A Deontological Approach to Business Ethics: Beyond Maximization of Profits

Wataru Asanuma, St. Thomas University, Florida, USA

Abstract: In most businesses the model of corporate governance has changed from the shareholder to stakeholder model. There have been implemented new laws and regulations such as the Federal Sentencing Guidelines for Organizations (FSGO) and the Sarbanes-Oxley Act. Despite all these efforts, there still remains a tension between business and ethics. The reason will become clear in the light of consequentialism (utilitarianism) and non-consequentialism (deontology) debate in classical ethical theory. One approach to business ethics is that morality is embedded in the success of business. But some unethical behaviors are included in and some moral obligations are excluded from the maximization of profits. The upshot is that in some cases there is a stark contrast between the greatest good and the rights of all individuals. The pursuit of profits relatively easily escapes the observance of the moral obligations and there must be some moral force to prevent business practices from unethical behaviors. But the tenet of Kantian ethics is that deontological ethics is not inclined to formalistic rigorism and heteronomy of will. Keywords: Business Ethics, Shareholder Model, Stakeholder Model, Federal Sentencing Guidelines for Organization (FSGO), Sarbanes-Oxley Act, Consequentialism (utilitarianism), Non-consequentialism (deontology), Cultural Relativism, Kants Categorical Imperative

Introduction

NE APPROACH TO business ethics is that the observance of the moral obligations is inherent or embedded in the success of business. At first sight, it seems indeed as though there is a conflict between business and ethics, because the pursuit of profits as an aim of business deems to be itself unethical or amoral. As DeGeorge calls the Myth of Amoral Business, however, if a business or corporation were completely indifferent to ethical judgments, it would be doomed to failure from the start. This paper shall explore whether or not this sort of defense of business ethics can really provide a normative foundation for business ethics. It is attractive to claim that the observance of the moral obligations, which seems to be irrelevant to business, is embedded in the success of business, but then we could not come to grips with, if any, the moral obligations that outrun or transcend the maximization of profits. To that aim, first of all, we shall see that, although the model of corporate governance has changed from the shareholder to stakeholder model, a tension between business and ethics still remains to be resolved. We shall also see that, despite their merits, new laws and regulations such as the Federal Sentencing Guidelines for Organizations (FSGO) and the SarbanesOxley Act are not good enough to deter unethical behaviors. Then, we shall examine why this is so in the light of consequentialism (utilitarianism) vs. non-consequentialism (deontology) debate in classical ethical theory. Furthermore, we shall consider the ethical limits of cultural relativism in connection with deontological philosophy. Finally, from a deontological
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standpoint the paper concludes that there should be some social responsibilities that business must take at the expense of its profits.1

Shareholder to Stakeholder
There are the two models of corporate governance: the shareholder model and the stakeholder model. The shareholder model defines the purpose of business as maximizing the economic interests of investors and owners (shareholders),2 whereas the stakeholder model defines it from a broader perspective taking into account the interests of those who have a stake in the business, such as employees, customers, communities etc (stakeholders). In most businesses the shareholder model has changed to the stakeholder model. From an ethical point of view, however, we have to note here that the reason why most businesses are now concerned not only with shareholder interests but also with stakeholder interests is just because otherwise they could not maximize shareholder interests and not lead to the success of business. For instance, by taking Wal-Mart as an example, Ferrell, et al. explain that (t)oday, the failure to balance stakeholder interests can result in a failure to maximize shareholders wealth. Most firms are moving toward a balanced stakeholder model as they see that this approach will sustain the relationships necessary for long-run success.3 So, in the stakeholder model shareholder interests are still paramount and it is not that shareholder interests have been overcome by stakeholder interests. Then, could we say that the stakeholder model gives us an adequate understanding of the moral obligations in business? Consider the case in which wealthy businessmen donate a lot of money to charity, and this does not arise from pure sympathy with the unfortunate, but rather from selfish reasons (e.g., increased reputation that might lead to more financial gain). Are they appropriately called morally virtuous persons? Some philosophers would say that morality can be reduced to self-interests or has nothing to with motives and intentions. But it seems to me that momentum is not on their side and they need to make more compelling arguments concerning the foundation of morals to win over the opponents. Perhaps there are many more ethical limits in the stakeholder model. For instance, Orts and Strudler argues that the stakeholder model, because of its emphasis on the human interests, is faced with philosophical difficulty when dealing with ethical issues that are not directly involved in human activities.4 There is no doubt that the stakeholder model has more ethical merits than the shareholder model. But should it be all there is to business ethics? By this I mean that the two models together stop short of resolving a conflict between business and ethics. For the model shift is due to the maximization of shareholder interests. Bowie follows the line of thought with which we began our discussion: the observance of the moral obligations is embedded in the success of business so business and ethics are reconcilable. Against Bowie, Hoffman does

