for that further good.

2. Ascription of goodness to someone in some role or function within some socially

established practice; this is to judge that agent good insofar as these goods are internal
to the practice and are considered as ends worth pursuing for their own sake. For
example, excellence as a chess or bridge player, as a doctor or lawyer, as a golfer or
soccer player, as a violinist or figure skater are values sought as ends within each
practice, art or skill. Some operant virtues such as temperance, courage, prudence
386
 and justice belong here.

3. Ascription of goodness to all human beings as human beings, not as fulfilling certain
roles but fulfilling one’s human being and becoming. These are unconditional
judgments about “human flourishing,” how best they enable us to live genuine human
lives of effective practical reasoning in almost every culture and space and time.
Some general intrinsically human virtues such as goodness, truthfulness, benevolence
and freedom belong here; these virtues are pursued for their own sake and qua
human beings.

Practical reasoning is used under all three ascriptions, but the exercise of independent
practical reasoning is one essential constituent to full human flourishing (MacIntyre 1999: 105).
[See Corporate Ethics Exercise 10.1, 10.12 and 10.14]

Benevolence and the Four Cardinal Executive Virtues

Not all good people are virtuous or rightly ordered; some good people may still be disordered
in some areas of their life. Hence, beyond the virtues of temperance, courage, justice and
prudence, moral philosophers postulate a fifth virtue that conditions all these four cardinal virtues
to make the person good: charity or benevolence (Keenan 1992: 11; Rahner 1966). Charity or
benevolence does not only mean performing charitable acts; this is one of its outcomes. Real
charity or benevolence is the love that strives for greater union with God and neighbor through
attempts that realize right living.

Charity or benevolence is a virtue of striving, whereas temperance, courage, justice, and

prudence are virtues of attaining. Benevolence (or charity) is the moral description for a person
who literally strives to realize rightness (Frankena 1973). The benevolent person’s will is bent on
right realization, but it may not always attain the beneficial act (Schüller 1979: 188ff). The
benevolent person is good, but his or her behavior may sometimes miss the mark (Keenan 1992:
11). Thus, when someone possesses the four cardinal virtues, that person is rightly ordered; if in
addition that person is also benevolent, that person is good. Conversely, one may be benevolent
but not with the four cardinal virtues: this person strives to be temperate, brave, just and prudent,
but has not yet attained such integration. That is, many people may be benevolent, but not yet
brave, temperate, just and prudent; but notwithstanding their failure to attain rightness, they often
may mean well, try hard, and certainly wish to be otherwise.

Any willful exercise is twofold: the primary exercise out of which we are moved, and the
secondary exercise by which we execute the judgment to act. The primary exercise defines
goodness; the secondary exercise defines rightness. For instance, out of benevolence a mother
may judge to overlook the wrongdoing of a child. The mother is good, because she is seeking
what is right for the child. Nevertheless, perhaps the child actually needs in this particular instance
to be corrected or punished. If so, then the act of “overlooking” is wrong in this case; by
exercising this wrong judgment, the mother is failing to grow in parental prudence. The first
exercise of being moved by benevolence has no connection to rightness, as its does not necessitate
a right judgment. However, it requires the willingness to exercise oneself toward what one
believes is right judgment (Keenan 1992: 55-6).

387
 Virtues are constant interior dispositions that produce promptness and facility of action as
well as joy in acting; but they do not pertain per se to goodness (Pinckaers 1962). As rightly
ordered interior dispositions, they enable us to intend and execute other rightly ordered acts.
Whether these rightly ordered acts are acquired out of goodness or badness, pertains to whether the
agent is benevolent or not. For instance, one may be brave, temperate, just and prudent for
different reasons: for instance, an egoistical politician may try to be just for the sake of political
gain; a sexually frigid person may find temperance easy; a young rookie may strive to be brave for
career objectives. A specific virtue tells us only that one wants a rightly ordered disposition in a
specific aspect of life such as temperance, courage, justice or prudence; they do not tell us why.
We need benevolence to explain that the person who intends to acquire virtue is intending
rightness out of goodness (Keenan 1992: 13). [See Corporate Ethics Exercise 10.6, 10.17 and
10.18]
Corporate Ethics Failures
Our moral judgments are made by our “conscience” – the inner voice that is not so much
developed as is a “gift” given to us by our religion, upbringing and culture. Often, conscience is
what decides in a moral dilemma; the latter is called dilemma because competing values make it
difficult for one to find the right answer. As corporate executives take on more responsibilities
and juggle more roles and commitments, their dilemma becomes increasingly complex, loaded
with grey areas, and difficult to resolve. Confronting conflicting dilemmas requires careful
attention to the facts, objects, people, events, properties, values and cultures that are involved,
and investigating many possible solutions to the problems originating dilemma. Making the
right judgment and decisions depends less on feelings and emotions but on a rational process of
moral deliberation. Moral judgments require more than knowledge of the values drilled into us
since childhood. We need what Greek philosophers like Aristotle called phronesis, a kind of
prudence or practical judgment of knowing that apprehends the theories but also appreciates how
these theories apply to experience and good judgment. Phronesis is like wisdom – the capacity
to make good decisions in real-life situations. Phronesis does not occur by mere transfer of
knowledge from teacher to student; it needs facilitative and discursive teaching; it requires drills
in order to make sound moral decisions; it demands that mentors guide students through the
actual process of making a moral judgment or decision (Palma-Angeles 2014).
Most corporate failures today reflect low levels of wisdom and Phronesis, low level of ethical
maturity, and often, a badly trained conscience. A person may be “good” or morally upright in
his personal dealings as a good son, daughter, parent, a classmate or friend – that is being good
to people close to us. Being just “good” in this sense does not prepare a person for professional
life. Being ethical is not only about being a good spouse, a good neighbor. Ethical maturity is
more than that: it is about rising to a level of living where we become concerned with the
interests of anonymous “others” affected by our decisions. It is like the Golden Rule: Do unto
others what you would others do to you. It is about being a good citizen, being cognizant and
fair to those we do not know personally, but who are nonetheless stakeholders in our world.

As Howard Gardner (2006: 129-30) observes, the more morally mature we become, the more
we develop our ability for abstraction. In the jargon of cognitive science, ethics involves an
abstract attitude – the capacity to reflect explicitly on the ways in which one does, or does not,
fulfill a certain role. Ethical maturity requires us to go beyond a personal point of view to the
standpoint of an impartial spectator. Ethical maturity transcends inward looking concerns to
388
identifying ourselves with the most objective point of view – the point of view of the others or
the universe. Ethical maturity is the result of a deliberate process of formation – a process that
transforms us into self-propelling moral agents capable of logical and abstract thinking and
reasoning whereby we can anchor our decisions upon universal moral principles.

Observation and Measurement of Corporate Virtues

How can one assess a rightly ordered person? How can one assess a person as virtuous?
Given our discussions above, we should be able to define and measures some of aspects of these
two related notions. Both notions imply behaviors that can be observed such as, the rightly ordered
or virtuous persons can discern and keep striving for the right actions, can discern and avoid wrong
actions, will have consistently acted rightly, will have consistently avoided acting wrongly, and
will be comfortable with right actions and uncomfortable with wrong actions. Moreover, they
have an uncanny way of striking balance between excesses. They demonstrate patterns of
temperance and bravery, justice and prudence, above all, benevolence, in our previous encounters
with them. As judged from their behavior their motivations seem right and their intentions seem
good. The final outcomes of their rightly ordered actions most often seem genuine goodness for
all, with harm meant to none. All these activities are observable and/or interpretable,
documentable and verifiable, and hence, predictable. Regarding the last qualifier - these people
have acted rightly in the past, and have demonstrated high levels of goodness thus far, and we can
safely predict they will behave so in the future. In general, benevolence can serve as a description
for all good persons. Recent moral philosophers emphasize the observability of otherwise abstract
notions such as being rightly ordered, virtuous, and good (Hampshire 1982). Goodness per se,
may not be directly observable, but must be deduced or at least presumed from other observable
behavior such as ceaseless striving for and consistently rightly ordered actions (Keenan 1992).

However, some cautions are in order. Regarding observation of virtues, Augustine raised
some questions (Langan 1979). Each virtue has a version of what Augustine called a “deceptive
resemblance.” For instance, imprudence is a vice that is contrary to the virtue of prudence, but
craftiness is its “deceptive resemblance: the latter is cleverness of a bad or selfish person. Thrift as
contrary to vice of prodigality is right behavior, but niggardliness is its deceptive resemblance; the
latter is thrift of a selfish person. Similarly, according to Augustine, injustice is a vice contrary to
the virtue of justice, but vengeance is its deceptive resemblance: vengeance belongs to the selfish,
and justice to the benevolent. Thus Augustine argued that moral virtues have both contrary vices
and “deceptive resemblances;” while the virtues and their contrary vices can be observed and
measured, deceptive resemblances being “deceptive” and outcomes of selfishness are both hard to
observe (Langan 1979). These could be right behavior, but resulting from bad dispositions
(Keenan 1992: 13).
Another elusive aspect of moral behavior is underlying motivations and intentions. The
boundary between goodness and rightness is marked by the distinction between motivation and
intention. Rightness has two dimensions: the choice, and the agent’s reasoning for acting; the
latter is intention. Rightness pertains to intention and choice: one can actually have the right
intention but, lacking prudence, make a wrong choice; or one make a right choice but from a
selfish intention. According to some moral philosophers (e.g., Frankena 1980: 48; Hare 1964:
185) moral goodness depends solely on the motivation of the person. Motivation can be
psychological or moral: psychological motivation concerns question of rightness or wrongness
whereas moral motivation concerns whether one moves oneself out of benevolence or charity to
389
realize oneself or one’s action rightly. Moral motivation explains the agent’s fundamental
disposition: the driving force behind one’s prudent, temperate or chaste behavior. If one is morally
motivated solely out of self-aggrandizement or egoism, then it could be immoral; if one is
motivated predominantly by benevolence, it is moral (Toulmin 1950: 155-60, 201-11). Moral
motivation gives moral significance to all right dispositions, virtues and actions, and it alone is the
singular description of moral goodness (Keenan 1992: 15).

Summarizing the above discussion on moral goodness, Exhibit 10.5 is the fifth and last
check of company cases against major requirements of moral goodness via executive virtue. [See
Corporate Ethics Exercise 10.7]
Cultural and Geographic Determinants of Virtue

Following MacIntyre (1981, 1984, 1988), we may define the task

of virtues as the acquisition and development of practices that
perfect the agent into becoming a moral person while acting morally
well. Virtuous practices enhance both one's actions and character.
The crucial question that poses immediately is, precisely what are
the most important virtues that make one a moral or good person?
The answer is complicated on two counts: a) claims of culture and
geography, and b) the uniqueness of individuals. Regarding both
these propositions, MacIntyre (1981, 1988) warns that historically
local communities determined the practices that shape the virtuous
person. For instance, in the Greek Homeric culture, one considered
the “warrior” to be the prototypical virtuous person. Aristotle
(1984) reflecting on Greek aristocratic culture posed the Athenian
gentleman as the paragon of virtue, especially, of prudence. Each
community and era elevates its own icons of holiness: a young Maria
Goretti who dies fighting off a rapist is not a Dorothy Day (Patrick
1987). Besides the claims of culture, the uniqueness of the
individual makes its own claim. Similarly, American individualist
cultures (e.g., The American Idol) have venerated their own idols of
virtue and good life (Bellah et al., 1985, 1992). No single portrait of
a moral saint or hero has ever provided a definitive expression of
what a human person ought to be. Thus, any attempt to articulate a
single anthropological portrait normative for moral conduct is futile
and fictitious; moral excellence is as unlimited as the individual is
complex and as human experience is itself original (Flanagan 1991).
The deep truth is “that persons find their good in many different
390
ways;” “the heterogeneity of the moral is a deep and significant
fact” (Flanagan 1991: 158, 195). People can only become morally
excellent persons by being themselves; the saint has always been an
original, never an imitation (Keenan 1995).
Even Kohlberg's (1981) model of the morally right person who goes through a series of six
successive stages of growth to reach the final stage of moral development is essentially
reductionistic and demands unreasonable conformity; the person emerging through the six stages
may not be a right thinker, but just a Kohlberg clone (Whitebeck 1992). Kohlberg's theory
suppresses the fact that that the "heterogeneity of the moral is a deep and significant fact"
(Flanagan 1991: 158). Even the prefabricated categories of psychological testing (e.g., a J, E or P
in Myers-Briggs, or 1 to 8 in anagrams) by which we try to predict and understand behavior
surrender the uniqueness of our human identities (Flanagan 1981). [See Corporate Ethics Exercise
10.8]

Reverence as an Executive Cultural Virtue

[See Ciulla, Joanne B. (2015)]

Several philosophers and researchers touch on what Pruzan

(2014) says about the consciousness and personal character of the
leader. Confucius observes, “If a ruler sets himself right, he will be
followed without his command. If he does not set himself right, even
his commands will not be obeyed” (Confucius, Analects 13.6).
Spirituality may be a way of ‘setting oneself right’ but the
humanistic approach emphasizes doing so through others.
Confucius writes, “A man of humanity, wishing to establish his own
character, also establishes the character of others, and wishing to be
prominent himself, also helps others to be prominent” (Confucius,
Analects 6.28).

Empirical studies of authentic leadership focus on self-

knowledge. Bruce Avolio and Fred Luthans define authentic
leadership as “a process that draws from both positive psychological
capacities and a highly developed organizational context, which
results in both greater self-awareness and self-regulated positive
behaviors on the part of leaders and associates, fostering positive
self-development” (Luthans and Avolio 2003: 243). This definition
later adds explicit and ‘doable’ moral elements such as: “a pattern
391
of leader behavior that draws upon and promotes both positive
psychological capacities a`nd 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” (Walumbwa et al. 2008: 94).

Authentic leadership is basically about how a leader’s self-

knowledge contributes to making oneself an effective and a moral
leader. There is an inherent circularity in this definition of authentic
leadership. Morality seems to be both - the cause, the effect or
result, and quality of being authentic. One senses a similar problem
with spiritual-based leadership. Spiritual-based leadership seems to
entail a more introspective process than servant leadership in which
leaders grow and develop by improving the people that they serve
(Greenleaf 1977). Spirituality may not be necessary for ethical
leadership; however, Pruzan believes that spirituality motivates
leaders to be ethical. Yet, people can also motivate each other to be
ethical.

The Southern African concept of ubuntu offers another example

of how identity and moral growth are connected to the community.
Archbishop Desmond Tutu says that a person with ubuntu is open
and not threatened by others because “he or she has a proper self-
assurance that comes from knowing that he or she belongs in a
greater whole and is diminished when others are humiliated or
diminished, when others are tortured or oppressed, or treated as if
they are less than who they are” (Tutu 2000: 31).

Philosophers such as Confucius and ancient Greeks such as

Socrates, Thucydides, and Protagoras refer to the virtue of
reverence in a way that seems similar to spirituality. The ancient
Greeks emphasize reverence as the primary virtue for leaders. As
philosopher and classicist Paul Woodruff writes in his book
Reverence: Renewing a Forgotten Virtue, “reverence is the virtue
392
that keeps leaders from trying to take tight control of other people’s
lives. Simply put, reverence is the virtue that keeps human beings
from trying to act like gods” (Woodruff 2001: 4). According to
Woodruff, reverence consists of the ability to feel awe and a
profound respect for others that comes from the realization that
leaders and followers are all part of a larger whole.

Reverence is a kind of umbrella virtue that encompasses

humility, respect for persons and the world around us, and a sense
of awe about things greater than the self. Today people usually
think of reverence in relation to religion however, it is also a secular
notion that makes an explicit connection between the self and others,
leaders and followers. Pruzan touches on this idea when he talks
about the “feeling of unity” that comes with love. Since reverence is
a virtue, which is not a feeling but a practice and way of doing
things, it is easier to get around Pruzan’s “paradox of pragmatism.”
Aristotle defines virtues as conscious habits or things that we do. We
learn them through education and role models (Aristotle,
Nichomachean Ethics, Book. 2.5).

Cardinal Virtues for Corporate Professionals

Cardinal virtues concern rightly ordered lives, and acquired cardinal virtues are accessible to
all people. Being virtuous is more than having a particular habit of acting, e.g., prudence. Rather,
it means having a fundamental set of related virtues that enable a person to live and act morally
well. The cardinal virtues (the word cardinal is derived from the Latin word “cardo” for “hinge”)
provide the minimal both of what human persons should basically be and at what human action
should basically aim. They do not characterize the ideal business management person nor exhaust
the entire domain of business management virtue. They enable a person to be sufficiently rightly
ordered to perform morally right action. Beyond the cardinal virtues other virtues may be needed
and important, but the cardinal virtues perfect the fundamental anthropological dimensions of
being human that are needed for integrated virtuous behavior (Aquinas 1963: ST I-II, 61:2-3). All
other issues of virtue “hang” on the skeletal structures of both rightly integrated dispositions and
right moral action (Keenan 1995). That is, we could make the description of cardinal virtues
formal enough so that each business management culture (specific to country, industry, firm,
product, and brand) could fill each virtue with its specific material content for practical application.

Thus, if we want to pursue the project of naming “cardinal

virtues” in business management, we need to take the claims of
393
business management culture and the uniqueness of business
management professionals into account. Following Flanagan (1991),
our pursuit is not so much naming so called cardinal virtues in
business management, but whether we ought to preconceive a
definitively virtuous person in business management (as a unique
incarnation of business management virtues). Alternately, following
Keenan (1995), we can simply identify the minimal conditions that
must be met to call a business management person virtuous. That
is, we will investigate the possibility of naming certain minimal
though universal expressions of corporate virtues that subsequently
may be given content in diverse business and market cultures.
We pursue the proposition of cardinal virtues for the corporate executive primarily to respond
to the three-fold question of MacIntyre (1981) posed earlier: Who am I? Who ought I to become?
What steps ought I to take to become that person? These questions move from self-examination to
an expression of goals to finally a discernment of means to achieve those goals (Keenan 1997).
These questions are extraordinarily general: they cross cultural boundaries and transcend
individual uniqueness. Rather than being definitive expressions of character, the cardinal virtues
perform a heuristic function to answer broadly the three questions raised by MacIntyre; they
express what minimally constitutes a virtuous person.

The classical cardinal virtues proposed by Aristotle (1984),

Aquinas (1963), MacIntyre (1981), Pieper (1966), Porter (1987), and
others are prudence, justice, fortitude, and temperance. Hence,
rather than re-invent a list, we might as well investigate into this
time-tested set of four virtues as a fit for business management
professionals. They are called cardinal because they are “principal”
or fundamental to the rectitude of virtuous living. They provide the
basics for all right order in human action. They are necessary and
sufficient conditions for describing an agent and an action as
virtuous (Keenan 1995). This rectitude consists in ordering the
appetitive, intellectual and moral powers that enable us to act. For
instance, prudence orders our practical reason; justice orders the
will or our intellectual appetite; temperance and fortitude perfect
the passions. The four virtues are cardinal because they sufficiently
order all those areas of our lives that are engaged in moral acting
(Porter 1993).
394
 The cardinal virtues are connected. The basic intellectual virtue among these four is
prudence: the practical reason (phronesis according to Aristotle 1984). It looks forward to the
overall end of life and sets the agenda for attaining that end and all intermediate ends (Aquinas
1963); it discerns and sets the standards of moral action. Hence, Aristotle (1984) and Aquinas
(1963) held the absolute priority of prudence: no acquired virtue is more important. That is,
prudence governs all the other three cardinal virtues. That is, prudence can properly direct the
agent to be just, temperate, and fortitudinous. Fortitude or courage perfects the irascible or
struggling power; temperance or moderation perfects the concupiscible or desiring struggle in us.
Both fortitude and temperance primarily reflect the morals of the body: they order us interiorly.
However, we pursue temperance and fortitude in order to be more just. Next to prudence,
justice is the chief moral virtue. Justice is the only relational virtue. Justice relates us to others
and orders all our relationships and exterior activities with people (Rawls 1971). A virtue is
greater to the extent it expresses higher and more rational good. Justice expresses that greater
good both by the fact that it is in the rational appetite and thus nearer reason, and because it alone
orders not only the agent, but the agent in relationship to others. For this reason, justice is the
chief moral virtue (Aquinas 1963; I-II, 66.4). [See Corporate Ethics Exercise 10.19]

Cardinal Corporate Virtues in Conflict

To the extent that prudence, justice, fortitude and temperance

have their own domain and subject matter, they may not conflict,
nor have competitive claims against each other. In their
hierarchical relationship to reason, prudence comes first, then
justice, then fortitude and temperance. That is, while temperance
governs all our interior appetites, fortitude governs our appetites in
relation to others, and justice governs all our external actions,
prudence governs the right dispensation of justice, fortitude and
temperance. Hence, a descending hierarchical sequence, both logical
and ontological, from prudence to justice to fortitude, and to
temperance seems intuitively reasonable. If there is any conflict
between temperance, fortitude and justice, then justice would take
simple priority (Aquinas 1963; I-II, 61.2-4; 66.4). Thus, according
to Aquinas, justice holds a privileges place; it has no competition; it
is both necessary and sufficient by itself.

But giving justice too much priority and prominence may

degenerate virtue ethics back to a distributive justice ethic of
principles and rules, precisely what virtue ethics is trying to avoid.
395
Hence, contemporary virtue-ethics scholars do not accord justice its
self-sufficiency, but instead twin justice with other virtues such as
trust or faith, love or charity. Contemporary virtue-ethics
acknowledges the possibility that cardinal virtues could be in
competition or conflict with one another (Spohn 1992). In this
sense, virtue ethics concurs with deontologists and teleologists in
maintaining that conflict among key directing guidelines is inherent
to all methods of moral reasoning (Keenan 1995).

Frankena (1973: 52), for instance, saw irresolvable conflict

between the two fundamental principles of beneficence and justice.
In the context of biomedical ethics, Beauchamp and Childress (1989:
211) argue that there is no overriding authority or principle in
either the patient or the physician, not even to act in the patient’s
best interest. Similarly, Hauerwas (1981: 144) argues that we have
the task of sorting out conflicting values throughout our moral lives;
that is, in the long run, we must live a life that ethically incorporates
a variety of relational claims that are made on us. This we do
through the narrative of our lives we live.

Thus the virtues are related to one another not in some inherent
way as was argued by the classical exponents of cardinal virtues.
Nor do they complement one another per se. Rather, “they become
integrated in the life of the prudent person who lives them” (Keenan
1995: 722). The unity of the virtues is found not in some theoretical
apportioning of the cardinal virtues to specific powers or faculties; it
is found rather in the final living out of lives shaped by prudence
anticipating and responding to virtuous claims.

The Unique Role and Primacy of Prudence in the Corporate World

Among the intellectual and moral virtues, prudence stands in a category by itself. Prudence
is in reason as its subject, and since virtue perfects the subject that it dwells in, prudence perfects
reason. The object of prudence is things to be decided and done; i.e. the object of prudence is all
immanent operations. Hence, the object of prudence needs the specific moral virtues to provide
396
the context of its activity. For this reason, prudence is the only intellectual virtue that needs the
moral virtues. In other words, as all immanent operations are its object, prudence always engages
the same objects as the moral virtues.21

In his Theory of Moral Sentiments, Adam Smith (1790: 189) defines prudence as the union of
two qualities of a) reason and understanding, on the one hand, and b) self-command on the other.
Smith used the notion of “self-command” from the Stoics; this has nothing to do with either self-
interest or what Smith calls “self-love.” Prudence goes well beyond self-interest maximization;
among all virtues, prudence is most helpful to the ‘individual,’ whereas other virtues such as
humanity, justice, generosity, sympathy and public spirit, are the qualities most useful to others
(Smith 1790: 189).

Concluding Remarks
Despite their marked different approaches, all three ethical theories, deontology, teleology
and distributive justice, ask the same question: What actions are right? Virtue ethics asks instead:
What kind of person should we be? Moral character rather than right action is fundamental to the
virtue ethics tradition. Since the Enlightenment, moral philosophers concentrated on specific acts
that are justified by rules or consequences, while deliberately ignoring the questions of virtue,
character, and the nature of human happiness (Spohn 1992). Virtue-based ethics emphasizes the
role of judgment, character and virtues in moral life. In this view, people are the center of ethics,
and not just their actions. Moral rules prescribe how one should act, whereas agent-based virtue
ethics pays attention to what type of person an executive is or should become. Although executive
actions can be prima facie judged right or wrong, good or bad, moral or immoral, based on
deontological, teleological and distributive justice considerations, yet there are cases when we need
to go far beyond these considerations to the very character and virtue of the executive who acts.
Often, the 30 moral rules (deontological, teleological and distributive justice) presented in Chapters
Two and Three may not apply, of even if they do apply, their application requires judgment, and
one needs to be virtuous in order to apply the right rule rightly and at the right time. Moreover, too
much emphasis on moral rules and laws can make morality too legalistic, if not inhuman (De
George 1995: 124).

Almost all proponents of virtue ethics consider it more adequate

21
Prudence requires the moral virtues, and the moral virtues require prudence – their interconnection spells their mutual
dependency. Without prudence, this interconnection could not be posited and the three moral virtues could be just “habits” but nor
virtues (ST I.II 65 1c, ad1, ad3, ad4). That is, without prudence the three habits will be just inclinations lacking the complete
character of virtue. Acting through prudence, however, reason directs and forms these inclinations into the moral virtues (ST II.II
47.5 ad1). The centrality of prudence in establishing the interconnection of the virtues is unique to Aquinas. The moral virtues are
interconnected through prudence. He refers to the “form” in describing the relationship of prudence to other virtues: prudence unites
the virtues because in defining the mean for each moral virtues it stands as “that which is formal in all the moral virtues” (ST I.II 66
2c), and hence, all these other virtues are “matter” to prudence (ST I.II 65 1 ad3). And since all moral virtues derive their goodness
from their formal element, they derive goodness from prudence (ST I.II 67 1c). Each habit is specified by its own matter: justice by
operations, fortitude by passions, but each habit is a virtue by prudence (ST II.II 47 5c). Thus, the “whole matter of moral virtues
falls under the one rule of prudence”(ST I.II 65.1 ad3), and prudence because of its priority, is more excellent than the moral virtues
(ST I 79.12c; II 47 .6c and ad1, ad3 and 7c).

397
than utilitarianism or neo-Kantianism because it provides a more
comprehensive picture of moral experience and reflects closer to the
issues of ordinary life (Donahue 1989). Virtue ethicists believe that
a virtue defined as “disposition to act, desire, and feel that involves
the exercise of judgment” can lead to a recognizable human
excellence - “an instance of human flourishing” (Yearley 1990: 2).

Under certain conditions normative ethics may not be strong

enough to induce good executive behavior; it needs to be
supplemented by virtue-based ethics. Table 10.4 summarizes the
reasons.

Much of right moral conduct cannot be codified in rules and

principles. Real moral situations are too complex: while moral rules
are too general and simplistic. “Substantive virtues” such as
benevolence, justice, and generosity make one more responsive to
moral claims, and “enabling virtues” like empathy and sensitivity
can conscientize us to the demands of particular cases. In such
cases, the judgments of virtue will be primary and judgments of
rightness derivative (Trianosky 1990: 342). Prudent and wise
persons whose virtue incorporates an appreciation of the basic
principles of moral rightness will make the best practical judgments
(Hursthouse 1991), most tolerant pluralists (Mara 1989), or good
citizens (Burt 1990).
Virtue is a form of competence that enables us to grasp the meaning and melody of life as a
whole and to arrive at that basic option for good that brings all our thoughts, desires and actions
to maturity (Häring 1997: 3). Everybody admits today that competence and relationships in
one’s profession are well worth the effort they take. Virtue is a much more comprehensive and
profound sort of competence than professional or relational competence. It guarantees that our
personal life and our life with others will be completely meaningful. The issue at stake is moral
competence: the value and nobility of the human person in one’s private and public life. The
goal of a virtuous life is nothing less than true, inner freedom to achieve the Good, the True, and
the Beautiful. Virtue is always concerned with the whole, with the whole personality in the
context of all relationships and activities. According to Aristotle and Aquinas, the end of virtue
is happiness, and real happiness is comprehensive of all our life and activities, and something
that endures forever. Hence, they both concluded that there is only one virtue: according to
Aristotle, the virtuous individual will have all the virtues and these cannot conflict in principle
(NE 1145 a2); or conversely, if a person has one virtue constitutive of goodness, he or she has
398
them all (NE 1144 b30- 1145 a2); according to Aquinas, there is only one moral virtue:
happiness (ST I.II 60.1, ob3).

Other skills-related excellences such as expertise in science (medicine, engineering, nuclear

physics), in commerce (business, law, politics), in arts (music, poetry, writing), in crafts
(painting, sculpting, building) and in sports (racing, skiing, skating, pitching) require tremendous
body-power, mind-concentration and will-power, and may be considered as "moral" virtues in so
far as these "capacities" are put to good humanitarian use. Virtue ethics also focuses on human
virtues, albeit a much longer list. For example, Pincoffs, giving new life to the ideas of Aristotle,
offers a list of over six dozen virtues (1986: 85). He argues that the development of virtuous
character should be a primary goal of the human condition, and he identifies four classes of
virtues: aesthetic, ameliorating, instrumental, and moral. Virtue ethics is about conditioning
oneself to act morally as a matter of habit (Jones, Felps and Bigley 2007: 139-140). [See
Corporate Ethics Exercise 10.20]

Concluding Executive Ethical Challenges

1. Executive virtue ethics focuses on executive human physical virtues: Draw your list of feasible (it can be
done), viable (I can do it), and desirable (I should do it) virtues that relate to PQ (what Stephens called
“physical quotient” in his Eighth Habit (2004), especially physical fitness.
2. Executive virtue ethics focuses on executive human intellectual virtues: Draw your list of feasible (it can
be done), viable (I can do it), and desirable (I should do it) virtues that relate to IQ (what Covey (2004)
called “intellectual quotient”), especially intellectual fitness.
3. Executive virtue ethics focuses on executive human emotional virtues: Draw your list of feasible (it can
be done), viable (I can do it), and desirable (I should do it) virtues that relate to EQ, (what Covey (2004)
called “emotional quotient”), especially emotional fitness.
4. Lastly, and most importantly, executive virtue ethics focuses on executive human spiritual and moral
virtues: Draw your list of feasible (it can be done), viable (I can do it), and desirable (I should do it)
virtues that relate to SQ (what Covey (2004) called “spiritual quotient”), especially spiritual and moral
fitness.
5. List and implement concrete actions and activities to exercise your PQ+IQ+EQ+SQ fitness daily.
6. Everyday dedicate some quality time for reflecting on your PQ+IQ+EQ+SQ fitness progress.
7. Check it with your significant other. Consult your children when they grow. You will be happy

