Concepts and Theories of Business Ethics

Chapter 2
Definition of Ethics

•Ethics is a branch of axiology.

•Axiology which includes metaphysics---the
branch of philosophy, logic, epistemology--- the
theory of knowledge
•Ethics as a moral and normative science refers
to principles that define human behavior as
right, good and proper.
•“Morality”, according to philosophers, refers to
human conduct and values.
 Ethics, Morality and Law
• Ethics is a branch of phbehaviorthat aims to answer the
basic question, “What should I do?” It’s a process of
reflection in which people’s decisions are shaped by
their values, principles, and purpose rather than
unthinking habits, social conventions, or self-interest
• Many people also inherit their morality from their family,
community, or culture. Morality is the belief that some
behaviour is right and acceptable and that other
behaviour is wrong. A morality is a system of principles
and values concerning people's behavior, which is
generally accepted by a society or by a particular group
of people. Such as: Always tell the truth. Do not destroy
property. Have courage.
 Law

• Definition of law is a rule of conduct developed by the

government or society over a certain territory. Law follows
certain practices and customs in order to deal with crime,
business, social relationships, property, finance, etc. The
Law is controlled and enforced by the controlling authority.
Such as,
•Bankruptcy law.
•Immigration law.
•Social Security laws.
•Federal anti-discrimination and civil rights laws that protect
against racial, age, gender and disability discrimination.
•Patent and copyright laws
 Relationship among morality, ethics and law

• Morality as it is normally understood is a set of principles

that outline correct (virtuous, proper) behavior for an
individual. Usually morality is based in some philosophy,
and often that philosophy is based in religion.
• Ethics as it is normally understood is a set of principles
that outline correct (virtuous, proper) behavior within a
community or society. Ethics is also usually based in
some philosophy, though generally speaking it is more
secular( not connected with religious or spiritual matter)
and analytical (systematic and logical)
• Law is a set of formal rules adopted by a community or
society that are meant — ideally — to reflect and enforce
moral or ethical principles.
Relationship among morality, ethics and law

• Morality aims at the perfection of the individual through ‘right

understanding’ and ‘right action’, though it often has social and
interpersonal implications.
• Ethics aims at the perfection of a society through proper pro-
social understanding and behavior. Behaviors that can be
described as prosocial include feeling empathy and concern
for others. Prosocial behavior includes a wide range of actions
such as helping, sharing, comforting, and cooperating.
• Law in its best sense, is intended to encourage moral or
ethical behavior; in its worst sense law becomes a mere tool
for punishing transgressions (wrongdoings) against moral or
ethical authority.
 Morality and Law

• Philosopher James Rachel suggests two criteria

fulfilling a minimum conceptions of morality, i)
reason, ii) impartiality.
• By the reason he means that a moral decision must
be based on reasons acceptable to other rational
persons.
• Impartiality is fulfilled when the interest of all those
affected by a moral decisions are taken into account.
• People often tend to confuse legal and moral issues.
 William Shaw brings two context to illustrate
legality and Morality:

• i) Action can be illegal, but morally right: There is a

clear cut difference between law and morality. an action
performed can be illegal but morally right. For example, it was
illegal in the eye of Pakistani army to help the patriotic
freedom fighter in the war 1971 , but in the eye of
Bangladeshies to hide those patriotic from Pakistani Army had
been morally admirable act.
 William Shaw brings two context to illustrate
legality and Morality:

• ii) Action that is legal can be morally wrong: On the

other hand, action can be legal but fully wrong morally.

• 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.
Law vs Morality in Organizations

• Law just codifies a nation's ideals, norms, custom and moral

values. However, changes in law can take place to reflect
the conditions of the time in which they are enunciated or
published. For example, during British Ruel in India ,
several laws were enacted that benefited to the colonial
power and its maintenance, and militated against the
interest of natives .
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.

• The strong ethical base of the individual as well as of the

organization would come to the rescue of that situation.
 Normative Theories in business

• The word ‘normative’ is an adjective which comes from the

word ‘norm’, which means a ‘standard’, or a ‘rule’, so moral

norms are standards or principles with which people are

expected to comply. Obviously, people have different ideas

about what these standards are, so the various normative

theories of ethics therefore focus on what they claim makes

an action a moral action: on what things are good or bad, and

what kind of behavior is right as opposed to wrong.

Normative Theories in business

• The following normative theories are therefore

illustrate some different sets of ideas about how

we should live. There are types of ethical theory.

