Business Ethics

ESC Dijon

Marek Hudon
Academic Year 2010-2011

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A few words of presentation..

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 Sources

• Textbook: Velasquez, M. (2006), Business

Ethics. Concepts and Cases (6th edition),
Pearson: New Jersey.
• Slides related to the textbook: Paul L.
Schumann
© 2004 by Paul L. Schumann. All rights reserved.

• Slides related to World Hunger: Lawrence

Hinman
© Lawrence Hinman

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 Objective of the course

• Introduce core business ethics issues

• Present analytical frameworks used to adress
ethical dilemnas
• Apply these frameworks to a few case studies
• Discuss the relevance of ethical concerns in the
management of (for-profit and non-profit)
companies

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 Table of Content

1. Introduction to ethical issues

2. Moral principles: Five core theories

3. Examples and applications

4. Alternative management

5. Conclusion
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Enron Video A few questions

Why did it Who is

happen? responsible?
 Three levels of ethical issues

Systemic Issues
Morality of capitalism or laws

Individual Issues
Corporate Issues
Manager put pressure on staff
Morality of corporate culture
 For each level, ethical values suggest
two main ideas (Pogge, 2002):

Character Achievement

• Good person • Ethical quality of the

• Admirable aims and person’s deeds
ambitions • Historical impact of
the world

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 Three levels of ethical issues
Character
(rationality)
Achievement
Systemic Issues
(consumption)
Morality of capitalism or laws

Character
Character
(social , green NGO)
Achievement
Achievement
(Nike suppliers)
Individual Issues
Corporate Issues
Manager put pressure on staff
Morality of corporate culture
 How to make your point? Moral reasoning
.. from “Fair Game”

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 Moral Reasoning.. from “Fair Game” (2)

Governments (administrations) should protect their

(secret) workers who are at risk, in danger
 Moral standards/ criteria

Former Bush administration gave her name (unclassified

file)
 Factual information

This administration was immoral

 Moral judgement
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 Moral responsibility: Guns (p. 49)

• Are gun manufacturers responsible for the

deaths?
• When is a company morally responsible for
deaths caused by a product?

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 When Moral Responsibility?
Did they cause/
helped it or fail to
Did they act of prevent something
their own free will avoilable?
(no external
abuse, internal
abuse)?

1. Causality

3. Deliberate

2. Knowledge/
Did they know what
ignorance they were doing?

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 Example: Is Europe responsible for hunger in
Africa?

Context:
Colonies

Independance in 60s

Debt (HIPC)
© Lawrence Hinman

What do you think? Multinationals

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 Is Europe responsible for hunger in
Africa?
Did they cause/
helped it or fail to
Did they act of prevent something
their own free will avoilable?
(no external
abuse, internal
abuse)? Intervention,
relationship debt/
1. Causality poverty, fail to put
Sure Efficient
institutions?
3. Deliberate

Natural resource 2. Knowledge/

owernship but global Did they know what
ignorance they were doing?
trends (debt, AID)
 Deliberate
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ignorance?
 Who is responsible?

• Managers put some pressure on his employee

• Profit objectives of his unit
• …

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 Moral Responsibility
• Implications for management: Employee complaining at
HR office for harrassment (frequent e-mails, phone calls at
night, managers shouting etc.)
• Is there an (ethical) problem? If yes, who is responsible for
unethical conduct in business?
• Depends on the factual information: More pressure than
other department? Real pressure?)
• Depends on causality: Other reasons why employee is
stressed? Stress because of office disposition?
• Depends on free-will: Was the manager forced to increase
productivity? To double productivity in one month?

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 Moral Responsibility

• 3 Views:
– 1. The employees who made the unethical decision
• Corporations don’t make decisions, people do
• Therefore, the people who made the unethical decision
should be held responsible
– 2. The corporations
• Employees’ decisions are made in the context of
corporate policies, corporate norms, organizational
structure, and corporate culture
• Therefore, the corporation as a whole should be held
responsible
– 3. Both the corporation and the employees involved
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 Moral responsibility

• Limit can be very thin..