399
 Exhibit 10.1: A Preliminary Check of Cases against Major Definitions of
Virtues
Dimensions of Executive
Virtue
Socrates: Virtue is both knowing the
good and willing the good of our
actions.
Plato: Four cardinal virtues of
prudence, justice, fortitude and
temperance.
Democritus (460-370 BC) held that
to call a person “good” one had not
only to do the good but also want to
do it because it was good. Aristotle
maintained that a virtuous person is
not one who does virtuous acts once
in a while, but one who does them
regularly over long periods of time
and does them as “second nature.”
(p.19)
Aristotle: Virtue is an acquired
character trait that manifests itself
in habitual action of doing good.
Aquinas: Moral and intellectual
virtues are produced in us by
humanly reasoned acts, and they
perfect us through the doing of
“good” deeds.
Kant: Virtue is a categorical
imperative; often it may be a
hypothetical imperative.
Foot: Virtues are specific
dispositions determined by the need
to correct certain deficiencies
MacIntyre: virtues are skills
internal to activities or practices
that are necessary for the
performance of certain roles or
offices in society.
Panama Nature Chicken
Fresh Pvt. Ltd Farm Production
(PNFPL) (CFP)
PNFPL knew the good Those indulging in CFP
of village farming and know the evil of chicken
was willing to do it. farm production and will
it since CFP continues to
be cruel even to this day.
PNFPL seems to CFP seems to disregard
demonstrate all four all four cardinal virtues.
cardinal virtues.
PNFPL can be called CFP as action-strategy
“good” and virtuous can be called if CFP for
not only because they food chain is itself a good
do good among village activity. CFP can be
farmers, but because made good when it is
doing this activity is highly civilized and
itself good. They humanized.
should do it as their
second nature.
PNFPL seems to verify CFP as action-strategy
this definition does not verify it
PNFPL is an CFP as action-strategy is
intellectual virtue; as a hardly an intellectual or
moral virtue it may be moral virtue.
questionable.
PNFPL is definitely a CFP is mostly a
hypothetical reprehensible
imperative, but not hypothetical imperative
apparent as a as feeding fast food
categorical imperative chains, but never a
categorical imperative.
PNFPL is a virtue in CFP is a virtue to the
this sense. extent it feeds the food
chain.
PNFPL is a virtue in CFP is a virtue to the
this sense. extent it feeds the food
chain.
400
Dividend Payments via
Debt (DPD)
DPD may not be evil by itself,
but not good in the long run.
Continuing to do it is not
virtuous.
DPD seems to demonstrate
fortitude and temperance but
little of prudence and justice.
DPD as a strategy can be called
good if it a “good” activity by
itself, and not only when profits
are low.
DPD as a strategy cannot be a
habitual action that does good.
DPD as action-strategy is
arguably an intellectual virtue
in the short run, but fails as
intellectual and moral virtue in
the long run.
DPD may be a hypothetical
imperative for satisfying
investors, but never a
categorical imperative.
DPD is a virtue in this sense.
DPD is a virtue in this sense.
Exhibit 10.2: A Second Check of Company Cases against Major Developments
of Executive Virtue
Dimensions of Executive
Virtue
According to Aristotle, moral virtues are
habits that enable a human person to
live according to reason (see p. 9).
Aristotle argued that a proper control of
our reason and passions should not just
repress them completely nor indulge in
them freely. Rather a good virtue is to
seek the mean between two extremes,
both of which are vices. Prudence is the
virtue that enables us to know the mean
in a given situation (see p. 10).
Aristotle also said that a virtue is a
character state concerned with choice
ruled by the golden mean determined
by prudence or the practical reason. It
is not possible to be fully good without
having practical wisdom, nor
practically wise without having
excellence of character (p. 11).
An agent is praised not merely for the
possession of virtue, but for its exercise
and exemplification in concrete
circumstances. The virtuous person is
one who knows how to act and feel in
ways appropriate to the circumstances
(p.11).
All perceptions, reactions and
assessments are contextual. The
virtuous act that hits the mean is
directed toward the right persons, for
the right reasons, on the right
occasions, and in the right manner (p.
12).
The end of life that all human beings
should aim is happiness (eudemonia).
The virtues are not merely means to
happiness, but constitute it; that is,
happiness does not merely consist of
what we get in life but also includes who
we are (p. 13).
Real virtue presupposes that what we do
is not only good for one self at a given
time but is really good for one’s self as a
human being. It is for the sake of
achieving the latter good that we
practice the virtues and we do so making
right choices about means to achieve
that end (p. 14).
Panama Nature
Fresh Pvt. Ltd
(PNFPL)
PNFPL exhibits moral
virtues as habits that
enable us to live
according to reason.
PNFPL’s over-expansion
plans may not realize
virtue as a golden mean
between two farm
production extremes.
PNFPL seems to be a
right choice as long as the
choice is ruled by the
golden mean determined
by the market place. But
is the choice sourced by
practical reason and
character excellence?
PNFPL seems to be a
right choice and an
exercise of virtue led by
concrete village
circumstances of India.
PNFPL is a contextual
perception, reaction and
assessment that seem to
hit the right persons at
the right time and for the
right reasons.
PNFPL should aim to
bring happiness
(eudemonia) to all
stakeholders.
PNFPL’s farming
activities can be a virtue
if they do good not only
for the company but for
all its stakeholders as
human beings and in a
permanent way.
401
Chicken
Farm Production
(CFP)
CFP hardly verifies moral
virtues in the Aristotelian
sense.
CFP seems necessary in a
non-vegetarian food chain
context; but cruelty to
chicken from farms to
slaughter could be reduced
following the golden mean.
CFP as a choice and action-
strategy can be a virtue if
ruled by the golden mean of
reducing cruelty to animals.
But is the choice as mean
sourced by practical reason
and character excellence?
CFP can be a right choice
and an exercise of virtue
when led by concrete
circumstances of providing
affordable quality food via
fast food chains to the
marginalized.
CFP is a contextual
perception, reaction and
assessment that might have
hit the right persons at the
right time and for the right
reasons.
CFP can best aim at
consumer satisfaction;
happiness as eudemonia is
farfetched via CFP, unless in
the midst of squalor.
CFP is a virtue if it benefits
not only the company but all
its stakeholders as human
beings and in a permanent
way.
Dividend Payments via
Debt (DPD)
DPD may be a temporary moral
virtue and habit, but it does not
empower the executives to live long
according to reason.
DPD could be tempered as a
strategy using the golden mean rule
of virtue.
DPD as a choice and strategy can
be a virtue if and when determined
by the golden mean. But is the
choice as mean sourced by practical
reason or character excellence?
DPD can be a right choice and an
exercise of virtue when led by
concrete circumstances of keeping
investors happy in a stagnant
market.
DPD can be a contextual
perception, reaction and assessment
that may not have hit the right
persons at the right time and for the
right reasons.
DPD is a satisfaction strategy at
best. Happiness as eudemonia via
DPD is a fuzzy dream.
DPD may be a temporary virtue to
the extent it benefits not only the
company but all its stakeholders as
human beings and in a permanent
way.
 Exhibit 10.3: A Third Check of Cases against Major Processes of an Ethic of
Executive Virtue
Dimensions of Executive
Virtue
Developing a virtue-based ethics for
business, Solomon (1992a: 104) argues
that mere wealth creation should not be
the purpose of any business. Instead, we
must conceive of business as an essential
part of the good life, living well, getting
along with others, having a sense of self-
respect, and being part of something one
can be proud of” (p. 17).
Individuals are embedded in
communities and that business is
essentially a community activity in
which we work together for a common
good, and excellence for a corporation
consists of making the good life possible
for everyone in society (Solomon 1992a:
209) (p.17).
According to MacIntyre, “internal
practices” with goals and results can
change, expand, diminish, but not at the
expense or gain of another. These
“internal goods” are not competitive, not
objects but “outcomes” of competition to
excel; they are unique to the internal
practices; the more one has them, the
better off is the corporation and the
community thereof (p.17).
Business should be a human endeavor
in which executives ought to find
fulfillment, and therefore, emphasize
the need for virtue in business. This is a
valuable reminder that business is part
of human and moral life (p.18).
“To act rightly is to act rightly in affect
and conduct. It is to be emotionally
engaged and not merely to have the
affect as accompaniment or
instrument” (Sherman 1989: 2).
Emotions themselves are modes of
moral response that determine what is
morally relevant and, in some cases,
what is required (p. 18).
According to Hauerwas (1981), moral
business management decision is not so
much of what one is obliged to do, but
the kind of person one would be by doing
it . To act rightly is to act rightly in
affect and conduct. Discerning the
morally salient features of a situation is
part of expressing virtue and part of the
morally appropriate response (p. 18).
There may be a strategic virtue in
doing things rightly, but there is a
moral virtue in doing right things
rightly (Aristotle 1985) (p. 19).
Panama Nature
Fresh Pvt. Ltd
(PNFPL)
PNFPL should not
exclusively focus on wealth
creation, but make it an
essential part of the good life
of village farmers that
enables them to live well,
share with others, and be
proud of themselves as an
exemplary village.
PNFPL should consider its
business essentially as a
village community activity
in which all work together
for a common good.
PNFPL’s virtue as
excellence should consist of
making “good life” possible
for all its stakeholders.
PNFPL seems to have
developed its own “internal
practices” and “internal
goods” that are not
competitive, but “outcomes”
to excel. These outcomes
are unique to its internal
practices. The more one
has these internal practices,
the better is PNFPL.
PNFPL is best when it
becomes a human endeavor
that is part of village human
life and also part of their
moral life.
PNFPL must be emotionally
engaged in village farming
activities; emotions should
modes of their moral
response that help
determine what is relevant
and required in the villages
they work.
PNFPL can be a moral
business management not in
terms what it feels morally
obliged to do, but in being
the kind of moral person it
becomes by doing what it
does. Discerning morally
salient features of village
farming should be a part of
PNFPL’s moral virtue.
PNFPL should aim at moral
virtue that not only does
right things, but also does
them rightly.
402
Chicken
Farm Production
(CFP)
CFP if focused only on profits
can be degrading to animal and
human life. Instead, CFP,
humanely conceived and
designed, can transform itself
into creating a “good life” for
all, human and non-human
beings.
CFP can be transformed if its
business is essentially a
community activity where it
functions in which all work
together as a farm community
making “good life” possible and
available for all its
stakeholders, especially, the
poor.
CFP does have its own
“internal practices” that are
competitive and questionable.
They are more based on
“external goods” that
MacIntyre speaks of. Virtue is
incompatible with “external
goods” and the cutthroat
competition they imply.
CFP needs to be much refined
and civilized before it can be a
human endeavor that is part of
human and moral life of
communities that depend upon
fast food chains.
CFP is best humanized when all
stakeholders (producers,
distributors and consumers
included) are emotionally
engaged in the lives of animals
they feed on; these modes of
emotional responses should
prompt what is relevant and
required.
CFP is an essential part of the
non-vegetarian food chain. The
challenge is to make it a human
and moral business endeavor in
relation to both humans and
non-humans. Discerning the
morally salient features of CFP
should be a part of expressing
its moral virtue.
CFP should aim at moral virtue
that not only does right things,
but also does them rightly.
Dividend Payments via
Debt (DPD)
DPD is a profit-based concept. It
should widen its domain to the
company and its stakeholders, its
local and broader communities in
creating a “good life” for them
beyond wealth.
DPD may be temporarily justified if
its purpose and business is
essentially a community activity in
which all work together as a
stakeholder community making
“good life” possible and available
for all.
DPD as an “internal practice” can
be just temporary as they are
deceptive in the long run. They are
based on “external goods” such as
properties, possessions, profits,
sales and market shares; they are
objects of competition; they are
competitive. In relation to external
goods, winners imply losers, the pie
is fixed, and benefits imply costs.
DPD as a temporary strategy can
be a human endeavor; but it cannot
be a lasting feature of human and
moral life of the investor
communities.
DPD is currently profits measure;
when mixed with debt it may
become deceptive. Only emotional
engagement could reveal what is
morally relevant and required in
DPD strategies.
DPD as a temporary choice and
strategy is moral if the business is
itself a moral and human endeavor.
Discerning the morally salient
features of DPD is part of
expressing virtue and part of the
morally appropriate response.
DPD should aim at moral virtue
that not only does right things, but
also does them rightly.
 Exhibit 10.4: A Fourth Check of Case Companies against Major Antecedents
of Executive Virtue
Dimensions of Executive
Virtue
Contemporary moral philosophers argue
that executed acts are not necessary for
the moral description of persons. That is,
goodness (or badness) is not consequent
to questions of rightness or wrongness
but antecedent to it, distinct from it,
determinative of it. Persons are good
who strive to realize the right, and
actions are right when they satisfactorily
fulfill the demands of protecting and
promoting values (pp. 20-21).
Thus, a person who performs a wrong
action can be called good for performing
the action, as long he strives to do the
right. Thus, we no longer call people
good if they do good actions, rather we
call them good when they strive to realize
rightness (p. 21).
Conversely, people are bad not when
they perform “bad” actions but when
they fail to strive to perform the right.
Badness, then, is not simply acting out of
selfishness or malice; prior to act,
badness pertains to the failure to strive
for rightness (Keenan 1992). [p.21]
Contemporary understanding of moral
goodness is fundamentally related to the
concept of human freedom. Due to
nature, nurture, economics, luck, and
other external causes, some people are
more capable of realizing right activity
and goodness. Some have a ready
disposition to be temperate, or just or
prudent (p.21).
In general, people perform right activity
based on their strengths, and wrong
activity from their weaknesses. Since
each person has a different set of
strengths and weaknesses, each person is
differently inclined to right or wrong (p.
21).
One could improve upon one’s strengths
and reduce one’s weaknesses – this is the
exercise of virtue by which one orders
oneself. The more a person enjoys
personal freedom, the more is that
person rightly ordered, and vice versa
(p.21).
Panama Nature
Fresh Pvt. Ltd
(PNFPL)
PNFPL’s executed good
acts are not enough to
describe them as moral.
Goodness is antecedent and
determinative of what
PNFPL does. PNFPL is
morally good when it
consistently strives to be
good before launching into
action.
PNFPL’s over-expansion
plans do not determine
whether they are moral or
bad; the question is
whether PNFPL always
seeks to do the right thing
rightly antecedent to
whatever it does.
What PNFPL does may be
good or bad or indifferent.
What matters for moral
predication is that PNFPL
consistently seeks to do
good and avoid bad.
PNFPL makes a right
choice and an exercise of
right virtue when acting
freely from innate strengths
and controlled weaknesses.
Since PNFPL has a
different set of strengths
and weaknesses, it is
differently inclined to right
or wrong. Any judgment
call should take this into
account.
PNFPL should
continuously and freely
seek to augment its moral
strengths and eliminate its
moral weaknesses. The
more it does this, the more
morally ordered are its
strategic deliberation,
choice and action.
403
Chicken Farm
Production (CFP)
Whether companies that
engage in CFP thinking that
CFP is good does not make
them moral. They are moral
when they consistently strive
to be good before launching
into any CFP action.
CFP seems a necessary evil
in a non-vegetarian food
chain context; antecedent to
CFP if companies are
consistently seeking to strive
for rightness, then the guilt
that doing CFP entails may
be exonerated.
What CFP does may be good
or bad or indifferent. What
matters for CFP people for
being moral is that they
consistently seek to do good
and avoid evil.
CFP can be a right choice
and an exercise of virtue
when led by true freedom of
one’s striving for rightness
and avoiding evil.
Those who engage in CFP
come from a different set of
strengths or weaknesses, and
hence, differently inclined to
right or wrong. Any
judgment call should take
this into account.
Those who engage in PFP
should continuously and
freely seek to augment their
moral strengths and
diminish their moral
weaknesses. The more they
do this, the more morally
ordered are their subsequent
strategic deliberations,
choices and actions.
Dividend Payments via
Debt (DPD)
DPD does not make companies that
do it automatically moral.
Goodness is antecedent and
determinative of what DPD does.
Companies that engage in DPD are
moral when they consistently strive
to be good before launching into
any DPD choice or venture.
DPD may be a necessary evil in a
highly competitive world. Doing
DPD in itself does not make one
good or bad; Striving consistently
to be right and good before any
DPD decisions, defines goodness
and being moral.
DPD may be good, bad or
indifferent. What matters for
moral attribution is that those
engage in DPD consistently strive to
do good and avoid evil for all its
stakeholders.
DPD can be a right choice and an
exercise of virtue when led and
determined by true freedom of
one’s striving for rightness and
avoiding evil.
Those who engage in DPD come
from a different set of strengths or
weaknesses, and hence, differently
inclined to right or wrong. Any
judgment call on them should take
this into account.
Those who engage in DPD should
continuously and freely seek to
augment their moral strengths and
combat their moral weaknesses.
The more they do this, the more
morally ordered are their
subsequent strategic deliberations,
choices and actions in relation to
DPD.
 Exhibit 10.5: A Fifth Check of Company Cases against Major
Requirements of Moral Goodness via Executive Virtue
Dimensions of Executive
Virtue
Moral goodness always requires that
we strive to realize the right. Failure
to strive to realize the right is moral
failure.
Moral goodness as a striving is not
simply wishing; it is actual self-
motivation willing to consider all the
factors necessary to moral living, to
deliberate about them, and to execute
the decision. That is, moral goodness is
found in the exercise of the will to do
and be good – this is virtue ethics.
The contrary of moral goodness is not
the willingness to be bad, but the failure
to be good. The will becomes or is
morally bad in its failure to consider all
the values and factors that pertain to
moral life.
We grow in virtue only if we exercise
right acts in relation to that virtue. If
we do not exercise right or virtuous
acts, we do not become rightly ordered
or virtuous. Exercise needs both
encouragement to execute the act and
the wisdom to know which act to
execute, in which case exercise follows
reason.
Not all good people are virtuous or
rightly ordered; some good people may
still be disordered in some areas of their
life. Hence, beyond the virtues of
temperance, courage, justice and
prudence, moral philosophers postulate
a fifth virtue that conditions all these
four cardinal virtues to make the
person good: charity or benevolence.
Charity or benevolence is a virtue of
striving, whereas temperance, courage,
justice, and prudence are virtues of
attaining. Benevolence (or charity) is
the moral description for a person who
literally strives to realize rightness.
Any willful exercise of virtue is twofold:
the primary exercise out of which we are
moved, and the secondary exercise by
which we execute the judgment to act.
The primary exercise defines goodness;
the secondary exercise defines rightness.
[See Corporate Ethics Exercise 10.15]
Panama Nature
Fresh Pvt. Ltd
(PNFPL)
PNFPL should seek moral
goodness by always striving
to realize the right, and
avoid moral failure of not
striving to realize the right.
PNFPL should seek moral
goodness by the exercise of
corporate will - by willing
to consider all the factors
necessary to moral living,
to deliberate about them,
and to execute the
consequent decision.
Moral badness for PNFPL
is not its willingness to be
bad, but its failure to be
good – when it fails to
consider all the values and
factors that pertain to
moral life in village
farming.
PNFPL can grow in virtue
only if it exercises right acts
in relation to that virtue,
failing which it cannot
become rightly ordered or
virtuous. Exercising right
acts needs wisdom and
reason or prudence.
PNFPL’s village farming
strategies should be not
only transformed by the
four cardinal virtues of
prudence, fortitude,
temperance and justice, but
also by benevolence that
conditions and sharpens the
four cardinal virtues.
PNFPL can strive for moral
goodness while exercising
benevolence, and can attain
moral goodness while
seeking the four cardinal
virtues of temperance,
courage, prudence and
justice.
PNFPL needs to seek
goodness by the primary
exercise of being properly
motivated and seek
rightness by the secondary
exercise of deciding to act
rightly.
404
Chicken Farm
Production (CFP)
Any CFP activity should seek
moral goodness by always
striving to realize the right, and
avoid moral failure of not
striving to realize the right.
Any CFP action should seek
moral goodness by the exercise
of corporate will - by willing to
consider all the factors
necessary to moral living
despite CFP, to deliberate
about them, and to execute the
consequent decision.
Moral badness of CFP is not its
willingness to be bad, but its
failure to be good – when it
fails to consider all the values
and factors that pertain to
moral life in a CFP context.
Those who must use CFP can
still grow in virtue of
compassion only if they exercise
right acts in relation to that
virtue, failing which they can
easily become disordered.
Exercising right acts needs
wisdom and good reasoning.
CFP activities should be not
only humanized and civilized
by the four cardinal virtues of
prudence, fortitude,
temperance and justice, but
also by compassion or
benevolence that conditions and
sharpens the four cardinal
virtues.
All engaged in CFP can still
strive for moral goodness when
exercising compassion and can
attain moral goodness while
seeking the four cardinal
virtues of temperance, courage,
prudence and justice.
Any CFP activity needs to seek
goodness by the primary
exercise of being properly
motivated and seek rightness
by the secondary exercise of
deciding to act rightly.
Dividend Payments
via Debt (DPD)
Any DPD strategy should seek
moral goodness by always
striving to realize the right, and
avoid moral failure of not
striving to realize the right.
DPD should seek moral goodness
by the exercise of corporate will -
by willing to consider all the
factors necessary to moral living
despite DPD, to deliberate
about them, and to execute the
consequent decision.
Moral badness for DPD is not its
willingness to be bad, but its
failure to be good – when it fails
to consider all the values and
factors that pertain to moral life
involved in DPD.
Those who must use DPD can
still grow in virtue of honesty to
stakeholders only if they exercise
right acts in relation to that
virtue, failing which they can
easily become disordered.
Exercising right acts needs
wisdom and good reasoning.
DPD strategies should be not
only informed by the four
cardinal virtues of prudence,
fortitude, temperance and
justice, but also by charity or
compassion toward all
stakeholders.
Companies that must engage in
DPD can still strive for moral
goodness when exercising
benevolence on all affected by
DPD and can attain moral
goodness while seeking the four
cardinal virtues of temperance,
courage, prudence and justice.
Any PDP activity needs to seek
goodness by the primary exercise
of being properly motivated and
seek rightness by the secondary
exercise of deciding to act rightly
at the right time.
 Table 10.1: Characterizing the Virtuous Zone of both “Internal Practices”
and “External Goods” in a Business Environment (V = Virtue Potential)
Value-Chain Value-Chain Value-Virtue Enhancing Parameters along:
Components: Internal Practices External Goods
“Internal Practices”

Stimulating
Feasibility -

Cost-Effec-

Procedures
Fair &Just

Ecological

Profitable
Customer

Customer
Honesty-
Integrity
Viability

Security
tiveness

Ethical/
Privacy
Safety-

Moral
Sales-
Innovation Idea generation V V V V V V V V V V
Innovation Concept generation V V V V V V V V V V
Creativity-Innovation V V V V V V V V V V
Patentable ideas and concepts V V V V V V V V V V
Prototype generation V V V V V V V V V V
Design-testing V V V V V V V V V V
Fabrication-casting V V V V V V V V V V
Upstream Materials selection V V V V V V V V V V
Value Chain: Components selection V V V V V V V V V V
Front-end Assembly line operations V V V V V V V V V V
Innovations Supply chain management V V V V V V V V V V
Purchasing V V V V V V V V V V
(18 areas) Transportation logistics V V V V V V V V V V
Warehousing V V V V V V V V V V
Process Technology V V V V V V V V V V
Product Technology V V V V V V V V V V
Quality Control V V V V V V V V V V
Inventory optimization V V V V V V V V V V
Product sizing V V V V V V V V V V
Product packaging V V V V V V V V V V
Product labeling V V V V V V V V V V
Midstream Instruction Manuals V V V V V V V V V V
Value Chain: Order Processing V V V V V V V V V V
Mid-end Delivery Logistics V V V V V V V V V V
Installation/use/maintenance V V V V V V V V V V
Innovations Inventory replenishment V V V V V V V V V V
(10 areas) Store shelving V V V V V V V V V V
Shelf replenishment V V V V V V V V V V
Product preannouncements V V V V V V V V V V
Press Release V V V V V V V V V V
Unit Costing V V V V V V V V V V
Unit Pricing V V V V V V V V V V
Price Bundling V V V V V V V V V V
Downstream Product Bundling V V V V V V V V V V
Value Chain: Rebate and discounting V V V V V V V V V V
Free sampling and testing V V V V V V V V V V
Back-end Promotions & advertising V V V V V V V V V V
Innovations Credit/financing V V V V V V V V V V
(21 areas) Store choice and retailing V V V V V V V V V V
Point of purchase display V V V V V V V V V V
Salesperson service V V V V V V V V V V
Servicing Warranties V V V V V V V V V V
Customer complaints V V V V V V V V V V
Customer redress V V V V V V V V V V
Customer loyalty generation V V V V V V V V V V
Building brand Community V V V V V V V V V V
Customer co-designing V V V V V V V V V V
Customer co-production V V V V V V V V V V
Customer co-partnering V V V V V V V V V V

405
Table 10.2: A Partial Characterization of Goodwill and Good and the
Opposites
Executive Executive Actions
Motives Good
[Right actions that promote
good values]
Assumption 1: Right actions
with right motives are a
necessary condition for
calling a person good (Hare
1952)
Good Good people doing good.
Examples:
A “good” person
A virtuous person
A moral person
An ethical person
A just person
A righteous person
An upright person
Assumption 3: Right actions
are not a necessary condition
for calling a person good
(Kant 1964).
Bad people doing good.
Bad Examples:
A bad-willed success
A malevolent courage
An ill-willed victory
Parading charity
Almsgiving for power
Oppressive kindness
Philanthropy for tax write-
offs
406
Bad
[Wrong actions that
promote disvalues]
Assumption 2: Wrong
actions are not a necessary
condition for calling a
person bad (Aquinas 1964).
Good people doing bad.
Examples:
A good-willed failure
An ignorant mistake
A misinformed disaster
A conscientious boycott
An addict’s violence
Killing in a just war
Involuntary murder
Assumption 4: Right
actions are a necessary
condition for calling a
person good (Moore 1912)
Bad people doing bad.
Examples:
A “wicked” person being
wicked
A vicious person’s vice
A malicious person’s
malice
A selfish person acting
selfish
Deliberate drunken
violence
Killing in an unjust war
Voluntary murder
407
 Table 10.3: A Synthesis: Goodwill, Goodness, Right & Good to Understand
Virtue versus Vice
Agent’s Motives Virtue as Habitual Nature of Action Nature of Corporate Executive Examples of
(Morality Pre-dispositions (Deontology) Consequences Virtue versus Vice
Ethics) (Virtue Ethics) (Teleology)
Good-willed corporate executives
Good-striving corporate executives
Good Right-acting corporate executives
Right Good corporate management results
Good-willed corporate executives
Good-striving corporate executives
Goodness as Bad Right-acting corporate executives
Bad corporate results (e.g., bad economy)
striving and Good-willed corporate executives
wanting to be Good
Good-striving corporate executives
Wrong-acting corporate executives
right Wrong Good corporate results (e.g., sheer luck)
Good-willed corporate executives
Good-striving corporate executives
Bad Wrong-acting corporate executives
Bad corporate results (e.g., poor planning; bad model)
Good-willed corporate executives
Poor-striving corporate executives
Good Good Right-acting corporate executives
Right Good corporate results (e.g., a booming industry)
Good-willed corporate executives
Poor-striving corporate executives
Badness as Bad Right-acting corporate executives
Bad corporate results (e.g., a stagnant industry)
not striving Good-willed corporate executives
and not Good
Poor-striving corporate executives
Wrong-acting corporate executives
wanting to Wrong Good corporate results (e.g., a booming economy & luck)
be right Good-willed corporate executives
Poor-striving but good motive corporate executives
Bad Wrong-acting corporate executives
Bad corporate results (e.g., bad performance)
Bad-willed but good-striving corporate executives
Good Right-acting evil corporate executives
Good corporate results (e.g., a malevolent success)
Right Bad-willed but good-striving corporate executives
Bad Right-acting corporate executives
Goodness as Bad corporate results (e.g., a malevolent failure)
striving and Bad-willed but good-striving corporate executives
Good Wrong-acting corporate executives
wanting to be Good corporate results (e.g., a fraudulent success)
right Wrong Bad-willed but good-striving corporate executives
Bad Wrong-acting corporate executives
Bad corporate results (e.g., a fraudulent failure)
Bad-willed and bad-striving corporate executive
Good But acting right with good corporate results
Bad (e.g., a shrewd corporate success)
Badness as Right Bad-willed and bad-striving corporate executive
Bad But acting right with bad corporate results
not striving (e.g., a shrewd corporate failure)
and not Bad-willed and bad-striving corporate executive
Good Acting wrong with good corporate results
wanting to (e.g., an immoral and wicked corporate success)
be right Wrong Bad-willed and bad-striving corporate executive
Bad Acting wrong with bad corporate results
(e.g., an immoral and wicked corporate failure)

408
 Table 10.4: Normative versus Virtue-based Ethics for Corporate Executives

Dimensions Normative Ethics Virtue-based Ethics

Definition The ethical Theory that bases the morality of
executive actions primarily in relation to
compliance to existing social and/or moral norms.
Moral Search and conformity to the proper norm
Orientation
Predominant Rule Utilitarianism: The rule of norm does not
Philosophy express the intrinsic morality of the action but
only the reasonableness or rightness of a given
executive behavior that conforms to a given
moral or social norm.
Domain of The moral rightness or wrongness of the
Moral Value executive action that conforms to norms
Domain of Under what conditions does an executive action
Inquiry become morally right or wrong?
Objective Legitimacy of the social or moral norm.
Source Fundamental rightness of the given norm.
(conditions) of Close conformity of the executive action to the
Moral Value moral norm.
Rightness of the intended and unintended
consequences of the chosen action.
The ethical Theory that bases the morality of executive
actions primarily in relation to the moral virtuous
quality and predispositions of the executive agent.
Virtue-based ordered will and good-oriented choices
Rule Ontologism: The rule of virtue-based ethics does
express the intrinsic morality of the action not in its
conformity to a given moral or social norm but by the
goodness of the executive agent whose moral virtues
prompted the given action.
The moral goodness or badness of the executive agent
and action
Under what conditions does an executive action become
morally good or bad?
Fundamental moral goodness of the chosen action.
Fundamental moral goodness of the choosing person.
Fundamental goodness of the executive moral virtues
backing the action.
Goodness of the intended and unintended consequences
of the chosen action.

Subjective Right internalization of the norm. Goodness of executive intentions that desire the action.
Source Quality of executive freewill that chooses the action.
(conditions) of Right interpretation of the chosen norm. Goodness of the intellectual moral virtues that prompt
Moral Value Rightness of the execution of the chosen norm. the execution of the action: wisdom, prudence.
Goodness of the executive volitive moral virtues that
prompt the execution of the action: Moral courage,
pertinacity, consistency, passionate commitment.
Objective Illegitimacy of the social or moral norm. Fundamental moral evil of the chosen action.
Source of Fundamental wrongness of the given norm. Fundamental moral badness of the choosing person.
Moral Disvalue Close conformity of the executive action to the Fundamental badness of the executive moral vices
wrong moral norm. backing the action.
Wrongness of the intended and unintended Badness of the intended and unintended consequences of
consequences of the chosen action. the chosen action.

Subjective Wrong internalization of the wrong norm.
Source of
Moral Disvalue Wrong interpretation of the chosen wrong norm.
Wrongness of the execution of the chosen norm.
Expected moral Rightness of the moral norm.
outcomes Conformity to the moral norm.
Rectitude of the conformity.
Badness of executive intentions that desire the action.
Quality of executive free will that choses the evil action.
Wickedness of the intellectual moral vices that prompt
the execution of the action: lack of wisdom, imprudence.
Wickedness of the executive volitive moral vices that
prompt the executive action: Moral cowardice, lack of
perseverance in seeking goodness and truth, in
consistency, passionate commitment for evil.
Goodness of the choosing executive.
Goodness of the executive choice.
The agent and the organization becoming good.

409
 Table 10.5: The Universal Golden Rule as a Defining Moral Principle in
World Religions
Religion Religious Philosophy
Hinduism The goal in life is Moksha (liberation) from
the body or rebirth. The lives of Hindus
(2400 BC?) are governed by three doctrines or
principles: Dharma (universal law), Karma
(cumulative residue of personal actions),
and Samsara (the cycle of rebirth).
Judaism A monotheistic religion based on the laws
and the teaching of the Holy Scripture and
(2000 BC?) the Talmud
Zoroastrianism Believes in afterlife and in the continuous
struggle of the universal spirit of good
(650 BC?) (Ormazd) with the spirit of evil (Ahriman),
but the good will ultimately prevail.
Buddhism Buddhism teaches that suffering ensues
from wrong desire, and that right thinking
(630 BC) and self-denial will enable the soul to
achieve Nirvana, a divine state of release
from misdirected desire.
Jainism Jainism emphasizes asceticism, nonviolence,
and reverence for all living things.
(600 BC)
Confucianism Ethical teachings formulated by Confucius
and introduced into Chinese religion,
(520 BC) emphasizing devotion to parents, family,
and friends, cultivation of the mind, self-
control, and just social activity.
Christianity Christianity believes that Jesus is Christ,
the Prophet, the Messiah, Savior and God.
(30 AD) His central tenet was love: Love one
another as I have loved you. He preached
nonviolence, forgiveness, mercy and
compassion as a source of happiness.
Islamism Orthodox Islamism advocates universal
brotherhood, nonviolence, mercy and
(600 AD) compassion; refrains from pork; legislates
prayer five times a day, and Mecca (in
Saudi Arabia) is its most sacred city.
Bahai Forbids begging, polygamy, drinking
alcoholic drinks, buying and selling slaves,
(1844 AD) and stresses principles of universal
brotherhood, social equality etc.
410
Golden Rule
Version
Do naught unto others
what you would not have
them do unto you
(Mahabharata 5, 1517)
What is hateful to you, do
not to your fellowman
(Talmud, Shabbat 31a)
Whatever is disagreeable to
yourself, do not unto others
(Shast-na-shayast 13:29)
Hurt not others with that
which pains yourself
(Udana-Varga 5:1)
Treat all others as you
would like to be treated
(Sutrakritanga 1.11.33).
What you do not want done
to yourself, do not do to
others (Analects 15:23)
Whatever you want others
to do unto you, do also to
them (Matthew 7:12); you
must love your neighbor
as yourself (Rom 13:8-10).
No one of you is a believer
until he loves his neighbor
what he loves for himself
Choose for your neighbor
that which you choose for
yourself (Epistle to the Son
of the Wolf: 30)
Comments
The principal and most
ancient religious traditions in
India.
Judah was the fourth son of
Jacob from Leah (Gen
29:35); the Judaic tribe
descended from him, the
strongest of the twelve tribes
of Israel (Num1:26).
A religious philosophy of the
Persians before they
embraced Islam; founded by
Zoroaster, its principles are
contained in Zend-Avesta.
Siddhartha Gautama
Buddha was enlightened (=
Buddha) c. 637 BC in India.
He founded Buddhism.
A religion of India, offshoot
of Hinduism founded in
India in the 6th century BC
Confucius (Kung Futzu 551-
479 BC) was a philosopher
and teacher in China
Christ (Christos = anointed
in Greek, Messiah in
Hebrew) was prophesied in
the OT and was born as
Jesus of Nazareth c. 6 BC.
He was sent to establish the
Kingdom of God on earth.
Islamism or the Muslim
monotheistic religion believes
that the supreme deity is
Allah and that Mohammed is
the chief prophet and
founder
Bahai stems from Babism, a
modern Persian religion
founded c. 1844 by the Bab
(Mirza Ali Mohammed) from
Persia.
 Corporate Ethics Exercises
10.1 A quick journey through the history of virtue from 450 BC to 1981 AD will reveal the following:

 Socrates (c. 470-399 BC) identified virtue with knowledge and held that one could not know the good
without likewise willing it. {Good knowledge is a function of the good will, and vice versa].
 Plato (c. 428-347 BC) expounded on four virtues: wisdom, courage, temperance, and justice.
 Aristotle (384-322 BC) described virtue as an acquired character trait that manifests itself in habitual
action. He identified moral virtues as a state of character.
 Aurelius (121-180 AD) believed justice as the foundation of all other virtues, as it is closely related to
nature. He also held that justice is its own reward and the main source of human gratification.
 St. Ambrose (c. 340-97 AD) introduced the term “cardinal virtues” to designate the four Platonic virtues of
wisdom, courage, temperance, and justice.
 Thomas Aquinas (1224-74 AD) defined moral virtues as dispositions for the formation of passions and/or
habits; moral virtues enable us to follow reason in dealing with our desires, emotions, and actions.
 Baruch Espinoza (1632-77) regarded primordial human virtue to be the effort to conserve one’s being; the
development of that virtue requires one to live with conformity with reason.
 John Locke (1632-1704) held that virtue and vice is the approbation or dislike, the praise or blame, of
individual societies.
 Immanuel Kant (1772-1804) related virtue to those categorical duties that are firmly settled in our character.
It does not concern directly with our happiness, but our worthiness to be happy. Hence, virtue is its own end
and reward.
 Foot (1978) regarded virtues as specific dispositions determined by the need to correct certain deficiencies.
 MacIntyre (1981) argued that virtues are skills internal to activities or practices that are necessary for the
performance of certain roles or offices in society.

a) As a corporate executive committed to be virtuous in managing business, how will you internalize and
incorporate this history of virtue in your executive life?
b) How will you build on each historical description of virtue in forming your own philosophy of managerial
virtue?
c) Which concept of virtue is best geared to manage business turnarounds justly and why?
d) Which concept of virtue is best geared to manage business transformation justly and why?
e) Which concept of virtue is least disposed to manage business turnarounds justly and why?
f) Which concept of virtue is least geared to manage business transformations justly and why?
g) What would be your list of “cardinal virtues” for business turnarounds or transformations, and why?
h) Aristotle described virtue as an acquired character trait that manifests itself in habitual action. How will you
develop this virtuous character for handling business turnarounds or transformations?
i) Aquinas defined moral virtues as dispositions for the formation of passions and habits. How will you
develop these dispositions for managing business turnarounds or transformations?
j) Kant related virtue to those categorical duties that are firmly settled in our character. How will you perform
this duty to be virtuous?
k) If, according to MacIntyre (1981), virtues are skills internal to activities that are necessary for the
performance of certain offices in society, how will you go about identifying and developing these skills in
you and in your company?

10.2 Examine the following Propositions and respond to the questions that follow:

Proposition 01: The virtue of any profession is excellence. Virtue as excellence is a perfection of a power in
relation to its end.
Proposition 02: The ultimate good that an executive’s virtue should pursue is the happiness or fulfillment of all
stakeholders
Proposition 03: The ultimate good that a corporate executive’s virtue should pursue is the happiness or “full
human flourishing” of all stakeholders
411
 Proposition 04: There are certain social goods that are good for their own sake and not for what they will do to
us individually. Thus, acts of generosity, justice, and compassion are done for the sake of
others and are worth doing in and for themselves. It is only through the acquisition and
exercise of these virtues that turnaround executives and their stakeholder communities can
flourish in a specifically human mode.

a) How do you understand and apply each of these propositions to you as a corporate executive?
b) How will you understand and apply each of these propositions to your specific business situation?
c) What is the common theme running through all these six propositions?
d) Which proposition presupposes another, and why?
e) Which propositions follows another, and why?
f) Which proposition is crucial to all others and why?
g) Which proposition is redundant, and why?
h) Which is the most practical proposition and why?
i) Which is the most abstract proposition and why?
j) Which is the most challenging proposition in the corporate world and why?

10.3 Examine the following Propositions and respond to the questions that follow:

Proposition 05: Executive virtues are intellectual when their end is truth and they are moral when their end is
the good life.
Proposition 06: The good executive learns virtues by practice and by his/her practical reason.
Proposition 07: The exercise of independent practical reasoning is one essential constituent to full human
flourishing.
Proposition 08: One cannot be an independent practical reasoning executive without being able to give others
an intelligible account of one’s reasoning.
Proposition 09: Virtues presuppose a crucial distinction between what an executive at any particular time takes
to be good for one self and what is really good for one’s self as a human being.
Proposition 10: Pursuing good for oneself as a human being needs much practice of the virtue of making right
choices about right means to achieve right ends. Such choices demand a capacity to judge
and to do the right thing in the right place at the right time and in the right way.

a) How do you understand and apply each of these propositions to you as an executive?
b) How will you understand and apply each of these propositions to your specific business situation?
c) What is the common theme running through all these six propositions?
d) Which proposition presupposes another, and why?
e) Which propositions follows another, and why?
f) Which proposition is crucial to all others and why?
g) Which proposition is redundant, and why?
h) Which is the most practical proposition and why?
i) Which is the most abstract proposition and why?
j) Which is the most challenging proposition in the executive world and why?
k) Which is the most neglected or violated proposition in the executive today and why?
l) How will you fulfill proposition 10 in the state of corporate financial distress?
m) How will you safeguard proposition 10 in the state of corporate bankruptcy and liquidation?

10.4 Aristotle declares virtue is a “mean” between two extremes, the extremes being vices, one being a vice of
excess, and the other being the vice of deficiency. Virtue as a mean is not an arithmetic mean; it is a mean
“relatively to us” and is often judged by circumstances. In some cases, it may be preferable to err on the side of
the excess than of deficiency, while in others, the reverse may be true. A person of good character readily and
always sees the right mean. It is the wise person’s enduring trait that can always be counted on. Thus,
Aristotelian virtues comprise just and decent ways of living as a social being.

412
 Domain of Virtue Vice of Deficiency Golden Mean Vice of Excess
Confidence Cowardice Courage Rashness
Charity Miserliness Liberality Prodigality
Claiming honor Humility Self-respect Vanity
Self-Revelation Self-depreciation Truthfulness Boastfulness
Building relationships Sulkiness Friendliness Obsequiousness
Feeling anger Un-irascibility Gentleness Irascibility
Feeling shame Bashfulness Modesty Shamelessness
Feeling pain at competitors’ Malevolence Righteous indignation Envy
good
Feeling good at competitors’
pain
Compensating damage
Collateral damage
Being impartial
Being fair to all stakeholders
Paying trade bills
Claiming receivables
Deferring taxes
Deferring payroll
Deferring bonuses
Deferring promotions
Closing plants
Massive layoffs
Offshore outsourcing

a) Examine and rank the first eight virtues in terms of their crucial importance in your business.
b) How will you defend your ranking under (a)?
c) Which is most crucial virtue in a corporate executive and why?
d) How do you plan to execute these virtues in a corporate executive situation?
e) Fill in the blanks. Justify your entries.
f) Add and justify your own virtues that you think are most crucial in an executive.

10.5 Examine the following Propositions and respond to the questions that follow:

Proposition 11: It is in the nature of human beings to seek the good. Eudemonia or happiness is the extreme
limit of all good things achievable in action (Aristotle 1985).
Proposition 12: Eudemonia is sought as an ultimate good for its own sake; every other good is sought for the
sake of eudemonia (Aristotle 1985).
Proposition 13: To aim at having a flourishing life is to pursue a “second order end” towards which other first-
order ends are subordinated (Rawls 1971).
Proposition 14: Happiness is blessedness or prosperity: it is the state of being well and doing well in being
well.
Proposition 15: Real happiness must manifest over a full, long-lasting adult life and not merely for brief periods
(Aristotle 1985).
Proposition 16: Real happiness is eudemonia that is best defined as “human flourishing.” This postmodern
term means the possession, use and fulfillment of one’s mature powers or natural capacities
over a long period of time (Cooper 1985).
Proposition 17: To be a good person and to live a good life are considered human aspirations in tandem.
Happiness and a good moral life are somehow synonymous
Proposition 18: Such aspirations are not imposed on human beings but rise from their very nature as individual
and social human beings.

a) How do you understand and apply each of these propositions to you as an executive?

413
 b) How will you understand and apply each of these propositions to your specific executive situation?
c) How do you understand Aristotle’s concept of eudemonia as an executive?
d) How will you apply and understand eudemonia in a particular executive situation?
e) What does the postmodern term “human flourishing” mean to you as a translation of eudemonia?
f) How can you achieve “human flourishing” in an executive situation?
g) How can you bring about “human flourishing” to stakeholders in a cash flow crisis situation?
h) How can you bring about “human flourishing” to stakeholders in a financial distress situation?
i) How can you bring about “human flourishing” to stakeholders in a Chapter 11 bankruptcy situation?
j) How can you bring about “human flourishing” to stakeholders in a Chapter 7 bankruptcy situation?

10.6 Consider the following Propositions of Virtue Ethics and respond to the questions that follow:

Proposition 19: Virtue is excellence in the knowledge of good that enables one for the good and happy life
(Plato).
Proposition 20: Virtue is the state of character that makes a person good or happy (eudemonia) and makes that
person to do what is good (Aristotle).
Proposition 21: A virtuous person knows good, is good, and does good (Aristotle)
Proposition 22: For Aristotle, the central (cardinal) virtue is practical wisdom (Greek: phronesis).
Proposition 23: Virtue determines the end, and practical wisdom makes us do what is conducive to that end
Proposition 24: While practical wisdom is the central virtue, "prudence" is a link between intellectual, moral
and theological virtues (faith, hope and love) (Aquinas).
Proposition 25: Prudence is a right way of acting according to reason; it disposes one to choose means most
conducive to the final end ( telos) of an act (Aquinas).

a) How do you understand and apply each of these propositions to you as an executive?
b) How will you understand and apply each of these propositions to your specific executive situation?
c) Apply Proposition 19: What is the “good” that can enable you, as an executive, to ensure the good and
happy life of all your stakeholders?
d) Apply Proposition 20: What is the “virtue as a state of character” that can enable you, as an executive, to do
what is good and thus, make all business stakeholders happy?
e) Apply Proposition 21: As an executive, do you consider yourself as a virtuous person who knows good, is
good, and does good?
f) Apply Propositions 22-23: As an executive, how do you define and understand the virtue of “practical
wisdom” in an executive?
g) Apply Propositions 24-25: As a corporate executive, how do you define and understand the virtue of
“prudence” in business management?

10.7 In normative virtue ethics there seems to be a circularity of its logic as seen in the following standards.

 In the purely virtue-based ethic, the normative standard is that the good is that which the virtuous person
does and the virtuous person is the person who does what is good for humans.
 In the purely virtue-based ethic, the moral person is one who can be relied upon to be habitually good and
to do good under all circumstances.
 In the purely virtue-based ethic, one holds that the right and the good are what the virtuous persons
understands them to be and the virtuous person is the one who is and does what is right and good.

a) How do you get out of this circularity and with what logical success?
b) The challenge is to provide a normative force for virtue outside this circularity. What do you suggest and
why?
c) Is moral principles-based ethics a better option in corporate situations and why?

10.8 In resolving the circularity of virtue ethics logic as stated in CEE 10.7, how will you use the following arguments
and with what success?
414
 a) Frankena (1975) argues that virtues merely augment an existing method; they do not supply specific directives
for determining right or wrong conduct.
b) Virtue "is a corrective to the tendency to act against the good" (Foot 1978: 8).
c) Virtue is a trait that ameliorates the human condition (Warnock 1971).
d) Virtue is something that enhances evolutionary adaptation (Casey 1990; Wilson 1980).
e) Moral principles and rules direct, while virtues just enable us to act in accordance with the principles.
f) Virtues are auxiliary and derivative, and as such, are exercises necessary to accomplish the end to which the
principles and rules direct us.
g) Others counter argue (e.g., Nussbaum 1988, Kekes 1988) that the Greeks used virtues precisely to judge moral
conduct: virtues therefore can provide the standards for morally right conduct.
h) In fact, virtues, not moral rules and principles, are the source for understanding and force for performing
normative conduct, while moral principles and rules are derived from virtues.
i) Virtues are dispositions or acquired qualities that are necessary a) to achieve personal (internal) human good,
b) to sustain communities in which individual persons can seek higher good, and c) to sustain traditions that
provide historical context for individual moral lives (MacIntyre 1984, 1990).

10.9 Review Table 10.1. As an executive turning around or transforming your company do the following:

a) Identify “internal practices” in upstream value chain activities of your company.

b) Identify the virtue-value enhancing parameters of these upstream “internal practices.”
c) Identify the virtue-value enhancing parameters of the upstream “external goods.”
d) How will you implement virtue-ethics responsibilities under (b) and (c), and with what success?
e) Identify “internal practices” in midstream value chain activities of your turnaround company.
f) Identify the virtue-value enhancing parameters of these midstream “internal practices.”
g) Identify the virtue-value enhancing parameters of the midstream “external goods.”
h) How will you implement virtue-ethics responsibilities under (f) and (g), and with what success?
i) Identify “internal practices” in downstream value chain activities of your turnaround company.
j) Identify the virtue-value enhancing parameters of these downstream “internal practices.”
k) Identify the virtue-value enhancing parameters of the downstream “external goods.”
l) How will you implement virtue-ethics responsibilities under (j) and (k), and with what success?