• i) Deontology,
• ii) Teleology,
• iii)consequentialism and Iv) Character-based
ethics
Classification of Normative Theories

Normative Theories

Consequentialist Non-consequentialist
(Deontological – Duty-based)

Kantian
Egoism Utilitarianism Theories
 Ethical theories in business

Non-consequentialist (or deontological)

theories: Those that determine the moral
rightness or wrongness of an action based on
the action’s intrinsic features or character.
 Deontological Theory:

• The word ‘deontological’ comes from the Greek word

deon, meaning ‘obligation’, ‘necessity’, ‘that which is
binding’. Generally speaking, those words translate as
‘duty’, so deontological theories tell you what your
moral duties are. As you might guess, once people
start telling you what duties you have, those duties
form the basis of moral ‘rules’. Deontological systems
hold that the moral worth of an action lies in your
conforming to duties and rules, as opposed to
considering the consequences of what you do.
 Teleology:

• Teleological’ derives from the Greek word telos,

meaning ‘end’, ‘goal’, or ‘purpose’
• Teleological ethical theories can also be
consequentialist, because as well as being
directed towards an ultimate goal or purpose, a
teleological theory can also look to achieve the
best consequence in any particular situation. This
will follow the simple reason that to achieve the
best consequence in any particular situation will
generally contribute to the overall goal.
 Normative Theories in business

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

attempts to reach normative conclusions.
• Ethical theories in business include the followings by
William H Shaw:

 Consequentialist normative theory: Normative themes

—Egoism, Utilitarianism, Kantian ethics

 Non-consequentialist normative theory: Non-

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

• Consequentialist theories: Those that determine

the moral rightness or wrongness of an action based
on the action’s consequences or results.
 Consequentialism

• Consequentialist theories of ethics hold that the moral

worth of an action should be judged by its consequences.
So a good or right action is one which produces the best
consequences overall in the situation. There are
therefore situations where a consequentialist would be
prepared to lie if that was thought necessary to bring
about the best consequences.
 Egoism
Egoism: The view that morality coincides with the
self-interest of an individual or an organization. It
can be said that egoism is an ethical theory that
treats self interest as the foundation of morality.

Decisions based on egoism mainly are intended to

provide positive consequences to a given party’s
interest without considering the consequence to
other parties.
 Egoist

Egoists: Those who determine the moral value

of an action based on the principle of personal
advantage.
 An action is morally right if it promotes one’s
long-term interest.
 An action is morally wrong if it undermines
 Two kinds of Egoism
There are 2 types of egoism : personal and impersonal

Personal egoists: Pursue their own self-interest but do not make

the universal claim that all individuals should do the same.

Impersonal egoists: Claim that the pursue of one’s self-interest

should motivate everyone’s behavior. Egoists do not necessarily

care only about pursuing pleasure (hedonism) or behave

dishonestly and maliciously toward others. Egoists can assist

others if doing so promotes their own advantage.

 Psychological Egoism

 Psychological egoism: According to the proponents of

psychological egoism, human beings are so made that they
must behave selfishly. They assert that all actions of men are
motivated by self-interest and there is nothing like unselfish
action.

 Even acts of self-sacrifice are inherently self-regarding insofar

as they are motivated by a conscious or unconscious concern
with one’s own advantage.
 Psychological Egoism

• Psychological egoism claims that each person has but one ultimate
aim: her own welfare. This allows for action that fails to maximize
perceived self-interest, but rules out the sort of behavior
psychological egoists like to target — such as altruistic or
philanthropic behavior or motivation by thoughts of duty alone.
And it allows for aiming at things other than one’s welfare, such as
helping others, where these things are a means to one’s welfare.
 Example

• Psychological egoism is the notion that we are

always deep down motivated by what we perceive to
be in our own self-interest. Psychological altruism,
on the other hand, is the view that sometimes we
can have ultimately altruistic motives. Suppose, for
example, that Mr. X saves Jim from a burning office
building.
 Criticisms of Egoism

(1) The theory is not sound: The doctrine ( principle) of

psychological egoism is false – not all human acts are
selfish by nature, and some are truly altruistic.
( philanthropic) help for others at times of natural
disasters, like floods, earth quake, etc.

(2) Egoism is not a moral theory at all: Egoism misses the

whole point of morality, which is to restrain our selfish
desires for the sake of peaceful coexistence with others.
It is an ethical theory.
 Criticisms of Egoism

• Egoism ignores blatant wrongs: All patently wrong

actions are morally neutral unless they conflict with
one’s advantage.