I would like to urge the readers not to think that my claim is something like this: there are some social responsibilities that business must take by going as far as to dig itself into a hole of its own accord. As we shall see later, deontological ethics does not demand supererogatory actions of this sort. I grant that business cannot subsist without making profits and the pursuit of profits goes hand in hand with the observance of moral obligations up to some point. But my point is that there are some social responsibilities that business must take beyond maximizing profits. 2 A shareholder is also known as a stockholder. For the sake of consistency, I shall use the term shareholder in this paper below. 3 Ferrell, et al. (2009), p. 41. 4 Orts and Strudler (2002).

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not believe the rational that good ethics is good business is a proper one for business ethics.5 Hoffman argues the moral obligations of business from a biocentric against homocentric viewpoint in connection with environmental ethics. There is a good reason to believe that a tension between business and ethics still remains to be resolved.

Laws and Business Ethics

Which way should the business world be governedby no rules, its own rules or the ordinary rules of society?6 Friedman, in his famous New York Times Magazine article in 1970 entitled The Social Responsibility of Business is to Increase its Profits, claims that the free market acts better than new laws and regulations as a natural deterrent to unethical behaviors. Friedman of course does not advocate dog-eat-dog style business practices but says that business must remain within the rules of the game. But what kind of game? When business is seen as a game like contact sports, the ordinary rules of society do not hold for the business world and sometimes this view constitutes a pretext for illegal or unethical behaviors of businesspeople. As DeGeorge points out, however, if we did not expect businesspeople to do business in accordance with the ordinary rules of society, we would not be shocked or outraged by their unethical behaviors.7 The reason why the business world should be governed by the ordinary rules of society is that people cannot decline the game of business because they are not economically self-sufficient.8 The new laws and regulations, such as the Federal Sentencing Guidelines for Organizations (FSGO) of 1991 and the Sarbanes-Oxley Act of 2002, have been implemented in order to discourage illegal or unethical behaviors and enhance programs designed to improve business ethics and social responsibility.9 The FSGO encourages legal and ethical behaviors by allowing reduced penalties for organizations that develop effective compliance programs. The Sarbanes-Oxley Act prohibits accounting firms from providing both auditing and nonauditing or consulting services to the same client. Given the recent corporate scandals, these additional laws and regulations are indeed absolutely necessary and there should be the implementation of stricter rules for ethical and legal compliance.10 But new laws and regulations alone would not be good enough to solve the current issues in business ethics. In general, one of the ways to see why the new legislations are not good enough to solve the current issues in business ethics is that there still remains a loophole for cost-benefit analysis of compliance or violation of the law. Consider a simple example in which a company would rather pay a fine or penalty in favor of the bottom line. Indeed the harsher punishment for the violation of the law is the right direction. But the compliance cost of the SarbanesOxley Act is so high that many small companies cannot help delisting themselves from the U.S. stock exchange. There are some executives who attempt to bend corporate codes for fear of litigation as a result of increased disclosure required by the Sarbanes-Oxley Act. So
5 6

Hoffman (1991), p. 176. When the business world is governed by its own rules, we shall put more emphasis on the rules that run afoul of the general codes of ethics rather than the business-specific rules. 7 Rosenstand (2009), pp. 654, 660. 8 Ferrell, et al. (2009), p. 62. 9 Ibid., p. 107. 10 The list would be inexhaustible: Enron, Bernard Madoff, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, etc. It is ironic that Toyota, Goldman Sachs, and BP can be added to this list in a timely manner.

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some people claim the supremacy of managerial integrity over additional laws and regulations as the key to solving the ethical issues in business.11 In any case, the laws and regulations are just the minimum set of socially responsible behaviors. The social responsibilities of business are not limited to no fraud or deception. There are some social responsibilities of business that must go beyond the dictates of positive laws, sometimes at the expense of its profits.