10.10 Review Table 10.2. As a corporate executive turning around or transforming your company do the following:

a) Identify the areas were you and your colleagues are doing “good” things as “good” people.
b) How can you augment this zone and with what strategies?
c) Identify the areas were you and your colleagues are engaged in “bad” actions but as “good” people.
d) How can you minimize this zone and with what strategies?
e) Identify the areas were you and your colleagues are engaged in “good” actions but as “bad” people.
f) How can you transform these “good” actions with good motives and with what strategies?
g) Identify the areas were you and your colleagues are engaged in “bad” actions but as “bad” people.
h) How can you eliminate this zone and with what strategies?

10.11 Review Table 10.3. Rightness concerns two dimensions of human living: a) that the agent is rightly ordered; b)
that the act is rightly ordered. One does not follow from the other: temperate people may occasionally fall, and
not all alcoholics always drink excessively (MacIntyre 1981: 166-7). No one, no matter how well ordered, is
perfect; no one, no matter how disordered, is an absolute failure. Hence the need to distinguish whether a
person is actually living a rightly ordered life and whether a person’s action is right; neither description,
however, depends upon goodness. Goodness asks whether one strives through right action to make oneself
rightly ordered. The good person consistently looks for opportunities that better one’s strengths and reduce
one’s weaknesses that order oneself, and that make one more free. As an executive engaged in actual
turnarounds and transformations,

415
 a) How do you define, understand and apply what it means that your life as an agent or person is “rightly
ordered”?
b) How do you define, understand and apply what it means that your actions are “rightly ordered”?
c) How does (a) condition (b), and why?
d) How do you define, understand and apply what it means to be a “good person”?
e) How do you define, understand and apply what it means to execute Executive “goodness”?
f) How do you define, understand and apply what it means to experience and witness ethical “goodness”?
g) How do you define, understand and apply what it means to experience and witness moral “goodness”?
h) How do you define, understand and apply what it means to experience and witness spiritual “goodness”?

10.12 Review Table 10.4. As a corporate executive turning around or transforming your company do the following:

a) Identify the “good” executive results you have achieved as “good” people striving to be “right” and doing the right things?
b) Identify the “bad” executive results you have obtained but as “good” people striving to be “right” and doing the right
things?
c) Identify the “good” executive results you have achieved as “good” people striving to be “right” but doing the wrong
things?
d) Identify the “bad” executive results you have obtained as “good” people striving to be “right” but doing the wrong things?
e) Identify the “good” executive results you have achieved as “good” people not striving to be “right” but ending doing the
right things?
f) Identify the “bad” executive results you have obtained but as “good” people not striving to be “right” but ending doing the
right things?
g) Identify the “good” executive results you have achieved as “good” people but not striving to be “right” and doing the
wrong things?
h) Identify the “bad” executive results you have obtained as “good” people not striving to be “right” and doing the wrong
things?
i) Identify the “good” executive results you have achieved as “bad” people striving to be “right” and doing the right things?
j) Identify the “bad” executive results you have obtained but as “bad” people striving to be “right” and doing the right things?
k) Identify the “good” executive results you have achieved as “bad” people striving to be “right” but doing the wrong things?
l) Identify the “bad” executive results you have obtained as “bad” people striving to be “right” but doing the wrong things?
m) Identify the “good” executive results you have achieved as “bad” people not striving to be “right” but ending doing the
right things?
n) Identify the “bad” executive results you have obtained but as “bad” people not striving to be “right” but ending doing the
right things?
o) Identify the “good” executive results you have achieved as “bad” people but not striving to be “right” and doing the wrong
things?
p) Identify the “bad” executive results you have obtained as “bad” people not striving to be “right” and doing the wrong
things?

10.13 Consider the following Propositions of Virtue Ethics and respond to the questions that follow:

Proposition 26: Virtue is an operative habit: it does something. Virtue perfects a power for its operations: it
perfects the intellect in intellectual virtues, and it perfects the appetitive powers (will,
emotions, and passions) in moral virtues.
Proposition 27: As a form, virtue perfects the power in which it resides. Thus, virtue perfects the person,
making the agent good and his operations also good.
Proposition 28: The virtues are acquired not by repeatedly performing the same types of actions but by
intending and executing the same types of actions: the virtues are acquired willfully and not
accidentally (Keenan 1992: 13).
Proposition 29: We generally call a person virtuous who is both rightly ordered and therefore, predictably good.

416
 To say that a person is virtuous is to predict that the person will consistently perform rightly
ordered behavior (Keenan 1992: 10).
Proposition 30: People who are rightly ordered are persons with virtues: their will, reason, and passions are
ordered. As habits of living or conduct, virtues belong to those who live rightly (Fagothey
1959).
Proposition 31: The more a person enjoys personal freedom, the more is that person rightly ordered, and vice
versa.
Proposition 32: Conversely, the more a person is rightly ordered, the more is that person predisposed to realize
right activities, and this is goodness.
Proposition 33: In general, we call people virtuous, if they demonstrate striving to right activity in all the
dimensions of their personality. Each attribution of virtue describes someone as rightly
ordered in a specific area of human activity. Often goodness is not even presumed.
Proposition 34: When we attribute a specific virtue to someone, we imply that we can predict a specific
behavior relative to that virtue. For instance, a just person will respect the rights of all people;
a prudent person will always assess the costs and benefits before deciding on a value-balanced
activity.

a) How do you understand and apply each of these propositions to you as a corporate executive?
b) How will you understand and apply each of these propositions to your specific business situation?
c) Apply Propositions 29-32: What is “rightly ordered” behavior that can enable you, as a corporate executive,
to ensure the good and happy life of all your stakeholders?
d) Apply Proposition 33: What are the “rightly ordered activities” that can enable you, as a business executive,
to do what is good and thus, make all your stakeholders happy?
e) Apply Proposition 34: What virtuous behaviors can your stakeholders predict about you as a business
executive, and why

10.14 MacIntyre (1999: 66-98) speaks of a threefold classification of ascription of good; practical reasoning is used
under all three ascriptions, but the exercise of independent practical reasoning is one essential constituent to full
human flourishing (MacIntyre 1999: 105).

A) Ascription of good by which we evaluate something only as means; for instance, we judge one to possess
certain skills or to exploit certain opportunities insofar as they enables one to use them as means for a
further good.

B) Ascription of goodness to someone in some role or function within some socially established practice; this
is to judge that agent good insofar as these goods are internal to the practice and are considered as ends
worth pursuing for their own sake. For example, excellence as a chess or bridge player, a doctor or a
lawyer; these are values sought as ends within each practice, art or skill. Some operant virtues such as
temperance, courage, prudence and justice belong here.

C) Ascription of goodness to all human beings as human beings, not as fulfilling certain roles but fulfilling
one’s human being and becoming. These are unconditional judgments about “human flourishing,” how
best they enable us to live genuine human lives of effective practical reasoning in almost every culture and
space and time (e.g., intrinsically human virtues such as goodness, truthfulness, benevolence); these virtues
are pursued for their own sake as human beings.

a) Identify and describe ascriptions under (a) in an executive situation.

b) Identify and describe ascriptions under (b) in an executive situation.
c) Identify and describe ascriptions under (c) in an executive situation.
d) Identify and describe ascriptions under (a) and (b) in an executive situation.
e) Identify and describe ascriptions under (a) and (c) in an executive situation.
f) Identify and describe ascriptions under (b) and (c) in an executive situation.
g) Identify and describe ascriptions under (a), (b) and (c) in an executive situation.
h) What do you notice as you go from question (a) to question (h), and why?

417
 i) Which ascriptions or their combinations are best for successful business turnarounds and transformations
and why?

10.15 Study Figure 10.1, and apply it to you concrete business situation and focus on obligations to your
stakeholders. Keeping Figure 10.1 in mind, do the following:

a) Define your “object specificity” in relation to your business situation. That is, what is the specific object
(cause, context) of your executive situation that you wish your stakeholders to know?
b) Given this object-specificity, how will you work on correctly forming the object-sensed specificity of
your stakeholders?
c) How will you measure this object-sensed specificity, and with what validity, reliability and practicality?
[Measurability 01]
d) Given this object-sensed specificity, how will you correctly form the object-perceptivity of your
stakeholders?
e) How will you measure this object-perceptivity, and with what validity, reliability and practicality?
[Measurability 02]
f) Given this object-perceptivity, how will develop the object intelligibility of your stakeholders?
g) How will you measure this object intelligibility, and with what validity, reliability and practicality?
[Measurability 03]
h) Given this object-intelligibility, most importantly, how will you establish the object intentionality of your
stakeholders?
i) How will you measure this object intentionality, and with what validity, reliability and practicality?
[Measurability 04]
j) Given this object-intentionality, how will you predict stakeholder object-activity behavior to your project
under (a)?
k) How will you measure this object-activity behavior, and with what validity, reliability and practicality?
[Measurability 05]

10.16 Study Figure 10.2, and apply it to you concrete business situation and focus on your moral obligations to your
stakeholders. Keeping Figure 10.2 in mind, do the following:

a) How do you present the moral aspects of your business project to your stakeholders?
b) How can you vouch the overall stakeholder project is legal?
c) How can you vouch the overall stakeholder project is ethical?
d) How can you vouch the overall stakeholder project is moral?
e) How can you vouch the overall stakeholder project is good for all stakeholders?
f) How can you vouch the overall stakeholder project is fair for all stakeholders?
g) Next, how will you get your stakeholder to accept this project as legal, ethical, moral, good and fair?
h) How will you ensure your stakeholder do not reject this project as legal, ethical, moral, good and fair?
i) How will you develop their moral goodness and virtue to do (g) and avoid (h)?

10.17 Not all good people are virtuous or rightly ordered; some good people may still be disordered in some areas of
their life. Hence, beyond the virtues of temperance, courage, justice and prudence, moral philosophers
postulate a fifth virtue that conditions all these four cardinal virtues to make the person good: charity or
benevolence. Any willful exercise is twofold: the primary exercise out of which we are moved, and the
secondary exercise by which we execute the judgment to act. The primary exercise defines goodness; the
secondary exercise defines rightness. As a business executive involved currently in turning our company
around:

a) How would you define and exercise the virtue of temperance as moral goodness?
b) How would you define and exercise the virtue of temperance as moral rightness?

418
 c) How would you define and exercise the virtue of executive courage as moral goodness?
d) How would you define and exercise the virtue of executive courage as moral rightness?
e) How would you define and exercise the virtue of justice to all stakeholders as moral goodness?
f) How would you define and exercise the virtue of justice to all stakeholders as moral rightness?
g) How would you define and exercise the virtue of executive prudence as moral goodness?
h) How would you define and exercise the virtue of executive prudence as moral rightness?
i) How would you define and exercise the virtue of executive benevolence as moral goodness?
j) How would you define and exercise the virtue of executive benevolence as moral rightness?

10.18 Consider the following Propositions of Virtue Ethics and respond to the questions that follow:

Proposition 35: Moral goodness always requires that we strive to realize the right. Failure to strive to realize
the right is moral failure.
Proposition 36: Moral goodness as a striving is not simply wishing; it is actual self-motivation willing to
consider all the factors necessary to moral living, to deliberate about them, and to execute the
decision. That is, moral goodness is found in the exercise of the will to do and be good – this
is virtue ethics.
Proposition 37: The contrary of moral goodness is not the willingness to be bad, but the failure to be good. The
will becomes or is morally bad in its failure to consider all the values and factors that pertain
to moral life.
Proposition 38: We grow in virtue only if we exercise right acts in relation to that virtue. If we do not exercise
right or virtuous acts, we do not become rightly ordered or virtuous. Exercise needs both
encouragement to execute the act and the wisdom to know which act to execute, in which case
exercise follows reason.
Proposition 39: Not all good people are virtuous or rightly ordered; some good people may still be disordered
in some areas of their life. Hence, beyond the virtues of temperance, courage, justice and
prudence, moral philosophers postulate a fifth virtue that conditions all these four cardinal
virtues to make the person good: charity or benevolence
Proposition 40: Charity or benevolence is a virtue of striving, whereas temperance, courage, justice, and
prudence are virtues of attaining. Benevolence (or charity) is the moral description for a
person who literally strives to realize rightness.
Proposition 41: Any willful exercise of virtue is twofold: the primary exercise out of which we are moved, and
the secondary exercise by which we execute the judgment to act. The primary exercise
defines goodness; the secondary exercise defines rightness.
Proposition 42: Virtues are constant interior dispositions that produce promptness and facility of action as well
as joy in acting; but they do not pertain per se to goodness. As rightly ordered interior
dispositions, virtues enable us to intend and execute other rightly ordered acts.

a) How do you understand and apply each of these propositions to you as a business executive?
b) How will you understand and apply each of these propositions to your specific executive situation?
c) Apply Propositions 35-37: How do you define, internalize and realize moral goodness and avoid moral
badness in you, especially as a business executive?
d) Consider Proposition 38: How do you use this Proposition to cultivate moral goodness and diminish moral
badness, and to what effect?
e) Consider Propositions 39-40: How do you use benevolence to nurture moral goodness and diminish moral
badness, and to what effect?
f) Consider Propositions 41-42: How do you use these propositions to exercise the virtue of benevolence that,
in turn, will empower you to nurture moral goodness and diminish moral badness, and to what effect?

10.19 Cardinal virtues concern rightly ordered lives, and acquired cardinal virtues are accessible to all people. Being
virtuous is more than having a particular habit of acting, e.g., prudence. Rather, it means having a fundamental
set of related virtues that enable a person to live and act morally well. The cardinal virtues do not characterize
the ideal executive nor exhaust the entire domain of executive virtue. They enable a person to be sufficiently
rightly ordered to perform morally right action. Beyond the cardinal virtues, other virtues may be needed and

419
 important, but the cardinal virtues perfect the fundamental anthropological dimensions of being human that are
needed for integrated virtuous behavior.

a) Identify, define and specify your set of cardinal virtues unique to you as a person but that will enable you
to live well and act morally well.
b) Identify, define and specify your set of cardinal virtues unique to you as a business executive, but one that
will empower you to be rightly ordered in all that think, decide and do.
c) What is the role of benevolence in this set of cardinal virtues, why and with what effect in the corporate
world?
d) What is the specific role of prudence in this set of cardinal virtues, why and with what effect in an
executive profession?
e) What is the unique role of justice in this set of cardinal virtues, why and with what effect in you as an
executive?

10.20 In implementing justice in your dealings with all stakeholders, consider the following propositions on justice,
and accordingly, see how you could strategize justice in your company:

a) The subject of justice is the will; the object of justice is life’s needs.
b) Justice is strictly concerned with rectifying operations of external acts, primarily in dealing with others,
whereas the other two moral virtues of fortitude and temperance rectify our passions, mostly in dealing
with ourselves.
c) The essential matters of justice are external operations or affairs, not passions. The due measure of
external act is justice: justice is doing things right.
d) Through justice, our external operations and acts are made good. We are called “good” through justice,
because it is only through right and just operations that our wills are rectified.
e) The rectification attained in justice occurs through attaining the mean.
f) Though, prudence is the essential “goodness” of the moral virtues, justice is the chief of moral virtues.
The attainment of the rule by which actions are called just simply depends upon prudence.
g) Justice as a natural inclination to observe the due measure among persons cannot attain the rule of reason
except as it is moved and directed by prudence, which provides the mean and is itself the form, rule, and
measure of justice.

420
 Chapter 11
The Ethics of Corporate Interpersonal Trust
Building trust and living interpersonal trust are crucial corporate executive virtues that are needed today.
Once you have developed and solidified a high level of genuine interpersonal trust with all your
stakeholders, especially customers, suppliers and employees, then you are on the right path of managing
and transforming your company. A high-level of interpersonal trust between all stakeholders and
corporates in a business situation will break down communication barriers, foster serious conversation
and sharing of ideas, and will eliminate corporate transactional anxieties of fear, mistrust, guilt, rigidity,
blame and resentment. When stakeholders trust you and you trust them, then, you speak freely, they speak
freely, and your mutual sustained transparency is a gateway to survival, revival and sustained corporate
recovery and transformation, and steady growth and prosperity. Conversely, when there is low trust, high
mistrust and high distrust among stakeholders in a business situation, communications and conversations
are stressed and fragmented, teamwork and team spirit are very low, and the company is heading toward
its ruin and extermination. Such is the crucial role of interpersonal trust in business. This Chapter
explores the crucial phenomenon of corporate interpersonal trust. We review various concepts, definitions
and theories of trust from the management literature in general, and from the marketing field in
particular, to derive psychological, behavioral, ethical and moral principles of corporate trust, trusting
relations, and trusting strategies.

“You can have all the facts and figures, all the supporting evidence, all the endorsement that you want, but if
you don’t command trust, you won’t get anywhere,” (Nail Fitzgerald, Former Chairman, Unilever).

“You can’t have success without trust. The word trust embodies almost everything that 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, especially businesses
that deal with the public,” (Jim Burke, former Chairman and CEO, Johnson & Johnson).

“You cannot prevent a major catastrophe, but you can build an organization that is battle-ready, that has high
morale, that knows how to behave, that trusts itself, and where people trust one another. In military training, the
first rule is to install soldiers with trust in their officers, because without trust they won’t fight” (Peter Drucker,
cited by Stephen MR Covey (2006: 47)).

“While corporate leadership still has a long way to go in restoring trust, the research makes one thing clear:
Americans expect CEOs to take the lead, make a meaningful commitment to trust-building, be accountable – and
deliver on the promise of trust through corporate behavior,” Rich Jernstedt, CEO of Golin/Harris.

Trust is one thing that changes everything in an organization. All things are rooted in trust.
While ethics is fundamentally important and necessary, it is absolutely insufficient. Trust is hard,
measurable, and impacts everything else in relationships, organizations, markets, and societies.
Financial success comes from success in the marketplace, and success in the marketplace comes
from success in the workplace, and the heart of all success is trust. Trust is the Ultimate Root and
Source of our Influence. Low trust causes friction, whether it is caused by unethical behavior or
by ethical but incompetent behavior (because even good intentions can never take place of bad
judgment). Low trust is the greatest cost in life and in organizations, including families. Low
trust creates hidden agendas, politics, interpersonal conflict, interdepartmental rivalries, win-lose
thinking, defensive and protective communication – all of which reduce the speed of trust. Low
trust slows everything, every decision, every communication, and every relationship (Covey,
Stephen M. R. (2006) Speed of Trust, pp. xxiv-xxv).

Simply stated, trust means confidence. The opposite of trust – mistrust – is suspicion. When
you trust people, you have confidence in them – in their integrity and in their abilities. When you

421
mistrust people, you are suspicious of them – their integrity, their agenda, their capabilities, or
their track record. “The moment there is suspicion about a person’s motives, everything he does
becomes tainted,” Mahatma Gandhi. But when you begin to trust people in an organization,
everything begins to change – you increase speed of decision and actions, you lower cost, you
increase sales, you increase profits and growth – you improve results in all areas. The speed of
trust affects the speed of the marketplace you control. On the contrary, low trust (i.e., bad
relationships) slows everything (Covey 2006: 9).

Before we trust others, do we trust ourselves? If we cannot trust ourselves, we will have a
hard time trusting others. This personal incongruence is often the source of our suspicion of
others. We judge ourselves by our intentions and others by their behavior. Hence, the fastest
ways to restore trust is to make and keep commitments – even very small commitments – to
ourselves and to others (Covey 2006: 12-13).

The Economics of Trust: Low Trust Tax

“Mistrust doubles the cost of doing business,” (John Whitney, Columbia Business School).
“Widespread distrust in a society … imposes a kind of tax on all forms of economic activity, a tax
that high-trust societies do not have to pay,” (Francis Fukuyama: Trust). When trust is high,
speed of decisions goes us, and costs go down. Consider the following cases:

Warren Buffett, CEO of Berkshire Hathaway, in 2004 completed a major acquisition of

McLane Distribution (a $23 billion company) from Wal-Mart. Both companies as listed public
corporations were subject to all kinds of market and regulatory scrutiny. Typically a major
merger of this size would mean “due diligence” by lawyers, auditing by auditors and accountants
to verify mountains of information. But in this case both parties had high trust with each other,
and a deal was made in less than two hours, and the deal was cleared and completed in less than a
month. In a management letter that accompanied his 2004 annual report, Warren Buffet wrote:
“We did no ‘due diligence.’ We knew everything would be exactly as Wal-Mart said it would be –
and it was.” High trust is high speed, low cost.

Herb Kelleher, chairman and CEO of Southwest Airlines, is another example of great trust.
Walking down the hall one day, Gary Barron, then executive VP of the $700 million maintenance
organization for all Southwest, presented a three-page summary memo to Kelleher outlining a
proposal for a massive reorganization. On the spot, Kelleher read the memo, asked one question
that Baron responded satisfactorily, and Kelleher concluded: “Then it’s fine with me. Go ahead.”
The whole interaction took about four minutes. Kelleher was a trusted leader, and he also
extended trust to others. He trusted Baron’s character and his competence. The deal moved with
incredible speed. High trust is high speed, low cost. Low trust is a tax, while high trust is a
dividend.

According to a study by Warwick Business School in the UK, outsourcing contracts that are
managed based on trust rather than on stringent agreements and penalties are more likely to lead
to trust dividends for both parties – as much as 40% of a total value of a contract. High trust is
high speed, low cost.

422
 “Trust is something you can do something about, and probably much faster than you think. …
Nothing is as fast as the speed of trust. Nothing is as fulfilling as a relationship of trust. Nothing
is as inspiring as an offering of trust. Nothing is as profitable as the economics of trust. Nothing
has more influence than a reputation of trust. Trust truly is the one thing that changes everything.
And there has never been a more vital time for people to establish, restore, and extend trust at all
levels than in today’s global society” Stephen MR Covey (2006: 26).

In his best seller, The World is Flat, New York Times columnist Thomas Friedman observes
that this new “flat” economy is all about partnering and relationships that thrive or die based on
trust. “Without trust, there is no open society, because there are not enough police to patrol every
opening in an open society. Without trust, there can also be no flat world, because it is trust that
allows us to take down walls, remove barriers, and eliminate friction at borders. Trust is essential
for a flat world.

Exhibit 11.1: Myth vs. Reality regarding Trust

[See Stephen MR Covey (2006), Speed of Trust, p. 25).

Myth
Trust is a soft and emotional concept and
fuzzy
Trust is slow and slowing operations
Trust is solely built on integrity.
You either have trust or you do not; and
there is nothing you can do about it.
Once lost, trust cannot be restored.
You cannot teach trust.
Trusting people means risky and
vulnerable.
Reality
Trust is a hard, measurable and quantifiable concept,
construct and strategy that affect speed and cost of corporate
operations.
Nothing is as fast as the speed of trust. Trust can leverage
any strategic advantage.
Trust is a function of integrity (ethics and character) and
competence (skills, expertise).
You can create trust when absent or destroy when present.
It is up to you to build trust in you and in your organization.
Though difficult, in most cases you can restore trust.
Not all trust is inherited. When not inherited it can be
nurtured, cultivated, taught and learnt.
Not trusting people is a greater risk and more vulnerable.

How does Trust Work?

Trust is one of the most powerful motivations and inspirations. People want to be trusted.
They respond to trust. They thrive on trust. How does trust work? Trust is a function of at least
two things: character and competence. Character includes ethics, your integrity, your motives,
your intentions and your intent with people. Competence includes your capabilities, your skills,
your outcomes or results, your track record. And both are vital. Character and competence are
both necessary. In his best seller, The World is Flat, New York Times columnist Thomas
Friedman observes that this new “flat” economy is all about partnering and relationships that
thrive or die based on trust. “Without trust, there is no open society, because there are not enough
police to patrol every opening in an open society. Without trust, there can also be no flat world,
because it is trust that allows us to take down walls, remove barriers, and eliminate friction at
borders. Trust is essential for a flat world. Character is a constant; it is necessary for trust in any
circumstance. Competence is situational; it depends upon what the circumstance requires.

423
 Most of us do not know how powerful we are in building trust, in changing the level of trust in
any relationship, as we do not know how to build trust “from inside-out,” writes Stephen MR
Covey (2006: 33). The key is in understanding and learning how to navigate in what he calls the
“Five Waves of Trust” that starting from within work outwards life a ripple effect. The five
waves of trust model serves as a metaphor for how trust operates in our lives. It begins with us
individually, continues into our relationships, expands into our organizations, and encompasses
our global society at large – this is the “inside-out” paradigm of this model. To build trust with
others, we must start with ourselves. The five waves also form a structure for understanding and
making trust actionable in our day-to-day family and corporate life. Summarily, the five waves
are presented in Exhibit 11.2.

The First Wave of Trust – Self Trust – is all about credibility – that is, demonstrating the
integrity, intent, capabilities and track record that one represents. These four qualities are primary
qualifications of prosecutor lawyers in selecting members of the jury; they make you believable,
both to yourself and others. It all boils down to two related questions: Do I trust myself – i.e., -
Do I believe myself that I am believable? Second, am I believable that others can trust? Simple
instances can prove self-trust: do I keep the promise I made to exercise daily? Do get by alarm
and do the exercise the first in the morning? Do I set goals and commitments, and then
consistently fail to fulfill them till I lose my confidence in myself? It is reported that while most
Americans make New Year Resolutions, only 8% Americans actually keep them.

Exhibit 11.2: The Five Waves of Trust from Inside-out

[See Stephen MR Covey (2006), Speed of Trust, pp. 34ff).

The Wave: Definition Operation

Key Variable
The First Wave: Self-trust is confidence we have in ourselves,
Self-Trust: Credibility in our ability to set and achieve goals, to keep
commitments, and the like.
The Second Wave: There are 13 behaviors crucial to high-trust
Relationship Trust: leaders around the world: e.g., talk straight,
Consistent behavior demonstrate respect, create transparency,
right wrongs, show loyalty, deliver results, get
better, confront reality, clarify expectations,
be accountable, listen first, keep
commitments, and extend trust.
The Third Wave: Align your character and competence to
Organizational Trust: organization’s systems, symbols and
Alignment structures that promote trust or reduce
mistrust
The Fourth Wave: Market Brands powerfully affect customer behavior
Trust: Reputation and loyalty. Customers always refer, buy and
patronize high-trusted brands.
The Fifth Wave: By contributing or “giving back” we
Societal Trust: counteract suspicion, cynicism, and low-trust
Contribution inheritance taxes within our society.
How credible am I? How believable am I? A good
and strong character with high competence of
credibility, judgment, and influence deserves and
attracts trust from others.
How do you establish and increase “trust accounts”
with others? Exercise the 13 behaviors: they can be
learnt, cultivated and acquired by any individual at
any level within an organization, including the
family. The net result is significantly increased
ability to generate trust with all stakeholders.
How do you build, sustain and enhance trust in
organizations such as family, schools, colleges,
workplace, office, boardroom, corporation,
governments, church, clubs and associations?
How can your personal brand (reputation) and that
of the company reflect the trust of customers,
suppliers, investors and local and national
communities?
How can our “contributions” create value for others
and for society at large? How can we inspire others to
create value and contribute as well?

Case 5.1: Managing Trusting Relationships in Indian Organized Retailing

The Indian retail market, which grew at 11.2% compound annual growth rate (CAGR) during 2007-2009, is
estimated to grow from $427 billion in 2010 to $637 in 2015, with food and grocery accounting for the major share
(Shekhar 2011). The Indian retail market is broadly classified into the unorganized sector and the organized sector.
Unorganized retailing is the traditional form of retailing in India with the retail outlets located near residential areas
424
and mostly run by unlicensed retailers. The unorganized market is a seller’s market with a limited number of brands
and little choice available to customers. It is unregulated, free of tax laws, and grows very slowly.

Organized retailing refers to the modern form of formal trading activities such as registered shops, malls,
supermarkets, factory outlets, and supermalls, and is generally located in high traffic commercial areas. For instance,
while the clothing market is highly fragmented with numerous organized and unorganized sectors operating under
various retail formats, the Indian apparel and footwear industry is highly organized and represents currently the
largest market opportunity for the organized retailers. Branded apparel industry is about 20% of the total apparel
market in India. Men’s clothing accounts for about 42% of all branded apparel sales, while women’s apparel
constitutes just 36% and children’s wear is at 22% currently. While the unorganized retail market is still dominating
in India, the organized sector rapidly grew at CAGR19.5% during 2007-2009, thanks to the emergence of the large
middle income class which seeks for quality goods and services. The Indian retail market contributed 10% to GDP
and 6.5% of employment in 2009.

Despite uncertainty and slowdown in the Indian economy, India has recorded sustained growth in merchandise
retail during the decade 2002-2012, and is expected to do so in the coming decade. This is primarily because India’s
GDP has been growing at an average 6% during this period. Growth in GDP translates to growing per capita income
to increased discretionary spending to growing per capita consumption of food and apparel and entertainment, which
means augmented merchandise retail trade. Also, owing to rapid urbanization, India’s urban share in merchandise
retail is estimated to grow from 40% in 2002 and 48% in 2012 to nearly 56% in 2021. Today in India (2014) there are
53 cities with populations exceeding a million, while there were only 23 such cities in 1991. But Indian organized
retail will continue to face rigid government regulations, complex taxation rules, and high cost of real estate in urban
areas. Organized retail is capital-intensive with long gestation period. Hence FDI liberalization in the retail sector
(which is a State subject) would be critical.
The Indian organized retail market began to grow steadily since 1991 with the liberalization of the retail markets
to FDI. The father of organized retailing in India is presumably Kishore Biyani who first introduced the Pantaloons
retail chain in India (Biyani later pioneered three upscale linked outlets: Brand, Brand Factory, and the City Bazaar).
Currently, organized retailing is sprawling in major cities of India with shopping centers, multiplex malls, and
supermalls that offer variety shopping, entertainment and food all under one roof. The free flow of FDI into
organized retailing in India is periodically resisted by politicians who fear that the swelling organized retail sector
may destroy the neighborhood kirana stores, thus undermining Indian culture.

Apparently, single brand retail is doing well in India. In 2006, the Indian government allowed only up to 51%
FDI in single brand retail. This has increased FDI in Indian retailing. In February 2010, the Indian government
allowed 100% FDI in single brand retail, in wholesale cash and carry and 51% FDI in multi brand retail. This may
intensify both domestic and foreign competition in organized retailing.

The organized sector, however, has its own problems of supply side of procurement with fragmented sourcing,
unpredictable availability, unsorted food provisions and daily fluctuating prices, and problems of demand side of high
consumer expectations of product quality, variety, hygiene, and fresh produce, reasonable prices, coupled with fast
changing lifestyles and demographic shifts and product obsolescence. Moreover, with the advent of information and
communication technology (ICT), Indian consumers are expecting integrated customized solutions to their
multidimensional demands. Even after two decades of organized retailing in India margins are low and do not match
with foreign counterparts. In this context, building strong trusting relations with suppliers and customers becomes
imperative and challenging. A leading organized retailer like Brand, Brand Factory, Big Bazaar, Pantaloon, Shoppers
Stop, Lifestyle, and the like may handle as many as 400,000 products and services with millions of transactions per
day. The retailing phenomenon can even be more complex and demanding during particular festivals and holiday
seasons.

Malls and independent stores are still struggling in India. They have found the capital cost of investing in land
and filling the go-downs a losing proposition. High rentals between 15-20% of sales and low footfalls in malls, have
led many a mall to insolvency and bankruptcy. Consumer behavior also revealed that most Indians do not like or
afford to spend on premium retail prices. Most mall consumer spends are mainly at the food-courts and the
multiplexes (Krishna 2015: 62-63). “One of the reasons why the kiranas thrive is because retailers, barring a few,
have not made modern retailing a career option,” said B. S. Nagesh, vice-chairman of Shoppers Stop, one of the
largest organized retailers in India, in an interview with the Businessworld (see BW Businessworld, June 15, 2015: p.
64). Of the 450 million workers in India, only 30 million (less than 6.7%) are in he organized sector, while the rest

425
continue in the “informal” employment sector, according to Kronos, the global human resource technology firm.
Most of the informal workers experiment with entrepreneurship and the kirana store offer the lowest market-entry
barrier. One can start a kirana store with small finance from family and friends. Presumably, it is the same spirit
which the Uber and Ola have tapped to make taxi driver their partners. Some of these drivers actually also own small
shops and drive taxis for that extra income (Krishna 2015: 64).

Historically, the Indian consumer has always been hyper-local, preferring his neighborhood baniya. There is a
rural, semi-urban, agro-social and cultural (linguistic) bonding and mutuality between the buyer and the seller, the
customer and the kirana vendor, between the neighborhood stores and the neighboring small communities that are
unique to multi-linguistic and culturally diverse India and that are unparalleled in other large urban or city
environments. “Our goal has always been to bring the experience of a neighborhood shop in a large store, which is
convenience and great service” says Kishore Biyani, Chairman, Future Group. The big retailers have underestimated
the underlying strength of the Kiranas and their importance in the unorganized job market. Organized impersonal
retailing with its mass-distribution and possibly one-time, disconnected, discreet transactional nature, goals and
objectives may not be able to capture, attract, and retain such deep buyer-seller loyalties that the unorganized kirana
stores command. Giant retailers are learning this now and are seeking partnership with rural kirana vendors (Krishna
2015).

How Organized Online Marketing and Kirana Shops can support Each other
In 2006, when large retail giants in India such as Reliance Industries, Future Group, the Aditya Birla Group, and
others invested Rs 40,000 crore (then US$ 10 billion) to expand organized retailing, there was strong sentiment that
this project would kill the neighborhood kiranas. Today in 2015, barely nine years later, the opposite has happened:
the retail giants seem to empower the kiranas to survive, blossom and prosper. Neighborhood kirana stores know
their customers like none. Giant retailers like Amazom.com, Brand, Brand Factory, Pantaloons, and City Bazaar have
now learnt that partnering with them is their best bet. Jeff Bezos, the founder of Amazon.com, wants to use the
Kirana network, earlier seen as competition, to grow retail sales. His target is to bring India’s 5,000 kiranas under
Amazon umbrella within two years. His kirana business model is simple: the kirana store earns Rs 20 for every
package delivered to the customer’s doorstep, and Rs 15 for every packet picked up by the customer from his store.

Bhuvaneshwari Rice Shop, founded in 2012, is a 500 square foot kirana store of Madan Mohan Reddy, age 21, of
Bangalore. He works hard over 17 hours a day and makes around Rs. 50,000 a month. He is tech savvy graduate,
ambitious, and uses a large smartphone. A digital literate, he knows about products such as the mobile wallet and is
open to cash-on-delivery to win new customers. Some 18 months ago, January 2014, Amazon.com, the $89 billion
online retail giant, began its “I Have Space”(IHS) program using the street corner mom & pop kirana network to
deliver products to Amazon customers. Reddy saw his future instantly, made a phone call and registered as a delivery
partner. Rest is history. He provided his PAN card details to Amazon.com, and the latter gave him a Samsung tablet
and a palm-sized credit card payment device to connect the payments to Amazon’s seller app and the cloud server on
the backend. Reddy has not looked back since. Because of Amazom.com he has extra reach and more customers. His
sales have increased by Rs 20,000 per month and he makes an additional Rs 15,000 by delivering products ordered on
Amazon at his store. When customers come to his store to pick up their Amazom.com orders, they buy products and
services from his stores. Moreover, when he began delivering Amazon products doorstep to some of his loyal
customers, they asked him if he would deliver groceries too. Madan earns currently Rs 85,000 a month.

Madan’s success story is infectious. The Amazon HIS program is catching on in Bangalore and will be scaled up
in other major cities of India. This recent kirana attention is “because the kiranas know the customer better than
anybody and their services add more value to our customer service experience,” says Amit Agarwal, managing
director of Amazon India. The kiranas may know the customer more, but do not capture that information, while
Amazon can use this data mine for advantage.

Kiranas are also hubs for booking rail, air and bus tickets along with centers for filling up passport and tax forms
and mobile recharge vouchers to supplement their revenue. Over the years, kiranas have widened their services to
include selling apparel, mobile repairs, and ironing clothes. Reports by CRISIL and Ernst & Young estimate the total
number of kiranas in India at 12 million outlets and they clearly seem to dominate the $550 billion retail market. The
organized retail sector accounts for less than 8% of Indian retail sales, and this share has crept up only by 3% during
the last ten years. If you can’t beat them, join them, is the current Amazon strategy. While Flipkart and Snapdeal

426
have not made the kirana partnership their immediate agenda, Kishore Biyani’s $3 billion Future Group is committed
to learning from and linking with the Kiranas.

References:
Bahree, Megha (2011), “India Unlocks Door for Global Retailers,” The wall Street Journal, November 25, A1.
Bloomberg Business Week (2011), “Wal-Mart waits with Carrefour as India wins Instant gain: Retail,” November 30.
Ministry of Commerce (2011), “FDI Policy in Multi Brand Retail,” Government of India, November 28.
Shekhar, Raja B. (2011), “Impact of Service Quality on Apparel Retail Customer Satisfaction – A Study of Select
Metropolitan City of Hyderabad,” Journal of Management Research, 3:2, 13-26.
The Indian Economist (2011), “Indian Retail Reform: No Massive Rush,” December 2.
The Indian Economist (2011), “Indian Retail: The Supermarket’s Last Frontier,” December 3.
Krishna, Vishal (2015), “Lucrative Liaisons,” in BW Businessworld June 15, 2015, pp. 62-66).

Ethical Questions:
1. Retailing is a buyer-seller trust building game. As an organized retailer executive, how do you plan and strategize
building the trusting brand community of suppliers and customers?
2. As a middleman between brands suppliers and highly brand-conscious customers, what vulnerabilities do you
foresee on both sides, and how do you plan on working round such vulnerabilities?
3. Sophisticated organized retailing today needs highly specialized talent of informed and problem-solving
salesmanship and building lifetime loyalties among major target markets – how will you recruit, train, develop
and retain such sales force retailing talent, and all these with high principled ethics?
4. Taxation still favors small businesses in India; moreover, regulations restrict real estate purchases, especially
agricultural land for safeguarding backward integration of food production and logistics. In this context, how
will you build trusting relationships with government authorities and regulations enforcement people?
5. Discuss the ethics of 100% FDI in single brand retailing in India since February 2010.
6. Given 100% FDI in single brand retailing study its social, ethical and moral impact on the single brand domestic
industry as well as on the lifestyles of the Indian consumer. For instance, will it intensify both domestic and
foreign competition in organized retailing?
7. As a corporate retailing executive in India, how would you empower organized retailing by building trusting
relationships, and even with competition?
8. As a corporate organized retailing executive in India, how would you design and build a win-win partnership by
building trusting relationships with the immense 12-million kirana network in India? What will be its ethical
ramifications?

Case 5.2: Bain sues EY over $60-m loss in Lilliput Kidswear

[See Reuters (2014), “Bain sues EY over $60-m loss in Lilliput Kidswear,” Business Line, Saturday, June 14, 2014, Kolkota, p. 1].

Global private equity firm Bail Capital Partners LLC (BCPL) is suing EY (formerly Ernst & Young) in a US
court claiming that the auditing firm cost it roughly $60 million by advising it to invest in Lilliput Kidswear (LK), a
children’s clothing company in India. BCPL alleges that it invested around $60 million in LK in May 2010 for a non-
controlling equity interest of 30.99 percent stake, based on false financial statements that EY had audited and
certified. BCPL and ten other subsidiaries of BCPL have sued Ernst & Young Global Ltd in a Massachusetts court,
claiming that their investment in LK is currently “rendered worthless.” EY, however, retorted that “these allegations
of wrongdoing are baseless and EY will vigorously defend this matter.”

BCPL who had invested the capital in Lilliput in 2010 had plans to expand LK before taking it to an initial public
offering (IPO). Around 2012, BCPL was alerted to serious problems with the accounting in LK via a call from a
whistleblower, soon after an IPO for LK was approved. BPCL halted the LK IPO process after investigating the
whistleblower’s claims and finding inflated sales at LK, according to the suit. The suit alleges that BPCL, which has
a long standing global relationship with EY, was specifically targeted by EY to invest in LK, because the Boston-
based BPCL had the resources to pay a higher investment price of LK and the prestige and knowledge to take the
company to an IPO. According to a copy of the complaint filed with the Stuffolk Country Court, obtained by Reuters,
the law suit also alleged that BPCL invested in LK because it relied on false financial statements and EY’s false audit
opinions, and that EY continued to certify LK’s financial statements “even as Lilliput’s fraud grew with EY’s active
assistance.” BPCL is suing EY for “fraud, aiding and abetting fraud, negligent misrepresentation, and unfair and
deceptive trade practices based on EY’s involvement in the scheme to defraud BPCL.”