• The theory does not stand against so many personal

and organizational vices such as corruption, bribery,
pollution, gender, and racial discrimination.
 Utilitarianism

 Definition: The moral theory that we should act in ways that

produce the most pleasure or happiness for the greatest number of
people affected by our actions.

 Main representatives: The British philosophers Jeremy Bentham

(1748–1832) and John Stuart Mill (1806–1873).

 The principle of utility: Actions are morally praiseworthy if they

promote the greatest human welfare, and blameworthy if they do
not.
 Utilitarianism
Six points concerning utilitarianism:
(1) In choosing between alternative courses of action, we
should consider the net worth of happiness vs.
unhappiness produced by each course of action.

(2) We should give equal consideration to all individual

preferences, then calculate the net worth of the various
kinds of pleasures and pains.
 Utilitarianism

(3) Anything can be morally praiseworthy in some circumstances if it

promotes the greatest balance of pleasure vs. pain for the greatest
number of people.
(4) We should seek to maximize happiness, not only immediately, but in
the long run.
(5) We should avoid choosing actions if their consequences are
uncertain.
(6) We must guard against bias in our utilitarian calculations when our
own interests are at stake. So it is advisable to rely on rules of thumb.
 Utilitarianism

Utilitarianism in an organizational context:

 Provides a clear and straightforward standard for

formulating and testing policies.

 Offers an objective way for resolving conflicts of self-

interest.

 Suggests a flexible, result-oriented approach to moral

decision making.
 Criticisms of Utilitarianism

(1) The practical application of the principle of utility involves

considerable difficulties.

(2) Some actions seem to be intrinsically immoral, though

performing them can maximize happiness.

(3) Utilitarianism is concerned with the amount of happiness

produced, not how the amount is distributed, so the theory
can run counter to principles of justice.
 Kant’s Ethics

 Immanuel Kant (1724–1804): A German philosopher with a

non-consequentialist approach to ethics.

He Said the moral worth of an action is determined on the

basis of its intrinsic features or character, not results or
consequences. Believed in goodwill, that good actions
proceed from right intentions, those inspired by a sense of
duty. He said that action to be morally worth it should reflect
a goodwill. By will, Kant meant the unique human capacity to
act from principle.
 Kant’s Ethics

Contained in the notion of good will is the concept of duty. He told when
we can act from duty does our action have moral worth. He stressed that
the action must be taken only for duty’s sake and not for other reason.
Imperatives of morality are not hypothetical, but categorical.

The categorical imperative: Morality as a system of laws analogous to

the laws of physics in terms of their universal applicability.

The morality of an action depends on whether the maxim (or subjective

principle) behind it can be willed as a universal law without committing
a logical contradiction.
 Kant’s Ethics

For example, "I must drink something to quench my thirst" or "I must
study to pass this exam." A categorical imperative, on the other hand,
denotes an absolute, unconditional requirement that must be obeyed in
all circumstances and is justified as an end in itself.
 Kant’s Ethics

Formulations of the categorical imperative:

(1) Universal acceptability: To determine whether a principle is a

moral law, we need to ask whether the command expressed
through it is acceptable to all rational agents.

(2) Humanity as an end, never as a means: We must always act

in a way that respects human rationality in others and in
ourselves. Always to treat other people with dignity and
respect.
 Kant’s Ethics

Kant in an organizational context:

(1) The categorical imperative provides a solid standard for
the formulation of rules applicable to any business
circumstances.
(2) Kant emphasizes the absolute value and dignity of
individuals.
(3) Kant stresses the importance of acting on the basis of
right intentions.
 Criticisms Kant’s Ethics

(1) Kant’s ethics is too extreme insofar as it excludes emotion

from moral decision making and makes duty paramount.

(2) Kant fails to distinguish between excepting oneself from a rule

and qualifying a rule on the basis of exceptions.

(3) It is not always clear when people are treated as ends and
merely as means.
 NORMATIVE THEORIES OF BUSINESS
ETHICS: CLASSIFICATION
Normative Theories

Stockholder Theory Stakeholder Theory Social Contract Theory

Normative theories of business ethics

• Stockholder theory: Expresses the 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.
Normative theories of business ethics

• Stakeholder theory: Argues that a corporation’s

success in the marketplace can best be assured by
providing 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.
 NORMATIVE THEORIES OF
BUSINESS ETHICS
• 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 the payroll and involved them in
the investigation of the cause. In a short time, the
workers located the cause, rectified it and resumed
production.
NORMATIVE THEORIES OF BUSINESS ETHICS

• Social Contract theory: It 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.
 Social Contract theory