Consequentialism (Utilitarianism) vs. Non-consequentialism (Deontology)

In this section we shall subject the previous discussions to a more philosophical perspective. The debate over consequentialism (utilitarianism) vs. non-consequentialism (deontology) is classical and most fundamental in ethics. When considered in the light of this debate, business ethics starts to take on a clearer shape. As epitomized in the famous phrase the greatest happiness of the greatest number, utilitarianism is a hedonistic doctrine which is committed to maximize actual or expected utility.12 A utilitarian prioritizes public utility (efficiency) over justice in the sense that someones win means others loss (zero-sum game), so the less advantaged could sacrifice themselves to the more advantaged. On the other hand, a deontologist claims that there must be some basic rights guaranteed for every single individual whatever it takes to protect them, and prioritizes justice over public utility (efficiency) in the sense that inequalities are only allowed in so far as they are to the benefit of all. John Rawls, in a voluminous book titled A Theory of Justice, contrasts utilitarianism with social contract theory, and defends the latter against the former. The point is that there are some cases in which the greatest good is in a stark contrast with the rights of all individuals. In short, utilitarianism is a Good-based philosophy, whereas deontology is a Right-based philosophy. Consequentialism or non-consequentialism is an ultimate choice in the adoption of a substantial moral principle. We have to note here that deontology does not mean a decision-makers individual rights to make a decision but a decision-makers obligation or duty to prioritize the rights of all individuals over anything else. So it is a utilitarian who sacrifices some for the benefit of others and it is a deontologist who protects the rights of all individuals against the greatest good. It would be possible for one to make a decision without placing oneself at the center of the decision-making. To see this, it would be helpful to regard utilitarianism as universal hedonism, as distinct from egoistic hedonism. In egoistic hedonism one indeed places oneself at the center of the decision-making and chooses an action that maximizes ones own happiness in the calculation of happiness. On the other hand, utilitarianism (universal hedonism) calculates happiness from a broader perspective and chooses an action that maximizes the common good (the greatest happiness of the greatest number). In the extreme case, utilitarianism requires one to sacrifice oneself to others. Deontology, however, treats the rights
11

Ferrell, et al. (2009), p. 104. Although the famous phrase the greatest happiness of the greatest number is often introduced as Benthams, Hutcheson (1694-1746) is the first one to introduce it in the history of ethics. But whether Hutcheson is a utilitarian, and whether Hume, who takes over a lot from him, is a utilitarian is still controversial, so the phrase itself allows a lot of interpretations. Later J. S. Mill made improvement on it, taking into account not only the quantity but also quality in the calculation of happiness: It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied.
12

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of all individuals as being equal and does not demand such a supererogatory action.13 The point is that, since from a deontological standpoint the rights of all individuals deem to be equal, claiming ones own rights does not imply egoism. It is interesting to see a hypothetical scenario that Ferrell et al. come up with in order to make stand out the overarching differences between utilitarian and deontological decisionmaking.14 Sam Colt is a sales person whose company produces nuts and bolts and he is considering a deal with a bridge contractor. Assume that the bolts of his company have a 3 percent defect rate, which is not unlawful but turns out to be unfit for use at the time of disaster such as earthquake. A utilitarian Sam Colt conducts a cost-benefit analysis. The probability of an earthquake is 50 percent and even if there should be an earthquake, those who are benefited from the bridge (the community as a whole) would exceed the fatalities (as many as one hundred people). A utilitarian Sam Colt would make a deal because he conceals the defect rate of the bolts from the bridge contractor (which deems the greatest good as a result of a cost-benefit analysis). On the other hand, a deontological Sam Colt sees the rights of all individuals as being equal. If there should be an earthquake, some must lose their lives even though the number of them would be small compared with the number of those who are benefited from the bridge. A deontological Sam Colt would decline the deal because he informs the bridge contractor of the defect rate (which deems the protection of the rights of all individuals). This hypothetical scenario illustrates the case in which the greatest good is in a stark contrast with the rights of all individuals: a utilitarian Sam Colt prioritizes the greatest good over the rights of all individuals, whereas a deontological Sam Colt prioritizes the rights of all individuals over the greatest good. Friedman, in the New York Times Magazine article mentioned above, claims that only a person has responsibilities and it is not appropriate to say that business has responsibilities. He thinks that promoting a social interest such as providing employment, eliminating discrimination and avoiding pollution should not be the social responsibilities of business. According to Friedman, there is one and only one social responsibility of businessto use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. The executive, as an agent of the shareholders, employees, or customers, should spend their money in such a way that they can receive benefits in the form of higher dividends, higher wages, or lower prices, so Friedman says. According to Friedman, although social responsibilities promoting a general social interest may be left up to the executive as an individual (principal) spending ones own money, the executive as an agent spending someone elses money on something from which he or she can make no profits (e.g., donating money to charity) is to impose him or her on taxes, and Friedman is opposed to it by citing the famous battle cry of the American Revolution: no taxation without representation. Friedmans philosophy is basically utilitarian and he holds the position with which we began our discussion: the observance of the moral obligations is embedded in the success of business. It seems that his position is more radial libertarian because he believes that the free market acts as a natural deterrent to unethical behaviors without governmental intervention. Liechty disagrees with Freedman. The point of Liechtys rebuttal is that Friedmans logic is self-defeating. To see this, consider the case in which the executives are debating a pro13 14