427
 Kids under the age of 12 constitute close to a quarter of the total population of India. The Kids-wear market is
growing fast and KPMG estimates this market to grow from Rs. 30,000 crore in 2013 to Rs. 43,000 crore by 2021.
However, this market is highly fragmented with the 3 major players in the organized sector till 2013, namely Lilliput,
Gini & Jony, and Catmoss, occupying a meager 5% of the total market. The uncontrolled expansion that these
companies have done showed its effects in the form of high debt-ridden financials for these retailers along with stiff
competition from mom-and-pop stores. Lilliput Kids-wear, which ventured into direct retail in 2003, had 290
exclusive stores in India and 40 abroad. Not only was it forced to shut shops, but it also had a debt of Rs. 850 crore in
its books (as of 2013). However, with other players such as Mahindra Group’s Mom & Me, and other international
players like Zara, Gucci etc. also entering the Indian market, the overall awareness for organized retail in this segment
has gone up.

Ernst & Young (EY) had a longstanding relationship with Bain Capital by virtue of providing audit and advisory
services to the group companies for years. EY advised Bain to invest in Lilliput Kids wear, for which it was the
auditor, since January 2010. The audited financial statements presented to BCPL showed a thriving business with
growing revenues and earnings while the reality was in stark contrast. LK had intentionally falsified its financial
statements to hide its poor performance, with inaccurate revenues, costs, with loans outstanding as well as inflated
sales figures. EY certified LK’s financial statements for more than a year and provided those certifications to Bain.
The situation came to a head when Bain was alerted by a whistleblower about the fraud happening in LK. After
investigating these claims, Bain decided to stop a planned IPO of LK’s stock and sued EY for $60 million for “fraud,
aiding and abetting fraud, negligent misrepresentation, and unfair and deceptive trade practices."

According to Bain’s lawsuit, the fraud at LK was done with the full knowledge and assistance of EY, who knew
that LK had inflated its sales, concealed loans, and forged bank confirmations, yet assured Bain about the veracity of
the financial records. Allegedly, EY was in full complicity with LK and shared details of its planned audit procedures
with Lilliput in advance and even allowed Lilliput to perform certain audit testing on itself. Seemingly, it even went
to the extent of issuing unqualified audit opinions and later eliciting LK’s help in back-filling its audit work papers to
show that it had conducted audit procedures that it had in reality not performed. EY served both as Lilliput's outside
statutory auditor, having the duty of performing unbiased check on the retailer's financial statements as well as seller's
agent, i.e. LK’s financial advisor to bring on board new investors wherein its compensation was based on the selling
price of LK's shares – an obvious conflict of interest. In fact, EY gained financially from both sides by earning a
lucrative fee as auditor as well as getting a 'success fee' for obtaining a high valuation for Lilliput.

Recent initiatives incorporated in the Companies Act 2013 of India, provide some relief to PE investors like
BPCL. Section 147 and 448 would tighten the noose on auditors intentionally endorsing false and misleading
financial statements, reports etc. The government is also planning to institute a Market Research and Analysis Unit to
check for financial scams and administer market surveillance on defaulting companies as well as develop an early
warning system for potential fraudulent activities in companies.

The case involves three key stakeholders – Bain Capital Partners, Lilliput Kids wear and Ernst & Young. It
brings to light the classic case of breach of trust. This is arguably the most high-profile alleged accounting fraud case
which also involves negligent misrepresentation, and unfair and deceptive trade practices. The events in case have led
to breakdown of the mutual trust between Bain and EY, painstakingly built over several years. This is likely to cause
a big blow to their professional relation as Bain would be more suspicious of any future dealings with EY, thus
increasing the transaction cost due to higher monitoring requirement. In today’s world where all companies are
lobbying to get their way around various policies, controlling majority of the world’s resources, it becomes extremely
important to see the impact of such unethical and unfair practices on the overall development of a nation, especially
developing nations such as India.

Companies manage to achieve strategic efficiencies as a result of mutual trust that develops as a result of
longstanding ties with their partners. This enables companies to reduce various transactional costs, and gain mutually.
This is how the relationship between Bain Capital and EY can and should be defined. However, by trusting EY and
not taking a second opinion, Bain managed to save on the due diligence costs but faced with a much bigger loss as a
result of EY’s inaccurate information. Providing inaccurate information with the intent to misguide Bain Capital was
morally incorrect on EY’s part, and would greatly hamper their working ties, and any strategic benefits that they
could have got otherwise in the long run .

428
 As per the current guidelines of the Central Vigilance Commission of India’s Code of Ethics for chartered
accountants: a) “A professional accountant should be straightforward and honest in performing professional
services;” b) “A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or
influence of others to override objectivity,” and c) “When in public practice, an accountant should both be, and
appear to be, free of any interest which might be regarded, whatever its actual effect, as being incompatible with
integrity and objectivity.”

Bain Capital and TGP Capital were the primary affected parties as the value of their investment was eroding
rapidly. Lilliput stands to lose not just its current source of funding but also a tarnished image would make it difficult
for it raise funds in the future. Lilliput's founder, Sanjeev Narula, initially cooperated with the audit but then stopped,
protesting that the probe went too far. Subsequently the High Court ordered that the audit dispute be settled by an
arbitration tribunal.

Sources close to Bain and TPG had acknowledged later on that their due diligence failed to find irregularities
prior to the investment. The sources say the buyout firms were encouraged by the fact that Lilliput had an independent
board, a reputable auditor - the local affiliate of Ernst & Young, S.R. Batliboi & Co - and prior ownership by an
established, large, local private equity firm. However, there should no compromises with the procedure of due
diligence, as even some corporations of South Korea which were deemed “too big to fail” went bankrupt and led to
the Asian Financial Crisis of 1997. When asked for his opinion on the issue, the LK founder, Narula, very rightly said
that the whole situation could have been resolved better through face-to-face talks with Bain Capital than by the court.

Ethical Questions:
1. Who is legally wrong: BPCL for suing EY or EY for allegedly targeting BPCL to invest in LK? Why?
2. Who is ethically and morally wrong: BPCL for suing EY or EY for allegedly targeting BPCL to invest in LK?
Why?
3. EY was an auditor of LK’s financials and Bain Capital had a non-controlling stake of 30.99% in LK. How do you
ethically and morally assess “conflict of interest” in these transactions?
4. To what extent does BPCL’s suit against EY violate the long standing trusting relationships between the two
companies, and why?
5. Should BPCL have taken a “second opinion” on LK, and not univocally trust on EY’s certified audit opinions on
LK, especially after receiving the whistleblower’s call in 2012?
6. Can BPCL legally and ethically claim redress for its blind faith in EY’s audit opinions of LK?
7. To what extent is EY’s involvement in targeting BPCL to invest in LK a “fraud, aiding and abetting fraud,
negligent misrepresentation, and unfair and deceptive trade practice”?
8. For building and reinforcing trusting relationships between long-standing partners such as EY and BPCL, how
would you resolve this BPCL’s suit against EY amicably and out of court?

Case 5.3: Building Indo-Japan Trusting Business Relationships

In his telephonic conversation with Narendra Modi soon after the latter’s election victory, Japanese Prime
Minister Shinzo Abe said that he would like to work closely with Modi towards further development of Japan-India
Strategic and Global Partnership. Japan is also seeking early clearance for its proposed investments in the ambitious
industrial corridor projects. In May 2014, the Japanese Ambassador to India, Takeshi Yagi, had led a group of senior
Japanese officials from investment and project funding agencies of the Japanese Government for a meeting with
Industry Secretary Amitabh Kant to discuss investment and funding plans in the newly planned industrial corridors of
India. Japan has committed $4.5 billion (about Rs 27,000 crore) for the Delhi-Mumbai industrial corridor. Japan is
also considering giving financial and technological support to a similar industrial corridor between Chennai and
Bangalore. India is the biggest receiver of Official Development Assistance from Japan and Indian companies; India
is also the second biggest (after the Chinese) receiver of assistance from Japan Bank for International Cooperation.

Most of these Indo-Japanese projects, however, have suffered a setback following tough requirements under the
new Land Acquisition Act. The Department of Industrial Policy and Promotion (DIPP) has asked the Rural
Development Ministry to make exceptions for Government-led infrastructure projects.

Tadashi Yanai, Chairman of Fast Retailing Group, met Prime Minister Narendra Modi on Wednesday, June 25,
2014, expressing his intentions to source garments from India for the Uniqlo chain of casual clothing. Modi
welcomed Yanai’s interest and highlighted the advantages that India enjoys, including availability of cotton, skilled
429
labor, robust infrastructure, a big domestic market and good ports for exports. As of February 2014, Uniqlo had a
total of 1,383 stores in Japan, China, Hong Kong, Taiwan, Korea, UK, USA, France and Russia. Yanai, who is also
the President and CEO of the Fast Retailing Group, wants now to enter Asia, and India, in particular. At present India
allows 100% FDI in single brand retail and up to 51% in multi-brand retail. According to Yanai, Asia is “the focal
point for generating prosperity and eradicating poverty.”

Meanwhile, Japan is putting pressure on India to sort out taxation, labor and other problems that Toyota,
Mitsubishi and Honda are currently facing in India. Labor unrest has emerged as a big problem affecting Japanese
investments in India. The Indian arm of Toyota Motors temporarily shut down two of its plants near Bangalore
following strikes by some employees who were protesting delays in salary hikes. Suzuki Motors faced violent labor
protests in 2012 that led to one death and several arrests. Retrospective taxation is another issue bothering the
Japanese investors. The Finance Ministry has placed tax demands on certain Japanese companies, which includes a
bill of $2 billion on Mitsubishi and about $600 million on Honda.

Current Japanese Ambassador to India, Takeshi Yagi, has sent a letter to the Prime Minister’s Office (PMO)
urging early resolutions and solutions to issues affecting Japanese companies in India and their fast-tracking proposed
investments, especially in the ambitious industry corridor projects of India. Earlier, the Japanese Embassy had also
sent notes to the Finance and Commerce Ministries stressing on the need for a predictable and transparent business
environment. During an interview, the Department of Industrial Policy and Promotion (DIPP) said to Business Line,
“We are aware of the problems related to various Japanese companies that have been raised by the Japanese
Ambassador. We have asked different Ministries and Departments that are involved to act on them.”

Recently, the BJP Government seems to have agreed that retrospective taxation is not a good idea. Accordingly,
Japan has renewed its attempts to sort out the tax related issues with the BJP Government. Japan wants to intensify
its ties with India also to counter Chinese influence in the region. Japan’s Chief Cabinet Secretary Yoshihide Suga
told a press conference in Tokyo recently that Modi was very friendly toward Japan. “We expect to further deepen
our political and economic relations with India,” Suga said.

[The Indian government maintains that some Foreign Portfolio Investors (FPIs) and Foreign Institutional Investors
(FIIs) had gone to the tax Authority of Advance Ruling (AAR) which ruled that MAT was applicable. The tax
authority clarified that the current demand of 20 per cent minimum alternate tax (MAT) on capital gains made by the
foreign investors (FPIs and FIIs included) is what is genuinely due to the government. This law is retrospective of all
tax dues of the past years. Hence, it was called the law of retrospective taxation. It is not new, but just a reassertion
of a law in force for the last fifty years in India. Retrospective Taxation was formally implemented by adding an
amendment to the Income Tax Act of 1961. Through the Retrospective Taxation amendment the Indian Government
now had the ability to demand the payment of taxes on any overseas transaction involving an Indian asset dating back
over 50 years. What FIIs and FPIs are asking is retrospective exemption and not retrospective application of a tax law.
They were referring to reported apprehensions among foreign investors that the government was creating a new tax
demand using retrospective tax legislation which they fear would deter foreign investment. "The Income-Tax
department has won cases in tribunals (Authority of Advanced Ruling) on levy of MAT on capital gains made by
FIIs. If we do not demand tax now, then we could be hauled up by authorities like CAG and CBI," the sources said.
Read more at:
http://economictimes.indiatimes.com/articleshow/46838009.cms?utm_source=contentofinterest&utm_medium=text&
utm_campaign=cppst].

Recently, Takeshi Tagi had also requested that the Finance Ministry of India ask the RBI to allow currency swap
transactions for the Japan Bank for International Cooperation (JBIC). There is a huge demand for rupee-based loans
in India for various projects and JBIC could offer dollar or Yen funds through a swap. But RBI prohibits this. If such
transactions are allowed, JBIC would be able to lend at much lower interest rates because of its high credit rating.
This will also help JBIC offer long term low interest rupee loans for projects not connected with the Delhi-Mumbai
Industrial Corridor (DMIC), where JBIC has 26% stake. Incidentally, India and Japan have an extant arrangement for
swapping their local currencies against the US dollar; the size of the swap deal has been recently expanded to $50
billion from $15 billion. This swap is primarily aimed at tackling short-term liquidity problems – an insurance
facility that could help both governments deal with any balance of payment problems arising out of or leading to
extreme volatility in exchange rates. That is, central banks of both countries can approach each other for dollars
against payment of their local currencies. The current proposal is that an Indian bank, with the consent of the RBI,
could provide rupees to JBIC against yen or dollar payments which JBIC would lend to Indian projects. JBIC would

430
bear the exchange rate risk. Separately, Tokyo has also approached RBI for its approval for Japanese Bank Mizuho in
Ahmedabad (See Financial Express, July 2, p.3).

Sources:
Amiti Sen (2014), “Japan writes to India on Problems faced by its Companies here,” Business Line, Tuesday, June 26, 2014, p.4;
“Japan’s Uniqlo wants to source Garments from India,” Business Line, Tuesday, June 26, 2014, p.4.
Bhattacharya, Roudra (2014), “Prod RBI to allow Currency Swap for JBIC: Tokyo to Govt.,” The Financial Express, Wednesday,
July 2, 2014, p. 3.
http://economictimes.indiatimes.com/articleshow/ 46838009.cms?utm_source=contentofinterest&utm_ medium =
text&utm_campa

Ethical Questions:
1. Based on Chapter 05 and what follows, design a strategic ethical plan for building lasting industrial and commerce
relationships between India and Japan that are based on mutual trust.
2. While mistrust is the opposite of trust, distrust can coexist with trust. To what extent are relationships between
two economic powers like Japan and India best ethically developed as combinations of trust with distrust?
3. Mutual trust also includes vulnerability. Explore the current mutual vulnerabilities between Japan and India as
market powers, and how would you ethically cultivate mutual trust despite such vulnerabilities?
4. Transparency is a necessary condition for the ethics of trust. How can you bring about transparency,
predictability and trust in India’s commercial transactions with Japanese partners, especially in relation to
taxation, retrospective taxation, excise duty, and FDI regulation?
5. Good employee relations are very important for building trusting relations in companies. How would you go
about building strong employee trust in top management (and vice versa) in an Indo-Japanese business
transactions context?
6. Indo-Japanese business relations are often among strangers meeting for the first time. What specific models and
theories will you invoke for building ethical and moral Indo-Japanese trusting relations among stranger
partners?

The Ethics of Executive Trust

“Hire well, manage little,” affirms Warren Buffett. He builds trust and relies on trusting
relationships. His model of extreme decentralization would not work unless he trusted the
operating managers, and they delivered. A notable fact is that nobody at Berkshire Hathaway is
awarded stock options. Having hired well, Buffett limits his interactions with his CEOs to the
minimal, only to get involved in capital expenditure (CAPEX) decisions. He allows 100%
operating freedom to his managers, with full expectation that they will be conscientious. This
tightrope walk has ensured that Berkshire has never lost a CEO to competition in all these
decades. It also demonstrates the fiduciary responsibility that is ingrained in the Berkshire
culture. In May 2009, when the world was barely merging out of the credit crisis, Warren
Buffett’s partner Charlie Munger said something fundamental about Berkshire Hathaway that
resonated with the 35,000 people present at the annual meeting: “Our model is a seamless web of
trust that’s deserved on both sides. That’s what we are aiming for. The Hollywood model, where
everyone has a contract and no trust is deserved on either side, is not what we want at all.”
Warren Buffett added: “We don’t want relationships that are based on contracts.” It is this
seamless web of deserved trust that is unique to Berkshire (See Mahalakshmi N. and Rajesh
Padmashali (2015), “50 Master Moves that Shaped Berkshire Hathaway,” Outlook Business,
Special Issue, India, June 12, 2015, p. 38, 40).

Franklin Covey said that trust is a combination of character and competence. Most executives
work on improving their competence, almost forgetting that building their character has far
greater impact on people round them than their skill sets. “Organizations and leaders high on
431
competence but low on character will not survive in the long run” said Shivkumar, Chairman and
CEO of PepsiCo India Holdings Pvt. Ltd, in his recent JRD Tata Ethics Oration, XLRI,
Jamshedpur, Jharkhand, India. He added, “Trust in a leader generates confidence and optimism in
every sphere. Trust in a leader builds a powerful ecosystem” (Shivkumar 2014: p. 5).

Building trust and living interpersonal trust are crucial corporate executive virtues that are
needed today. Once you have developed and solidified a high level of genuine interpersonal trust
with all your stakeholders, especially employees and customers, then you are on the right path of
managing and transforming your company. A high-level of interpersonal trust between all
stakeholders and you in a business situation will break down communication barriers, foster
serious conversation and sharing of ideas, and will eliminate anxieties, fear, guilt, rigidity, blame
and resentment. When your stakeholders trust you and you trust them, then, you speak freely, they
speak freely, and your mutual sustained transparency is a gateway to survival, revival and
sustained corporate recovery and transformation. The informal and transparent communication
networks that you establish between all concerned parties will hoist and empower the company
for steady growth and prosperity. Conversely, when there is low trust, high mistrust and high
distrust among stakeholders in a business situation, communications and conversations are
stressed and fragmented, teamwork and team spirit are very low, and the company is heading
toward its ruin and extermination. Such is the crucial role of interpersonal trust in business. This
Chapter explores the phenomenon of corporate interpersonal trust.

Human beings are naturally predisposed to trust. It is a survival-mechanism, (that is, it is in

our genes and childhood and adolescent learning), that has served our species quite well. Our
willingness to trust, however, can get us into trouble, especially when we trust too readily, and
have difficulty distinguishing trustworthy people from untrustworthy ones. In the wake of
massive and pervasive abuses of trust (e.g., Enron, Tyco, WorldCom, AIG, Washington Mutual,
Fannie May, Freddie Mack, Bernie Madoff, and all other new corporate scandals that surface each
day), social psychologist Roderick Kramer suggests that we rethink trust today. [Appendix 11.1
provides a timeline of business trust and mistrust situations in the U.S. market of the last century].
May be we trust poorly, or trust too readily. At a general or species level, this may not matter
very much as long as there are more trustworthy people than not. Nevertheless, at the individual
level, it can be a real problem. We could be very vulnerable. To survive as individuals, we must
learn to trust wisely or temperately (Kramer 2009).
Most people are disgusted with the state of corporate ethics in America riddled as it is with too
many acts of dishonesty and unethical dealings. The result is a lack of people’s trust in the
American business. Commenting on the sequential debacles of Enron, Adelphia, Tyco, and
World.com in 2001-2002, Brett Trueman, professor of accounting, Haas School of Management,
UC, Berkeley, remarked: “This is why the market keeps going down every day – investors don’t
know who to trust. As these things come out, it just continues to build” (cited in Maxwell 2003:
3).

Mutual trust is a symbiotic relationship – leaders must first trust others before others will trust
them. Building trust takes time, courage, and consistency, but the results and rewards are an
unimpeded flow of intelligence. Good leaders do not want yes-people around them; they want
everyone to tell the truth even though it may cost them jobs. Exemplary leaders encourage, and
even reward, openness and dissent. Dissent may make you briefly uncomfortable; but better
information (via dissent) helps you to make better decisions. Good leaders, moreover, admit
mistakes. Admitting your mistakes not only disarms your critics but also encourages your
432
employees to own up their own failings. Speaking truth to power (e.g., to a boss) requires both a
willing listener and a courageous speaker. It took tremendous courage for an Enron employee to
confront Jeffrey Skilling with the facts of the company’s financial deception (O’Toole and Bennis
2009).

Previous studies of long-term orientation in channel relationships (e.g. Anderson and Narus
1990; Anderson and Weitz 1989, 1992) have concentrated mainly on the importance of transaction-
specific investments (TSIs) in determining long-term relationship orientation. TSIs, it is presumed,
would create dependence and lock-in customers, both necessary for long-term orientation. While
TSIs and dependence may be necessary conditions for long-term relationships, they are not
sufficient, since both focus on present and existing conditions. We need to supplement them by trust,
which looks for the long-term future (Ganesan 1994). This is trust based virtue-ethics.

If trust facilitates informal cooperation and reduces negotiation costs, then it is invaluable to
corporate and business organizations that depend upon professional people, cross-functional
teams, interdepartmental synergies, skilled work groups, and other cooperative structures to
coordinate business treatment (see Creed and Miles 1996; Powell 1990; Ring and Van de Ven
1994). Further, in those firms where flatter organizations are advocated, trust can certainly
facilitate cooperation across boundaries such as functional areas, divisions, and management-
versus-union lines (Williams 2001). Executives and employees may be continually required to
cross group boundaries to secure cooperation from stakeholders over whom they have no
hierarchical control, and this may be particularly difficult and challenging across cross-cultural,
cross-religious and cross-social groups that are commonly encountered in business situations (see
Fiske and Neuberg 1990; Kraemer 1991; Kraemer and Messick 1998; Stikin and Roth 1993).

The best device for creating trust between business executives and stakeholders is to establish
and support trustworthiness of both parties (Hardon 1996). Building trustworthy relationships by
habitually discharging mutual obligations between parties to transactions can mitigate the risk of
opportunism on the part of both parties, and forestall costly legal battles and the consequences of
expensive fraudulent insurance premiums (see Whitener et al., 1998).

The Importance of Trusting Relationships in Business Management

Scholars have seen trust as an essential ingredient for a healthy personality, as a foundation for
interpersonal relationships, as a foundation for cooperation, and as a basis for stability in social
institutions and markets. Mutual trust between business partners has been found to be very vital
in the uncertain, complex, volatile and fast-paced business environment of today, especially given
modern developments of globalization, and strategic global competitive alliances (Prahalad and
Hamel 1994), multicultural and multilingual relations (Cox and Tung 1997; Sheppard 1995).

There are many reasons why reciprocal trust among corporate executives and various
stakeholders is becoming important in all business transactions. Trust leads to successful
relationships and improves communication, cooperation, satisfaction, and purchase intent in a
marketing-exchange context (Anderson and Narus 1990; Doney and Canon 1997; Morgan and
Hunt 1994). Interpersonal trust can be an important social resource for facilitating cooperation
and enabling social interactions between various actors in a business environment (see Coleman
1988; Zucker 1986). Trust reduces the need: a) to suspect and monitor each other’s behavior, b)

433
to formalize monitoring and control procedures, c) to create completely specified contracts, and
thus, d) can reduce negotiation costs (Powell 1990). [See Corporate Ethics Exercise 11.1]

The growing importance of relationships in business has also

heightened interest in the role of trust in fostering such relationships
(Bendaupudi and Berry 1997; Blau 1964; Garbarino and Johnson
1999; Kozak and Cohen 1997; Sirdeshmukh, Singh, and Sabol 2002).
For instance, considerable effort has been devoted to examining the
role of trust in relationship development, particularly within
distribution channels in marketing (Doney and Capon 1997; Morgan
and Hunt 1994; Nicholson, Compeau, and Sethi 2001). Several
conceptual (e.g., Gundlach and Murphy 1993; Nooteboom, Berger,
and Noorderhaven 1997) and empirical (e.g., Garbarino and Johnson
1999; Tax, Brown, and Chandrashekaran 1998) approaches have
proposed trust as a key determinant of relational commitment. We
can adopt these approaches to incorporate and build trust in
business situations.

Business literature, in general and marketing literature, in

particular, has advocated for decades the need for customer trust
and stakeholder relationships. However, the need has been
academically expressed more recently. Some quotes and opinions in
this regard:
 “One of the most salient factors in the effectiveness of our present complex social organization is the
willingness of one or more individuals in a social unit to trust others” (Rotter 1967: 651).
 Trust is the “cornerstone of long-term relationships” (Spekman 1988: 79).
 Trust is generally viewed as an essential ingredient for successful relationships (Berry 1995; Dwyer, Schurr
and Oh 1987; Moorman, Deshpande and Zaltman 1993; Morgan and Hunt 1994; Garbarino and Johnson
1999).
 A central idea in the theory of partnering suggests that differences in trust and commitment are the features
that most distinguish customers as partners from customers who are single-transaction buyers (Berry 1995;
Webster 1992).
 Theories of partnering propose that customers with strong relationships not only have higher levels of trust
and commitment, but also that trust and commitment become central in their attitude and belief structures
(Morgan and Hunt 1994).
 In personal selling or retailing what differentiates relational partnerships from functional (or transactional)
relationships is the level of trust and commitment to the other party (Levy and Weitz 1995; Weitz,
Castleberry and Tanner 1995).
 Customer trust is an essential element in building strong customer relationships and sustainable market share
(Urban, Sultan and Qualls 2000).
 To “gain the loyalty of customers, you must first gain their trust” (Reichheld and Schefter 2000: 107).
 The “inherent nature of services, coupled with abundant mistrust in America, positions trust as perhaps the
single most powerful relationship marketing tool available to a company” (Berry 1996: 42).

434
 Thus, for instance, there is much focus on mutual trust and trustworthy relationships in
marketing, especially in relation to commitment in marketing (Achrol 1991; Gundlach, Achrol, and
Mentzer 1995; Morgan and Hunt 1994), and buyer-seller relationships and contracts (Doney and
Cannon 1997; Dwyer, Schurr, and Oh 1987). This focus can and should be easily transferred to the
discipline of business management. The high levels of trust characteristic of relational exchanges
enable exchange partners and stakeholders to focus on long-term benefits of the relationship
(Ganesan 1994), ultimately enhancing competitiveness and reducing transaction costs (Noordewier,
John and Nevin 1990).

A company representative who proves to be dishonest and unreliable could easily jeopardize
long-term relationship with a trusted supplier (Kelly and Schine 1992). On the other hand, highly
trusted salespeople have been found to sustain customer commitment despite management
policies that may not always benefit the customer (Schiller 1992). [See Corporate Ethics Exercise
11.2]

What is Trust?

In recent years, the issue of trust has been seriously discussed in management and marketing
literature. The view of trust as a foundation for social order spans many intellectual disciplines
and levels of analyses (Lewicki, McAllister, and Bies (1998: 438). Understanding why people
trust, and how trust shapes human relations has been the central focus of psychologists,
sociologists, political scientists, economists, anthropologists, and students of organizational
behavior and marketing.

Definitions of Trust in the Management Literature

According to Lewicki and Bunker (1995), the study of trust may be categorized based on how
trust is viewed: as an individual difference, as a characteristic of interpersonal transactions, and as
an institutional phenomenon. Specific disciplines have been associated with these three approaches.
Thus,

 Personality psychologists view trust as an individual characteristic (Rotter 1967, 1970, 1980);
 Social psychologists define trust as an expectation about the behavior of others in transactions, focusing on
the contextual factors that enhance or inhibit the development and maintenance of trust (Lewicki and Bunker
1995, 1996); lastly,
 Economists and sociologists have focused on trust building institutions that reduce uncertainty and anxiety
(Zucker 1986).

Each discipline has its own focus, and accordingly, provides only a partial or incomplete
description of trust. McAllister (1995: 25) argues for two bases of trust, one (cognition-based trust)
grounded in cognitive judgments of the competence of an exchange partner, and the second (affect-
based trust) founded on affective bonds between exchange partners. Lewicki and Bunker (1995)
distinguish three types of trust: Calculus-, knowledge, and identification-based trust, and Sitkin
(1995) propose three others - competency-, benevolence- and value-based trust. Sirdeshmukh, Singh,
and Sabol (2002) derive customer trust in the service area from operational competence, operational
benevolence, and problem solving orientation on the part of both frontline employees and
management policies and practices that back frontline employees. Mayer, Davis, and Schoorman
(1995: 712) argue that trust is “the willingness of a party to be vulnerable to the actions of another
party based on the expectation that the other will perform a particular action important to the
trustor, irrespective of the ability to monitor or control the other party.” Most organizational
scientists (e.g., Granovetter 1985; Ring and Van de Ven 1992) view trust as a mechanism that
435
mitigates opportunistic behavior among exchange partners. Rousseau, Sitkin, Burt, and Camerer
(1998: 395) combine common themes from trust definitions based on sociology, psychology, and
economics, and define trust as “a psychological state comprising the intention to accept vulnerability
based on positive expectations of the intentions or behaviors of another.”

Table 11.1 summarizes major differences in the definitions of trust reflected in the Management
Literature.

Definitions of Trust in the Marketing Literature

Marketing scholars have emphasized different aspects of trust. In an organizational context of
trusting independent marketing researchers, Moorman, Zaltman and Deshpande (1993: 82) define
trust “as a willingness to rely on an exchange partner in whom one has confidence.” According to
Morgan and Hunt (1994: 23) trust exists “when one party has confidence in an exchange partner’s
reliability and integrity.” In the context of buyer-seller relations, Doney and Capon (1997: 36) define
trust as “the perceived credibility and benevolence of a target of trust.” In the service area,
Sirdeshmukh, Singh, and Sabol (2002: 17) define “consumer trust as the expectations held by the
consumer that the service provider is dependable and can be relied on to deliver on its promises.”
Accordingly, Sirdeshmukh, Singh, and Sabol (2002) derive dependability and reliability of the
service provider based on three service qualities: operational competence, operational benevolence,
and problem-solving orientation. All three are expected from both frontline employees (FLEs) and
management policies and practices (MPPs). An important aspect across all definitions of trust in
marketing is the notion of trust as a belief, a sentiment, or an expectation about an exchange partner
that results from the latter’s competence, credibility, reliability or intentionality (Ganesan 1994).

As is obvious, Moorman, Zaltman and Deshpande (1993) and Morgan and Hunt (1994) focus
primarily on the credibility or confidence aspects of trust, without specific considerations of the
notion of benevolence in trust. Both definitions draw from Rotter’s (1967, 1980) definition of trust
cited earlier which is based on generalized expectancy of partner’s reliability. While Moorman,
Zaltman and Deshpande (1993) incorporate “willingness” in their definition of trust, Morgan and
Hunt (1994) do not. The former argue that willingness is a critical facet of trust since one could
cognitively agree that a potential is trustworthy, but not go to the next step of willing to rely on that
partner (Moorman, Zaltman and Deshpande 1992: 315). Doney and Capon (1997) add benevolence
to credibility to their definition of trust, while Sirdeshmukh, Singh, and Sabol (2002) consider
benevolence as an antecedent to trust.

Further, according to Moorman, Zaltman and Deshpande (1992) and Mishra (1996),
vulnerability is an important constituent of trust; in the absence of risk or vulnerability, trust is not
necessary, since outcomes are not of consequence to trustors. Sabel (1993: 1133) defines: “trust is
the mutual confidence that no party to an exchange will exploit the other’s vulnerability.” Ganesan
(1994) and Mayer, Davis and Schoorman (1995) view trust in conative and behavioral terms. Other
marketing researchers use cognitive or evaluative definitions of trust, empirically verifying the link
between trust evaluations and behavioral response (Doney and Capon 1997; Morgan and Hunt 1994;
Sirdeshmukh, Singh, and Sabol 2002).

Table 11.2 summarizes and synthesizes these divergent views of trust in the marketing literature.
Most studies of trusting relationships in marketing are from a marketer/service provider
perspective, and not from the consumers’ viewpoint. Hence, most of the theoretical underpinnings
of trust have been derived from inter-organizational contexts and constructs (Singh and
Sirdeshmukh 2000). The few consumers’ viewpoint studies on trust that exist invoke either the
agency theory (e.g., Bergen, Dutta, and Walker 1992; Casson 1997) or psychological approaches
(e.g., Garbarino and Johnson 1999; Morgan and Hunt). More recently, some have tried combination
436
of these two approaches (e.g., Singh and Sirdeshmukh 2000; Singh, Sirdeshmukh, and Sabol 2002).

Further, earlier trust-studies in marketing (e.g., Anderson and Narus 1990; Anderson and Weitz
1989, 1992; Moorman, Zaltman and Deshpande 1992, 1993 and Morgan and Hunt 1994) have
treated trust as a uni-dimensional construct. However, later studies (e.g., Doney and Capon 1997;
Ganesan 1994; Sirdeshmukh, Singh, and Sabol 2002) have treated trust as a multidimensional
construct; the latter provides greater diagnostic with respect to the effect of trust on long-term or
short-term orientation (Ganesan 1994).

Building Trusting Relationships

Based on reviews of interpersonal trust literature, and as applied to the business executive-
stakeholder context, we define trust under three facets (Whitener et al., 1998: 513):

a) A stakeholder’s trust in another party such as a business or corporate executive reflects an expectation or
belief that the other party will behave benevolently, competently, honestly, and predictably.
b) The stakeholder cannot control or force the business or corporate executive to fulfill this expectation, and
thus, trust involves a willingness to be vulnerable and a risk that the executives may not fulfill that
expectation.
c) Thus, stakeholder trust involves some level of dependency on the business/corporate executive and hence,
stakeholder satisfaction (as an outcome) in a business situation will be influenced by the actions of the
business/corporate executives.

Defined thus, stakeholder trust is an attitude (see Fishbein and Ajzen 1975; Robinson 1996)
held by the stakeholder toward the business executive. This attitude derives from the
stakeholder’s perceptions, beliefs, and attributions about the business executive, and these, in turn,
are based upon stakeholder’s knowledge and observations of the business executive. [See
Corporate Ethics Exercise 11.3]

The Biochemistry of Human Trust

[See Kraemer (2009: 70-73)]

Thanks to our large brain, humans are born physically powerless and highly dependent on
caretakers. Thus, we enter the world “hardwired” to make social connections. For instance,
within an hour of its birth, the baby will draw her head back to look into the eyes and the face of
the person gazing at her. Within a few more hours, the infant will orient her head in the direction
of the mother’s voice. Within a few more hours, the baby can actually mimic a caretaker’s
expressions and keep on exchanging mimics. In short, we are social beings socially hardwired
from our birth. Scientists now consider the nurturing qualities of life – the parent-child bonding
and mutual exchanges between caretakers – as the critical attributes that drive brain development.
Serious lack of nurturing bonding may even impair brain development. This partly explains the
success of the human species in terms of survival. We are born to be engaged and to engage
others, which is what trust is largely about. The natural tendency to trust makes sense in our
evolutional history.

Research indicates that the brain chemistry governing our emotions plays an important role in
trust. According to Paul Zak, a cutting edge scientist in the new field of neuroeconomics,
oxytocin, a powerful natural chemical found in our bodies (which, incidentally, also plays major
role in a mother’s birth-labor management and milk production) can enhance trust and
trustworthiness between people playing experimental trust games. Even a squirt of oxytocin-
437
laden nasal spray is enough to do it. Other researchers have confirmed this – oxytocin is
connected with positive emotional states that create social connections. Even animals become
calmer, docile and less anxious when injected with oxytocin.

We tend to trust people who resemble us physiologically. Lisa DeBruine provides compelling
evidence on this feature. She developed a clever technique for creating an image of another
person that could be morphed to look more and more (or less and less) like a study participant’s
face. She found that trust significantly increased with greater levels of similarity. The tendency
to trust people who are similar to us may be rooted in the possibility that such people might be
related to us. Other studies affirm that we like and trust people who are members of our own
social group more than we like and trust outsiders and strangers.

Psychologist Dacher Keltner and her associates have also shown that physical touch also has a
strong connection to the experience of trust. In an experimental game widely used to study
decisions to trust, an experimenter would touch slightly and unobtrusively the back of some
individuals when explaining the game while distancing from others. The former were more likely
to cooperate with their partner than compete against. Keltner also notes that greeting rituals
throughout the world involve touching.

Our brain wiring can also hinder our ability to make good decisions about how much risk to
assume in our relationships. Researchers identify two cognitive illusions that increase our
propensity to trust: a) person invulnerability (this illusion makes us underestimate the likelihood
that bad things will happen to us) and b) unrealistic optimism (this illusion overestimates the
likelihood that good things will happen to us). By the first illusion, we ignore high risks of street
crimes, drunken driving, over-speeding and the like thinking that nothing will happen to us. By
the second illusion, we fondly entertain high hopes of marrying well, having great industrial
careers, long life, and so on when the true odds of such combined outcomes is low.

The Psychology of Trust

Thus, it does not take much to tip humans towards trust. Trust is our regular default position;
we trust routinely, reflexively, and somewhat mindlessly across a broad range of social situations.
Trust rarely occupies the foreground of conscious awareness; we trust instinctively. Roderick
Kraemer prefers to call this “presumptive trust” – our tendency to approach many situations
without suspicion. Most of us, unless we have been victims of trust violation too early in life,
have a predisposition or bias toward trust (Kraemer 2009: 71).

Presumptive trust, however, can also be disastrous when combined with the way we process
information. For instance, we have a proclivity to see what we want to see. Psychologists call this
the confirmation bias. That is, we pay attention to and overweigh information that supports our
hypothesis or theory about the world, while we easily downplay or discount evidence to the
contrary. Moreover, we are heavily influenced by social stereotypes – we too easily link virtues
such as honesty, trustworthiness, reliability and likeability with facial characteristics, good looks,
age, gender, race, and the like. Psychologists call such tendencies our implicit theories of
personality. We categorize and label people quickly and render social judgments swiftly. Thus,
we may easily overestimate the trustworthiness of people while making ourselves physically,
financially and emotionally vulnerable. This could be even more dangerous if people fake

438
outward sign of trustworthiness. Virtually any indicator of trustworthiness can be manipulated or
faked by smiles, maintaining strong eye contacts, gentle touch, cheery banter, and the like.

Further, we often rely on trusted third parties to verify the character or reliability of other
people. Calling and interviewing “references” is a case in point. We easily “roll over” our trust
from one known and trusted party to another who is less known. This is “transitive trust” says
Kraemer (2009: 72). Transitive trust can lull people into a false sense of security. Evidence
suggests that Bernie Madoff was very skilled at cultivating and exploiting social connections –
one of his hunting grounds was the Orthodox Jewish community, a tight-knit social group.

We can never be certain of another’s motivations, intentions, character, or career/business

ambitions. We simply have to choose between trust (thereby opening ourselves to potential
abuses if we are dealing with an exploiter – this is Beta or Type II error) or distrust (which means
missing out on all the benefits if the other person happens to be honest and caring – this is alpha
or Type I error). This doubt and ambiguity lingers over every decision to trust.