• Social Contract theory is drawn from the models of the

political –social contract theories enunciated by
thinkers like Thomas Hobbes , John Locke and Jean
Jacques Rousseau. When members of the society
give the firm legal recognition, the right to exist
engage them in any economic activity and earn profit
by using the society’s resources , it obviously implies
that the firms own an obligation to the society.
 Ethics and religion

• The world’s great religions––Christianity,

Hinduism and Islam have all left their indelible
(permanent) marks on morality and the conduct
of people in every aspect of human endeavor,
including business. Every religion has provided
its followers its own set of catechisms ( religious
instructions), 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 Church. But now the trend has
changed and organizations and institutions relate business
with 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.
 Teachings of the Church

• 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 ( Pope Leo XIII
was the head of the Catholic Church from 20 February 1878 to his death in 1903.

He was the oldest pope). The central theme of the letter was the
relationship among the State, employers and the workers.
 Teachings of the Church [Rerum
Novarum]

• Key feature of the encyclical

 Directs the State and organizations to perform their duties

to the working class to avoid corruption or unethical
behavior in the society.

 When man is deprived of dignity and equality he will

indulge in unethical practices. Mutual support in the society
and organization will help individuals to perform their best
for productivity and profit.
 Teachings of the Church

• Gaudium 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.
 Teachings of the Church
Principles of Catholic Social Teaching

• Life and Dignity of the Human Person- Every person is made in

the image of God . This means that every life is sacred and all
people are worthy of respect, no matter who they are or where they
live . We are called to care for all human life .

• Call to Family, Community, and Participation-We believe people

have a right and a duty to participate in society, seeking together
the common good and well-being of all, especially poor and
vulnerable people.
Rights and Responsibilities: Rights are freedoms we have that are
protected by our laws, while responsibilities are duties or things that
we should do. In order to be good citizens, or members of a
community, we must understand our rights and responsibilities 
 Principles of Catholic Social Teaching

• Option for the Poor and Vulnerable- The Catholic social teaching
principle Option for the Poor and Vulnerable (United States Conference
of Catholic Bishops) encourages us to imitate Christ's love for the poor by
working to create a society where the needs of the poor are always
considered firs

• The Dignity of Work and the Rights of Workers- The dignity of the
person is lived out in society by the fulfillment of personal responsibilities.
Work is one such essential responsibility which shapes and fulfills human
dignity by providing for the needs of one's self and one's family. Work
belongs to the vocation of every person.
 Principles of Catholic Social Teaching

• Solidarity- When we see a group of citizens

protesting something on the news, marching in a
group, holding signs, and chanting slogans, that
means they are in solidarity with each other, or
united behind a common goal or purpose. Any time
when we express support of a group or the people in
it, we are showing solidarity with them.
 Principles of Catholic
Social Teaching

• Care for God’s Creation- One way that we can care for
creation is by taking care of the environment. Taking
small, conscious steps in our everyday life can help us
reflect on our call to care for creation—and make an
impact on the environment . There are many ways we
can do this, including respecting animals, reducing,
reusing, recycling, not littering, and by doing so
improving our carbon footprint, composting kitchen
scraps, and eating less meat can reduce waste.
 Indian Ethical Traditions

• The Hindu scriptures (sacred writings) 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.
 Indian Ethical Traditions

• 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 labor in industry.

• The origin of the trusteeship principle can be traced to

the concept of non-possession detailed in the
Bhagawad Gita.
 Indian Ethical Traditions

• Practicing 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.
 Indian Ethical Traditions

• Righteousness as the way in Gita

• The Bhagawad Gita cites numerous instances of how

moral values and ethics can be incorporated in 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.
 Indian Ethical Traditions

• 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.

 Indian Ethical Traditions

• 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
 Indian Ethical Traditions

• Message of the Gita: Chapter II, Verse 56

• “One who is not disturbed in mind amidst the threefold

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
 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.
Business and Islam
Business principles drawn from the teachings of
Prophet Mohammed:
• No fraud or deceit
• No excessive oaths( promises) in a sale
• Need for mutual consent
• Be strict in regard to weights and measures
• The prophet was very much against monopoly
• Free enterprise
• Hoarding is forbidden
• Forbidden transaction
 Business and Islam

• Shariah and Interest on Capital

• Shariah, the canonical [established] law of the followers of Islam,

forbids payment and receipt of interest on capital and money lent
and condemns usurious practices. Usury is the act of lending
money at an interest rate that is considered unreasonably
high or that is higher than the rate permitted by law.

• Shariah requires that investors profit only from transactions

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

 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.