For this, see John Rawls (1971), p. 155. Ferrell, et al. (2009), pp. 148ff

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posal to install scrubbers on smokestacks at a cost of five million dollars, as mentioned in Liechtys article.15 The point is that there are no laws to force the company to install scrubbers at the moment. So this is not just a matter of deception or fraud. Liechty argues that then there are some people who have to foot the bill for a five million dollar debt in non-market sector of the community. According to Friedmans logic, however, it is not acceptable because this in turn means imposing an illegitimate tax on some sector of the community. Its even worse because they hold no stakes in the company. We shall contrast utilitarian and deontologist decision-making in this scenario. A utilitarian would decide not to install scrubbers on smokestacks (which deems the greatest good as a result of a cost-benefit analysis), whereas a deontologist would decide to install scrubbers (which deems the protection of the rights of all individuals). From a deontological standpoint, it is particularly important Liechty claims that it is not a material question of how large this non-market sector of the community as a whole may be.16 He goes on to say that (a)n illegitimate tax is an illegitimate tax, whether levied on one person, thousands or an entire nation. This argument shows that there are some social responsibilities that business must take beyond the maximization of profits. The need for deontological decision-making is not limited to environmental issues. First, we shall draw upon the case of corporate disclosure. The Securities Exchange Act of 1934 requires the disclosure of information that has a material bearing on shareholder interests: the large amount of money that causes significant financial losses to a company. So the act was not concerned with a trifling amount, and materiality was a proportional concept in the sense that how much constitutes a material amount depends on the size of the company. According to Brummer, however, the materiality standard has changed to the reasonableness standard by the Foreign Corrupt Practices Act (FCPA) of 1977 and SECs supplementary regulations. So the company is now required to disclose even a small amount of money, which could have an important bearing on shareholder interests. Brummer defends the reasonableness standard against the materiality standard based on the three deontological arguments.17 Although the high compliance cost of the new standard is often raised as a ground of objection, Brummer dismisses this objection as being consequentialist in nature. The point of Brummers argument is that disclosure is an overriding duty that plays an important part in corporate accountability, and in this sense his defense of the stricter standard of corporate disclosure is deontological. So, according to Brummer, a strong burden of proof must remain with those who wouldnt give priority to this duty. Advertising ethics is another good place to see that there stands out vividly a contrast between utilitarian and deontological ethics because as in the case of puffery telling the truth sometimes conflicts with the efficiency of advertising. Pratt and James conducted the research via a questionnaire to 174 members of American Advertising Federation (AAF) from 25
15 16 17

Liechty (1985), p. 57. Ibid., p. 59. 1) According to W. D. Ross, we can only know basic duties to perform unless one duty is overridden by the other. In order to express the duties of this sort, he coins the term prima facie duties. Inspired by Ross, Brummer claims that disclosure is a prima facie duty that the executive has to shareholders. 2) Kants argument is deontological in that it appeals not to the consequences of but to the internal incoherency of the restraint of shareholders freedom that is caused by deficiencies in disclosure. 3) The new standard protects the self-correcting function of the internal accounting control recommended by SEC. The self-correcting process assumes that all participants can equally get access to all information relevant to the inquiry, which can only be achieved by the stricter standard.

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states.18 In the questionnaire, the sample practitioners are asked about four ethically problematic scenarios and respond to six statements on a scale of four-points.19 Four out of the six statements (1, 2, 3, 6), which contain deontological terms such as did something wrong, should be fired, I would do, and regardless of my response, particularly serve as direct measures of deontological ethics in industry. Since the sample practitioners responses vary significantly depending on the scenarios, the results of the research suggest that there are a variety of degrees in which advertising practitioners apply deontological ethics to their decision-making, and utilitarian or relativistic ethics is prevalent in industry. From the results of the research, the authors conclude that there is a need for advertising practitioners to more strictly adhere to deontological ethics in their decision-making, even though advertising codes of ethics are often written using deontological terms. The implementation of deontological ethics will provide advertising practitioners with stability in their decision-making in the sense that, when they are faced with perceived risks, deontological practitioners are least likely to alter their decisions, whereas utilitarian practitioners are most likely to change their decisions.

