Chapter 2

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Chapter 2
Concepts and Theories

of Business Ethics
Business Ethics and Corporate Governance, 2e A. C. Fernando

Definition of Ethics
Ethics as a moral and normative science refers to principles

that define human behaviour as right, good and proper.
“Morality”, according to philosophers, refers to human conduct

and values.

Law and Morality
There is a clear-cut difference between law and morality. In

a particular situation, an act that is legal may not be
morally right. For example, it will be legal for an
organization running in loss to lay off a few employees so
as to sustain itself. But it is not morally right to do so,
because the employees will find it difficult to find a living.
On the other hand, an action performed can be illegal but

morally right. For example, it was illegal to help Jewish
families to hide from the Nazis, but it would have been a
morally admirable act.

Law Vs Morality in Organizations
In the organization too, we will find such situations where

an act will be morally right and legally wrong to
perform. The strong ethical base of the individual as
well as that of the organization helps an employee
overcome such a situation. The law cannot cover the
wide variety of possible individual and group conduct.
The law prohibits actions that are against the moral
standards of society.

Ethical Theories in Business
Ethics is a normative study, i.e., an investigation that attempts

to reach normative conclusions.
Ethical theories in business include:
• Consequentialist normative theory: Normative themes—

egoism, utilitarianism, Kantian ethics.
• Non-consequentialist normative theory: Non-

consequentialist normative themes—duties, moral rights,
and prima facie principles

Classification of Normative Theories
Normative Theories
Consequentialist Non-consequentialist
(Deontological – Duty-based)
Egoism Utilitarianism Kantian

ethics

Normative Themes
Egoism
• contends that an act is morally right if and only if it best
promotes an agent’s long-term interests
• makes use of self-interest as the measuring rod for
actions performed
• is equated with an individual’s personal interest but it is
equally identified with the interest of an organization or
society
• intends to provide positive consequences to the party’s
interest without considering the consequence to the other
parties

Normative Themes: Egoism (Contd.)
Philosophers distinguish between two kinds of egoism:

personal and impersonal.
•Personal egoism: One should pursue his/her long-term

interest and not dictated what others should do.
•Impersonal egoism: Everyone should follow their best
long-term interest.

Utilitarianism
The proponents were:
Jeremy Benthan (1748–1832)

John Stuart Mill (1806–1873)
Utilitarian principle: An action is ethically right only if the

sum total of utilities produced by that act is greater than
the sum total of utilities produced by any other act that
could have been performed in its place.

Kantian Ethics
Proponent:
Immanuel Kant (1724–1804)
This theory introduces an important humanistic dimension to

business decisions, which is to behave in the same way
that one would wish to be treated under the same
circumstances and to always treat other people with
dignity and respect.

Kant’s Philosophy
• Stressed that action must be undertaken for duty's sake

and not for some other reason.
• Opined that the imperatives of morality are not
hypothetical but categorical. The core idea of this
categorical imperative is that an action is right if and only
if it will become a universal law of conduct.

Normative Theories of Business Ethics:
Classification
Normative Theories
Stockholder Theory Stakeholder Theory Social Contract Theory

Normative Theories of Business Ethics
Stockholder Theory: expresses business relationship

between stock owners and their managers running the day-
to-day business of the company. As per the theory,
managers should pursue profit only by all legal, non-
deceptive means.

Stakeholder Theory: This theory argues that a corporate’s

success in the marketplace can best be assured by catering
to the interests of all its stakeholders (shareholders,
customers, employees, suppliers, management and the local
community). This objective is achieved when corporations
adopt policies that ensure an optimal balance among all
stakeholders.

For example, Marico, the makers of Parachute oil, discovered

a harmless tint in the oil from one of its production lines. The
company withdrew the batch from the market, shut down
the production line, but kept the workers on payroll and
involved them in the investigation of the cause. In a short
time, the workers located the cause, rectified it and resumed
production.

Social Contract Theory: This is based on the principles of “social

contract”, wherein it is assumed that there is an implicit agreement
between the society and any created entity such as a business unit, in
which the society recognizes the existence of a condition that it will
serve the interest of the society in certain specified ways.