• Should we take the corporate culture into
account? Whatever the corporate culture and
the context?
• Who should analyse this issue in the company?
HR department? CEO? Probably independant
person but who is independant (ex of
procedures of contact person at ULB)?
• Global implications for companies and countries

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 Table of Content

1. Introduction to Ethical Issues

– Levels of ethical issues
– Moral reasoning
– Moral responsibility
2. Moral principles

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 Moral Principles

• Main Issue:
What moral principles should be used to make
moral judgments in business?
• We’ll use 5 moral principles
• Why these 5 specific moral principles?
– Complementary
– Comprehensive
– Commonly studied & used

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 Case study: Caltex (pp. 58-60) (1)

• Context:
– South Africa
– Since 1948: White-only National Party  Apartheid
– No vote, no union, nor right to freedom
• Caltex
– Jointly hold by Texaco and Standard Oil
– 80s: Started oil rafineries in South Africa (SA)
– Taxes and part of profits to SA governments

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 Stop 1st day

Case study: Caltex (2): Actors

Shareholders Managers
resolution

* Break relations * Activities help

with SA Black workers
government or (income increase, other
* Leave the country benefits)
* Withdraw would
endanger them

READ p . 58

What do you think? Should they leave? 23

 Case study: Caltex (2): Actors

Managers
If company leaves,
Welfare of workers
would decrease
* Activities help
 Utility Black workers
(income increase, other
benefits)
Special care of their
workers; cannot * Withdraw would
abandon them endanger them
 Ethics of care

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 1. Utilitarianism

• Utilitarian Principle: The morally correct action is

the one that maximizes net social benefits,
where net social benefits equals social benefits
minus social costs.
• Focus: the ends (results) of an action
– Maximize net social benefits
• Social benefits (good)
• Social costs (harm)

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Example of utilitarianism: Pinto Case

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 Utilitarianism
• Most good & least harm for everyone
• Consider all good & all harm
– Everyone who is affected (not private benefits & costs,
rather social benefits & costs)  Not only the one
performing the action
– Economic & non-economic
• Example: loss of income (economic)
• Example: pain & suffering (non-economic)
– Present & future
– Whether easily measured or not

 Inspired Cost-benefits analyses

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 Example related to utilitarianism

“A large group of people is stuck in a cave because a

fat man (no put down intended) is stuck in the only
exit of this cave. The only way to free themselves
would to dynamite their way out, therefore sacrificing
the fat man. Do they all free themselves at the cost
of one life or do they not kill him and all die?“
(Grassian, 1992)

 Kill the man in question and save all the others?

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 Example related to utilitarianism (2)

• The problem, of course, is that you (almost)

never know the future with certainty.

 What if the group realized, after killing the fat

man, that they could very well have lived
because the high waters wouldn't have reached
the top of the cave anyway.

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 Utilitarianism

• Concerns:
– Some benefits & costs might be hard to measure in
precise, non-controversial ways
• Example: value of a human life
• Response of utilitarianism: everything can be
monetarised
– Utilitarianism might appear to justify unethical
conduct: the ends justify the means
• Example: familly
– Choices, rankings can change with time

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 Five Moral Principles

1. Utilitarianism
– Maximize net social benefits
– Concerns on unmeasurable and extreme cases

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 Back to Caltex (3): Arguments
Shareholders
Unjust since
resolution
burdens on Blacks
not beard by Whites
* Break relations
with SA
government or
Violates Blacks civil
* Leave the country
and political rights

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 2. Rights

• Rights Principle: The morally correct action is

the one that you have a moral right to do, that
does not infringe on the moral rights of others,
and that furthers the moral rights of others.
• Focus: the means (methods); not the result

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 Rights

• Definition: individual’s entitlement to something

• Legal (juridiction) & Moral (as human)
• Positive & Negative
• Rights are entitlements
– Example: Right to free speech
– Example: Right to freedom of religion
– Example: Right to an education

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Child labor: Is there a price for education?

• Should child work?