Social Psychologist Roderick Kraemer (2009: 74-77) offers a few practical rules to adjust your
mind-set and behavioral habits that could reduce this doubt and ambiguity.

o Know Yourself: Do you trust too much and too readily? Are you an optimist that believes most people
are decent, harmless, and trustworthy? Hence, do you easily and indiscriminately open up to people
by disclosing sensitive and critical information about yourself and family, about others, or about your
company, before prudent, incremental foundations of trust have been established? Alternately, are
you the opposite of all of the above, and hence, too mistrustful when venturing into relationships with
others? Both are bad positions. Thus, figure out who you are, easily trusting the wrong people or
congenitally mistrusting the right people? If you are the former, then you must get better at
interpreting the cues of people you receive. If the latter, that is, you are good at getting and
interpreting cues but have difficulty forging trusting relationships, then you will have to expand your
repertoire of behaviors.

o Start Small: All trust entails risk, but you can manage the risk by keeping it sensible or small or
“shallow,” especially in the early stages of a relationship. Shallow trust implies small but productive
behaviors whereby you communicate your willingness to trust. For example, in the 1980s, Hewlett-
Packard allowed its engineers to take equipment home whenever they needed to without much red
tape – HP trusted them. When later the engineers returned the equipment, they validated HP’s trust
in them, and, over time, cemented it. Trust is incremental and hence you can manage it intelligently,
and it is also contingent (i.e., it is tied to reciprocity). Mutual and small or incremental deeds of trust
can help you build strong but tempered trust with others.

o Write an Escape Clause: If you have a clearly articulated plan for disengagement, you can engage more
fully and with more commitment. Far from undermining trust, such “hedging of one’s bets” allows
everyone in a negotiation or an organization to trust more easily and comfortably. Hedging or a good
back up plan can afford more breathing room as well.

o Send strong signals: In order to ensure that trust builds incrementally from initial acts to deeper and
broader commitments, it is important to send loud, clear and consistent signals. Sending strong signals
invites other tempered trusters and deters potential predators. Most of us tend to under-invest in
communicating our trustworthiness to others, because we take it for granted that others know us and
our virtues of fairness, honesty and integrity. Our reputation for toughness, for integrity, and for
equity can send a strong signals to the negotiating partners.

o Recognize the other Person’s Dilemma: Our trust dilemmas are many and anxiety provoking: with
whom should I invest my money? With whom should I forge a joint venture? Meanwhile, the other

439
 side of the business equation has its own dilemmas and need reassurance as to how much they should
trust us. The best trust builder is to have empathy and attention for the dilemmas and corresponding
perspectives of the other party. For instance, in his famous commencement address at American
University in 1963, President JF Kennedy praised the admirable qualities of the Soviets and declared
his willingness to work toward mutual nuclear disarmament with Soviet leaders. We know from
Soviet memoirs that this impressed the Soviets, and Premier Nikita Khrushchev used this trust-
builder toward initiating nuclear disarmament.

o Look at Roles as we as People: Adopt clear and compelling roles, and downplay social connections.
The latter are important, but often they get in the way of trust. For instance, we trust engineers
because we trust engineering theories and principles, and that engineers are trained to apply them.
Similarly with other professions and roles, such as Doctors and Lawyers. Deep trust in a professional
role can substitute our lack of personal experience with people. Role-based trust, however, is not fool-
proof, as the recent Wall Street meltdown and Bernie Madoff demonstrate.

o Remain Vigilant and always Question: Human beings seek closure, and this is true with trust dilemmas
as well. When we doubt a business deal like merger or acquisition we do due diligence, and we think
we can close the deal. But keep vigilant and questioning. The business landscape changes constantly
and that may make your due diligence outdated or flawed. Despite being uncomfortable we need to
question the people whom we trust. People can also change. This is tempered trust.

Trust plays a critical role in business, economics and the social vitality of nations. Our
predisposition to trust, however, can make us vulnerable. The above seven rules are a primer on
how to temper and discipline your trust and trusting relationships. Although neuro-economists,
behavioral scientists and social psychologists provide powerful new techniques such as brain
imaging and agent modeling to discover how we make judgment of trust, yet in day-to-day
operations we need some rules to temper our trust by sustained and disciplined ambivalence
(Kraemer 2009).

Exhibit 11.1 Checks Propositions from Interpersonal Trust theory against the three Case
Situations that head this Chapter. [See Corporate Ethics Exercise 11.4]

Building Trust in the Initial Stages

Trust can build even at earlier stages of interpersonal relationships, and does not necessarily
have to depend upon longer and relationships that are more frequent. It is more challenging to
build trust during initial stakeholder-business executive relationships when several factors are
significantly low such as interpersonal familiarity, perceived similarity of values and the length
and frequency of interactions. Additionally, there could be several situational factors that can
stimulate mistrust and/or distrust such as high risk, vulnerability, past damages sustained and past
track record of questionable behaviors among certain business executives. The latter have been
found to build mistrust (e.g., Doney and Cannon 1997; Nicholson, Compeau and Sethi 2001).
As a situational-contextual phenomenon, sociologists have associated trust with situation-
complexity and unfamiliarity (Williams 2001) that generate vulnerability and risk (Mayer, Davis
and Schoorman 1993), which in turn, could nurture positive distrust one can shield against
(Lewicki, McAllister and Bies 1998; Mechanic 1997).

440
 A typical buyer-seller or stakeholder-business executive exchange encounter is an
interpersonal exchange of social and economic benefits. Trust occurs in the context of this
exchange. [See Corporate Ethics Exercise 11.5]

Trust as an Expectation or Rational Prediction of

Behavior

Research within management literature has focused on trust primarily in terms of “rational
prediction” (Lewis and Weigert 1985: 969) wherein agents conceive distrust as a highly risky
situation that must one must reduce or avoid by rational choices that predict distrust. Such
“predictive” accounts of trust “appear to eliminate what they say they describe” (Becker 1996:
47), thus disregarding or removing core elements of trust (Flores and Solomon 1998; Lewis and
Weigert 1985). Under this view, trust exists only in an uncertain and risky environment; that is,
trust cannot exist in an environment of certainty (Bhattacharya, Devinney, and Pillutla 1998).

Trust is also defined as “a generalized expectancy held by an individual that the word, promise,
oral or written statement of another individual or group can be relied upon” (Rotter 1980: 1). Trust
is “a set of expectations shared by all those involved in an exchange” (Zucker 1986: 54). Trust is
based on an individual’s expectations that others will behave in ways that are helpful or at least not
harmful (Gambetta 1988). Williams (2001: 378) defines trust as “one’s willingness to rely on
another’s actions in a situation involving the risk of opportunism.” In contrast, distrust entails “the
belief that a person’s values or motives will lead one to approach all situations in an unacceptable
way” (Sitkin and Roth 1993: 373).

These definitions of trust imply behavioral expectations. For instance, Hosmer (1995) defines
trust as one party’s optimistic expectations of the behavior of another, when the party must make a
decision about how to act under conditions of vulnerability and dependence. Mayor et al. (1995)
define trust as “the willingness of a party to be vulnerable to the actions of another party based on
the expectation that the other will perform a particular action important to the trustor, irrespective
of the ability to monitor or control the other party.” Zucker’s (1986) definition of trust as a
preconscious expectation suggests that vulnerability is only salient to trustors after a trustee has
caused them harm. In reciprocal terms, distrust is understood as the expectation that others will not
act in one’s best interests, even engaging in potentially harmful behavior (Govier 1994).

Exhibit 11.2 checks propositions of interpersonal trust against levels of trust in the three case
situations. Exhibit 11.3 checks interpersonal trust building capacities with case situations based
on the theories of interpersonal trust.

[See Corporate Ethics Exercise 11.6 and 11.7]

Institution-based Initial Trust Levels

Institution-based trust means that one believes the necessary impersonal structures are in place
to enable one to act in anticipation of a successful, future endeavor (Shapiro 1987; Zucker 1986).
Zucker (1986) describes how certain specific institutional or social structures and arrangements
generate trust. For instance, rational bureaucratic organizational forms could be trust-producing
mechanisms for situations where the scale and scope of economic activity overwhelm
interpersonal trust relations. Public auditing of firms, SEC regulations, FTC mandates and other
government vigilance programs may increase customer trust in those companies. Institution-
441
based trust researchers maintain that trust reflects the security one feels about a situation because
of guarantees, safety nets, or other structures (Shapiro 1987; Zucker 1986). Thus, the safe and
structured atmosphere of a classroom may enable students to develop high levels of initial trust
(Lewis and Weigert 1985; Shapiro 1987); tough screening and high professional experience levels
of new recruits may help senior employees to trust them implicitly.

Trusting intention at the beginning of a relationship may be high because of institution-based

trust stimulators. Institution-based trust literature speaks of two such stimulators: situation
normality and structural assurances. Situation-normality: defined as the belief that successful
interaction is likely because the situation is normal (Garfinkel 1963) or customary (Baier 1986), or
that everything is in proper order (Lewis and Weigert 1985). Structural assurances: defined as the
socially learned belief that successful interaction is likely because of such structural safeguards or
contextual conditions as promises, contracts, regulations, legal recourse, and guarantees are in
place.

Both situation normality and structural assurances can affect trusting beliefs, and trusting
intentions in the following manner:

Situation Normality Affect Trusting Beliefs and Trusting Intention: For instance, a patient who enters a
clinic or a hospital environment may anticipate a successful visit with the doctor because of normal
situations such as safe and adequate parking, clean and secure physical surroundings, professional
credentials (as indicated by doctor’s certificates displayed prominently). Other subsequent
experiences may also reinforce trusting beliefs and intentions such as keeping appointments, good
customer service and fiduciary responsibility as reflected in the professional appearance of doctors
and nurses, and the friendly, yet professional healthcare providing services. Similarly, stakeholders
(e.g., customer, client, employee, supplier, creditor, and distributor) may believe that what they
observe in the corporate or business environment is normal or more than customary, and which may
help them feel comfortable enough to rapidly form trusting beliefs in, and a trusting intention toward,
the firm. Situation normality also can relate to the stakeholders’ comfort with their roles in relation to
the corporate or business executive’s roles in that setting (see Baier 1986).

Structural Assurances Affect Trusting Beliefs and Trusting Intention: Regulations regarding
certification of health or business professionals, spot-checking of healthcare or business delivery
facilities, and quality assurances should enable stakeholders to feel assured about their expectations
regarding the doctor or the business firm (see Sitkin 1995). In addition, guarantees, promises,
contracts and legal recourse should mitigate a stakeholder’s perceived risk involved in forming
trusting intention (Zaheer, McEvily and Perrone 1999), and enable the stakeholder to believe that the
trusted persons will make every effort to fulfill these contracts and promises, lest they should meet
with social disapproval or legal action (Sitkin 1995). For instance, believing that various safeguards
bound a healthcare delivery situation (e.g., screening procedures of doctors and nurses, board
certification of doctors and nurses, Hippocratic oaths) enables one to believe that the individuals (e.g.,
doctors, nurses) in the situation are trustworthy. Further, belief in the very institution of healthcare at
the national, state and local levels with all its reliability and authentication procedures will enable
stakeholders believe in the persons that deliver healthcare within it. Additional structures (e.g., no
discrimination, fairness of treatment) supporting fairness in the clinic or hospitals may generate
further cognitive consistency and consonance that leads to trusting beliefs and intention. Typical
structural assurances in the business world are GAAP and FASB, Sarbanes-Oxley Act of 2002,
external auditors, forensic auditors when necessary, social audit, SEC vigilance, consumer advocacy
watchdogs, better business bureau, various board certifications and professional associations,
government audit, EPA compliance, and labor unions. Structural assurances should be more
influential in initial relationships than in later, especially since information about the trusted person
may not be complete when the relationship begins, making situational information quiet salient
(McKnight, Cummings, and Chervany 1998: 479).

442
 Trusting Beliefs Affect Trusting Intention: Several scholars have found a positive link between trusting
beliefs and trusting intention (e.g., Dobing 1993; Mayer, Davis, and Schoorman 1995). Thus, if an
employee believes that his/her boss is benevolent, competent, honest, and predictable, one is likely to
form a trusting intention toward that person (see McKnight, Cummings, and Chervany 1998). In
general, beliefs and intentions tend to stay consistent (Fishbein and Ajzen 1975; Ajzen 1988).

Exhibit 11.4 checks institutional trust building capacities with case situations based on
propositions from the theories of institutional trust.

[See Corporate Ethics Exercise 11.8 and 11.9]

Inter-organizational Trust and Investments

Fang, Palmatier, Scheer and Li (2008) explore inter-organizational trust that can occur at
three distinct organizational levels in an inter-firm collaboration:

a) Inter-organizational trust between collaborating firms (say, A and B),

b) Each firm’s (A or B) agency trust in its own representatives assigned to a collaborative entity (co-
entity such as suppliers or distributors of A or B collaborating among themselves), and
c) Trust among the representatives assigned to the entity (intra-entity).

Inter-organizational and agency trust can motivate collaborating firm’s resource investments
in the co-entity (e.g., suppliers, distributors), particularly in the context of a differentiating
strategy. Intra-entity trust promotes coordination within the co-entity, while inter-organizational
trust and a differentiating strategy can magnify that effect. Thus, managing and building trust at
multiple levels between collaborating organizations is critical to the success of that collaboration.

Inter-organizational trust affects and stimulates investments into one another. These
investments could be in tangible and nonfungible assets such as manufacturing facilities,
specialized machine equipment and tools, office buildings and corporate headquarters, as also in
intangible assets such as employees who possess irreplaceable tacit knowledge, employees who
are trusted representatives of the firm, and strategic technologies and patents. Inter-organizational
trust increases relationship investments, communication, and reduces costs of opportunistic
behavior (Selnes and Sallis 2003). Mutual trust functions as a safeguarding and controlling
mechanism that enables information sharing and reduces the perceived risk of opportunism and
conflict between collaborating firms (Lane, Salk and Lyles 2001). Conversely, lack of such trust
can lead to suspicion and conflict (Bamford, Ernst and Fubini 2004) and may prevent future
investments and even lead to the withdrawal of existing investments (Inkpen and Beamish 1997).

Given our understanding of interorganizational trust in the context of social exchange and
agency theories, and given the fact that they can foster benefits of communication, information
sharing, and increased relational investments, we propose the following:

[See Corporate Ethics Exercise 11.10]. Table 11.3 summarizes the theories of trust and
corresponding Propositions we have discussed thus far. Most of these theories and propositions
deal with the initial stages of trust among relatively unfamiliar strangers. In general, as much as
we can assume stakeholders to be unfamiliar with the business situation and the newly appointed
business expert or executive, these theories can help in initiating and building trusting beliefs and
intentions.

443
 In summary, in explaining the initial stages of trust, personality psychologists view trust as a
personal psychological trait such as liking or as an individual difference (Deutsch 1960; Mellinger
1956). Others treating trust as a characteristic of interpersonal interactions, consider trust as an
interpersonal attitude (Anderson and Dedrick 1990; Jones and George 1998) or as socially
embedded expectations (Ross, Frommelt and Hazelwood 1987; Rotter 1971; 1980) and
relationships (Morgan and Hint 1994). As an institutional phenomenon, organizational scholars
have focused on developing initial levels of organizational trust among relative strangers
(McKnight, Cummings and Chervany 1998) or building deeper levels of trust among long
partnerships and relationships (Williams 2001). Finally, social psychologists define trust as an
expectation about the behavior of others in transactions, focusing on the contextual factors that
enhance or inhibit the development and maintenance of trust (Lewicki and Bunker 1996).

Exhibit 11.3 checks propositions from institutional theories of trust against institutional trust
building capacities under the three case situations

Later Stages of Trust Development

Knowledge-based trust theories propose that trust develops over time as one accumulates
trust-relevant knowledge through experience with the other person (Holmes 1991; Lewicki and
Bunker 1995). Thus, time and interaction history can develop high levels of trust.

Typically, trust development is often conceived as one’s experiential process of learning about
the trustworthiness of others by interacting with them over time (Lewicki and Bunker 1996;
Mayer et al., 1995; Ring and Van de Ven 1994). Stakeholders and business executives may relate
to each other in multiple ways, in multiple encounters, and even multiple relationships within a
given encounter. For instance, a stakeholder sees in the business expert an excellent specialist in
the field that the stakeholder is interested in, a great diagnostician with a very high level of
professionalism, a good work ethic, but less patient, less friendly, less compassionate, less
communicative, and less listening. The stakeholder’s relationship with the business executive is a
function of all these attributes and encounters, and consequently, the stakeholder may trust the
executive on some domains (such as academic excellence, professionalism work-ethic, and
business diagnostic skills), but distrust in other domains and encounters (e.g., communication,
listening, respect, compassion or patience with stakeholders). That is, the stakeholder may feel
comfortable to trust the executive on some counts, but feel inappropriate to trust in other aspects
(Baier 1985; Govier 1994). That is, parties to a trust (distrust)-relationship can hold
simultaneously different views of each other – not always consistent and accurate. Continuous
encounters with the executive may accumulate and interact to create a rich texture of experience
that may be dominantly trusting, but with occasional distrusting moments. Within the
stakeholder-executive relationship may occur many linkages (link multiplexity) depicting the
richness of interpersonal relationships (Katzenstein 1996).

Social network literature assumes that multiplex relationships are simply (or
unidimensionally) trusting in nature (Husted 1994; Ibarra 1995). That is, the stakeholder-business
executive relationship or encounter should be based on multiple linkages: professional, academic,
diagnostic, communication, confidentiality, compassionate caring, listening capacity, interaction
capacity, gentle bedside manners, good follow-up, and the like. Both trust and distrust can exist

444
within multiple relations (Lewicki, McAllister, and Bies 1998), but by and large, the higher the
bandwidth (richness and scope of relationships) and the larger number of linkages, the higher are
the chances of building trusting than distrusting relationships. The broader the experience of
stakeholder-business executive relationships across multiple contexts and encounters, the broader
the bandwidth; partners accumulate knowledge of each other’s strengths and weaknesses to
generate interpersonal relationships of trust (or distrust). In this connection, skeptical or
indifferent behavioral attitudes can undermine the potential for developing trusting relationships
(Wicks, Berman, and Jones 1999).

However, earlier theories of trust confound distrust with mistrust; that is, trust and distrust
were considered as polar opposites. We review both sets of theories: a) those that consider trust
and distrust as polar opposites, b) and those that consider trust and distrust as complementary
theories of trust. [See Corporate Ethics Exercise 11.11]

Trust and Distrust as Complementary Constructs

Trust and distrust are reciprocal terms. Both trust and distrust are separate but linked
dimensions. They are not polar opposites on a single continuum such that low trust means high
distrust and high trust means low distrust. Trust and distrust both entail certain expectations, but
whereas trust expectations anticipate beneficial conduct from others, distrust expectations
anticipate injurious conduct (Lewicki, McAllister, and Bies 1998). Both involve movements
toward certainty: trust concerning expectations of things hoped for and distrust concerning
expectations of things feared. Hence, both states can coexist (Priester and Petty 1996); they are
functional equivalents (Luhmann 1979).

Social network literature assumes that multiplex relationships are simply (or
unidimensionally) trusting in nature (Husted 1994; Ibarra 1995). That is, the stakeholder-business
executive relationship or encounter should be based on multiple linkages: professional, academic,
diagnostic, communication, confidentiality, compassionate caring, listening capacity, interaction
capacity, good follow-up, and the like. Both trust and distrust can exist within multiple relations
(Lewicki, McAllister, and Bies 1998), but by and large, the higher the bandwidth (richness and
scope of relationships) and the larger number of linkages, the higher are the chances of building
trusting than distrusting relationships. The broader the experience of stakeholder-business
executive relationships across multiple contexts and encounters, the broader the bandwidth;
partners accumulate knowledge of each other’s strengths and weaknesses to generate interpersonal
relationships of trust (or distrust). In this connection, skeptical or indifferent behavioral attitudes
can undermine the potential for developing trusting relationships (Wicks, Berman, and Jones
1999).

Organizational Psychology Theory of Trust and Distrust: Institution-based trust means

that one believes the necessary impersonal structures are in place to enable one to act in
anticipation of a successful future endeavor (Shapiro 1987; Zucker 1986). Zucker (1986)
describes how certain specific institutional or social structures and arrangements generate trust.
Institution-based distrust means that one believes the necessary impersonal structures are not in
place. For instance, rational bureaucratic organizational forms could be trust-producing
mechanisms for situations where the scale and scope of economic activity overwhelm
interpersonal trust relations. Public auditing of firms, SEC regulations, FTC mandates and other

445
government vigilance programs may increase customer trust in those companies. Institution-
based trust researchers maintain that trust reflects the security one feels about a situation because
of guarantees, safety nets or other structures (Shapiro 1987; Zucker 1986). Thus, the safe and
structured atmosphere of a classroom may enable students to develop high levels of initial trust
(Lewis and Weigert 1985; Shapiro 1987). Tough screening and high professional experience
levels of new recruits may help senior employees to trust then implicitly.

Trusting intention at the beginning of a relationship may be high because of institution-based

trust stimulators. Institution-based trust literature speaks of two such stimulators: situation
normality and structural assurances. Situation-normality: defined as the belief that successful
interaction is likely because the situation is normal (Garfinkel 1963) or customary (Baier 1986), or
that everything is in proper order (Lewis and Weigert 1985). Structural assurances: defined as the
socially learned belief that successful interaction is likely because of such structural safeguards or
contextual conditions as promises, contracts, regulations, legal recourse, and guarantees are in
place. The current healthcare crisis as a result of lack of insurance, high prices of prescription
drugs in the U. S. and fragmentation of care are instances of breakdown of situation normality and
structural assurances such that high levels of trust and distrust could coexist.

Sociological Theory of Trust and Distrust: Sociologists recognize the importance of trust
and distrust as mechanisms for reducing social complexity and uncertainty, and, accordingly, view
them as functional equivalents or substitutes. Luhmann (1979) argues that both trust and distrust
function to allow rational actors to understand, contain, and manage social uncertainty and
complexity, but they do so by different means. Trust reduces social complexity and uncertainty
by disallowing undesirable conduct from consideration and replacing it with desirable conduct.
Conversely, distrust functions to reduce social complexity and uncertainty by allowing
undesirable conduct and by disallowing desirable conduct in considering alternatives in a given
situation. In the latter case, distrust becomes a “positive expectation of injurious action”
(Luhmann 1979). Distrust simplifies the social world, allowing the individual to move rationally
to take protective action based on these positive expectations of harm. Social structures appear
most stable where there is a healthy dose of both trust and distrust to generate a productive tension
of confidence (Lewicki, McAllister, and Bies 1998). Luhmann (1979) even argues that “trust
cannot exist apart from distrust, and trust cannot increase without increases in distrust. Increases
in trust or distrust – apart from increases in the other – may do more harm than good.” An over-
trusted person can often exploit the over-trusting of a person. “Apart from a genuine openness to
the possible necessity of distrust, benign and unconditional trust appears to be an extremely
dangerous strategy for managing social relations” (Lewicki, McAllister, and Bies 1998).

Social Psychology Theory of Trust and Distrust: Human psychology functions in a social
context. Hence, if the social context of an exchange situation or an organizational relationship is
properly focused and fully brought into the social equation, then it is quite possible that an
individual who trusts a partner on some attributes (e.g., scientific knowledge, technical skill) may
distrust that partner on other features (e.g., social skills, ethical conduct, compassion skills), and
both these states can coexist. According to social psychologists (Cacioppo and Berntson 1994),
positive-valent and negative-valent attitudes can coexist, and thus, trust that involves confident
positive expectations and distrust that implies confident negative expectations regarding trusting
partners, can operate simultaneously in the same individual, although from different viewpoints
(Lewicki, McAllister, and Bies 1998).

446
 Interdependence Theory of Trust and Distrust: Recent definitions of trust imply
interdependent behavioral expectations. Thus, Hosmer (1995) defines trust as one party’s
optimistic expectations of the behavior of another, when the party must make a decision about
how to act under conditions of vulnerability and dependence. According to Moorman, Zaltman
and Deshpande (1992) and Mishra (1996), vulnerability is an important constituent of trust. That
is, in the absence of risk or vulnerability trust is not necessary, since outcomes are not of
consequence to trustors. Sabel’s (1993) definition of trust assumes vulnerability: “trust is the
mutual confidence that no party to an exchange will exploit the other’s vulnerability.” According
to Mayer, Davis, and Schoorman (1995), vulnerability accompanies trust. They define trust as
“the willingness of a party to be vulnerable to the actions of another party based on the
expectation that the other will perform a particular action important to the trustor, irrespective of
the ability to monitor or control the other party.” Zucker’s (1986) definition of trust as a
preconscious expectation suggests that vulnerability is only salient to trustors after a trustee has
caused them harm. Following this important trend, we incorporate the domain of vulnerability in
the business situation, since so many modern corporations in all their complexity, speed on
innovation, and cost-containment strategies imply vulnerability. Williams (2001) defines trust as
“one’s willingness to rely on another’s actions in a situation involving the risk of opportunism.”
In contrast, distrust entails “the belief that a person’s values or motives will lead one to approach
all situations in an unacceptable way” (Sitkin and Roth 1993).

In fact, trust-research “appears to be premised on the general idea that actors (i.e., individuals,
groups or organizations) become, in some ways, vulnerable to one another as they interact in
social situations, relationships and systems” (Bigley and Pearce 1998). As organizational
arrangements become more complex (as in the current health care or business environment),
actors’ vulnerability to one another could become broader and deeper, and trust may be one of the
best mechanisms actors have to cope with these new conditions (Bigley and Pearce 1998). Often,
stakeholders are unfamiliar with business executives, situations and constraints. Gathered
information in this regard may not be complete or totally reliable for establishing affective bonds
with one another. Stakeholder trust may be an effective surrogate in this regard.

Table 11.4 summarizes various complimentary theories of trust and distrust. They make some
key assumptions: 1) Trust and distrust are mutually inclusive and complementary bi-dimensional
conditions; that is, trust and distrust can coexist and reinforce each other. 2) Trust is good and
positive and distrust is also good and positive, although based on different expectations; trust
relates to beneficial expectations; distrust involves hazardous expectations; life experiences
involves both, and often at the same time. 3) Trust-distrust is embedded in the complex,
unfamiliar and vulnerable social context of human relationships.

Modern theory of trust and distrust makes room for both in a given business situation. That is:

 When one pays full attention to the role of social context in trust, then trust and distrust can coexist
(Greenhalgh 1995).
 Distrust is not mistrust, nor the opposite of trust, but a complimentary dimension that can enable
stakeholders, business executives, and governments to understand the specific and even positive role of
distrust in interpersonal trust.
 Trust-distrust is not a one-dimensional but a multidimensional construct (Greenhalgh and Chapman
1994).
 One could trust the executives under some dimensions, and legitimately distrust under other
((Lewicki, McAllister, and Bies 1998).

447
  Trust and distrust both entail certain expectations, but whereas trust expectations anticipate beneficial
conduct from others, distrust expectations anticipate injurious conduct (Lewicki, McAllister, and Bies
1998).
 Trust can exist in an environment of uncertainty (Bhattacharya, Devinney, and Pillutla 1998) that
every business situation implies.
 Trust can coexist with distrust under situations of unpredictability, error and situational complexity
(Bhattacharya, Devinney, and Pillutla 1998).
 The broader the experience of stakeholder-business executive relationships across multiple contexts
and encounters, the broader the bandwidth; partners accumulate knowledge of each other’s strengths
and weaknesses to generate interpersonal relationships of trust or distrust (Lewicki, McAllister, and
Bies 1998).
 Trust reduces social complexity and uncertainty by disallowing undesirable conduct from
consideration and replacing it with desirable conduct. Conversely, distrust functions to reduce social
complexity and uncertainty by allowing undesirable conduct and by disallowing desirable conduct in
considering alternatives in a given situation. In the latter case, distrust becomes a “positive
expectation of injurious action” (Luhmann 1979).
 Distrust simplifies the social world, allowing the individual to move rationally to take protective action
based on these positive expectations of harm (Luhmann 1979).
 Social structures appear most stable where there is a healthy dose of both trust and distrust to
generate a productive tension of confidence (Lewicki, McAllister, and Bies 1998).
 “Apart from a genuine openness to the possible necessity of distrust, benign and unconditional trust
appears to be an extremely dangerous strategy for managing social relations” (Lewicki, McAllister,
and Bies 1998).
 Trust that involves confident positive expectations and distrust that implies confident negative
expectations regarding trusting partners can operate simultaneously in the same individual, although
from different viewpoints (Lewicki, McAllister, and Bies 1998).
 Positive-valent (e.g., trust) and negative-valent (e.g., distrust) constructs are separable and can coexist.
The two constructs may systematically and negatively correlate, but their antecedents and
consequences may be separate and distinct (Cacioppo and Gardner 1993).
 Vulnerability is an important constituent of trust. That is, in the absence of risk or vulnerability trust
is not necessary, since outcomes are not of consequence to trustors (Moorman, Zaltman and
Deshpande 1992; Mishra (1996).
 Vulnerability accompanies trust. Trust as “the willingness of a party to be vulnerable to the actions of
another party based on the expectation that the other will perform a particular action important to the
trustor, irrespective of the ability to monitor or control the other party” (Mayer, Davis, and
Schoorman 1995).

[See Corporate Ethics Exercise 11.12]

Table 11.5 synthesizes various critical dimensions of trust under various theories of trust and
distrust. We include five basic theories of trust: a) Social Exchange, b) Agency Theory, c)
Rational Expectations, d) Psycho-logical Theory, and e) Dispositional Theory. Under each theory
of trust, we examine seven dimensions of trust: 1) Bases of trust-generation, 2) Nature of trust
generated, 3) Dynamics of trust-generation, 4) Implications of generated trust, 5) Typical benefits
of trust generated to the Trusted, 6) Typical benefits of trust generated to the Trustors, and 7)
Typical examples of trustor-trusted dyads. All dimensions under all five theories of trust are
useful in understanding trusting relations in business management. [See Corporate Ethics
Exercise 11.13]

Table 11.6 synthesizes stakeholder-business executive interpersonal relations as a function of

Low versus High, Trust and Distrust. Each quadrant suggests clear implications to various
stakeholders, including corporate and business executives. It is a challenge for all business
executives to generate in their stakeholders low fear, low skepticism and low cynicism such that
costs of monitoring and vigilance over all parties may be significantly reduced. On the other hand,
448
business executives also must do everything within their power and skills to generate high hope,
high faith, high confidence, high assurance in their stakeholders and welcoming high stakeholder
initiatives. [See Corporate Ethics Exercise 11.14]

Finally, Table 11.7 sketches costs versus benefits of various stakeholder-business executive
trust-distrust encounters. The bottom line of modern healthcare is profits so that the latter fuel
ongoing research and development and innovative modes of healthcare. [See Corporate Ethics
Exercise 11.15]

Trust in Buyer-Seller Business Management Relationships

Typically, a buyer-seller long-term exchange encounter represents a social exchange of
benefits. Obvious benefits voluntarily provided by the buyer include time, honesty, positive and
negative information about oneself, one’s credit, one’s family and social careers, and monetary
reward for the product or services; obvious benefits volunteered by the sellers relate to the quality
and price of their products and services, complemented by their competence, benevolence,
honesty, reliability, as reflected in care and concern for the customer.

The notion that customer relationships are key assets of any

organization, whether pro-profit or otherwise, is gaining increasing
prominence among both practitioners and academicians (Gruen,
Summers, and Acito 2000). This customer asset management
approach has been referred to as “relationship marketing,” and
recently, has received much attention in the area of building long
term relationships among channel members (Brown, Lusch, and
Nicholson 1995; Kumar, Scheer, and Steenkamp 1995; Morgan and
Hunt 1994). Marketing strategies such as book and record clubs,
frequent flyer programs, gold and platinum credit card valued
memberships, preferred customer memberships, and supplier guilds
are illustrations of practical long-term relationships. In the
professional service sector, lawyers, bankers, pastors, business
executives and doctors employ relationship-building approaches to
their mission and ministry.

Specific examples of relationship marketing include: a) Ritz-

Carlton with its personalized welcome and farewell of guests, using
the guest’s name whenever possible; b) Loyalty programs initiated
by airlines that consist not only of rewarding the most valuable
customers in the form of mileage prizes but also showing recognition
of providing special privileges (Wulf, Odekerken-Schröder, and
449
Iacobucci 2001); c) Compaq refused to sell computers directly to
customers because that would constitute competing with its own
dealers; the latter considered this refusal as a sign of Compaq’s
commitment to them, and the dealers reciprocated by providing the
brand greater support and shelf space (Day 1990); d) Proctor and
Gamble desisted from selling its top of the line men’s perfume “Boss”
over the Internet lest this practice should hurt P& G’s relationships
with Boss’s regular brick and mortar retailers.

The view of trust as a foundation for social order spans many

intellectual disciplines and levels of analyses (Lewicki, McAllister,
and Bies 1998: 438). Understanding why people trust, and how trust
shapes human relations, has been the central focus of psychologists,
sociologists, political scientists, economists, anthropologists, and
scholars of organizational behavior and marketing. Researchers
have seen trust as an essential ingredient for a healthy personality, a
foundation for interpersonal relationships and cooperation, and as a
basis for stability in social institutions and markets. Mutual trust
between business partners has been found to be very vital in the
uncertain, complex, volatile and fast-paced business environment of
today, especially given modern developments of globalization,
strategic global competitive alliances (Prahalad and Hamel 1994),
and multicultural and multilingual relations (Cox and Tung 1997;
Sheppard 1995).

Types of Business Exchanges and Relationships

Relationships in business management are best understood against

exchanges. Gundlach and Murphy (1993: 36-8) distinguish three
fundamental exchanges and exchange-relationships:
Transactional Exchanges: These involve discrete, single, short-term exchange events encompassing a
distinct beginning and a sharp ending (Dwyer, Schurr, and Oh 1987: 13). The purpose of exchange is
narrow: economic goods and services. In general, the investments of time, cost, switching cost, energy,
emotions and search are small. There are no buyer-seller duties before the transaction; if there are
any duties during the transaction, they are completely determined upfront (Golberg 1976).

Contractual Exchanges: These involve a series of many linked, extended, longer-durations exchange
events, each exchange conditioned on the previous, and often involve extended beginnings and
extended endings. These are open-ended contracts in which certain terms (e.g., order amount, price,
450
 terms of trade) may be deliberately left open to be agreed on at a later date. The purpose of exchange
is broad: economic goods and services, social relations, and long-term initiatives. The investments of
time, cost, switching cost, energy, emotions and search are moderate. Besides buyers and sellers, these
contractual exchanges may involve several firms, several functional departments (e.g., purchasing,
R&D, production, costing, financing, marketing, and PR) within them, and boundary spanning
linkages and coordination. They may involve equity (as in foreign wholly owned or majority owned
subsidiaries, joint ventures) or no equity (as in licensing agreements, turn key projects, collaborations,
and some forms of strategic alliances). There are distinct inter-organizational duties before the
transaction; and several emerge during and after the transaction. Typical consumer contractual
exchanges involve consumers’ credit-unions, buyer cooperatives, nursing home care, and child care
services.

Relational Exchanges: These involve extended, longest-durations exchange events traceable to

previous beginnings and endings, with several transactions merged together, and often involve
ongoing relationships (Dwyer, Schurr, and Oh 1987: 13), a complex web of operational and social
interdependencies. These are open-ended social or legal contracts in which certain terms (e.g., order
amount, price, and terms of trade) may be deliberately left out to be agreed on at a later date, if ever.
The purpose of exchange is broad: economic goods and services, social relations, and longer-term
initiatives. The investments of time, cost, switching cost, energy, emotions and search are high.
Typical business examples include long-term relations between suppliers, customers, banks, investors,
shareholders, local communities, government agencies, and international institutions (e.g., WTO,
World Bank, UNIDO). Typical consumer examples include long-term spousal and family
relationships, long-time neighborhoods, church or religious associations, professional associations,
fraternities, and guilds.

All the three exchanges are best placed on a continuum of relationships. The depth, quality,
value and duration of relationships increase from transactional to contractual to relational
exchanges. Similarly, the depth, quality and value of morality, trust, commitment, responsibility
and justice increase from transactional to contractual to relational exchanges.

Table 11.8 spells out some business responsibilities implied in transactional, contractual, and
relational exchanges under various transaction typologies. As a contrast, we are gradually
witnessing the emergence and predominance of trusting relational exchanges today. Relational
exchanges are connected over time with mutually benefiting anticipated goals and expectations,
careful planning, trust and commitment (Gundlach, Achrol and Mentzer 1995; Morgan and Hunt
1994). Marketing executive responsibilities increase as one gets involved with exchanges from
pure one-time discrete transactions to global strategic alliances.

The first two types of exchanges in Table 11.8 are discrete, while the remaining eight are
increasingly relational. However, discrete and relational exchanges are not simply two categories
of exchange, but run on a continuum from discrete to relational exchanges (Anderson and Narus
1991; Dwyer, Schurr, and Oh 1987; Heide and John 1992). The gradual transition from discrete
to relational transactions in marketing has its own implications to marketing executives: it calls
for more relational trust and mutual responsibility between partners of relational exchanges. [See
Corporate Ethics Exercise 11.16]

1. 1 TRUST AND RELATIONAL CO N T RACT I N G IN BUSINESS

MANAGEMENT

Basically, a contract states relationships between an enterprise and its stakeholders

(Eisenhardt 1989). An enterprise is any pro-profit or non-pro-profit institution such as firms,

451
corporations, associations or governments that offers a product or service to its target markets. A
contract can take various forms such as exchanges, transactions, or the delegation of the decision-
making authority, as well as formal legal documents.

There are various reasons why we need contracts in our transactions with people. The primal
reason is the nature of the society we live in. Our freedom is expanded by the recognition of
contractual rights and duties (Rawls 1971). Because people in any society are not very isolated
from others, share common needs and wants with others, need others in the areas they are not
specialized in, and cannot be certain of the future, that contracts arise (Macneil 1980). Without
the institution of contracts and the right and duties that accompany them, modern business
societies could not exist nor cooperate (Velasquez 1988). All contracts presume choices that
project into the future, and imply mechanisms of exchange relationships that reduce risk and
uncertainty (Lusch and Brown 1996).

Four basic ethical rules that govern social contracts are (Garrett, 1986: 88-91): 1) Both parties
to a contract must have full knowledge of the nature of the agreement they are entering; 2) Neither
party must intentionally misrepresent the facts of the contractual situation to the other party; 3)
Neither party must be forced to enter the contract under duress or force; and 4) The contract must
not bind the parties to an immoral act. Contracts that violate one or more of these ethical rules
have been traditionally declared null and void since they diminish freedom that constitutes the
essence of contracts (Rawls 1971: 342-50). The parties have a duty of complying with the terms
of the contract. Failure to do so treats the other contracting party as a means and not as an end
(Kant 1964), and violates mutual trust (Rawls 1971).
An enterprise has contracts (with varying degrees of formality and specificity) with its
stakeholders such as customers and clients, creditors and suppliers, shareholders and bondholders.
22
Basically, the enterprise may be considered as a "nexus of contracts between its top managers
and its stakeholders" (Jones 1995: 407). The board of directors and shareholders can influence
these contracts. In as much as enterprise managers have a strategic position by which they enter
directly or indirectly into contracts with various stakeholders, they can be considered as
contracting agents for the enterprise.

In general, legal and formal agreements define transactional normative contracts, while ethical
and moral principles determine relational normative contracts (Gundlach and Murphy 1993).
Business management can have both individual and group contracts that could be implicit or
explicit, legal or normative, transactional or relational. All these dyads (explicit/implicit,
legal/normative, transactional/relational) are not categorical but are exchanges that run on a
continuum from implicit to explicit, from legal to social normative, from discrete, short-term
transactional to long-term relational contracts. Other things being equal, legal responsibility
increases with explicit, legal, and transactional contracts, whereas moral responsibility increases
with implicit, normative and relational contracts.

22
Contracts could be implied or implicit, explicit or normative, depending upon how concrete, specific and comprehensive the
terms of contracts are spelled out. Individual contracts are between individuals, while group contracts are between groups.
Contracts could be viewed and drawn from within by individuals or groups, or by a third party of outsiders. Contracts are
normative when they reflect a social consensus and reinforcement of specific behaviors and exchange patterns, - that is, a mutual
understanding exists between parties as to how they will interact and deal with each other, including the handling of future
contingencies (Lusch and Brown 1996). In general, normative contracts are group contracts viewed from within by the contracting
groups.