Ethics and Religion
The world’s great religions—Christianity, Hinduism and Islam

—have all left their indelible marks on morality and the
conduct of people in every aspect of human endeavour,
including business. Every religion has provided its followers
its own set of catechisms, moral instructions, beliefs, values
and virtues, traditions and commitments.

Teachings of the Church
The Church always supports and promotes the welfare of the

poor. People often think how we can relate business and
ethical teachings of the Church. But now the trend has
changed and organizations and institutions relate business
to religion and ethics. This transition is due to the
increased importance of ethics in business. The Church’s
concerns and ethical teachings are found in several papal
encyclicals, i.e., letters the pope writes to his followers.

Rerum Novarum
Since the late 19th century, there has developed a strong

tradition of reflective thought on economic issues within
the Catholic Church. This concern on economic issues
effectively started in May 1891, with the publication of
Rerum Novarum, an encyclical by Pope Leo XIII. The
central theme of the letter was the relationship among the
State, employers and workers.

Key Feature of the Encyclical
• Directs the State and organizations to perform their

duties to the working class to avoid corruption or
unethical behaviour in the society.
• When man is deprived of dignity and equality they will
indulge in unethical practices. Mutual support in the
society and organization will help individuals to perform
their best for productivity and profit.

Gautim Et Spes
Pastoral documentation of the Church released during the

Second Vatican Council held between 1962 and 1965.
The rapid change and technological advancement have led to
aggressive demands on individuals, forcing them to indulge
in unethical practices. There is an internal fight of values,
and basic values of human beings have changed.

Indian Ethical Traditions
The Hindu scriptures such as the Gita and the Upanishads

speak of the performance of right duty, at the right time in
the right manner. The rich Indian tradition has always
emphasized the dignity of human life and the right to live in
a respectful manner.

Gandhian Principles of Trusteeship
Implies that an industrialist or businessman should consider

himself to be a trustee of the wealth he possesses. The
trusteeship concept should also be extended to the labour in
industry.
The origin of the trusteeship principle can be traced to the
concept of non-possession detailed in the Bhagawad Gita.

Practising Gandhian Principles
In the recent past, social involvement by business has, for

the most part, taken the shape of public charity. This has
included the building of temples, hospitals and educational
institutions. A few examples include the Birla Temple in
Calcutta, the Shree Vivekananda Research and Training
Institute set up by Excel Industries in Mandvi, the L&T
Welfare Centre in Bombay, the Tata Institute of
Fundamental Research and the Voltas Lifeline Express.

Righteousness as the Way in the Gita
The Bhagawad Gita cites numerous instances of how moral

values and ethics can be incorporated into one's work life.
Many of its verses are directly significant for the modern
manager who may be confused about his direction and
struggling to find an answer to ethical dilemmas. The Lord
reiterates that work or karma is the driving force of life, and
that this work has to be ethical.

Message of the Gita: Chapter II, Verse 47
“You have a right to perform your prescribed duty, but you

are not entitled to the fruits of action. Never consider
yourself the cause of the results of your activities and never
be attached to not doing your duty.”
This stanza implies that the performer of an action has only

to perform the prescribed duty and not think about the
result of the action, because the result is beyond his control.
This teaching of Gita draws one's attention to Nishkama
Karma.

Gita’s Message in an Organization
When applied to an organization where one is only worried

of the result, he is likely to fall into improper activities. On
the other hand, if he is ready to do his duty to the utmost of
his ability and set aside the result, he will be an ethical
person in the organization.

Message of the Gita: Chapter II, Verse 56
“One who is not disturbed in mind amidst the three-fold

misery or elated when there is happiness and who is free
from attachment, fears and anger, is called a sage of steady
mind.”
A steady mind gives the right attitude and right direction.

Detachment is that quality which enables the individual not
to accept anything for his personal gratification. Personal
desires and conflicting interests end up in unethical practices.

Business and Islam
All principles covering business emanate from the Holy

Quran, as they are explained and amplified in the Hadith
(collection of the Prophet’s sayings).
The Prophet Mohammed ordained that businesses should

promote ethical and moral behaviour and should follow
honesty, truthfulness and fulfilment of trusts and
commitments, while eliminating fraud, cheating, cut-throat
competition, lending money at interest to people in need and
false advertising.