• Should child work to pay their
education?
• Can child work to pay their
education when low quality of
education?
• Programme: work in morning;
education in the afternoon
• Human right to education vs.
More utility? 35
 Conflicting rights: HIV

25 million+ 30 million+
died living with
of AIDS since It in 2008
1981

Source: UN

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Link to Article
http://www.youtube.com/watch?v=qSpTdO4FBZI&feature=related
By applying the patent system to the drug product and the
process, "we create inherently unjust monopolies and
block knowledge transfer" that could save so many lives
around the world. It is time to rewrite the rules of
intellectual property rights, a pillar of the world trade
system, critics like Jabbar argue. "In the context of HIV
and AIDS, we need a new concept of people's property
rights instead of intellectual property rights.
Stiglitz suggests setting up a fund to pay fees to scientists
who come up with cures for key diseases - after which the
drugs would go into the public domain instead of being
'owned' by pharmaceutical companies. (Son, 2009)

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• Conflicting rights
• Positive vs. Negative rights

 What moral rights do people have?

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 Rights, Duties, & Interests
• Function of rights: to
protect interests
– Autonomy
– Equality
– Example: Free speech
– Example: Freedom of
religion
– Example: Education
• Rights create duties
– Belief that is the right way
for all to behave
Interests

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 Kantian application to Caltex

• Reversability: Would Whites accept this situation

for them?
How would you like in their place?

• Universability: Would everyone act on ?

What if everybody did that?

1st formulation 40
 41
Source: Shultz
 Another example of Kantian application

• Five people waiting for organ transplant

• Healthy person arrives at the hospital ; his
organs could save
• Utilitarianism: ethical to kill him
• Kant: killing the healthy patient would be using a
person as a means to an end

 Something must be good in itself, without

considering the consequences
2nd formulation 42
 What rights do individuals have?

• Immanuel Kant (1724–1804)

Categorical Imperative:
– Reversibility
– Universalizability (everyone could act on)
Deontological (rules and duties) rather than
consequences
Start from interior motivation

2dn formulation: treating humanity as an end? Not as a

mean
– Respect / Free Consent of stakeholders
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 Criticism on Kant

• Is reversibility always clear enough?

All murders should be punished (What if I am a murderer?)

• What if rights of a same person conflict?

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 Resolve Conflict Among Rights
But, when rights are in conflict, how
should we resolve those conflicts
among rights? Clear enough?

• Rights protect interests and create

duties
• When rights conflict:
– Examine competing interests
– Decide which interest is more
important
– Give priority to right that protects Interests
more important interest

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 Access to water

• 30 September 2010: UN Human Rights Council

has by consensus adopted a resolution affirming
that water and sanitation are human rights.
 justiciable and enforceable
• More efficient when we pay?

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 Fair wage

Exercice in groups:
• Yes, it is fair!
• No!!

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Fair Wage: Michael Jordan

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 Challenges

• How to measure value added (total wealth,

profits, marginal productivity)?
• Externalities (over-consumption/ environmental
impact ?) included?

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 Stop 2nd day

From ‘my’ well-being to societal well-being

• From NEF report ‘A bit rich’: SROI (pp. 29)

• Six (use 2 here) jobs: City banker vs. hospital
cleaner (pp. 15 & 21 – Methodo: pp. 30 & 32)
• Which one contributes most?

?
• Nevertheless
 Difficult to calculate
 Transparency (open discussion but pressure to
increase salary, inflation) 50
Fair Wage: Michael Jordan

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• After our discussion M. Jordan, which criteria
would you use?
• Is there any ethical issue related to them?

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 Which criteria for wages in the company?
Choices
• Seniority, • Social mission

• Competences, • History of institution

• Age, • Former job

• Competition,
• Painfullness
• Studies
• Place

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Which criteria for wages in the company?

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 Ethics of Care
Link to article

• In groups of 4 or 5
• What is the right behavior and
when?
• Why?

• Until now, assumed that ethics should be

impartial
• Nevertheless, special & close relationships
(friends, relatives etc.)
• Basic argument: ethical behavior is more than
impersonal principles 55
 Ethics of Care

• Relationships matter
– Should preserve nurture special relationships
– Respond to their needs, values, desire
– Particularly for the vulnerable who depend on me
– Example: love toward son or daughter versus toward
a stranger
• Care Principle: The morally correct action is the
one that appropriately cares for the people with
whom you have valuable & close relationships

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 Applications of ethics of care

• Feminists: C. Giligan: men and women

approach of moral issues – Indiv. of rights vs
women on care
• Communitarian ethics:
– concrete communities have a fundamental value that
should be preserved and maintained
– Individual isolated is not important
• But demand of care can conflict demands of
justice (eg managers obligation of justice
towards company vs. friend)
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 Objections to care

What could we criticise?