The Ethical Limits of Cultural Relativism

In this section we scale up the previous discussions to the international level. Although in global business ethics arise a number of specific issues that we havent encountered in the national level, we shall keep sight of the consequentialism vs. non-consequentialism debate here as well. We are going through the following three stages in global business ethics: 1) Cultural imperialism, 2) Cultural relativism, 3) Universal values. In cultural imperialism, we unconsciously tend to impose our own culture on others. It would be easy to see that cultural imperialism turns into confrontation or clashes between different cultures. So we move up to the next stage: cultural relativism. We learn from cultural relativism that the moral distinction between right and wrong is different from culture to culture and has meaning only in the culture where it is placed. Applying the lesson of cultural relativism to business ethics, we are told that When in Rome, do as Romans do. Caution is in order, however, when we take this lesson to the extreme. Take the Chinese melamine scandal as an example. The Chinese manufactures added toxic melamine to raw milk to increase the apparent amount of protein contained in it. A cultural relativist might advise us that, even though the Chinese companies are to blame above all else, this is just a matter of business practices in the country concerned. It seems to me, however, that the melamine scandal reminds us that there must be some general or universal moral values (core values) beyond the cultural differences. These are basic values that apply regardless of social structure, whether it may be capitalism or socialism. This leads us to the natural law theory: beside the positive laws of each nation, the natural law reflects ethical codes that

18 19

AAF is the largest professional organization in advertising industry in the U.S. Four ethically problematic scenarios are: 1) Giving gifts to a potential client., 2) Lying about an update on an account., 3) Seeking confidential information, 4) Using outdated data. Six statements are: 1) What X did was wrong., 2) X should be fired., 3) I would do just what X did., 4) Most ad execs would do just what X did., 5) My firm/dept. has a policy, either written or oral, on situation or practice., 6) Regardless of my response to No. 5, it is a good idea for my firm/dept. to have a policy, either written or oral, on situation or practice. A scale of four-points is definitely yes to definitely no. For this, see Pratt and James (1994).

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all nations ought to abide by. One of the toughest challenges we face in global business ethics would be how to balance the tension between cultural relativism and global values. Even though all empirical evidence points to the lack of universal codes, it doesnt follow from this that there are no general or universal codes because they have yet to appear. Actually, When in Rome, do as Romans do style business practices dont hold for every country. Take as an example the sales of harmful products in foreign countries. Despite a decline in domestic cigarette sales for various reasons (e.g., increasing public awareness of the health effects associated with smoking) tobacco companies expanded their markets to developing countries and increased their sales. Indeed cigarette sales in developing courtiers could be justified on the basis of low longevity rates there. But in such a case the common sense tells us that there is a need for an international agreement to regulate the sales of the products.

Conclusion
As far as business sticks to the maximization of profits, even if shareholder interests are extended to stakeholder interests or short-term interests to long-term interests, the observation of the moral obligations is limited to those which can maximize profits. But we have seen that in some cases the greatest good conflicts with the rights of individuals in the light of consequentialism (utilitarianism) vs. non-consequentialism (deontology) debate in classical ethical theory. So there still remains a tension between business and ethics in the sense that some unethical behaviors are included in and some moral obligations are excluded from the maximization of profits. Some social responsibilities of business must go beyond the dictates of laws and regulations, sometimes at the expense of its profits. We began our discussion with Bowies view that the observance of the moral obligations is embedded in the success of business or Friedmans liberalism that the free market is a natural deterrent to unethical behaviors. But I believe that the pursuit of profits relatively easily escapes the observance of the moral obligations and there must be some moral force to prevent business practices from unethical behaviors. It might be objected that deontological ethics is more likely inclined to formalistic rigorism and heteronomy of will. Given that Kants categorical imperative is the basic tenet of deontological ethics, however, it is Kant who attempts to bring moral law nearer to intuition by saying that three formulations of categorical imperative are basically equivalent, and it is Kant who establishes the moral law upon persons who view themselves as rational agents with autonomy of will.

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References
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About the Author

Dr. Wataru Asanuma Wataru Asanuma received a Ph.D. degree in philosophy from Florida State University in 2009. Originally from Japan, he had received his B.A. and M.A. in the same subject from Kyoto University. His main research interest lies in logic and the philosophy of mathematics and the philosophy of science in general.

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