Shariah and Interest on Capital
Shariah, the canonical law of the followers of Islam, forbids

payment and receipt of interest on capital and money lent
and condemns usurious practices.
Shariah requires that investors profit only from transactions

based on the exchange of assets, not money alone, and
therefore, interest is banned.

Islamic Bonds or Sukuk
Bankers sell Islamic bonds or sukuk, by using property and

other assets to generate income equivalent to interest they
would pay on conventional debt.
The money cannot be invested on stocks of companies

dealing in alcohol, conventional financial services (banking
and insurance), entertainment (cinemas and hotels),
tobacco, pork meat, defence and weapons while computer
software, drugs and pharmaceuticals, and automobile
ancillaries are all Shariah-compliant.

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Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.

Concepts and Theories

Business Ethics and Corporate Governance, 2e A. C. Fernando

Ethics as a moral and normative science refers to principles

“Morality”, according to philosophers, refers to human conduct

Business Ethics and Corporate Governance, 2e A. C. Fernando

There is a clear-cut difference between law and morality. In

On the other hand, an action performed can be illegal but

Business Ethics and Corporate Governance, 2e A. C. Fernando

In the organization too, we will find such situations where

Business Ethics and Corporate Governance, 2e A. C. Fernando

Ethics is a normative study, i.e., an investigation that attempts

Ethical theories in business include:

• Consequentialist normative theory: Normative themes—

• Non-consequentialist normative theory: Non-

Business Ethics and Corporate Governance, 2e A. C. Fernando

Egoism Utilitarianism Kantian

Business Ethics and Corporate Governance, 2e A. C. Fernando

Business Ethics and Corporate Governance, 2e A. C. Fernando

Philosophers distinguish between two kinds of egoism:

•Personal egoism: One should pursue his/her long-term

Business Ethics and Corporate Governance, 2e A. C. Fernando

The proponents were:

Jeremy Benthan (1748–1832)

Utilitarian principle: An action is ethically right only if the

Business Ethics and Corporate Governance, 2e A. C. Fernando

Immanuel Kant (1724–1804)

This theory introduces an important humanistic dimension to

Business Ethics and Corporate Governance, 2e A. C. Fernando

• Stressed that action must be undertaken for duty's sake

Business Ethics and Corporate Governance, 2e A. C. Fernando

Stockholder Theory Stakeholder Theory Social Contract Theory

Business Ethics and Corporate Governance, 2e A. C. Fernando

Stockholder Theory: expresses business relationship

Business Ethics and Corporate Governance, 2e A. C. Fernando

Stakeholder Theory: This theory argues that a corporate’s

Business Ethics and Corporate Governance, 2e A. C. Fernando

For example, Marico, the makers of Parachute oil, discovered

Business Ethics and Corporate Governance, 2e A. C. Fernando

Social Contract Theory: This is based on the principles of “social

Business Ethics and Corporate Governance, 2e A. C. Fernando

The world’s great religions—Christianity, Hinduism and Islam

Business Ethics and Corporate Governance, 2e A. C. Fernando

The Church always supports and promotes the welfare of the

Business Ethics and Corporate Governance, 2e A. C. Fernando

Since the late 19th century, there has developed a strong

Business Ethics and Corporate Governance, 2e A. C. Fernando

• Directs the State and organizations to perform their

Business Ethics and Corporate Governance, 2e A. C. Fernando

Pastoral documentation of the Church released during the

Business Ethics and Corporate Governance, 2e A. C. Fernando

The Hindu scriptures such as the Gita and the Upanishads

Business Ethics and Corporate Governance, 2e A. C. Fernando

Implies that an industrialist or businessman should consider

Business Ethics and Corporate Governance, 2e A. C. Fernando

In the recent past, social involvement by business has, for

Business Ethics and Corporate Governance, 2e A. C. Fernando

The Bhagawad Gita cites numerous instances of how moral

Business Ethics and Corporate Governance, 2e A. C. Fernando