• Could lead to favoritism

• Could lead to ‘burnout’: too many close

relationships

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 Five Moral Principles

1. Utilitarianism
2. Rights
3. Distributive Justice
4. Ethics of Care
5. Virtue Ethics

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 Virtue Ethics

• Pp 108-109: Example of Boesky

• Virtue Principle: The morally correct action is the
one that displays good moral virtues, and that
does not display bad moral vices.

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 Virtue Ethics

• Examples of virtues: compassion,

conscientiousness, cooperativeness, courage,
fairness, generosity, honesty, industriousness,
loyalty, moderation, self-control, self-reliance,
tolerance
• Examples of vices: cowardice (weakness),
treachery, dishonesty, laziness, neglect,
selfishness

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Comparison

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Why do we care about
business ethics?

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 From ethics to Responsibility?
• Milton Friedman, “The Social Responsibility of Business
Is to Increase its Profits,” New York Times Magazine
• First, corporate executives and directors are not qualified
to do anything other than maximize profit. Business
people are expert at making money, not at making social
policy.
• Second, and more fundamentally, corporate officers
have no right to do anything other than maximize profit ;
otherwise “tax” on the company’s owners, employees
and customers in order to accomplish a social purpose

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 2. Ethical Relativism

• Theory of Ethical Relativism: There are no

universal moral principles
– Different societies have different moral beliefs
– No way to judge a society’s moral principles as being
right or wrong
– Only possible judgment: Does a society live up to its
own moral principles?

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 Objections to ethics in business

1. Pursuit of profits ensure maximum social

benefits

2. Managers’ main obligation is to the company

3. Business ethics is limited to the law

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 Flaws of Ethical Relativism (or Insufficient?)

• Some moral principles are required if the society

is to survive
 Ethics apply to all human activities
 Business cannot survive without ethics
• What appear to be differences in moral
principles may only be surface differences
• Just because two people have different moral
beliefs doesn’t mean they’re both right

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 Stop 3rd day

Flaws of Ethical Relativism (or Insufficiencies?)

• The theory produces unacceptable conclusions.

Examples:
– Slavery in the United States
– Treatment of Jews in Nazi Germany

• Velasquez argues that “…ethical behavior is the

best long-term business strategy for a
company…” (p. 5).
Do you agree or disagree?

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 Five Moral Principles

1. Utilitarianism
2. Rights
3. Ethics of Care
4. Virtue Ethics

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 Microfinance in a snapshot
• Institutions with double bottom line:
– Reach financial excluded
– Be financially sustainable to remain
• Around 150 million clients of MFIs (e.g. Microcredit
Summit)
• Over 750 million savings and loan accounts in “alternative
financial institutions” (AFIs) in developing and transition
countries (CGAP, 2005)
• Around 10,000 MFIs+ but overinvestment in top MFIs
• Unevenly developed (South Asia >< Africa)
• Commercial funding to Latin America
 Microfinance in a snapshot (2)
• Major institutions in Bangladesh (GB  8m)

• Around $1 bn per year by donors

• Around EUR 5 bn EUR of MIV

• Interest rates: average of 30% p.a., between 20 and …

 Some questions to discuss for the case
• Donor funds (or NGO public money) given before 2000
found their way into private pockets. Normal? To which
extent?
• It is unethical to see the poor pay for private profits?
• Is microfinance an industry or is it an economic justice
movement?
 Compartamos capital structure

• Compartamos AC (the NGO): 39.2 percent,

• ACCION Gateway fund: 18.1 percent
• IFC: 10.6 percent
• Directors and managers: 23.7 percent
• Other private Mexican investors: 8.5 percent

• Mission: Provide capital to women micro-

entrepreneurs. Support to establish family
microenterprises in marginalized communities.
 Compartamos Subsidies

$1 000 000 Loan

as Subordinated
Debt

$200 000 TA

Source: CGAP $800 000

Investment
 Interest rates: Compartamos

• Yield of Gross Loan Porfolio in MBB (2007):