452
 Most transactions take place today in the context of ongoing relationships between producers,
suppliers, marketers, customers and consumers. Repeat purchases go beyond pure transactions to
brand loyalty, and sometimes, to an on-going buyer-seller relationship (Ganesan 1994; Kalwani
and Narayandas 1995). Industrial buyer-seller relationships have moved from arm's-length
adversarial price-battles to more friendly mutually dependent commitments (Jackson 1985). Even
market transactions between competitor firms have become "domesticated" (Arndt 1979) – they
have become more relational than adversarial. Such domesticated transactions take place between
the focal firm and its supplier firms, the focal firm and its channels (Anderson and Narus 1990,
1991; Heide 1994), between the focal firm and even its competitors, especially in the form of
strategic alliances and marketing co-alliances.

We invoke two responsibility principles from the management literature in support of social or
relational contracts:
Social contract: Corporations are responsible because of their social contract of justice behavior
with society; that is, they must constrain self-enhancement to allow society to act and grow
collectively (Dunfee 1999; Walster, Walster, and Berscheid 1978).

Reciprocal Socialization: We are continually taught that if we treat others fairly, we will also be
treated fairly (Lerner 1977). This is a version of the golden rule.

Day (2000) speaks of a “relationship spectrum” that includes an array of three relationship types:
transactional exchanges, value-adding exchanges, and collaborative exchanges. He suggests that an
increasing amount of marketing related capability is required as one moves from transactional to value
adding to collaborative exchanges.

Based on the variety of definitions and bases of trust provided by scholars, Table 11.4 lists the
critical characteristics (in italics) of trusting relationships in marketing. Ongoing trust-based
relationships with a set of customers can represent the most important business asset of the
corporation (Webster 1992). Continuing to be informed experts on the customers and keeping the
rest of the corporation network informed about them is the foremost duty of trust-building
relationships in marketing (Webster 1992).

In the wake of this trend of trust and long-term relationships in marketing, one should expect
that both suppliers and customers might build up their trust in those marketing executives who
consistently exhibit high levels of responsibility to all stakeholders. Obviously, the current thrust
of trust and relationships in marketing practice should also enhance the sense of executive
responsibility among marketing managers and practitioners.

Responsibility is best exercised in fostering long term relationships with stakeholders

(Drumwright 1994; Ganesan 1994) in a spirit of mutual trust and commitment (Gundlach and
Murphy 1993; Morgan and Hunt 1994). The additional marketing executive responsibilities
accrue from the nature of relational trust. Howsoever conceived, defined or implemented, trusting
long-term relationships imply and mandate higher moral responsibilities than discrete and short-
lived transactional relations mandate. [See Corporate Ethics Exercise 11.17 and 11.18]

Trusting Relationships in Business Management to Lessen Transaction Costs

453
 Exchanges and relationships can be facilitated and honored through legal processes and
contracts; but reliance on law can be costly in terms of both resources and time and may
potentially erode buyer-seller interdependence and relationships (Gundlach and Murphy 1993).
According to Williamson (1975, 1981), an understanding of transaction costs is central to the
study of organizations. Transaction costs include the costs of reaching an agreement satisfactory
to both sides of an exchange or contract, adapting the agreement to unanticipated contingencies,
and enforcing its terms. Nevertheless, because of bounded rationality and the costs of writing,
negotiating, bargaining, and implementing a contract, a comprehensive contract involving a long-
term relationship is not possible; at best, contracts are incomplete but viable. In such incomplete
contracts the hazards of opportunistic behavior are greater because the termination of the
contracted relationship cannot be achieved easily. But all these hazards can be mitigated or
eliminated if there is growing trust between exchange-contract partners. Mutual trust helps
partners to agree to adapt unanticipated contingencies in a mutually acceptable and profitable
manner. In such trusting relationships, parties can easily respond to current inequities through
equitable solutions that can arise and span over a long period of time (Ganesan 1994).

That is, relational exchange participants rely more often on extra-legal (“domesticated”)
governance to maintain their relationships and resolve disputes (Arndt 1979; Beale and Dugdale
1975). The Japanese Keiretsu exemplifies this mode of maintaining trade and business
relationships among partners. Interpersonal trust can be an important social resource for
facilitating cooperation and enabling social interactions between various actors in a business
environment (Coleman 1988; Zucker 1986). Trust reduces the need to suspect and monitor each
other’s behavior, the need to formalize monitoring and control procedures, create completely
specified contracts, and can also thereby reduce negotiation costs (Powell 1990). The efficiency,
adjustment, and even survival of any social group depends upon the presence or absence of trust
(Rotter 1967).

If trust facilitates informal cooperation and reduces negotiation costs, then it is invaluable to
organizations that depend upon professional people, cross-functional teams, interdepartmental
synergies, temporary work groups, and other cooperative structures to coordinate customer
satisfaction management (Creed and Miles 1996; Powell 1990; Ring and Van de Ven 1994). Further,
in those firms where flatter organizations are advocated, trust can certainly facilitate cooperation
across boundaries such as functional areas, divisions, and management-versus-union lines (Williams
2001). Business executives continually cross group boundaries to secure cooperation from business
professionals over whom they have no hierarchical control, and this may be particularly difficult and
challenging across cross-functional, cross-cultural, cross-religious and cross-social groups that are
commonly encountered in American business environments (Fiske and Neuberg 1990; Kraemer
1991; Kraemer and Messick 1998; Stikin and Roth 1993).

The best device for creating trust between parties to a business exchange is to establish and
support trustworthiness of both parties (Hardon 1996). Building trustworthy relationships by
habitually discharging mutual obligations between exchange partners can mitigate the risk of
opportunism on the part of both parties, and forestall costly legal battles and the consequences of
expensive malpractice insurance premiums (see Whitener et al., 1998).

Moreover, if beliefs about trustworthiness are often associated with the same social and
cultural (ethnic and linguistic) group memberships, and propensities of untrustworthiness are
associated with different social and cultural groups, then developing interpersonal trust as a
bonding mechanism may be very important in marketing products and services in American
454
markets that have widely cross-cultural professional teams and customers (Brewer and Brown
1998; Kraemer 1994; Kraemer and Messick 1998). However, there is also a stream of literature
that maintains that dissimilar groups can signal trustworthiness, especially if professionals from
different groups bring complementary skills and competences as demonstrated by board
certification, ethics and training (McKnight, Cummings, and Chervany 1998; Meyerson, Weick,
and Kraemer 1996).

Business Management Stakeholder-Executive Cooperation

Trust has long been considered fundamental to cooperative relationships (Blau 1964; Deutsch
1958). Stakeholder trust is morally desirable: the emotional states associated with trust suggest its
goodness; it creates economic benefits for all parties to the exchange (Wicks, Berman and Jones
1999). Mutual trust in stakeholder-business executive relationships – when both feel they can
trust each other and are worthy of trust in return, provide a critical basis for self-esteem and a
sense of security (Baier 1994). In contrast, when people distrust others and do not trust
themselves their self-esteem may be harmed and their sense of security compromised. Since trust
is a moral good, all people involved in a business environment should try both to cultivate trusting
relations and to be seen as trustworthy (Baier 1994; Wicks, Berman and Jones 1999). Since
business relationships with stakeholders are often among relative strangers (who are likely to be
self-interested), mutual trust building is even more imperative (Frank 1988). In addition,
trustworthiness of corporate and business executives can be a source of competitive advantage
(Barney and Hansen 1994).

Working together well requires some level of trust (Bromiley and Cummings 1995), and
increasingly common new work encounters demand that the parties come to trust each other
quickly (Meyerson et al., 1996). Stakeholder-business executive encounters need working
together and involve increasingly new work encounters, both of which need high and quick levels
of trust for productive outcomes. Both need to know how trust initially forms.

A central idea in the theory of partnering suggests that differences

in trust and commitment are the features that most distinguish
customers as partners from customers as single transaction buyers
(Berry 1995; Webster 1992). Theories of partnering propose that
customers with strong relationships not only have higher levels of
trust and commitment, but also that trust and commitment become
central in their attitude and belief structures (Morgan and Hunt
1994). In personal selling or retailing, what differentiates relational
partnerships from functional (or transactional) relationships is the
level of trust and commitment to the other party (Levy and Weitz
1995; Weitz, Castleberry and Tanner 1995).
Social network literature assumes that multiplex relationships are simply (or
unidimensionally) trusting in nature (Husted 1994; Ibarra 1995). That is, the stakeholder-business
executive relationship or encounter should be based on multiple linkages: professional, academic,
455
diagnostic, communication, confidentiality, compassionate caring, listening capacity, interaction
capacity, gentle bedside manners, good follow-up, and the like. Both trust and distrust can exist
within multiple relations (Lewicki, McAllister, and Bies 1998), but by and large, the higher the
bandwidth (richness and scope of relationships) and the larger number of linkages, the higher are
the chances of building trusting than distrusting relationships. The broader the experience of
stakeholder-business executive relationships across multiple contexts and encounters, the broader
the bandwidth; partners accumulate knowledge of each other’s strengths and weaknesses to
generate interpersonal relationships of trust (or distrust). In this connection, skeptical or
indifferent behavioral attitudes can undermine the potential for developing trusting relationships
(Wicks, Berman, and Jones 1999).

Knowledge-based trust theories propose that trust develops over time as one accumulates
trust-relevant knowledge through experience with the other person (Holmes 1991; Lewicki and
Bunker 1995). Thus, time and interaction history can develop high levels of trust.

Exhibit 11.5 checks trust-distrust combination possibilities with case situations based on the
theories that assert coexistence of trust with distrust. [See Corporate Ethics Exercise 11.19]

Reducing Opportunistic Behaviors:

The Role of Trust and Justice

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 the
Transaction Cost Economics (TCE) theory of Williamson (1975, 1985, 1990, 1991, 1993)
(marketing) organizations exist because of their superior abilities to attenuate (marketing)
opportunism through the exercise of hierarchical (both rational and social) controls that, in
general, are not accessible to "markets". However, 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
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. This section
examines the roles of dual factors: trust (rather subjective) and justice (more objective) in
reducing opportunistic behavior in marketing transactions.

Opportunism and Opportunistic Behavior

Opportunism is a central concept in the Transactions Cost Economics (TCE) theory of
Williamson (1975, 1985, 1993). 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 of
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

456
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). However, 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).
TCE makes two behavioral assumptions: a) opportunism, which suggests that one cannot
predict others' behavior, and b) bounded rationality, which implies that 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 part can be furthered by opportunism (Williamson 1975). These people, without being aware,
are instrumental in opportunistic outcomes of others.

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 are acts of self-interest with guile (Goshal and Moral
1996).

Opportunism differs from mere "self-interested behavior". The latter is presumed to be

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, however, does not specify the mechanisms (e.g., economic institutions,
markets) through which opportunism is created or reduced (Hart 1990), and instead assumes it 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) can be
controlled by proper social sanctions.23

Determinants of Opportunistic Behavior

23
Williamson's theory of TCE has been critiqued by several scholars. 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,
organization begin where markets fail; for one thing, organizations may not weed out all
opportunism by rational or social control, and the other is, 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 "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).

457
 Various factors spurring opportunism have been identified:

o According to TCE, opportunistic behavior is positively related to the opportunity (i.e., expected
benefits) for such behavior, and these are primarily determined by the characteristics of the
transaction such as "asset specificity"; when the latter is high it acts as a "locomotive" for
opportunism (Williamson 1985: 56). That is, when the transaction partner has invested much
capital and technology in the transaction-exchange that cannot be used for other products, the
predator could "hold-up" such assets by being opportunistic; such opportunism is the ultimate
cause of the failure of the free markets and for the existence of organization.

o 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. Opportunistic behavior is also 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).

Further, when the outcomes of transaction-exchanges are highly uncertain, opportunistic

behavior can go undetected (Hill 1990: 508), 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, and when opportunistic behaviors
are facilitated by a high-discretion (that is, non-fiat, non-monitored) environment within an
organization, then opportunism thrives (Goshal and Moran 1996).

How to Control Opportunistic Behavior

Williamson (1985) postulated three hierarchical governance mechanisms as controlling
opportunistic behavior: fiat (command), monitoring, and incentives. These three are "sanctions"
that are "required not as a normal motive for obedience, but as a guarantee that those who would
voluntarily obey shall not be sacrificed by those who would not," (Williamson 1991: 191).

Fiat is a blunt instrument. Monitoring and incentives may have both positive and negative
effect on opportunistic behavior. For one thing, fiat, monitoring, and incentives imply costs (thus
eroding competitive price advantage) and other practicality considerations, both of which may
discourage the use of sanctions (Goshal and Moran 1996). Further, the use of surveillance,
monitoring, and authority may lead employees to distrust the management, which in turn may lead
to increased surveillance and control. For the controllees, the use of control implies that they are
neither trusted nor trustworthy to behave appropriately without such controls. Managers believe
that good behavior of employees is because of the controls they applied, and not because of any
intrinsic motivation on the part of the subordinates, and hence, managers may develop a jaundiced
view of the employees.

Moreover, increased use of rational controls increases the organization's dependence on those
controls, shifts voluntary compliance to compulsory compliance and work-to-rule, and encourages
more-difficult-to-detect opportunistic behavior, and eventually, the costs of enforcing these
controls will grow such that they are no longer a viable (cost-effective) option for the organization
(Goshal and Moran 1996). The cost of implementing such controls will build up "unneeded
bureaucrats and wasteful bureaucratic practices" that breed inefficiency (Williamson 1991b: 78).
Using hierarchy as a response to the threat of opportunism "involves additional bureaucratic costs
458
that do not have to be borne by actors who tacitly agree to cooperate and trust each other," (Hill
1990: 508).

If, as discussed earlier, uncertainty causes immeasurability of performance outcome, and if

immeasurability triggers opportunistic behavior, then one can control opportunistic behavior by
controlling uncertainty in organizations. Basically, there are two sources of uncertainty in
organizations: a) external environment arising from the complexity and dynamism of technologies
and markets; b) internal environment of the organization, arising from discretionary behavior of
individuals. Hence, organizations will reduce opportunistic behavior by creating low discretion,
high-compliance environment inside the organization, and they will choose external environments
of less complex and less volatile technologies (Eisenhardt 1985). In general, large-volume,
standardized processes and products, and mature businesses will involve highly programmed
(non-discretionary) activities - but these are market mechanisms and not organizational controls.
Hence Hill (1990) argued that for such businesses, markets are likely to possess superior
efficiency characteristics than those of organizations.

Surveillance that is perceived as controlling threatens the controllee's personal autonomy,

damages self-perception, and decreases his/her intrinsic motivation from consummate cooperation
to perfunctory compliance or work-to-rule practice (Enzle and Anderson 1993). As extrinsic
rewards are increased, there is a loss of intrinsic motivation and commitment, both of which may
not be restored when extrinsic rewards are later withdrawn (Baker, Jensen and Murphy 1988).
What is even worse, surveillants may come to distrust their targets as a result of their own
surveillance, while targets themselves become unmotivated and untrustworthy, which in turn may
require more intensive surveillance, and increased surveillance may further damage the target -
thus developing a "pathological spiral relationship between the controllers and the controllees
wherein both trust and trustworthiness deteriorate (Enzle and Anderson 1993: 263).

One could use less formal (social control) governance mechanisms to attenuate opportunism
or change opportunistic attitudes, such as establishing mutuality of goal-preferences, ensuring
mutual communications to build motivation and commitment, and creating normative integration
by inviting individuals to internalize values and goals of the organization. However,
internalization of goals is rarely uniform within an organization. Those who internalize values
less may experience the higher internalization of others as a threat or as a coercive form of peer
pressure to conform (Goshal and Moran 1996). Hence TCE considers social control as a
"nonviable" alternative to attenuate opportunism (Williamson 1993: 98).

One could form "clan organizations" wherein members have attained high and long-standing
levels of socialization, strong social memory, and stable membership that they are very aware that
interests of an organization cannot be furthered by opportunistic stratagems of any sort (Alvesson
and Lindkvist 1993). Were "people in a clan to believe that others would intentionally attempt to
misrepresent and seek personal goals, at the expensive of the collective good, then, the
cooperation and tolerance of short-run inequities necessary for the clan to function would
disappear" (Wilkins and Ouchi 1983: 476). The clan form of an organization therefore perceives
no threat of opportunism, even from opportunists (Goshal and Moran 1996).

Whatever the form (rational or social) control, there must be a "control-context fit" for control
to extenuate opportunism (Eisenhardt 1985; Ouchi 1979). That is, certain kinds of control

459
mechanisms are more appropriate and effective than others for certain kinds of businesses and
activities.

Thus, if opportunistic behavior should be effectively controlled, then the control tools require
high measurability of behavioral outcomes and a control-context fit, both of which maybe hard to
obtain (Goshal and Moran 1996). Hence, the need of controls beyond the rational and social, to
moral control which calls for trust and justice. Table 11.9 summarizes business executive
responsibilities under opportunistic threats in the company and among external stakeholders. [See
Corporate Ethics Exercise 11.20-11.22]

Corporate Integrity as Determining Trust

In the organizational behavior (OB) and human resources
management (HRM) literature, scholars have paid considerable
attention to the topic of integrity. For instance, in the context of
employee selection, scholars have examined integrity as a predictor
of job performance and counterproductive behaviors (for a review,
see Ones, Visvesvaram and Schmidt 1993). Researchers have also
explored the role of integrity in corporate leadership (Bass 1990;
Kirkpatrick and Locke 1991; Yukl and Van Fleet 1992). Other
scholars have investigated the function of integrity in determining
trust in organization (Butler and Central 1984; Hosmer 1995; Mayer,
Davis and Schoorman 1995). Despite this stream of management
literature on integrity and its great potential for building trust, the
concept of integrity is not clear, or fully defined or conceptualized
(Becker 1998; Rieke and Guastello 1995). Specifically, integrity has
been confounded with allied notions such as honesty (Butler and
Cantrell 1984; Yukl and Van Fleet 1992), conscientiousness (Barrick
and Mount 1991), trust (Mayer, Davis and Schoorman 1995), or a
composite of personality traits such as dependability, adherence to
conventional norms, drug avoidance, job commitment, moral
reasoning and sociability (Sackett, Burris and Callahan 1989).
Some Confounding Definitions of Integrity:
o “Integrity means that a person’s behavior is consistent with espoused values and that the person is
honest and trustworthy” (Yukl and Van Fleet 1992: 151).

o Integrity is the reputation for truthfulness and honesty of the trusted person (Butler and Cantrell
1984). Hosmer (1995) incorporates this notion into his theory of organizational trust.

460
 o “The relationship between integrity and trust involves the trustor’s perception that the trustee adheres
to a set of principles that the trustor finds acceptable (Mayer, Davis and Schoorman 1995: 719).

Honesty and Integrity

The first two definitions related integrity to honesty. Honesty, from an objectivist view, is
the refusal to pretend the facts of reality are other than what they are; it is a recognition of the fact
that one cannot fake existence or facts regarding the external world. Integrity, on the other hand,
is the recognition of the fact that one cannot fake one’s conscience or consciousness, i.e., facts
regarding one’s true principles and values (Rand 1957:1019). Within the framework of the Big
Five theory of personality, conscientiousness “reflects dependability; that is, being careful,
thorough, responsible, organized, and planned,” and it also “incorporates volitional variables, such
as hardworking, achievement-oriented, and persevering” (Barrick and Mount 1991:4). However,
one can vary widely on dimensions such as being careful and organized. For instance, an absent-
minded professor may be careless (e.g., misplacing things) and not organized (say, in his lectures),
but may be ruled by solid moral principles such as justice, productivity and reason. According to
Collins and Schmidt (1993:680), conscientiousness “reflects such characteristics as dependability,
carefulness, and responsibility.” Thus, honesty requires that one does not use one’s consciousness
to distort reality, and integrity requires that one does not betray the convictions of one’s
consciousness in action (Becker 1998:158). Integrity is a manifestation of one’s rationality;
irrational people do not possess integrity. Integrity requires that reason, not emotion or
popularity, be one’s primary guide. [See Corporate Ethics Exercise 11.24]

Integrity and Commitment

The third definitional approach (Mayer, Davis and Schoorman 1995: 719) advances the
concept of integrity, as it recognizes that integrity involves an individual’s commitment to some
principles. To have integrity, one must adhere to one’s conviction about moral principles. One
such principle is honesty, and honesty best serves one’s best self-interests. Other principles for
integrity are those of independence, justice and productivity. Honesty is a necessary condition for
integrity, but not its sufficient condition (Becker 1998: 158). Responsibility also relates to
integrity insofar as it involves dependably doing what one has promised to do. Thus, prima facie
valid integrity items are (Becker 1998:159).
1. I value reason, purpose and self-esteem;
2. I am rational, honest, independent, just, productive, and proud;
3. My values, goals, and behavior are congruent; and
4. I am willing to do whatever is necessary to live according to my most cherished values .
However, these principles could be subjective (personal integrity) or intersubjective (those
deemed acceptable by the trustor), the latter is called moral integrity (Mayer, Davis and
Schoorman 1995). In any case, the notion of integrity succumbs to some form of moral
relativism. The latter holds that there are no absolute principles, but, rather, that all ethical
principles are valid relative to individual choice and cultural norms; that is, principles and values
are subjective, relative, and socially constructed or created (rather than discovered) via inner
psychological processes (Peikoff 1991). Under such an approach, historically evil people could
still be deemed to have integrity. Hitler followed his own principles [e.g., promotion of the
master race and those of others (e.g., Nazis)]; Saddam Hussein followed his own principles of
ethnic purity and those of others (say, Shiite Muslims who advocated such principles). Such an
approach could not really distinguish a morally integrated person from an amoral one. It would
461
subjugate morality to personal or public opinion, even if such opinions were incorrect or evil
(Becker 1998).

Drawing selectively on Aristotle, Solomon (1992) argues for a virtue-based holistic

conceptualization of business ethics that views human activity in business organization as
embedded in larger social and existential concerns. “Altruism isn’t self-sacrifice; it’s just a more
reasonable conception of self, as tied up intimately with community, with friends and family who
may, indeed, count more than we do” (Solomon 1992:106). Solomon (1992) argues that virtues
are characteristics that define one’s connections with society and community; that participation in
the business enterprise should be thought of as one aspect of living well, cultivating self-respect,
and developing satisfying social interdependencies. Solomon (1992) argues that integrity is a
multifaceted attribute that reflects, among other things, moral courage (i.e., the will to do what
one knows one should do), the ability to balance institutional loyalty with moral autonomy, and
the avoidance of hypocrisy and self-deception (i.e., practicing what one preaches). Integrity also
encompasses a kind of moral humility – an understanding that one’s principles are not universal.
“Integrity does not mean being the moral rock around which the rest of the earth resolves”
(Solomon 1992:172).

Randian objectivist notion of integrity is egoistic opportunism

(Barry and Stephens 1998). Integrity involves openness, affection
and flexibility; an organization known for corporate integrity is
composed of open-minded, caring individuals. Integrity surely
involves principles and policies, but it also involves a sense of social
context, moral courage, and standing up for others as well as for
oneself (Solomon 1992:174). While Becker (1998) endorses Randian
objectivism that attributes integrity to an individual who is honestly
and consistently serving self-interest as long as no tangible harm is
inflicted on others, Solomon’s (1992) notion of integrity challenges a
wider test of one’s ability to act in consistent and principled ways
that potentially benefit rather than merely avoid harming, members
of social communities within which one’s actions are embedded. [See
Corporate Ethics Exercise 11.23]
Integrity in the Integrative Social Contracts Theory (ISCT)

Adapting contractarian philosophies of Hobbes (1651/1950), John Locke (1690/1988) and

Rawls (1971) to business ethics, Donaldson and Dunfee (1994; 1995; 1999) argue for bounded
moral rationality: business executives may not be able to comprehend all the moral implications
of ethical dilemmas, which they must resolve. Hence business executives and organizations fulfill
ethical obligations through consent and through conformity to social norms. Some of these norms
are microsocial contracts with various stakeholders including local communities in which the
businesses operate. These microsocial norms are legitimate (i.e., ethical) to the extent they

462
conform to larger macrosocial norms called metanorms or hypernorms (fundamental moral
principles) having roots in cultural, religious and philosophical beliefs. Hypernorms are
unspecified or indeterminate principles “fundamental to human existence” (Donaldson and
Dunfee 1994: 265). They reflect a convergence of beliefs about morality, rights and obligations.
Hypernorms are contingent on widespread agreement of social and business communities.

Thus, ISCT emphasizes the role of communities in the lives of individuals in general, and
business executives in particular. Deontologists (e.g. Kant 1797/1996; Rawls 1971) and
psychologists who study moral development (e.g., Kohlberg 1981) agree that moral maturity is
predicated upon principles, rational and impartial ethical choice. However, they see such a moral
choice antithetical to Rand’s selfishness or her notion of egoism. Existing approaches to business
ethics propose a more textured analysis of how moral dilemmas arise and are resolved by
individuals who function within multiple and overlapping social, religious and philosophical
systems. Thus, Rawls (1971) argued that we can construct a just society only when we, acting
rationally, realize that our self-interests are inextricably linked with those of fellow citizens. In
contrast, Rand’s principles are deterministic within the contours of an appropriate social and
political system. ISCT‘s micro-social norms would be equivalent to them, with a difference.
Both micro-social and macro-social norms are based on both individuals and societies that
demand a wider consensus. In other words, ISCT goes far beyond Rand’s narrow confines of
individual morality.

What Constitutes a Good Trusting Leader?

Was Adolph Hitler a good leader? Was he a good leader in so far as he mirrored the hopes of
the German people, and was he a bad leader in as much he also reflected the hates of the German
people? As a leader he won elections consistently, and he fulfilled his promises by changing
Germany along lines his followers wanted. Obviously, Hitler was a leader, but was he a moral
and ethical leader? Was he virtuous leader? Was he a trusting leader?

James McGregor Burns proposed a theory of transforming leadership that is based on ongoing
moral relationship of leaders and followers. In his book, Leadership, Burns (1978) transforming
leadership as a relationship in which leaders and followers morally elevate each other. For Burns,
leadership is about change and sharing common purpose and values. Transforming leaders help
people change for the better and empower them to improve their lives and the lives of others. For
Burns, the values of moral leadership are those of the Enlightenment – liberty, equality, and
community – a big picture view of the ultimate ends of leadership. Moral and ethical leadership
translates these values into being honest, fair and just. Following Burns (2004), Table 11.10
identifies ethical virtues, ethical values, and moral values that should characterize various types of
business management leadership.

Delving deep into the psychological and moral depths of leadership, Hollander (2004)
describes the leader-follower relationship as a unified interdependent relationship held together by
loyalty and trust, and rooted in the leader’s commitment to principles of justice, equity,
responsibility, and accountability in the exercise of authority and power. Similarly, analyzing the
role of emotions in the leader-follower relationship, Solomon (2004) argues that trust is the
emotional core of leader-follower relationship, and that we can better understand this relationship
by analyzing how the leaders and the led provide mutual trust.

463
 Concluding Remarks

The view of trust as a foundation for social order spans many

intellectual disciplines and levels of analyses (Lewicki, McAllister,
and Bies (1998: 438). Understanding why people trust, and how trust
shapes human relations has been the central focus of psychologists,
sociologists, political scientists, economists, anthropologists, and
students of organizational behavior and marketing. Scholars have
seen trust as an essential ingredient for a healthy personality, as a
foundation for interpersonal relationships, as a foundation for
cooperation, and as a basis for stability in social institutions and
markets. Mutual trust between business partners has been found to
be very vital in the uncertain, complex, volatile and fast-paced
business environment of today, especially given modern
developments of globalization, and strategic global competitive
alliances (Prahalad and Hamel 1994), multicultural and multilingual
relations (Cox and Tung 1997; Sheppard 1995).
Currently there is much focus on mutual trust and trustworthy relationships in marketing,
especially in relation to commitment in marketing (Achrol 1991; Gundlach, Achrol, and Mentzer
1995; Morgan and Hunt 1994), and buyer-seller relationships and contracts (Doney and Cannon
1997; Dwyer, Schurr, and Oh 1987). The high levels of trust characteristic of relational
exchanges enable exchange partners to focus on the long-term benefits of the relationship
(Ganesan 1994), ultimately enhancing competitiveness and reducing transaction costs
(Noordewier, John, and Nevin 1990). Thus, a company representative who proves to be dishonest
and unreliable could easily jeopardize long-term relationship with a trusted supplier (Kelly and
Schine 1992). On the contrary, highly trusted salespeople have been found to sustain customer
commitment despite management policies that may not always benefit the customer (Schiller
1992).

Most organizational scientists (e.g., Granovetter 1985; Ring and Van de Ven 1992) view trust
as a mechanism that mitigates opportunistic behavior among exchange partners. Trusting long-
term relationships imply and expect higher moral responsibilities than discrete and short-lived
transactional relations expect. Trust is also a dynamic and continuous phenomenon (Flores and
Solomon 1998); that is, one can both trust and distrust people at the same time (Luhmann 1979),
given different experiences within the various facets of complex interpersonal trusting
relationships (Lewicki, McAllister, and Bies 1998). As relationships unfold one can continually
update one’s information and emotion base, and thus, one’s decisions to trust or distrust (Wicks,
Berman, and Jones 1999). Hence, it is more important to develop one’s willingness to trust, rather
than focus on being trustworthy.

464
 Currently, there is a woeful lack of knowledge and technology in building trust of the public in
the health care system; in fact, some medical professionals are even cynical, believing that loss of
trust was so pervasive in our commercialized health care system that no initiatives to build it
would likely succeed (Mechanic and Rosenthal 1999). Thus, creating social and interpersonal
trust should be a part of well-defined technology of structural innovations, positive incentives,
teamwork, interpersonal skills, and disease management initiatives (Landon, Wilson, and Cleary
1998; Scott et al. 1998).

465
 Exhibit 11.1: Checking Interpersonal Trust Levels with Case Situations
Dimension of Ethics of Trust
Explored
“One of the most salient factors in the
effectiveness of our present complex social
organization is the willingness of one or
more individuals in a social unit to trust
others” (Rotter 1967: 651). Trust is the
“cornerstone of long-term relationships”
(Spekman 1988: 79).
Trust is generally viewed as an essential
ingredient for successful relationships
(Garbarino and Johnson 1999).
Theories of partnering propose that
stakeholders with strong relationships not
only have higher levels of trust and
commitment, but also that trust and
commitment become central in their attitude
and belief structures (Morgan and Hunt
1994).
A central idea in the theory of partnering
suggests that differences in trust and
commitment are the features that most
distinguish stakeholders as partners from
stakeholders as single transaction buyers
(Berry 1995; Webster 1992).
Stakeholder trust is an essential element in
building strong stakeholder relationships and
sustainable market share (Urban, Sultan and
Qualls 2000). To gain the loyalty of
stakeholders, you must first gain their trust
(Reichheld and Schefter 2000: 107).
The “inherent nature of services, coupled
with abundant mistrust in America, positions
trust as perhaps the single most powerful
relationship marketing tool available to a
company” (Berry 1996: 42).
A company representative (such a
corporate executive) who proves to be
dishonest and unreliable could easily
jeopardize long-term relationship with a
trusted supplier (Kelly and Schine 1992).
Highly trusted salespeople have been
found to sustain customer commitment
despite management policies that may not
always benefit the customer (Schiller
1992).
Case 5.1: Managing
Trusting Relationships
in Indian Organized
Retailing
Managing trusting
relationships in Indian
organized versus unorganized
retailing is almost impossible
without the willingness of
each part to trust.
Trust as an essential
ingredient to successful
relationships can resolve the
current tensions between the
organized and organized
retail sectors in India
Strong relationships of trust
and commitment that fuel
positive attitude and belief
structures are essential for
lasting relationships between
the organized and
unorganized Indian retail
sectors.
Strong and differentiating
differences in trust and
commitment between the
organized and unorganized
Indian retail sectors are
necessary for lasting mutual
benefits.
Trust of various other
stakeholders that are involved
in the organized and
unorganized retail sectors is
necessary in building loyalty
relationships and sustainable
market share for all.
The inherent nature of
services, coupled with
mistrust in Indian markets
positions trust as perhaps the
single most powerful
relationship tool currently
available to the unorganized
and organized retail sectors in
India.
Dishonesty and unreliability
among the organized and
unorganized retail sectors of
India can seriously jeopardize
trusting relationships
between them.
Highly trusted partners
among the organized and
unorganized retail sectors of
India can sustain high levels
of customer commitment
despite organizational policies
unfavorable to the customers.
466
Case 5.2: Bain sues EY
over $60-m loss in
Lilliput Kidswear
If Bain and EY had strong
willingness to trust each
other, the current stressed
relations and litigation
would not have occurred.
Trust as an essential
ingredient to successful
relationships can better
resolve the current deadlock
between Bain and EY than
any other device.
Strong relationships of trust
and commitment that fuel
positive attitude and belief
structures are essential for
lasting relationships
between Bain and EY.
Strong and differentiating
differences in trust and
commitment between Bain
and EY are necessary for
lasting mutual benefits.
Trust of various other
stakeholders that are
involved in the Bain and EY
confrontation may be
necessary in building loyalty
relationships and
sustainable market share for
all.
The inherent nature of
services, coupled with
mistrust in Indian markets
positions mutual trust as
perhaps the single most
powerful relationship tool
available to Bain and EY to
settle their grievances.
Dishonesty and unreliability
among the Bain and EY
partners can seriously
jeopardize trusting
relationships between them.
Highly trusted partners
among Bain and EY can
sustain high levels of
customer commitment
despite organizational
policies unfavorable to the
customers.
Case 5.3: Building Indo-
Japan Trusting Business
Relationships
If Indo-Japanese commercial
relations should prosper, then
both countries and their
corporations need strong
willingness to trust each other.
Trust as an essential ingredient
to successful relationships could
be the best antecedent and
precursor for very promising
Indo-Japanese business
relations.
Strong relationships of trust
and commitment that fuel
positive attitude and belief
structures are essential for
lasting relationships between
Indian and Japanese politicians
and businesses.
Strong and differentiating
differences in trust and
commitment between Indian
and Japanese politicians and
businesses are necessary for
lasting mutual benefits for both
parties.
Trust of various other
stakeholders that are involved
in Indo-Japanese commercial
relationships may be necessary
in building loyalty relationships
and sustainable and mutual
market share for all.
The inherent nature of business,
coupled with mistrust in Indo-
Japanese markets positions
trust as perhaps the single most
powerful relationship tool
currently available to the
politicians and business people
of the two countries.
Dishonesty and unreliability
among the Indo-Japanese
partners in business
relationships can seriously
jeopardize trusting
relationships between them.
Highly trusted partners among
the Indo-Japanese business
partners can sustain high levels
of customer commitment
despite organizational policies
unfavorable to the customers.
 Exhibit 11.2: Checking Interpersonal Trust Building Capacities with Case
Situations
Ethics of Trust-Building
Capacity
We need to look at both sides of the
trusting relationships: how stakeholders
as trustors should trust the corporate
executives (as trusted), and in turn, how
corporate executives (as trusted) should
cultivate and serve trustworthiness
among stakeholders (as trustors).
A stakeholder’s trust in another party such
as a corporate or corporate executive
reflects an expectation or belief that the
other party will behave benevolently,
competently, honestly, and predictably.
The stakeholder cannot control or force the
corporate or corporate executive to fulfill
this expectation, and thus, trust involves a
willingness to be vulnerable and a risk that
the executives may not fulfill that
expectation.
Thus, stakeholder trust involves some level
of dependency on the corporate executive
and hence, stakeholder satisfaction (as an
outcome) in a corporate situation will be
influenced by the actions of the
corporate/corporate executives.
Defined thus, stakeholder trust is an
attitude toward the corporate executive
derived from the stakeholder’s
perceptions, beliefs, and attributions
about the corporate executive, and these,
in turn, are based upon stakeholder’s
knowledge and observations of the
corporate executive.
The higher the stakeholders’ trust in the
corporation and its executives defined in
terms of their willingness to share
information, strengthen communication,
and deepen relationships, the more will
the stakeholders be prepared to invest
tangible and intangible assets in the
firm, and hence, the higher are
corporate-transformation prospects.
People with trusting dispositions
cooperate better, whereas people with
distrusting predispositions tend to avoid
cooperative activities, fearing
exploitations (Hardin 1993).
Case 5.1: Managing
Trusting
Relationships in
Indian Organized
Retailing
As long as organized and
unorganized retailers (as
trusted) deserve the trust
of their customers (as
trustors), Indian retailing
can be very successful.
The Indian customer trust in
the organized vs.
unorganized retailing sector
is that the latter will behave
benevolently, competently,
honestly, and predictably in
every transaction.
To the extent that the
customers cannot control or
force the Indian retailing
sector to fulfill the
expectation of trust, they
must be willing to take the
risk of being vulnerable.
Hence, customer trust and
satisfaction will involve
some level of dependency on
the system and management
of the organized vs.
unorganized retailing sector.
Hence, customers’ trust
can best be strengthened
by a positive attitude
toward the retailers
derived from their
perceptions, beliefs, and
attributions about the
retailers, which, in turn,
are based upon their
knowledge and
observations of the
retailers.
Customers are prepared to
trust and invest tangible
and intangible assets in the
retailing sectors if the
latter are willing to share
information, strengthen
communication, and
deepen relationships with
them.
The challenge for the
retailing sectors in India is
enable customers to build
trusting predispositions in
them.
467
Case 5.2: Bain sues EY
over $60-m loss in
Lilliput Kidswear
As long as EY (as trusted)
deserves the trust of its
client Bain (as trustor), their
trusting relationship
equation will be balanced
and mutually beneficial.
Bain’s trust in EY is that the
latter will behave
benevolently, competently,
honestly, and predictably in
every transaction.
To the extent that Bain
cannot control or force EY
to fulfill the expectation of
trust, it must be willing to
take the risk of being
vulnerable.
Hence, as a customer Bain’s
trust in and satisfaction with
EY will involve some level of
dependency on the system
and management of EY and
its operations.
Hence, Bain’s trust can best
be strengthened by a
positive attitude toward EY
that is derived from Bain’s
perceptions, beliefs, and
attributions about EY,
which, in turn, is based upon
Bain’s knowledge and
observations of EY.
Bain will be prepared to
trust and invest tangible and
intangible assets in EY if the
latter are willing to share
information, strengthen
communication, and deepen
relationships with them.
The challenge for EY is
enable clients like Bain to
build trusting
predispositions in them.
Case 5.3: Building Indo-
Japan Trusting Business
Relationships
As long as Indian business
partners (as trusted) deserve
the trust of their host Japanese
business partners (as trustors),
their trusting relationship
equation will be balanced and
mutually beneficial.
The Japanese business partner’s
trust in the Indian counterpart is
that the latter will behave
benevolently, competently,
honestly, and predictably in every
transaction.
To the extent that the Japanese
business partners cannot
control or force the Indian
counterparts to fulfill the
expectations of trust, they must
be willing to take the risk of
being vulnerable.
Hence, as customers, Japanese
partners’ trust and satisfaction
will involve some level of
dependency on the system and
management of the Indian
counterparts.
Hence, Japanese trust in the
Indian partners can best be
strengthened by a positive
attitude toward them derived
from their perceptions, beliefs,
and attributions about the
Indian partners, which, in turn,
are based upon their knowledge
and observations of the Indian
counterparts.
Japanese partners will be
prepared to trust and invest
tangible and intangible assets in
the Indian counterparts and
projects if the latter are willing
to share information,
strengthen communication, and
deepen relationships with them.
The challenge for the Indian
business partners is to empower
their Japanese counterparts to
build trusting pre dispositions
in them.
 Exhibit 11.3: Checking Interpersonal Trust Building Capacities with Case
Situations Based on the Theories of Trust
Dimensions of Trust-Building
Capacities based on the
Psychological View of Trust
Mellinger (1956) defined trust as an
individual’s confidence in another
person’s intentions and motives, and
the sincerity of that person’s word.
Read (1962) argued that trusting
individuals: 1) expect their interests to
be protected and promoted by those
they trust; 2) feel confident about
disclosing negative personal
information about themselves, 3) feel
assured of full and frank information
sharing, and 4) are prepared to
overlook apparent breaches of trust
relationship.
Deutsch (1960) viewed trust as an
individual’s confidence in the
intentions and capabilities of the trust
partner and the belief that he or she
would behave as hoped.
Deutsch (1960) also viewed distrust as
confidence about a relationship
partner’s undesirable behavior,
stemming from the knowledge of his
or her capabilities and intentions.
Hosmer (1995) defines trust as one
party’s optimistic expectations of the
behavior of another, when the party
must make a decision about how to act
under conditions of vulnerability and
dependence.
Mayor et al. (1995) define trust as “the
willingness of a party to be vulnerable
to the actions of another party based
on the expectation that the other will
perform a particular action important
to the trustor, irrespective of the ability
to monitor or control the other party.”
Zucker’s (1986) defines trust as a
preconscious expectation suggests that
vulnerability is only salient to trustors
after a trustee has caused them harm.
Combining the psychological and
behavioral approaches, Lewicki,
McAllister, and Bies (1998: 439)
“define trust in terms of confident
positive expectations regarding
another’s conduct, and distrust in
terms of confident negative
expectations regarding another’s
conduct.”
Case 5.1: Managing
Trusting Relationships
in Indian Organized
Retailing
Both organized and the
unorganized sectors should
empower their customers
to have confidence in their
intentions and motives and
the sincerity of their
marketing promotions.
As trusting individuals,
customers expect the
retailers to fulfill Read’s
first three conditions of
trust; then they may be
prepared to overlook
apparent breaches of their
trust relationship.
As trusting individuals,
customers have high
confidence in the intentions
and capabilities of the
Indian retailing sector and
believe that it would
behave as hoped.
Despite their trust,
customers may also distrust
the Indian retailing sector
because of its past
undesirable behaviors and
capabilities.
Despite acting under
conditions of vulnerability
and dependence, customers
may still have optimistic
expectations of the
retailing sector.
As trusting individuals,
customers are willing to be
vulnerable to the actions of
the retailer based on their
expectations that the
retailer would do as
promised irrespective of
their capacity to monitor
them.
Customer vulnerability,
however, becomes salient
only when the retailer has
harmed them in previous
transactions.
Customer trust may be
defined in terms of
confident positive
expectations regarding the
retailer’s conduct, and
customer distrust in terms
of confident negative
expectations regarding
retailer conduct.
468
Case 5.2: Bain sues EY
over $60-m loss in
Lilliput Kidswear
Both Bain and EY should
empower one another to
have confidence in each
other’s intentions and
motives and the sincerity of
their transactional
communications.
As a trusting client, Bain
expects EY to fulfill Read’s
first three conditions of
trust; then Bain may be
prepared to overlook
apparent breaches of their
trust relationship.
As trusting individuals, Bain
may have high confidence in
the intentions and
capabilities of EY and
believe that EY would
behave as hoped.
Despite its trust, Bain may
also distrust EY because of
EY’s past undesirable
behaviors and capabilities.
Despite acting under
conditions of vulnerability
and dependence, Bain may
still have optimistic
expectations that EY would
behave as hoped.
As an trusting individual,
Bain may be willing to be
vulnerable to the actions of
EY based on Bain’s
expectations that EY would
do as promised irrespective
of Bain’s ability to monitor
EY.
Bain’s vulnerability,
however, may become
salient only when EY has
harmed Bain in previous
transactions.
Bain’s trust in EY may be
defined as confident positive
expectations regarding EY’s
conduct, and Bain’s distrust
in terms of confident
negative expectations
regarding EY’s conduct.
Case 5.3: Building Indo-
Japan Trusting Business
Relationships
Both Indian and their Japanese
counterpart partners should
empower one another to have
confidence in each other’s
intentions and motives and the
sincerity of their transactional
communications.
As trusting individuals,
Japanese investors expect the
Indian partners to fulfill Read’s
first three conditions of trust;
then Japan may be prepared to
overlook apparent breaches of
their trust relationship.
As trusting individuals, the
Japanese partners have high
confidence in the intentions and
capabilities of the Indian
counterparts and believe that
the latter would behave as
hoped.
Despite their trust, the
Japanese partners may also
distrust the Indian counterparts
because of their past
undesirable behaviors and
capabilities.
Despite acting under conditions
of vulnerability and
dependence, the Japanese
partners may still have
optimistic expectations that the
Indian partners would behave
as hoped.
As trusting individuals, the
Japanese partners are willing to
be vulnerable to the actions of
the Indian counterparts based
on their expectations that the
latter- would do as promised
irrespective of their capacity to
monitor them.
Japanese partners’
vulnerability, however, may
become salient only if the
Indian counterparts have
harmed them in previous
transactions.
Japanese customer trust in the
Indian counterpart may be
defined in terms of confident
positive expectations regarding
the latter’s conduct, and distrust
in terms of confident negative
expectations regarding the
latter’s conduct.
 Exhibit 11.4: Checking Institutional Trust Building Capacities with Case
Situations
Dimensions of Institutional Trust-
Building Capacities based on the
Institutional Theories of Trust
Institution-based trust means that one
believes the necessary impersonal
structures are in place to enable one to
act in anticipation of a successful, future
endeavor (Shapiro 1987; Zucker 1986).
Zucker (1986) describes how certain
specific institutional or social structures
and arrangements generate trust. For
instance, rational bureaucratic
organizational forms could be trust-
producing mechanisms for situations
where the scale and scope of economic
activity overwhelm interpersonal trust
relations.
Institutional processes such as public
auditing of firms, SEC regulations, FTC
mandates and other government
vigilance programs may increase
customer trust in those companies.
Institution-based trust researchers
maintain that trust reflects the security
one feels about a situation because of
guarantees, safety nets, or other
structures (Shapiro 1987; Zucker 1986).
Thus, the safe and structured
atmosphere of a workplace may enable
employees to develop high levels of
initial trust (Lewis and Weigert 1985;
Shapiro 1987);
Conversely, tough screening and high
professional experience levels of new
recruits may help senior employees to
trust them implicitly.
Situation-normality implies the belief
that successful interaction is likely
because the situation is normal or
customary or that everything is in
proper order (Lewis and Weigert 1985).
Structural assurances refer to the
socially learnt belief that successful
interaction is likely because of such
structural safeguards or contextual
conditions as promises, contracts,
regulations, legal recourse, and
guarantees are in place (McKnight,
Cummings, and Chervany 1998: 479).
Case 5.1: Managing
Trusting Relationships
in Indian Organized
Retailing
Especially the organized
retail sector in India must
ensure that impersonal
structures are in place that
can assure successful
future encounters for
customers.
Certain specific rational
bureaucratic
organizational forms or
social structures in the
retail sector in India can
generate trust where the
scale and scope of
economic activity
overwhelm interpersonal
trust relations.
India can mandate certain
institutional and legal
structures such as SBEC
regulations, periodic audits
and other government
vigilance programs in the
organized retail sector so
that they breed trust in
customers.
Customers will feel secure
and protected via
guarantees, safety nets, or
other structures in the
retail sector mandated by
governments.
The safe and structured
atmosphere of the Indian
retail sector will enable
customers, employees and
suppliers develop high
levels of initial trust in the
retail market system.
Tough screening and high
professional experience
levels in the organized
retailing sector may help
customers to trust them
implicitly.
Customers will feel
comfortable to patronize
the Indian retailing sectors
if the latter assure
“situation-normality.”
Customers will feel
comfortable to patronize
the Indian retailing sectors
if the latter assure the
normal “structural
assurances” of promises,
contracts, guarantees,
warranties, regulations and
legal recourse.
469
Case 5.2: Bain sues EY
over $60-m loss in
Lilliput Kidswear
As a consulting agent EY
must ensure that impersonal
structures are in place that
can assure successful future
client transactions and
endeavors with Bain.
Certain bureaucratic
organizational forms or
social structures in EY can
generate trust for Bain
especially when the scale
and scope of economic
activity between them can
overwhelm interpersonal
trust relations.
India can mandate certain
institutional and legal
structures such as SBEC
regulations, periodic audits
and other government
vigilance programs in
consulting companies such
as EY so that they breed
trust in clients like Bain.
Bain will feel secure and
protected via guarantees,
safety nets, or other
structures in EY and other
consulting companies
mandated by governments.
The safe and structured
atmosphere of consulting
companies like EY will
enable customers like Bain
and their employees and
suppliers develop high levels
of initial trust in consulting
market system.
Tough screening and high
professional experience
levels of skilled employees in
the consulting sector such as
EY may help clients like
Bain to trust them
implicitly.
Clients like Bain will feel
comfortable to patronize
consulting companies like
EY and KPMG if the latter
assure “situation-
normality.”
Clients like Bain will feel
comfortable to patronize
consulting companies like
EY if the latter assure the
normal “structural
assurances” of promises,
legal contracts, guarantees,
regulations and legal
recourse.
Case 5.3: Building Indo-
Japan Trusting Business
Relationships
As an inviting host, India must
ensure that impersonal
structures are in place that can
assure successful future client
transactions and endeavors
with Japan.
Certain bureaucratic
organizational forms or social
structures in India can generate
trust among Japanese
businesses especially when the
scale and scope of economic
activity between them can
overwhelm interpersonal trust
relations.
India can self-legislate certain
institutional and legal
structures such as SBEC
regulations, periodic audits and
other government vigilance
programs in its businesses such
they breed trust in B2B
partners such as Japan.
Japanese partners will feel
secure and protected via
guarantees, safety nets, or other
structures in Indian industries
and markets mandated by
governments.
The safe and structured
atmosphere of Indian industries
and markets systems will enable
foreign partners like Japan
develop high levels of initial
trust in engaging in the Indian
market system.
Tough screening and high
professional experience levels of
skilled employees in the Indian
industries and markets may
help clients like Japanese
business partners to trust them
implicitly.
Japanese business partners will
feel comfortable collaborating
with Indian counterparts if the
latter assure “situation-
normality” in the Indian
markets.
Japanese business partners will
feel comfortable collaborating
with Indian counterparts if the
latter assure the normal
“structural assurances” of
promises, legal contracts,
guarantees, regulations and
legal recourse.
 Exhibit 11.5: Checking Trust-Distrust Combination Possibilities with Case
Situations
Dimensions of Trust-Distrust
Building Capacities based on the
Theories that affirm coexistence of
Trust with Distrust
Social structures appear most stable
where there is a healthy dose of both
trust and distrust to generate a
productive tension of confidence
(Lewicki, McAllister, and Bies 1998).
Trust that involves confident positive
expectations and distrust that implies
confident negative expectations
regarding trusting partners can
operate simultaneously in the same
individual, although from different
viewpoints (Lewicki, McAllister, and
Bies 1998).
Trust can exist in an environment of
uncertainty that every corporate
situation implies. Trust can coexist
with distrust under situations of
unpredictability, error and situational
complexity (Bhattacharya, Devinney,
and Pillutla 1998).
The broader the experience of
stakeholder-management relationships
across multiple contexts and
encounters, the broader the
bandwidth; partners accumulate
knowledge of each other’s strengths
and weaknesses to generate
interpersonal relationships of trust or
distrust (Lewicki, McAllister, and Bies
1998).
Trust/distrust reduces social
complexity and uncertainty by
disallowing undesirable conduct from
consideration and replacing it with
desirable conduct. Distrust simplifies
the social world, allowing the
individual to move rationally to take
protective action based on these
positive expectations of harm
(Luhmann 1979).
Vulnerability is an important
constituent of trust. That is, in the
absence of risk or vulnerability trust is
not necessary, since outcomes are not
of consequence to trustors (Moorman,
Zaltman and Deshpande 1992; Mishra
(1996).
“Apart from a genuine openness to the
possible necessity of distrust, benign
and unconditional trust appears to be
an extremely dangerous strategy for
managing social relations” (Lewicki,
McAllister, and Bies 1998).
Case 5.1: Managing
Trusting Relationships
in Indian Organized
Retailing
Customer-retailer trust is
most stable where there is
a healthy combination of
both trust and distrust to
generate a productive
tension of mutual
confidence.
Trust that involves
confident positive
expectations and distrust
that implies confident
negative expectations can
operate simultaneously in
the same individual
customer.
Customer trust in the
retailing sector can exist in
an environment of market
uncertainty,
unpredictability, error and
situational complexity
common in businesses
today.
The broader the experience
of buyer-seller
relationships across
multiple retailing contexts
and encounters, the
broader the bandwidth of
their mutual trust.
Customer-retailer
trust/distrust reduces
social complexity and
uncertainty by disallowing
undesirable conduct in
considering alternatives in
a given situation.
Vulnerability is an
important constituent of
customer-retailer trust. In
the absence of risk or
vulnerability trust may not
be necessary, since
outcomes are not of
consequence to them.
Benign and unconditional
customer trust in the
retailing sector may be an
extremely dangerous
strategy for managing
social relations.
470
Case 5.2: Bain sues EY
over $60-m loss in
Lilliput Kidswear
Bain-EY mutual trust may
be most stable when there is
a healthy combination of
both trust and distrust to
generate a productive
tension of mutual
confidence.
Trust that involves confident
positive expectations and
distrust that implies
confident negative
expectations can operate
simultaneously in the same
organization such as Bain or
EY.
Bain’s trust in EY can exist
in an environment of market
uncertainty,
unpredictability, error and
situational complexity
common in businesses today.
The broader the experience
of Bain-EY relationships
across multiple consulting
and auditing contexts and
encounters, the broader the
bandwidth of their mutual
trust.
Bain-EY trust/distrust can
reduce social complexity and
uncertainty by disallowing
undesirable conduct in
considering alternatives in a
given transaction.
Vulnerability is an
important constituent of
Bain-EY trust. In the
absence of risk or
vulnerability trust may not
be necessary, since outcomes
are not of consequence to
Bain.
Benign and unconditional
Bain trust in EY may be an
extremely dangerous
strategy for managing
business and social relations.
Case 5.3: Building Indo-
Japan Trusting Business
Relationships
Indo-Japanese business trust
may be most stable where there
is a healthy combination of both
trust and distrust to generate a
productive tension of mutual
confidence.
Trust that involves confident
positive expectations and
distrust that implies confident
negative expectations regarding
each other can operate
simultaneously among Indo-
Japanese business partners.
Indo-Japanese partners’
mutual trust can exist in an
environment of market
uncertainty, unpredictability,
error and situational
complexity common in
businesses today.
The broader the experience of
Indo-Japanese business
partnership relationships across
multiple business contexts and
encounters, the broader the
bandwidth of their mutual
trust.
Indi-Japanese trust/distrust can
reduce social complexity and
uncertainty by disallowing
undesirable conduct in
considering alternatives in a
given partnership situation.
Vulnerability is an important
constituent of Indo-Japanese
trust. In the absence of risk or
vulnerability trust may not be
necessary, since outcomes are
not of consequence to either
party.
Benign and unconditional
customer mutual trust among
Indo-Japanese business
partners may be an extremely
dangerous strategy for
managing social relations.
 Table 11.1: Synthesizing Major Definitions of Trust in Management
Studies

Underlying Authors Definitions of Trust Remarks

Theory of
Trust
Mellinger Trust is an individual’s confidence in Hence some
(1956) another person’s intentions and motives, and people are more
the sincerity of that person’s word. trusting than
others
Personality Deutsch (1960) Trust is an individual’s confidence in the intentions and Trust and distrust are
Psychology: capabilities of the trust partner and the belief that he or she not opposites; they
Trust is an would behave as hoped; distrust is confidence about a can co-exist. Each is
individual relationship partner’s undesirable behavior, stemming from influenced by
characteristic: e.g., the knowledge of his or her capabilities and intentions. separate factors.
confidence,
benevolence, and Read (1962) Trusting individuals: a) expect their interests to be protected Trust is best when it is
willingness and promoted by those they trust; b) feel confident about mutual: one trusts
disclosing negative personal information about themselves, c) another to be trusted
feel assured of full and frank information sharing, and d) are in turn,
prepared to overlook apparent breaches of trust relationship.

Rotter A generalized expectancy held by an individual that the word, Trust is built on
(1967: 651) promise, oral or written statement of another individual or reliability of the
group can be relied upon. trusted.
Social Sabel (1993) Trust is mutual confidence that one party will not exploit Trust is built on
Psychology: mutual vulnerability confidence mutual
Trust is a vulnerability
characteristic of Mayer, Davis Trust is “the willingness of a party to be vulnerable to the Trust implies willed
interpersonal and Schoorman actions of another party based on the expectation that the mutual vulnerability
transactions: (1995: 712) other will perform a particular action important to the as pre-condition to
e.g., expectations of trustor, irrespective of the ability to monitor or control the strong partnership.
partner behavior other party.”
Lewicki, Combining the psychological and behavioral approaches, the Trust is bipolar: both
McAllister, and authors define “trust in terms of confident positive confident positive and
Bies expectations regarding another’s conduct, and distrust in negative expectations
(1998: 439 terms of confident negative expectations regarding another’s regarding the trusted.
conduct.”
Economics and Zucker (1986) Building trust among relative strangers reflects the security Trust is viewed as a
one feels about a situation because of guarantees, safety nets, mechanism to
Organizational or other structures. Rational bureaucratic organizational minimize
Sociology: Trust forms could be trust-producing mechanisms for situations opportunistic
is an institutional where the scale and scope of economic activity overwhelm behavior
phenomenon: e.g., a interpersonal trust relations
mechanism to
reduce uncertainty Shapiro (1987) Institution-based trust means that one believes the necessary Trust is viewed as a
and risk of impersonal structures are in place to enable one to act in mechanism to
opportunism anticipation of a successful future endeavor maximize the utility of
one’s behavior

471
 Table 11.2: Synthesizing Trusting Relationship Studies in the Marketing
Literature

Authors Study Definition of Trust Trust Trust

Context Trust Antecedents Concomitants Outcomes
Moorman, Trust between Willingness to rely Credibility of the Willingness to rely Enhances the
Deshpande & marketing on an exchange researcher and be vulnerable quality of user-
Zaltman researchers and partner in whom researchers
users of research one has confidence interactions
(1993:.82)
Ganesan Trust between Willingness to rely Credibility and Mutual dependence Positively
(1994: 3) retail buyers and on an exchange benevolence of the between retailer influences long-
vendors partner in whom vendor (buyer) and vendor term orientation of
one has confidence mutual
relationships.
Morgan and Independent Trust exists when Credibility: i.e., Functional conflict, Acquiescence,
Hunt automobile tire one party has reliability and uncertainty; shared cooperation,
(1994: 23) dealers confidence in an integrity of the values, communi- reduction in
exchange partner’s trusted; cation, resisting uncertainty
reliability and opportunistic
integrity behavior
Doney and Buyer-Seller The perceived Credibility and Enhances the
Capon relations credibility and benevolence of the likelihood of
(1997: 36) benevolence of a trusted future interactions
target of trust
Garbarino and Customer Trust in an Actor satisfaction, Customer Enhances overall
Johnson evaluation of a organization is actor familiarity, commitment as: satisfaction with
(1999: 71) nonprofit theatre “customer play-attitudes, identification with and commitment
as a function of confidence in the theatre-attitudes the organization, to the theatre and
one’s level of quality and psychological future intentions
relational bonds reliability of the attachment,
services offered.” concern for its
future, and loyalty
Singh and How agency and Consumer-trust is High levels of Customer’s Enhances
Sirdeshmukh trust mechanisms a psychological exchange- acceptance of consumer
2000 cooperate and state accepting performance vulnerability based trust/distrust,
compete to affect vulnerability based ambiguity, and on the competence overall
consumer on positive greater and benevolence of satisfaction, and
satisfaction and expectations of interdependence the seller loyalty
loyalty seller’s behaviors. between buyers
and sellers
Hewett and Trust building The perceived Dependable Acquiescence and Performance of the
Bearden 2001 between corporate credibility and credibility and cooperation subsidiary
headquarters and benevolence of benevolence of the
its foreign headquarters trusted
subsidiaries
Sirdeshmukh, Developing trust “consumer trust as Frontline Customer value Customer loyalty
Singh, and in retail and airline the expectations employee’s FLE)
Sabol services held by the and Management
consumer that the Policies and
(2002:17)
service provider is Practices’ (PPP):
dependable and operational
can be relied on to competence and
deliver on its benevolence;
promises.” problem solving
orientation.

472
 Table 11.3: Foundations of Interpersonal Trust between Stakeholders and
Corporate Executives
Basic Basic Theories Basic Factors Stakeholder-Corporate executive Trust
Concepts of Trust that promote Basic Hypotheses of Basic Factors that
of Trust Trust Stakeholder-Corporate promote Stakeholder-
executive Trust Corporate executive
Trust
Trust is Trust as a personality Personal reputation for Higher the Corporate executive’s
something trait, an individual trustworthiness. trustworthiness of the techno-professional and
personal difference. corporate executive, the empathy skills can
higher is stakeholder enhance trust-
trust. worthiness.
Trust as Trusting Trust as rational Honesty, integrity and Higher one’s honesty, Cultivate honesty,
Beliefs prediction of one’s past good record of the integrity and past good integrity and a reputation
good behavior trusted party record, the highest is trust of trustworthy behavior
of the trustor.
Trust as Trust as rational Dishonesty, The higher the dishonesty, Repair and restitute the
Mistrusting expectation of one’s unpredictability and unpredic-tability and past damage of past
Beliefs bad behavior past bad record of the bad record of the trusted dishonesty, lack of
trusted party party, the higher is the integrity and
mistrust of the trustor. untrustworthy behavior
Trust as an Frequency of Higher the stakeholder’s Frequent stakeholder-
interpersonal interactions and positive attitude toward corporate executive
attitude. interpersonal relations; the corporate executive mutually open and
Mutual openness (frank via frequent, mutually cooperative
Trust is information sharing); open and cooperative relationships and
interpersonal Mutual cooperation. interactions, the higher is interactions can foster
stakeholder’s trust. positive attitudes of
trust.
Trust as Socially Similarity of values; Higher a stakeholders’ Similarity of
Embedded Similarity of beliefs, trust in the business stakeholder-corporate
expectations. goals and objectives; corporate profession, the executive beliefs, values,
Trust as Faith in Similarity of higher is stakeholder trust goals and expectations
Humanity expectations. in the corporate executive
trust.
Trust as an Organizational values; Higher the stakeholder’s Corporate company
Trust is institutional or Institutional trust in the legal reputation, past track-
Institutional Organizational dependence structures; institution of business and record of honesty, and
phenomenon Organizational faith bankruptcy provisions, corporate executive-
building structures; the higher is stakeholder’s credentials can breed
trust. trust.

Complex and Accepting need for The higher one’s Stakeholder’s

unfamiliar dependency under acceptance of the acceptance of the
interpersonal complexity and complexity-unfamiliarity complexity, risk and
situations necessitate unfamiliarity. of the corporate situation, uncertainty of the
Trust is trust. the higher is stakeholder- corporate delivery
Situational corporate executive trust. system
Higher one’s willingness
Trust as a shield to Willingness to be to be vulnerable, higher is Stakeholders’
one’s vulnerability. vulnerable one’s trust willingness to be
One’s positive distrust of vulnerable
Trust can coexist Positive distrust can the health-delivery system Stakeholders’ positive
with distrust. enhance trust. can enhance stakeholder- distrust of the
corporate executive trust. corporate-bankruptcy
delivery system

473
 Table 11.4: A Synthesis of Theories and Definitions of Trust and Distrust

Theory Approach Definition of Definition of Implications for

(Authors) Trust Distrust Stakeholder-
Executive
Encounters
Table 11.4A: Trust and Distrust as Polar Opposites
Psychology Trust as an individual Trust is one’s Distrust is one’s diffidence Foster trusting and avoid
(Meillinger 1956; trait confidence in another’s about one’s undesirable distrusting confidence of
Deutsch 1960; Read positive intentions and behavior. patients.
promises.
1962)
Behavioral Trust as a rational Trust is cooperative Distrust is a non-cooperative Normatively, trust is good,
(Axelrod 1984; predictive choice of a conduct in a conflicting conduct in a mixed-motive distrust is bad. Nurture trust
Deutsch 1968; partner. Devoid of real interpersonal encounter. game situation. Distrust is to solve intractable conflict
social context, trust is a psychological disorder. situations and to promote
Erikson 1963; Lewis
function of incentives. effective collaboration.
& Weigert 1985)

Personality Trust is a personal pre- Trusting pre- Distrusting predispositions Distrust is a psychological
Disposition dispositional attribute dispositions indicate indicate high expectations disorder that needs to be
(Rotter 1967, 1971; low expectations and and cooperate less with the corrected. Trust-distrust
cooperate better. trusted. transcends the social context.
Stack 1988; Tardy
1988)
Expectation Trust is a generalized Trust is a set of Distrust is a set of Assure stakeholders that you
(Rotter 1980; expectancy expectations that the expectations that the trusted will act always in their
Gambetta 1988; trusted will behave will not behave helpful as interests, thus converting
helpful as expected by expected by the trustor. distrust to trust.
Zucker 1986)
the trustor.
Table 11.4B: Trust and Distrust as Complementary Constructs
Organizational Trust as an organizational Trust as believing in the Distrust as believing in the Complexity, undesirability
Psychology phenomenon supported institutional systems institutional systems and vulnerability of modern
(Baier 1986; by institutional (normal situations and (abnormal situations and business outcomes can
mechanisms. structural assurances) structural non-assurances) weaken situation normality
Garfinkel 1963;
that support trust. that support distrust. and structural assurances that,
Lewis and Weigert in turn, could result in high
1985; Shapiro 1987; distrust levels.
Zucker 1986)
Sociology Trust-distrust as a Trust and distrust Trust is a positive Do not over-trust. Total,
(Lewicki, McAllister mechanism for reducing coexist as functional expectation of beneficial unconditional trust could be
& Bies 1998; social complexity and equivalents or action; distrust is a positive dangerous for managing
uncertainty. substitutes for reducing expectation of injurious social relations.
Luhmann 1979)
social complexity. action.

Social Psychology Trust-distrust as a Trust as positive-valent Trust involves confident Trust is a necessary
(Cacioppo & continuum of one’s and distrust as negative- positive expectations and ingredient for social order;
Brenston 1994; psychological state that is valent attitudes can distrust involves confident hence, focus on nurturing
unstable and transitory. coexist. negative expectations trust. Sensitize to sources of
Lewicki, McAllister
regarding trusting partners. patient distrust and manage
& Bies 1998) them carefully.
Interdependence Trust-distrust as Trust is a function of Distrust is also a function of Trust-distrust investment
(Mayor, Davis & interdependent behavioral one’s dependence upon one’s dependence upon and should not be too high, or too
Schoorman 1995; expectations amidst and vulnerability vulnerability regarding the low, but geared to meet all
complexity and regarding the other other party. situations in a complex risky
Sitkin & Roth 1993;
vulnerability. party. world acceptably.
Williams 2001)

474
 Table 11.5: Stakeholder-Corporate executive Interpersonal Relations as a
function of Low and High, Trust and Distrust

STAKEHOLDER DISTRUST:
STAKE- HIGH: LOW:
High fear Low fear
HOLDER High skepticism Low skepticism
TRUST: High cynicism Low cynicism
High monitoring Low monitoring
High vigilance Low vigilance

Quadrant I: Quadrant II:

High-Trust Stakeholder- Medium-Trust
Corporate Executive: Stakeholder-Corporate
Executive:
HIGH: High value congruence, common objectives, Sustained trust and distrust; trust
and frequent interactions; constantly verified;
High hope, Pooled positive and trust-reinforcing
High faith, Strong reason to be confident in certain
experiences; few defense mechanisms; areas and diffident in others;
High confidence Conversations are rich, deep, personal and
High assurance Relationships are multiplex, multifaceted,
occasionally complex; highly segmented and bounded; like in
High initiatives Hence, reason to be mutually confident; strategic alliances;
No reason for suspicion; Significant amounts of information
High willed pooled interdependence and shared under strict confidentiality;
cooperation; Collaboration opportunities pursued bur
All opportunities for sharing information risks assessed;
pursued; Vulnerabilities continuously monitored
New trust-building initiatives sought. and protected.

Quadrant III: Quadrant IV:

Casual-Trust Stakeholder- High-Mistrust Stakeholder-
Corporate Executive: Corporate Executive:
Casual acquaintance; Undesirable eventualities expected and
LOW: feared;
Careful, bounded, arms-length discrete Conversations are cautious, guarded, and
Low hope, transactions; often laced with cynicism
Low faith, No pooled trust-reinforcing experiences; Pooled negative distrust-reinforcing
Low confidence Conversations simple and casual; experiences; bureaucratic checks;
Low assurance No reason to fear or be confident; No reason for mutual confidence;
Few initiatives No closeness or intimacy; Strong reason for watchfulness;
Low resistance No threats to confidentiality as little Significant resources for monitoring;
information of consequence is shared; Harmful or exploitative motives not ruled
out;
Limited interdependence and cooperation; Interdependence difficult over time or at
best, carefully managed;
Just professional courtesy. Offensive self-defense.

Source: Adapted from Lewicki, McAllister and Bies (1998: 445).

475
 Table 11.6: Profile of Stakeholder-Business Management Executive Trust
Levels: Costs versus Benefits
Business Trust Stakeholder’s Trust Level
Managemen Dimensions
t executive’s Low
Trust Level
Both stakeholder and business
management executive:
low mutual cooperation,
Costs
low mutual honesty,
low mutual benevolence
Low
Both stakeholder and business
management executive:
low involvement;
Benefits
low interdependence;
low investments, and
low benefits.
Business management executive-
Risks opportunism
Low executive commitment
High agency costs for the executive:
high trust investment costs;
high affect and emotion costs;
high loss probability;
Costs very few options;
low monitoring ability.
For the stakeholder: no significant
costs
Almost none to executives;
Significant benefits to stakeholders.
High
Benefits
Corporate executive abuse;
Corporate executive exploitation,
Corporate executive dissatisfaction;
Risks Corporate executive may refuse
cooperation.
Stakeholder opportunism.
Stakeholder betrayal
476
High
High agency costs for the stakeholder:
high trust investment costs;
high affect and emotion costs;
high profit-loss probability;
high costs of very few options;
low monitoring ability.
For the executive: no significant costs
Almost none to stakeholders;
Significant benefits to executives.
Stakeholder abuse;
Stakeholder exploitation,
Stakeholder dissatisfaction;
Stakeholder may switch & not return
Both for stakeholder and business
management executives:
low agency costs such as:
bonding costs
monitoring costs
warranty-guarantee costs;
search costs
Both for stakeholder and corporate
executive:
high commitment;
high mutual cooperation,
healthy interdependence;
high mutual honesty,
high mutual benevolence
high satisfaction
Sustaining high mutual trust;
High dependence;
Stifled creativity due to over-trust;
Few other options due to over-trust.
 Table 11.7: Business Executive Ethical Responsibilities as a Function of
Transactional, Contractual, and Relational Exchanges
Nature of Business Management Ethical Responsibilities Under:
Relationships
with Transactional
Stakeholders Exchanges
As single, one-time discrete
Pure One-Time exchanges, deliver good and
Transaction fair value.
Many Disconnected As many one-time discrete and
Transactions disconnected transactions,
execute each efficiently.
Make centralized purchasing
One-Stop Shopping attractive and maximize
Stakeholders satisfaction from one stop
shopping to develop loyalty.
As one time or multiple pure
Business To Business licensing agreements optimize
(B2B) Technology transfer satisfaction to both
Transfers parties; minimize transfer
costs.
As domestic and foreign
B2B Technology and turnkey projects and/or foreign
Management technical collaborations,
Transfers optimize them in relation to
time, cost, skills and future
opportunity.
B2B Joint Ventures: As domestic or international
Domestic, branches, divisions, affiliates,
International, or subsidiaries, optimize then
Multinational Or as above.
Global
B2B Domestic Or As strategic technology
Global Strategic collaborations provide value-
Technological adding and problem-solving
Alliances partnerships; as virtual
corporations, increase
networking efficiencies.
Internet and Web As discrete or many
Marketing Exchanges disconnected transactions,
deliver good and fair value.
Maximize speed, delivery,
billing and payment
efficiencies and satisfaction of
online orders.
Contractual
Exchanges
Some discrete one-time
exchanges may involve some
contracts.
Respect contracts if any.
Financial contracts (e.g.,
credit cards, life time
customers) may develop and
sustain one-stop-shop loyalty.
If international, licensing
contracts should be sensitive
to international trade and
commerce laws and host
country national sovereignty.
If international technical
collaboration, all inherent
contracts should be sensitive
to international business laws
and host country national
sovereignty.
If international, all inherent
contracts should be sensitive
to international laws and host
country national sovereignty
Respect patents, intellectual
rights, and cultural
imperatives of host country
partners’ core processes, core
products, formats and
standards.
Spell contractual
responsibilities that safeguard
consumer privacy, minimize
cyber-fraud, and protect
vulnerable segments such as
children and the elderly.
477
Relational Exchanges
No necessary relational
responsibilities
Some relational responsibilities
may gradually arise.
Some social contracts (e.g.,
commitment to local communities)
may develop long-term
relationships with customers.
Factor proportions: adopt
technology to host country
infrastructure; update host skills to
state-of-the-art tech transfer; invite
cross-licensing opportunity.
Ensure continued project
suitability to host country
environment and development;
volunteer & invite feedback.
Optimize host equity; share risks
equitably; maximize mutual share
of markets, profits and
opportunity; assume responsibility
for host company and country in
terms of growth and development.
Assume responsibility for
leveraging mutual and global
resources, core competencies,
markets, shares and profits.
Foster long-term loyalties and
trusting relationships by assuring
competence, competitive value,
quality, reliability, operational
benevolence and integrity.
 Appendix 11.1: A Timeline of Business Trust and Mistrust in the U. S. Market
[See Kraemer (2009), “Rethinking Trust,” HBR, pp. 72-75]
Year Trust-Mistrust Situation
1907 A scheme to corner the market in stock of United Copper causes the collapse
of Knickerbocker Trust and a financial panic.
1909 Moody’s publishes an analysis of the stocks and bonds of U. S. railroads
thus helping investors assess the risk of various assets.
1912 The U. S. Attorney sues Coca-Cola for false advertising. The ad industry
falls into public disfavor.
1913 The fallout from the panic of 1907 finally breaks the political resistance to
creating a strong central bank to avert monetary shortages.
1922- Confidence in the prospects of big industrial companies’ rises, and ordinary
1929 investors start purchasing stocks, besides bonds. The U. S. stock market
soars.
1930s During the Great Depression, the Pecora Commission investigates the
causes of the October 1929 stock market crash, uncovering a wide range of
misdeeds in banking.
1941 Unprecedented government spending for WW II leads to abuses by
contractors, especially in the U. S.
1950s Mutual Funds, developed in the 1920s, take off as investors cautiously begin
to invest in large intermediaries that distribute and manage their risks.
1960s Ralph Nader’s Unsafe at Any Speed heightens awareness that business and
consumer interests often clash.
1970s Securitization of loans begins, allowing home buyers to borrow from far-off
lenders.
1978 Drexel Burnham Lambert uses risk-analysis tools to build a market for junk
bonds to finance entrepreneurial companies and corporate takeovers. Junk
bonds trading scandals dips their popularity for a while, but, by 2000, the
use of junk bonds becomes pervasive in corporate finance.
1981 Deregulation flourishes during the time of Presidents Nixon and Ronald
Reagan as people start trusting business more than government.
1983 Jack Stack, the new CEO of Springfield Remanufacturing Corporation,
begins to share financial information and interpretation with all his 119
employees.
1984 A Union Carbide gas spill in Bhopal, India, becomes the worst industrial
disaster in history; this leads to greater skepticism about multinationals in
developing countries.
1990s Executive pay soars as U. S. companies experience a surge in
competitiveness. Global companies increasingly imitate the American
approach to business.
1995 Excitement about the Internet kicks off a period of “irrational exuberance”
in which investors bid up the stock prices of dot.com companies that have
little or no profit.
1997 eBay institutes its feedback stars rating system, allowing buyers to rate the
trustworthiness of sellers. By 1998, eBay’s registered user base rises from
341,000 to 2.1 million.
2000 The technology heavy NASDAQ Companies Index reaches a peak of 5048.62
in March 2000 – but only a few weeks later falls by 25%. The Internet
bubble bursts.
2001 After a series of financial overstatements, Enron seeks bankruptcy
protection. Tyco, WorldCom, and several energy companies follow suit.
2006 Grameen Bank and its founder, Muhammad Yunus, jointly receive the
Nobel Peace Prize. Grameen Bank is the first business to get this award.
2008 Excessive leveraging from securitization, combined with the bursting of the
housing bubble, leads to a severe credit crunch. Banks stop trusting
companies with loans, and investors stop trusting banks.
2009 After suffering a historical loss, AIG uses its government bailout ($170
billion) to pay employees millions in bonuses.
478
Trust-Building Institution
Creation
At one point, JP Morgan locks leading bankers in a
room until they agree to bail out weaker institutions
Moody’s is the first to rate public-market securities.
The growth of credit-rating agencies fosters investor
trust.
The National Vigilance Committee is created to
police truth in advertising. The Better Business
Bureau is born as its local subsidiaries.
The U. S. Congress founds the Federal Reserve
System
The U. S. stock market crashes in October 1929 -
the Great Depression.
The U. S. government helps rebuild trust in business
by regulatory bodies such as FDIC and SEC.
Harry Truman forms a special Senate committee to
investigate the scam.
The Mutual Funds industry soars.
Congresses passes several consumer safety and
environmental protection laws, including the Strict
Liability Law of 1966.
The U. S. government creates several regulatory
agencies to ensure that businesses act in public
interest.
No federal agency yet to control the junk bond
market. Junk bond rating agencies arise.
Several industries are deregulated: trucking,
advertising, healthcare, airlines, financial
products…
The Open Book Management is born.
No federal laws or agencies yet to vigilate MNCs in
the LDCs
The cult and agency-market for CEOs grows.
No federal agency to control this irrational dot.com
market exuberance.
The feedback stars rating system gets
institutionalized in several e-trading companies.
No federal agency to vigilate the NASDAQ activity.
Corporate fraud of irregularities in the accounting
and insider trading burgeons and becomes almost
nationally infectious.
Interest in social entrepreneurship increases and
several such institutions arise.
The world plunges into a severe recession.
President Obama calls it an “outrage” and asks the
Treasury Department to investigate it.
479
 Business Executive Exercises

11.1 As a corporate executive trying to build trusting relationships among your stakeholders and yourself, how will
you incorporate the following theoretical arguments to enhance your trusting relationships and why:

a) Trust leads to successful relationships and improves communication, cooperation, satisfaction, and
purchase intent in a marketing-exchange context (Anderson and Narus 1990; Doney and Canon 1997;
Morgan and Hunt 1994).
b) Interpersonal trust can be an important social resource for facilitating cooperation and enabling social
interactions between various actors in a corporate environment (see Coleman 1988; Zucker 1986).
c) Trust reduces the need to suspect and monitor each other’s behavior.
d) Trust reduces the need to formalize monitoring and control procedures.
e) Trust reduces the need to create completely specified contracts.
f) Total reciprocal trust can reduce negotiation costs (Powell 1990).

11.2 As a corporate executive trying to build trusting relationships between your stakeholders and you, how will you
incorporate the following considerations to enhance your trusting relationships and why:

a) “One of the most salient factors in the effectiveness of our present complex social organization is the
willingness of one or more individuals in a social unit to trust others” (Rotter 1967: 651).
b) Trust is the “cornerstone of long-term relationships” (Spekman 1988: 79).
c) Trust is generally viewed as an essential ingredient for successful relationships (Berry 1995;
Moorman, Deshpande and Zaltman 1993; Morgan and Hunt 1994; Garbarino and Johnson 1999).
d) A central idea in the theory of partnering suggests that differences in trust and commitment are the
features that most distinguish stakeholders as partners from stakeholders as single transaction
buyers (Berry 1995; Webster 1992).
e) Theories of partnering propose that stakeholders with strong relationships not only have higher
levels of trust and commitment, but also that trust and commitment become central in their attitude
and belief structures (Morgan and Hunt 1994).
f) In personal selling or retailing what differentiates relational partnerships from functional (or
transactional) relationships is the level of trust and commitment to the other party (Levy and Weitz
1995; Weitz, Castleberry and Tanner 1995).
g) Stakeholder trust is an essential element in building strong stakeholder relationships and
sustainable market share (Urban, Sultan and Qualls 2000).
h) To gain the loyalty of stakeholders, you must first gain their trust (Reichheld and Schefter 2000:
107).
i) The “inherent nature of services, coupled with abundant mistrust in America, positions trust as
perhaps the single most powerful relationship marketing tool available to a company” (Berry 1996:
42).
j) A company representative (such a corporate executive) who proves to be dishonest and unreliable could
easily jeopardize long-term relationship with a trusted supplier (Kelly and Schine 1992).
k) Highly trusted salespeople have been found to sustain customer commitment despite management policies
that may not always benefit the customer (Schiller 1992).