– Nominal: 30%
– Real: 22%
• Compartamos:
– 85% excluding. VAT
– Taxes: 15 % added tax (VAT) to the Government of
Mexico
• A controlling majority—2/3 of the shares—was
held by shareholders committed to development
objectives, not profits (Rosenberg, 2007)
 Basics of IR: Conflicting issues
• Higher IR but often much cheaper than second-best informal
funds (Morduch, 1999)
• Interest rate charged by the institution is one of the two main
selection criteria (Wright and Rippey, 2003) but Institutions’
sustainability matters for the poor in non-competitive
environments.
• Inequality of pricing but “markets function as mirrors” (Kanbur,
2003)
• High repayment but is it a sufficient condition to assume that
an interest rate policy is fair? Low wages accepted by workers
mean fair wages?
• Fair IR for borrower but unfair to workers and un-served poor?
 Intrinsically, interest rates of MF are an ethical issue
 What would be a fair interest rate?

Elements you could consider include:

• Clientele (poverty status)

• Macro-economic environment
• Mission of the MFI
• Competition
• Cost of funds + operating costs + profit margin?
 No cheap source of funds?
 Well-paid staff / international consultants?
 Profit to serve new clients?
 What is a reasonable profit margin?
• Fairness to whom?
It “overcharged” existing clients for the sake of
outreach to potential future clients, and all profits
accumulated in the NGO would remain at the
service of poor Mexicans—some as
microfinance clients and others as beneficiaries
(Rosenberg, 2007)
 How did Compartamos finance its growth?

• over 80 percent of this profit has been retained

within the company to fund growth in the number
and size of its loans, rather than being paid out
in dividends to shareholders
 Another perspective

• “The most powerful approach to the question of

whether interest charges are too high is to look
at the individual cost items that those charges
cover (cost of funds, loan losses, and
administrative costs) and the profit that's left
over after paying the costs. “ (Rosenberg, 2008)
• Surplus repartition  Distributive justice
• Interest rates:
– Systemic issue: transaction costs
(Rosenberg, 2007)
– Corporate issue: trade-off social and financial
performance (Mosley and Hulme, 1996;
Lensink et al., forthcoming) ?
 What would be a fair interest rate?

If we have to relate it to global questions

• Clientele (poverty status)  Needs or equality

• Mission of the MFI  Virtues
• Competition  Free choice
 3. Distributive Justice

• Distributive Justice Principle: The morally correct

action is the one that produces a fair distribution
of benefits and costs, good and harm.

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 Distributive Justice (Fairness)

• General Fairness Principles:

– People who are similar in relevant respects should be
treated similarly
– People who differ in relevant respects should be
treated differently

• But what characteristics are relevant in deciding

if people are similar? For Compartamos case, all
citizens equal? All financially excluded? All
people from same region?
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 How Define Justice (Fairness)?

• Egalitarianism:
– Standard: equal benefits and burdens; same level of
material goods and services
– Elaborations: political equality or economic equality
– Criticism: needs, ability differ; unequal in many
respects

• Capitalism:
– Standard: Contributions (money, work)
– Criticism: measure

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• Socialism:
– Standard: Abilities & needs
– Criticism: link to effort, obliterate individual liberty

• Libertarianism:
–Standard: Free choice
–All constraints imposed by others are evil
–“From each as they choose, each as they are chosen”
–Criticisms: related to disadvantages
 Ex: Object redistributive taxation since “immoral taking of
just holdings”
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 Justice as Fairness: Rawls

• Original position
– Veil of ignorance
– Relevant for today?
• John Rawls’s Principles:
1. Equal Liberty Principle  Priority
2. A. Equal Opportunity Principle (each able to qualify
for privileged positions)
B. Difference Principle (most needy)

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 Apply All 5 Moral Principles

• If all 5 principles reach the same conclusion,

then that’s the moral judgment
• But if there appears to be conflict among the
principles:
– Examine the nature of the apparent conflict: can you
think of a different course of action that would satisfy
all 5 principles?
– If not, set priorities among the principles.
• Example: the ends never justify the means