11.3 We need to look at both sides of the trusting relationships: how stakeholders as trustors should trust the
corporate executives (as trusted), and in turn, how corporate executives (as trusted) should nurture and
cultivate their trustworthiness in relation to stakeholders (the trustors). Given this, as a corporate
executive, how will you build trust based on the following aspects of mutual trust, and why?

a) A stakeholder’s trust in another party such as a corporate or corporate executive reflects an

expectation or belief that the other party will behave benevolently, competently, honestly, and
predictably.
b) The stakeholder cannot control or force the corporate or corporate executive to fulfill this
expectation, and thus, trust involves a willingness to be vulnerable and a risk that the executives may
not fulfill that expectation.
c) Thus, stakeholder trust involves some level of dependency on the corporate/corporate executive and
480
 hence, stakeholder satisfaction (as an outcome) in a corporate situation will be influenced by the
actions of the corporate/corporate executives.
d) Defined thus, stakeholder trust is an attitude (see Fishbein and Ajzen 1975; Robinson 1996) held by the
stakeholder toward the corporate executive.
e) This attitude derives from the stakeholder’s perceptions, beliefs, and attributions about the corporate
executive, and these, in turn, are based upon stakeholder’s knowledge and observations of the corporate
executive.

11.4 As a corporate executive trying to build trusting relationships in your company, how will you incorporate the
following definitions and considerations of the psychological view of trust to enhance trusting relationships
among stakeholders and why:

a) Mellinger (1956) defined trust as an individual’s confidence in another person’s intentions and
motives, and the sincerity of that person’s word.
b) Following this approach, Read (1962) argued that trusting individuals: 1) expect their interests to be
protected and promoted by those they trust; 2) feel confident about disclosing negative personal
information about themselves, 3) feel assured of full and frank information sharing, and 4) are
prepared to overlook apparent breaches of trust relationship.
c) Deutsch (1960) viewed trust as an individual’s confidence in the intentions and capabilities of the
trust partner and the belief that he or she would behave as hoped.
d) Deutsch (1960) also viewed distrust as confidence about a relationship partner’s undesirable
behavior, stemming from the knowledge of his or her capabilities and intentions.
e) Hosmer (1995) defines trust as one party’s optimistic expectations of the behavior of another, when
the party must make a decision about how to act under conditions of vulnerability and dependence.
f) Mayor et al. (1995) define trust as “the willingness of a party to be vulnerable to the actions of
another party based on the expectation that the other will perform a particular action important to
the trustor, irrespective of the ability to monitor or control the other party.”
g) Zucker’s (1986) defines trust as a preconscious expectation suggests that vulnerability is only salient
to trustors after a trustee has caused them harm.
h) In reciprocal terms, distrust is understood as the expectation that others will not act in one’s best
interests, even engaging in potentially harmful behavior (Govier 1994).
i) Combining the psychological and behavioral approaches, Lewicki, McAllister, and Bies (1998: 439)
“define trust in terms of confident positive expectations regarding another’s conduct, and distrust in terms
of confident negative expectations regarding another’s conduct.” By “another’s conduct” these authors
mean “another’s words, actions and decisions (what another says and dopes and how he or she makes
decisions;” and by “confident positive expectations” they imply “a belief in, a propensity to attribute
virtuous intentions to, and a willingness to act on the basis of another’s conduct” (Lewicki, McAllister,
and Bies 1998: 439). Conversely, by “confident negative expectations” they mean “a fear of, a propensity
to attribute sinister intentions to, and a desire to buffer oneself from the effects of another’s conduct”
(Lewicki, McAllister, and Bies 1998: 439).

11.5 Trusting beliefs on the part of your stakeholders imply that they have reasons to believe that you as a corporate
executive is trustworthy (i.e., you are well-known for your benevolence, competence, honesty, consistency and
predictability). Both trusting beliefs and trusting intentions are important in the initial stages of trust
development. In this light, how will the following professional categories help you to build your
trustworthiness in relation to your stakeholders, and why?

a) MBA (masters in business administration)

b) MSBTM (master of science in business corporate management)
c) CTP (certified corporate professional)
d) CIRA (certified insolvency and restructuring advisor)
e) CFE (corporate fraud examiner)
f) CFA (certified financial accountant)
g) CPA (certified public accountant)
h) CMA (certified management accountant)
i) TMA (corporate management association) membership

481
11.6 Research in management has focused on trust primarily in terms of “rational prediction” (Lewis and Weigert
1985: 969) of the other party’s (the trusted) behavior. In this context, trust is also defined as “a generalized
expectancy” held by a stakeholder that the word, promise, contract, oral or written statement of another
individual or group such as corporate or corporate executives can be relied upon (see Rotter 1980: 1). Trust is
“a set of expectations shared by all those involved in an exchange” (Zucker 1986: 54). Trust is a function of
one’s expectations that others will behave in ways that are helpful or at least not harmful (Gambetta 1988). In
this context, how will you generate trust in you from your stakeholders in relation to the following:

a) Your, word, promise or written schedule of paying your creditors.

b) Your, word, promise or written schedule of paying your employees’ payroll
c) Your, word, promise or written schedule of paying your short-term interest payments
d) Your, word, promise or written schedule of honoring your amortization schedules
e) Your, word, promise or written schedule of paying your suppliers.
f) Your, word, promise or written schedule of paying your tax authorities
g) Your, word, promise or written schedule of paying your lease agents
h) Your, word, promise or written schedule of paying your distributors for carrying your products
i) Your, word, promise or written schedule of paying your customers for warranties/guarantees
violated
j) Your, word, promise or written schedule of honoring agreements with local communities

11.7 A parallel trend in trust literature in management defines the domain of trust under vulnerability, risk and
damaged conditions. Thus, Williams (2001: 378) defines trust as “one’s willingness to rely on another’s
actions in a situation involving the risk of opportunism.” Trust exists only in an uncertain and risky
environment; that is, trust cannot exist in an environment of certainty (Bhattacharya, Devinney, and Pillutla
1998). Hosmer (1995) defines trust when the party must make a decision about how to act under conditions of
vulnerability and dependence. Mayor et al. (1995) define trust as “the willingness of a party to be vulnerable
to the actions of another party based on the expectation that the other will perform a particular action important
to the trustor, irrespective of the ability to monitor or control the other party.” Zucker’s (1986) definition of
trust as a preconscious expectation suggests that vulnerability is only salient to trustors after a trustee has
caused them harm. In this context, how will you restore trust in you from your stakeholders in relation to the
following:

a) Your, violated, promise or written schedule of paying your creditors.

b) Your, violated, promise or written schedule of paying your employees’ payroll
c) Your, violated, promise or written schedule of paying your short-term interest payments
d) Your, violated, promise or written schedule of honoring your amortization schedules
e) Your, violated, promise or written schedule of paying your suppliers.
f) Your, violated, promise or written schedule of paying your tax authorities
g) Your, violated, promise or written schedule of paying your lease agents
h) Your, violated, promise or written schedule of paying your distributors for carrying your products
i) Your, violated, promise or written schedule of paying your customers for warranties/guarantees
violated
j) Your, violated, promise or written schedule of honoring agreements with local communities

11.8 As a corporate executive trying to build trusting relationships in your company, how will you incorporate the
following factors and considerations of the institutional view of trust to enhance trusting relationships among
stakeholders and why:

a) Institution-based trust means that one believes the necessary impersonal structures are in place to enable
one to act in anticipation of a successful, future endeavor (Shapiro 1987; Zucker 1986).
b) Zucker (1986) describes how certain specific institutional or social structures and arrangements generate
trust. For instance, rational bureaucratic organizational forms could be trust-producing mechanisms for
situations where the scale and scope of economic activity overwhelm interpersonal trust relations.
c) Public auditing of firms, SEC regulations, FTC mandates and other government vigilance programs may
increase customer trust in those companies.

482
 d) Institution-based trust researchers maintain that trust reflects the security one feels about a situation
because of guarantees, safety nets, or other structures (Shapiro 1987; Zucker 1986).
e) Thus, the safe and structured atmosphere of a workplace may enable employees to develop high levels of
initial trust (Lewis and Weigert 1985; Shapiro 1987);
f) Conversely, tough screening and high professional experience levels of new recruits may help senior
employees to trust them implicitly.

11.9 Trusting intention at the beginning of a relationship may be high because of institution-based trust stimulators.
Two such stimulators are: situation normality and structural assurances. Situation-normality implies the belief
that successful interaction is likely because the situation is normal (Garfinkel 1963) or customary (Baier 1986),
or that everything is in proper order (Lewis and Weigert 1985). Structural assurances refer to the socially
learnt belief that successful interaction is likely because of such structural safeguards or contextual conditions
as promises, contracts, regulations, legal recourse, and guarantees are in place. Structural assurances should be
more influential in initial relationships than in later, especially since information about the trusted person may
not be complete when the relationship begins, making situational information quiet salient (McKnight,
Cummings, and Chervany 1998: 479).

a) How will you ensure situation-normality to your stakeholders in your corporate company?
b) Who could you convince a trouble corporate situation to be normal?
c) What would be the joint necessary conditions for such corporate situation normality?
d) What would be the joint sufficient conditions for such corporate situation normality?
e) How will you ensure structural assurances to your stakeholders in your corporate company?
f) Who could you convince a trouble corporate situation to be normal?
g) What would be the joint necessary conditions for such corporate structural assurances?
h) What would be the joint sufficient conditions for such corporate structural assurances?
i) How would you deploy structural assurances such as GAAP and FASB, Sarbanes-Oxley Act of 2002, and
to what effect?
j) How would you deploy structural assurances such as external auditors, forensic auditors, and social audit,
and to what effect?
k) How would you establish structural assurances through instruments such as SEC vigilance, consumer
advocacy watchdogs, better business bureau, and to what effect?
l) How would you use structural assurances such as various board certifications and professional
associations, and to what effect?
m) How would you employ structural assurances such as government audit, EPA compliance, and labor
unions, and to what effect?

11.10 The higher the stakeholders’ trust in the corporate corporation and its executives defined in terms of their
willingness to share information, strengthen communication, and deepen relationships, the more will the
stakeholders be prepared to invest tangible and intangible assets in the firm, and hence, the higher are
corporate-transformation prospects. Hence, how would you attract, retain and develop investments into your
corporate firm from stakeholders by promoting interorganizational trust using the following means:

a) Reducing inter corporate executive-stakeholder information asymmetries

b) Increasing corporate executive-stakeholder transparent communications
c) Increasing corporate executive-stakeholder transparent interactions
d) Increasing corporate executive-stakeholder relationship investments
e) Increasing corporate executive-stakeholder collaborations
f) Increasing inter corporate executive-stakeholders accountability
g) Increasing inter corporate executive-stakeholders responsibility
h) Increasing inter corporate executive-stakeholders commitment
i) Decreasing inter corporate executive-stakeholders social exchange costs
j) Increasing inter corporate executive-stakeholders social exchange benefits
k) Decreasing inter corporate executive-stakeholders agency theory reciprocal costs
l) Increasing inter corporate executive-stakeholders agency theory reciprocal benefits

483
11.11 According to Hardin (1993), people with trusting dispositions cooperate better, whereas people with
distrusting predispositions tend to avoid cooperative activities, fearing exploitations. As a corporate executive
desiring to win total trust of your stakeholders in your corporate rescue strategies, how would you eliminate
possible mistrust of your stakeholders in you stemming from the following circumstances:

a) Stakeholders’ lack of confidence in your skills and competencies, intentions and motives;
b) Stakeholders’ expectations that their interests may not to be protected or promoted by you;
c) Stakeholders’ diffidence about transparency in critical information sharing;
d) Their ill-preparedness to overlook apparent breaches of trust relationship;
e) Their distrust about your undesirable behavior based on their past knowledge of your capabilities and
intentions.
f) Their distrust as conflicting psychological states due to your unstable and transitory behavior;
g) Their distrust reflecting your psychological imbalance and inconsistency;
h) Factors exist within you that predispose them to distrust you, especially when they do not know you;
i) The more novel, complex and unfamiliar the corporate situation, the more will they be predisposed to
mistrust.
j) Cognition-based trust researchers argue that trust or distrust relies on rapid, cognitive cues or first
impressions.
k) Mistrust is “a generalized expectancy” held by stakeholders that the word, promise, oral or written
statement of another individual or group cannot be relied upon;
l) Distrust is one’s expectations that you will behave in ways that are not helpful or would be harmful.
m) Distrust is your stakeholders’ current vulnerability from the harm caused to them in the past.
n) Distrust is their expectation that you will not act in their best interests.
o) Mistrust is their fear that you may even engage in potentially harmful behavior (Govier 1994).

5.12 In theory of trust makes room for both trust and distrust in a given corporate situation. When one pays full
attention to the role of social context in trust, then trust and distrust can coexist (Greenhalgh 1995). Distrust
is not mistrust, nor the opposite of trust, but a complimentary dimension that can enable stakeholders,
corporate executives, and governments to understand the specific and even positive role of distrust in
interpersonal trust. Trust-distrust is not a one-dimensional but a multidimensional construct (Greenhalgh and
Chapman 1994). One could trust the executives under some dimensions, and legitimately distrust under
other ( (Lewicki, McAllister, and Bies 1998). Given this trend, how will you build an optimal level of trust
and distrust in your business corporate environment using the following theoretical considerations:

a) Trust and distrust both entail certain expectations, but whereas trust expectations anticipate beneficial
conduct from others, distrust expectations anticipate injurious conduct (Lewicki, McAllister, and Bies
1998).
b) Trust can exist in an environment of uncertainty (Bhattacharya, Devinney, and Pillutla 1998) that every
corporate situation implies.
c) Trust can coexist with distrust under situations of unpredictability, error and situational complexity
(Bhattacharya, Devinney, and Pillutla 1998).
d) The broader the experience of stakeholder-corporate executive relationships across multiple contexts
and encounters, the broader the bandwidth; partners accumulate knowledge of each other’s strengths and
weaknesses to generate interpersonal relationships of trust or distrust (Lewicki, McAllister, and Bies
1998).
e) Trust reduces social complexity and uncertainty by disallowing undesirable conduct from consideration
and replacing it with desirable conduct. Conversely, distrust functions to reduce social complexity and
uncertainty by allowing undesirable conduct and by disallowing desirable conduct in considering
alternatives in a given situation. In the latter case, distrust becomes a “positive expectation of injurious
action” (Luhmann 1979).
f) Distrust simplifies the social world, allowing the individual to move rationally to take protective action
based on these positive expectations of harm (Luhmann 1979).
g) Social structures appear most stable where there is a healthy dose of both trust and distrust to generate a
productive tension of confidence (Lewicki, McAllister, and Bies 1998).
h) “Apart from a genuine openness to the possible necessity of distrust, benign and unconditional trust
appears to be an extremely dangerous strategy for managing social relations” (Lewicki, McAllister, and
Bies 1998).

484
 i) Trust that involves confident positive expectations and distrust that implies confident negative
expectations regarding trusting partners, can operate simultaneously in the same individual, although
from different viewpoints (Lewicki, McAllister, and Bies 1998).
j) Positive-valent (e.g., trust) and negative-valent (e.g., distrust) constructs are separable and can coexist.
The two constructs may systematically and negatively correlate, but their antecedents and consequences
may be separate and distinct (Cacioppo and Gardner 1993).
k) Vulnerability is an important constituent of trust. That is, in the absence of risk or vulnerability trust is
not necessary, since outcomes are not of consequence to trustors (Moorman, Zaltman and Deshpande
1992; Mishra (1996).
l) Vulnerability accompanies trust. Trust as “the willingness of a party to be vulnerable to the actions of
another party based on the expectation that the other will perform a particular action important to the
trustor, irrespective of the ability to monitor or control the other party” (Mayer, Davis, and Schoorman
1995).

11.13 Table 11.5 synthesizes various critical dimensions of trust under various theories of trust and distrust. As a
corporate executives sincerely seeking to build trust in your stakeholders, which of the following theories of
trust will you, why, under what conditions, and to what effect?

a) Social Exchange Theory

b) Agency Theory
c) Rational Expectations
d) Psycho-logical Theory
e) Dispositional Theory
f) Interorganizational theory of trust.

Under each the six theories of trust, explore the following:

g) Bases of trust-generation
h) Nature of trust generated
i) Dynamics of trust-generation
j) Implications of generated trust
k) Typical benefits of trust generated to the Trusted
l) Typical benefits of trust generated to the Trustors, and provide
m) Typical examples of trustor-trusted dyads.

11.14 Table 11.6 synthesizes stakeholder-corporate executive interpersonal relations as a function of low versus
high, trust and distrust. Each quadrant suggests clear implications to various stakeholders, including
corporate and corporate executives. It is a challenge for all corporate executives to generate in their
stakeholders low fear, low skepticism and low cynicism such that costs of monitoring and vigilance over all
parties may be significantly reduced, and to generate in their stakeholders high hope, high faith, high
confidence, high assurance and welcoming high stakeholder initiatives. Consider Quadrant I. How will you
bring about the following in your stakeholders:

a) High value congruence, common objectives and frequent interactions;

b) Pooled positive and trust-reinforcing experiences; few defense mechanisms;
c) Conversations that are rich, deep, personal and occasionally complex;
d) Hence, reason to be mutually confident;
e) No reason for suspicion;
f) High willed pooled interdependence and cooperation;
g) All opportunities for sharing information pursued;
h) New trust-building initiatives sought.

11.15 Table 11.7 sketches costs versus benefits of various stakeholder-corporate executive trust-distrust encounters.
The bottom line of all corporations is survival, revival and profits so that the latter fuel ongoing research and
development and innovative modes of conducting business. In this context, whichever quadrant in Table
11.7 you may find yourself to be, how do you do the following:

485
 a) Avoid high agency costs for the stakeholder:
b) Avoid high trust investment costs for the stakeholder;
c) Avoid high affect and emotion costs for the stakeholder;
d) Avoid high profit-loss probability costs for the stakeholder;
e) Avoid high monitoring costs for the stakeholder;
f) Avoid high agency costs for the corporate executive:
g) Avoid high trust investment costs for the corporate executive;
h) Avoid high affect and emotion costs for the corporate executive;
i) Avoid high profit-loss probability costs for the corporate executive;
j) Avoid high monitoring costs for the corporate executive;
k) Promote high commitment among both stakeholders and the corporate executive;
l) Promote high mutual cooperation among both stakeholders and the corporate executive;
m) Promote healthy interdependence among both stakeholders and the corporate executive;
n) Promote high mutual honesty and trust among both stakeholders and the corporate executive;
o) Promote high mutual benevolence among both stakeholders and the corporate executive;
p) Promote high satisfaction and fulfillment among both stakeholders and the corporate executive.

11.16 Table 11.8 lists some business corporate responsibilities implied in transactional, contractual, and relational
exchanges under various transaction typologies. Relational exchanges are connected over time with
mutually benefiting anticipated goals and expectations, careful planning, trust and commitment (Gundlach,
Achrol and Mentzer 1995; Morgan and Hunt 1994). Executive responsibilities increase as one gets involved
with exchanges from pure one-time discrete transactions to global strategic alliances. The gradual transition
from discrete to relational transactions has its own implications to corporate executives: it calls for more
relational trust and mutual responsibility between partners of relational exchanges. Identify and illustrate
your specific business corporate executive responsibilities implied in transactional, contractual, and relational
exchanges under the following transactions:

a) Pure One-Time Transactions

b) Many Disconnected Transactions
c) One-Stop Shopping Stakeholders
d) Business To Business (B2B) Technology Transfers
e) B2B Technology and Management Transfers
f) B2B Joint Ventures: Domestic, International, Multinational or Global
g) B2B Domestic or multinational Strategic Technological Alliances
h) Internet- and Web-based Marketing Exchanges

11.17 Basically, a contract states relationships between an enterprise and its stakeholders (Eisenhardt 1989).
An enterprise is any pro-profit or non-pro-profit institution such as firms, corporations, associations or
governments that offers a product or service to its target markets. A contract can take various forms
such as exchanges, transactions, or the delegation of the decision-making authority, as well as formal
legal documents. As a corporate executive, how will you safeguard and honor the contracts you sign
with your stakeholders using the following ethical rules govern social contracts are (Garrett, 1986: 88-
91):

a) Both parties to a contract must have full knowledge of the nature of the agreement they are entering;
b) Neither party must intentionally misrepresent the facts of the contractual situation to the other party;
c) Neither party must be forced to enter the contract under duress or force; and
d) The contract must not bind the parties to an immoral act.

How will you use the following guidelines in fulfilling (a) to (d)?

e) Contracts that violate one or more of these ethical rules have been traditionally declared null and void
since they diminish freedom that constitutes the essence of contracts (Rawls 1971: 342-50).
f) The parties have a duty of complying with the terms of the contract.
g) Failure to do so treats the other contracting party as a means and not as an end (Kant 1964), and violates
mutual trust (Rawls 1971).

486
11.18 In general, legal and formal agreements define transactional normative
contracts, while ethical and moral principles determine relational normative
contracts (Gundlach and Murphy 1993). Day (2000) speaks of a “relationship
spectrum” that includes an array of three relationship types: transactional
exchanges, value-adding exchanges, and collaborative exchanges. In this
context, define and illustrate the following contracts in a business corporate
environment (see also Footnote 6), and specify corporate responsibilities and
trust prospects under each:

a) Explicit contracts
b) Implicit contracts
c) Transactional contracts
d) Relational contracts
e) Legal contracts
f) Normative contracts
g) Value-added contracts
h) Collaborative contracts
i) Social contracts
j) Reciprocal contracts or socialization

5.19 A central idea in the theory of partnering suggests that differences in trust and commitment are the features
that most distinguish customers as partners from customers as single transaction buyers (Berry 1995; Webster
1992). As a corporate executive partnering with your stakeholders in turning around you company, how will
you learn from the following observations, and with what effect, an why:

a) Theories of partnering propose that customers with strong relationships not only have higher levels of trust
and commitment, but also that trust and commitment become central in their attitude and belief structures
(Morgan and Hunt 1994).
b) Working together well requires some level of trust (Bromiley and Cummings 1995), and increasingly
common new work encounters demand that the parties come to trust each other quickly (Meyerson et al.,
1996).
c) Social network literature assumes that multiplex relationships are simply (or unidimensionally) trusting in
nature (Husted 1994; Ibarra 1995).
d) That is, the stakeholder-corporate executive relationship or encounter should be based on multiple
linkages: professional, academic, diagnostic, communication, confidentiality, compassionate caring,
listening capacity, interaction capacity, good follow-up, and the like.
e) Both trust and distrust can exist within multiple relations (Lewicki, McAllister, and Bies 1998), but by and
large, the higher the bandwidth (richness and scope of relationships) and the larger number of linkages, the
higher are the chances of building trusting than distrusting relationships.
f) The broader the experience of stakeholder-corporate executive relationships across multiple contexts and
encounters, the broader the bandwidth; partners accumulate knowledge of each other’s strengths and
weaknesses to generate interpersonal relationships of trust (or distrust).
g) In this connection, skeptical or indifferent behavioral attitudes can undermine the potential for developing
trusting relationships (Wicks, Berman, and Jones 1999).
h) Knowledge-based trust theories propose that trust develops over time as one accumulates trust-relevant
knowledge through experience with the other person (Holmes 1991; Lewicki and Bunker 1995). Thus,
time and interaction history can develop high levels of trust.

11.20 Opportunism as an executive strategic behavior can take many forms: a) Making false or empty "threats and
promises in the expectation that individual advantage will thereby be realized" (Williamson 1975: 26); b)
Seeking self-interest with guile (Williamson 1985); c) Seeking "self-interest unconstrained by morality"
(Milgrom and Roberts 1992); d) Other unethical behaviors such as lying, stealing and cheating, and e) Other

487
 "calculated efforts to mislead, distort, disagree, obfuscate, or otherwise, confuse" partners in business
(Williamson 1985: 47). As a corporate executive seeking to reduce opportunism in your corporate
company, how would you examine, measure, assess and sanction all five behaviors in the following
stakeholders and institutions? [See Table 11.9].

a) Suppliers
b) Retailers
c) Creditors
d) District sales representatives
e) Advertising agencies
f) Brokers.
g) E-brokers.
h) Fellow corporate or marketing executives.
i) Shareholders.

6.21 Transactions Cost Economics (TCE) makes two behavioral assumptions: a) one cannot predict the other's
behavior and b) one cannot identify one's own best behavior. Not all are inclined to opportunistic behavior; those
who do, the "determined minority," do so because of the above two assumptions. Some without being aware may
be “instrumental” in opportunistic outcomes of others (Williamson 1975, 1993). According to the TCE theory,
organizations exist because of their superior abilities to attenuate opportunism through the exercise of
hierarchical (both rational and social) controls. As a corporate executive how would you predict, assess and
control opportunistic behavior among the following charges? [See Table 11.9]

a) Sales personnel at retail outlets

b) Cost accountants
c) Sales accountants
d) Trade credit negotiators.
e) Blue-collar employees.
f) Labor unions
g) White collar employees
h) Financial accountants
i) Investments managers.

6.22 There is much scope for opportunistic behavior (acts of self-interest with guile or unconstrained by
morality) in business, in general, and in corporate management in particular. Opportunism is primarily a "human
condition," a human tendency or attitude. 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). Given the natural proclivity or propensity for opportunistic
behavior, and knowing the determinants of opportunistic behavior, as a corporate executive what steps would you
take to predict, control and sanction opportunistic behavior among these your charges? [See Table 11.9]:

a) New product designers

b) Channel stuffers to deplete inventory
c) Marketing managers who inflate sales
d) Marketing research team members who doctor test market data
e) Advertising managers to make exaggerated product/service claims.
f) Promotion managers who over-promote market offerings to the point of deception or persuasion
g) Brand pricing and profitability managers.
h) Distributors and logistics managers.
i) Marketing and accounts managers who offer easy credit to over-stimulate sales.
j) Insider trading among top executives
k) CFO who understates debt to project better leverage
l) Round-trip sales to inflate sales revenues

6.23 According to Collins and Schmidt (1993:680), conscientiousness “reflects such characteristics as
dependability, carefulness, and responsibility.” Thus, honesty requires that one does not use one’s

488
 consciousness to distort reality, and integrity requires that one does not betray the convictions of one’s
consciousness in action (Becker 1998:158). Integrity is a manifestation of one’s rationality; irrational
people do not possess integrity. Integrity requires that reason, not emotion or popularity, be one’s primary
guide. As a corporate executive how would you live and demonstrate your honesty and integrity in all your
dealing with your stakeholders, especially, using the following guidelines:

a) To have integrity, one must adhere to one’s conviction about moral principles.
b) One such principle is honesty, and honesty best serves one’s best self-interests.
c) Other principles for integrity are those of independence, justice and productivity.
d) Honesty is a necessary condition for integrity, but not its sufficient condition (Becker 1998: 158).
e) Responsibility also relates to integrity insofar as it involves dependably doing what one has promised
to do.

11.24 Based on their metaphysics, epistemology and ethics, objectivists define integrity as loyalty in action to
rational principles (genuine truths) and values (Peikoff 1991:259; Rand 1964: 52). That is, “integrity is the
principle of being principled, practicing what one preaches regardless of emotional and social pressure, and
not allowing any irrational consideration to overwhelm one’s rational convictions” (Becker 1998: 157). As
a corporate executive how would you formulate and validate your code of objective integrity, especially in
relation to the following guidelines:

a) Integrity requires a) acting in accordance with rational values, and b) such values should be morally
justifiable.
b) A morally justifiable code of ethics (or principles and values) is one that promotes the long-term
survival and well-being of individuals as rational beings.
c) In this sense, truly moral values are objective if a) they are valid concepts and conceptualizations
derived from valid sense perceptions and experiences with actual objects and conditions, and
d) As long as they promote the long-term survival and well-being of individuals as rational beings, and the
latter can be achieved independent of the opinions of observers.
e) “Integrity means loyalty to one’s knowledge, to the conclusions one can prove logically” (Peikoff
1991:261).
f) “Integrity is commitment in action to a morally justifiable set of principles and values, where the
criterion for moral justification is reality – not merely the acceptance of the values by an individual,
group or society.
g) Because survival and happiness are the ultimate standards of morality, life, not subjective opinion – is
the foundation of integrity.

489
 Chapter 14
The Ethics of Corporate Stakeholder Rights and Duties

Fr. Ozzie Mascarenhas S.J., Ph.D.

JRD Tata Chair Professor of Business Ethics, XRI, Jamshedpur
September 10, 2018

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,

490
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.

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

491
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.

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?

492
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 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

493
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
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?

494
 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
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

495
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.

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

496
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-
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?

497
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.
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.

498
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
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

499
 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
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.”

500
  “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.
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

501
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
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

502
villages in the vicinity of the mines, and why?

503
 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

504
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 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

505
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 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).

506
 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 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

507
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:

 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

508
 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. 24

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.

24 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 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).

509
 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?

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

510
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 20 th 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

511
 Opposites are 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

512
 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.

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.

Immunit Disability Liability X has immunity against Y in X has immunity against Y in relation
relation to P; to P;
y 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,

513
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.
 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).25 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

25 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].

514
bundles of relations of different types. 26

Hohfeld argued that legal rights are usefully understood in terms of several possible pairs
of jural 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).

26
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.

515
 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.

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.
But the top management at ML
Claim Jural has no right to pay unjust or
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
same.
Privilege 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
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
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

516
 Correlate as brokers, but they also are under
liability not to harm other
Liability 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.
The top management at ML has
Immunity Jural some immunity from being
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.
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.
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.

517
 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 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

518
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 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

519
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,
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

520
 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. 27 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

27 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].

521
 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. 28 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:

28 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.

522
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).

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. 29

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.

29
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.

523
 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 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:

524
  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 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.

525
 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.

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

526
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 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

527
 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:

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

528
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. 30 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
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

30
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).

529
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).

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

530
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 20th 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

531
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, 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.

532
 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.

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

533
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
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.

534
 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.

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

535
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.
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).

536
 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).

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.31

31 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

537
 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, 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

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 21 st century, President Bush and his
advisors have argued another rationale for intervention – to stop the proliferation of
weapons of mass destruction (Bush, NSS 15).

538
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.32 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 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. 33

32
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.

33 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

539
 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

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).

540
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 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.”

541
 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 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

542
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 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

543
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).34 In general, any
mimetic rush on terror may be the precise reaction sought 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):

34The 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 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).

544
  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 (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.

545
 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.

546
 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.

547
 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.

548
Table 14.3: A Hohfeldian Analysis of Corporate Executive Rights and Duties
Hohfeldia Jural Corporate Executive
n Concept Correlates/ Duties & Responsibilities
of Right Opposites under bankruptcy situations
as:
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.
549
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
Hohfeldia Corporate
n Executive
Privileges 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
Stakeholder Executive “No-
Privileges Rights”
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.
550
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
Ozzie Mascarenhas, S.J., Ph.D.
JRD Tata Chair Professor of Business Ethics, XLRI
September 2018

“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

551
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 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.

552
 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:

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

553
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-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?

554
 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 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

555
 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 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

556
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 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

557
 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 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:

558
 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.

559
 Exhibit 15.3.1: Network 18 + TV 18: Assortment of Offerings
[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

560
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.

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

561
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:
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

562
 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.

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

563
 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:

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).

564
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 dominance, consolidation, strategic
alliances, joint ventures, plants closings, mass labor layoffs, offshore outsourcing, and seeking
strategic bankruptcy.

Major Normative Ethical Theories or Systems

565
 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): 35

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.

35 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.

566
 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 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

567
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

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

568
 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)
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

569
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.

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

570
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. 36

36 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, 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

571
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

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.].

572
 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

573
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.

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.

574
 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 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

575
 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.

1. 1 ETHICAL DILEMMA AND CORPORATE E XE CUT I VE

DECISIONS
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
576
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).
1. 1
1. 1 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.37For 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 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

37Technically, 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.

577
conflicting demands.38 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. 39

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
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

38
Some 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).
39
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).

578
 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).

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.

579
 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).

According to teleology, a right conduct is determined solely by what is achieved by the conduct, that

580
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

581
 personal, and personal good takes primacy over social good.
 Enlightened Egoism states that when personal good is
sought it should be sought in conjunction 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).

582
 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
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!

583
 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.

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.

584
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
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,

585
  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

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

586
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).40

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.

40
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).

587
 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
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

588
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
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

589
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;
 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.

590
  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 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
591
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.

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

592
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 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

593
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.

594
 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

595
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
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 relat ivism 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.

596
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).

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

597
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
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

598
 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).

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

599
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

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).

600
 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 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

601
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. 41

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 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

41 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.

602
(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

603
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. 42

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).

42Distinguish this case from euthanasia. A doctor, who kills his/her patient to relieve him/her
from intractable suffering, directly kills the patient, 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).

604
1. 1
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 Standard Rules
s

Corporate
Judgments,
Act Application of Decisions Rule Application of
Ethical Theories and Ethical Theories
Strategies

What
rights/duties and Rule
Act Deontological norms/
Assessment Deontological
principles does Assessment
the corporate
action uphold?

What are the

Rule
Act Teleological social
Teleological
Assessment consequences of
Assessment
this corporate
decision and
action?
Does this action
Act Distributive evenly distribute Rule
Justice Assessment costs/benefits Distributive
and Justice
rights/duties Assessment
across all
stakeholders?

Does this action

Act Virtue promote the Rule Virtue
Ethics physical, Ethics
Assessment functional and Assessment
moral well-being
of all
stakeholders?
605
Figure 15.2: The Dynamic Structure of the Principle of Double Effect

Situation Situation Situation

Unique to Unique to Unique to
the the Good the Bad
Agent/Act Effect Effect

Condition 1: The Condition 2a: The Condition 2b:

act must be agent must intend The agent
morally good or the good effect. must only
at least morally tolerate the
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: Condition 4: The

The action must good effect must
be the last resort outweigh the evil
or the best effect.
alternative.

606
 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
Justice distributes all 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
Human and empowers human dignity of people
Dignity
affected 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
Responsibility is 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
607
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
all circumstances of contingency. real or practical or viable or doable or desirable? If not, how can it
be a rule of moral or ethical action?

608
 Table 15.2: Some Practical Distributive Justice Principles
Distributive Justice Distributive Justice Principles Critical Comments
Theory

Egalitarianism Equal access to the goods of life that What needs: real, felt or
every rational person desires based created? What equality:
on need and equality. human, economic, social,
racial?

Libertarianism Equal access to social and economic Advocates fair procedures

liberty to all. and systems rather than
substantive outcomes.
Utilitarianism Equal access to the goods of life such The free and equal access
that public utility is maximized. could be abused, thus
reducing public utility.
Fair Opportunism No person should be granted social This is a universalizable and
(Rawls 1971) benefits based on undeserved reversible principle (by
advantage (e.g., royalty, inheritance, Kantian criteria) and very
status) or disadvantage (e.g., gender, appropriate in a situation.
age, race, color, disability, religion,
and nationality).

Non-malfeasance 1. Above all, do not harm. Morality and goodness of the

Frankena (1973) 2. Protect or remove people from executive act increases from
harm. the first to the fifth
3. Prevent people from harm. principle.
4. Set up procedures that minimize
harm.
5. Do good whenever possible.

Well-being by Due The act should serve the well-being of
Care (Jonsen 1977) all 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
principle and process whereby originally
Libertarian theory "unheld things" began to be appropriated in
of justice, Nozick the first place.
b) The principle of justice in transfers: it is the
(1974) 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
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

609
 transfers if the original principles and justice states that a distribution is just
processes of acquisitions and transfers were if all are entitled to the holdings they
unjust. possess under a given distribution.

1. 1 TABLE 15.3: A HIERARCHICAL PROCESS OF ETHICAL-MORAL

REASONING FOR
1. 1 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

Principles:
Inductive 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:

Standards:
Inductive 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:

Deontology It violated my own duty to do the right thing.
Assessmen Teleology It will eventually make me unhappy about this strategy.
t 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?
Deontology It violates my duties towards all stakeholders.
moral Teleology Net benefits to most stakeholders are decidedly negative.
Assessmen Distributive Justice Uneven distribution of costs/benefits, rights/duties of this action.
t Corrective Justice Round trip sales uncorrected will deceive and cheat the public.

610
Virtue Ethics This action violates almost every executive virtue that must
promote the physical, functional and moral well-being of my
stakeholders.

611
 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.

612
 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

613
 several actions over longer time-periods; then, these are tantamount to corporation standards of ethical conduct
or the 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].
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

614

Steps What have you learnt in this iterative
moral reasoning and backward judgment
E-A and justification process?
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?
615
 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?
i There are other approaches to ethical and moral analysis that are quite laudable.
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
616
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?
From the
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.
ii Skoll World Forum on Social Entrepreneurship Published on April 16, 2015;

http://www.skollworldforum.org.

iii The 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).

iv There 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.
v 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).

vi 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;
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).

vii 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.

viii
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.

617
ix
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.

x 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

xi 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/

xii 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.
Gautam, Pradeep Kumar (2016). Understanding Dharma and Artha in Statecraft through Kautilya’s Arthashastra. Institute of
xiii

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).
xiv
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.
xv
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.
xvi
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 righ t 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

618
Ricardo, Augustine Cournot, and Leon Walras. However, modern “positive” economics has distanced itself from ethics, thereby
impoverishing itself seriously (Sen, 1990, p. 7-14).
xvii
(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.
xviii
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.
xix
Aristotle 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.
xx
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.
xxi
Pygmalion 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.
xxii
No 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).

In all these tragic and frightful sequences, all four laws of the “Fifth Discipline” were playing out: Today’s problems come
xxiii

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).

xxiv
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.

xxv
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/

619
xxvi
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.
xxvii
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.
xxviii
Italian 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.
xxix
Aquinas, 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.
xxx
The 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
xxxi
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.
xxxii
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.
xxxiii
See Hirschman, Albert O. (1976). The Passions and The Interests. New Jersey: Princeton University, 112.
xxxiv
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). .
xxxv
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 sufficientl y 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

620
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].
xxxvi
For 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.
xxxvii
The 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.
xxxviii
McRae, 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.
xxxix
The 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).
xl
C.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.

xli
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
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).

621
xlii
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.
xliii
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.
xliv
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].

xlv
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

xlvi
For 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.
xlvii
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 condit ions,
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.
xlviii
Bribery 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.

xlix
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).

l
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

622
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 wil l 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.
li
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 tha t 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 (x 3) 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 x 4), 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 t he 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).
lii
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).
liii
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).
liv
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

623
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).

lv
The 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.

lvi 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

lvii
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
lviii
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 productivit y 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.
lix
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

lx 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

lxi 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

lxii
Crofts, Andréa (2017, November 6). Notes from #WebSummit: Opening Address from Stephen Hawking: The impending impact

624
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

lxiii 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/

lxiv
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.

lxv
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.

lxvi
What 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 Intellige nce (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.
lxvii
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.

lxviii
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).

lxix
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 cor poration
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).

lxx
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
lxxi The endangered public company: The big engine that couldn’t. (2012, May 19), The Economist, 1-16.

625
lxxii
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.

lxxiii 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

626