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 GENERAL WELFARE
Utilitarianism
JUSTICE
Will the act lead to a
fair distribution of Who benefits from
benefits and burdens? the act? Who are
If it will cause burdened? Does the
inequality, will it act maximize the
improve the situation of total net benefit to
the least advantaged everyone concerned
persons? (stakeholders)?
RIGHTS

Does the act respect the CARE

moral rights of everyone
concerned? Does it treat
everyone as persons and Does the act show
not merely as things? proper care to people
we have special
relationships with?
VIRTUE Will the act help me Will it earn the trust of
develop my character? people we value?
Will it make me a better
person?
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Business Ethics by Manuel Velasquez
 Five Moral Principles

1. Utilitarianism Back to Pogge (2002):

2. Rights • Which one related to
3. Distributive Justice character?
4. Ethics of Care • Which one related to
5. Virtue Ethics achievements?

92
 Example A: Climate Change

• Emissions from North, first countries affected are in

Africa and Asia
• Huge investments needed
• Change of behaviors
Questions (30 minutes preparation):
• Do we have a responsibility towards the future
generations?
• Is there a duty compensate the South? How much?
(Who should pay the costs of climate change?)

93
 Responsibility towards Future generations

• Some argue they have equal rights than us:

– Leave the world no worse than we found it
– Care: Leave our children a world no worse
– Attfield/ Utilitarianist: Output left is no less
than from previous generations (but not the
same)
• When we calculate, what is the discount rate?
• Same nature or same level of welfare?

94
• Others object:
– Do not exist yet, therefore no duty related to rights, no
way to punish them
– If they would have rights, could sacrifize our civilisation
for their sake?
– Rights exist only if their holders have an interest to
protect. Do not know what rights future people might
have; will they care about environment?Maybe prefer
more consumption, less the environment?
– With technology, we could get back or leave same
world
95
 Duty to compensate the South?

• We did not create it! Libertarian

• Free transfer,

• Welfare (market for our

Utilitarian
companies, cost of
adaptation > budget)?

• We created it! Moral right (universal, revere)

• Do I have a special
relationship with inhabitants Care
from the South?

96
 More emphasis on Decreasing here rather than
paying for decrease in South?
• Polluter – payer principle
• But externalities, how to internalise?
• Efficiency argument (L. Summer thinking that
cheaper thus more efficient to outsource our trash)
• More efficient than paying for energy efficient
solution, should increase general welfare, what
leads to environmental behavior
• More population in South  More total utility to
work in the South

97
 Examples: B. Case Study: Unocal in Burma

1. Did Unocal do the right thing in deciding to invest in

the pipeline and then in conducting the project as it
did?

Assume there is no way to change the outcome of this

case and that the outcome was foreseen, was
Unocal then justified in deciding to invest in the
pipeline? 

98
2. In your view, is Unocal morally responsible for
the injuries inflicted on some of the Karen
people?  

3. Do you agree or disagree with Unocal's view

that "engagement" rather than "isolation" is "the
proper course to achieve social and political
change in developing countries with repressive
governments." Explain. 
99
Some cases: Which framework/ debate?

• Right

• Utility

• Virtue

100
• Right

• Utility

• Distributive
justice

101
Bank bailout

• Virtue (dishonest)

• Utility (society)

• Distributive justice

102
Source: Fortune
 Before conclusion..

• “Simply stated, ethics refers to standards of

behavior that tell us how human beings ought
to act in the many situations in which they find
themselves as friends, parents, children,
citizens, businesspeople, teachers,
professionals, and so on” Velasquez

103
 Conclusion

• Framework:
– Which level (systemic, corporate, indiv.)?
– Who is responsible for what?

• How to analyse this issue?

– Are there some legal or moral rights (Kant)?
– Net benefits (to which; me, relatives, all)?
– Special obligations?
– Will this lead to just distribution (needs,
contribution)?
104
• Business ethics is about trade-offs
• Self-regulation
• If insufficient, regulation
• Limits to regulation
• Ethics can pay

105
 Evaluation

• 20% participation
• 20% paper
• 60% exam

Exam
• Chapter 1, 2 and 7 of textbook
• Theory
• Case studies

106
Thank you!

107