Business 18: Introduction to Business Law ( S.

Spencer)

Lecture Notes – Chapter 2: Business Ethics & Social Responsibility

“What you are thunders so loudly that I cannot hear what you say to the contrary”
-- Ralph Waldo Emerson
WHY BOTHER WITH ETHICS?
We need to study business ethics to make better decisions for ourselves, the businesses
we work for and the society we live it.

• Society as a Whole Benefits

o Corporate compliance with the law is insufficient alone to ensure ethical
conduct b/c the laws do not encompass all expressions of ethical behavior.
(Corporate Social Responsibility Debate)
 STAKEHOLDER THEORY vs. PROFIT MAXIMIZATION
THEORY

• People Feel Better

o Studying ethical concepts and theories will help individuals define ethical
conduct and learn to use a strategy or framework for making decisions.
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o Studying ethical concepts and theories helps us understand ourselves and
others better.
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Unethical Behavior Can Be Very Costly

o Corporations are in positions of power that allow them to do greater
damage to others when they act unethically or socially irresponsibly.
o Increased exposure to liability and the passage of onerous legislation
controlling/monitoring business activity.
 Civil and criminal actions against wrongdoing corps. & their
executives.
 Congress passed the Sarbanes-Oxley Act of 2002 which increased
penalties for corporate wrongdoers & established rules designed to deter and
prevent future wrongdoing. Purpose of Statute: Encourage & enable
corporate executives to be ethical & socially responsible.
o Negative impact of public criticism on reputation and corps ability to earn
profits.
o Negative impact within the firm (Unethical environment may encourage
even more unethical conduct on part of employees)

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WHAT IS ETHICAL BEHAVIOR?

(See the Ethics Checklist & Analysis, pages 32- 36)

We will examine FOUR ETHICAL THEORIES:

1. RIGHTS THEORY
2. JUSTICE THEORY
3. UTILITARIANISM
4. PROFIT MAXIMIZATION

These four theories can be classified in two ways:

Teleological Ethical Theories = Focus on the CONSEQUENCES of a decision

Deontological Ethical Theories (“deeds”) = Focus on the DECISION itself.

RIGHTS THEORY
• Encompasses a variety of ethical philosophies holding that certain human rights
are fundamental and must be respected by other humans
• Focus is on each individual member of society and his/her rights
• Each of us faces a moral obligation not to harm the fundamental rights of others

KANTIANISM
• Immanuel Kant Strict deontologist
• 18th century philosopher
• Humans are moral actors free to make choices and are able to judge the
morality of any action by applying his famous Categorical Imperative
o “Act only on that maxim whereby at the same time you can will that it
shall become a universal law.” In other words, we judge an action by
applying it universally.

For example: Borrowing money even though you know you will never
repay it. Using the categorical imperative, you would state the following
rule/maxim: “When I want money, I will borrow money and promise to
repay it, even though I know I won’t repay it.” According to Kant, you
would not want this maxim to become a universal law because no one
would believe in promises to repay debts and you would NOT be able to
borrow money when you wanted or needed to. So, the maxim fails the
categorical imperative test, and you are compelled ethically NOT to
promise falsely that you will repay a loan.

o “Always act to treat humanity, whether in yourself or others, as an

end in itself, never merely as a means.” In other words, we may not use or
manipulate others to achieve our own happiness. In the example above,
you are using the individual/entity that you are borrowing from b/c if they
knew all the facts, they wouldn’t agree to the loan.

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Modern Rights Theories

• Propose mixed deontological theories b/c strict Kantianism’s
duties are absolute and sometimes create inappropriate results. (One can
NEVER lie or kill even though in some circumstances -- such as self-defense
-- it may be acceptable to do so.)
• Abide by a moral rule unless a more important rule conflicts
with it. (In other words, don’t compromise a person’s right unless a greater
right takes priority over it.) For example, members of society have a right
NOT to be lied to. However, if you could save someone’s life by telling a
falsehood, such as NOT telling a criminal the true location of a witness who
will testify against him, you would be compelled under the modern theory to
save the witness’ life by NOT telling the truth.)

Major Strength:
• It protects fundamental rights unless some greater right takes precedence.

Major Criticisms:
• Difficult to achieve agreement about which rights are protected. (Rights
fundamental to industrialized nations may be unknown or severely restricted
in developing nations. E.g., certain freedoms, the treatment of women OR
Even w/n a country, citizens may disagree about the ranking of rights. E.g.,
Some Americans argue that the right to health care is an important need that
should be met by the gov’t or a person’s employer while others are opposed
to funding universal health care b/c they want gov’t intervention limited.)
• Doesn’t consider the costs or benefits associated w/rights
• Creates a sense of entitlement that may have a negative impact on motivation.
(e.g., If one is entitled to a job, a place to live, food and healthcare regardless
of how hard he works, he may not be motivated to work to earn those things.)
Summary:
Determine whether anyone’s rights are negatively affected by an alternative.

JUSTICE THEORY
• John Rawls, published A Theory of Justice, in 1971
• Argued it was right for gov’ts to redistribute wealth in order to help the poor and
disadvantaged.
• Greatest Liberty Principle: Each person has an equal right to basic rights and
liberties. This is limited by the Difference Principle: Social inequalities are
acceptable only if they cannot be eliminated without making the worst-off class
even worse off.
• Focus is on outcomes. Are people getting what they deserve?
• Strength: Basic premise - The protection of those who are least advantaged in
society.
• Criticisms: Doesn’t examine the costs of producing the equality.

Summary:
Choose the alternative that allocates society’s benefits and burden most fairly.

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UTILITARIANISM
• Identified most with 19th century philosophers Jeremy Bentham and John Stuart
Mill
• Requires a decision maker to maximize utility for society as a whole
• Max Utility = achieving the highest level of satisfactions over dissatisfactions
• It judges our actions based on outcomes (teleological)
• Strength: Easy to articulate the standard of conduct – Merely do what is best for
society as a whole.
• Criticisms:
o Difficulty in measuring benefit & harm to all members of society.
o Unequal distribution of costs & benefits may lead to detrimental results
for a particular class or group of people.
Sumamry:
Choose the alternative that promises the highest net welfare to society as a whole.

PROFIT MAXIMIZATION

• Maximize the business’ long-run profits within the limits

of the law
• Based on the Laisse Faire Theory of Capitalism first
expressed by Adam Smith in the 18th century
• Argues total social welfare is optimized if humans are
permitted to work toward their own selfish goals
• The role of gov’ts and the law is limited solely to
ensuring the workings of a free market (by NOT interfering w/economic liberty,
eliminating collusion among competitors, & promoting accurate information in
the marketplace.
• Strength: Allocation of society’s resources to those units
that are most efficient increases overall productivity and maximizes total social
utility.
• Criticisms:
 Doesn’t concern itself with HOW wealth
is allocated in society. (for example, in the USA, 50% of our wealth is held by
10% of the population).
 Market imperfections and a person’s
station at birth interfere w/his ability to compete.
 The ability of laws and market forces to
control corporate behavior is limited
Summary: Choose the alternative that produces the most long-run profits for the
company within the limits of the law.

APPLYING THE ETHICS CHECKLIST: MAKING DECISIONS

(Apply the Ethics Checklist & Analysis, pages 32- 36)

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• Organization’s Responsibility to Society  Advertising Dilemma

• Organization’s Responsibility to its Customers Landlord’s Dilemma (Section 8 Housing)
• Organization’s Responsibility to its Employees Enron’s Pension Plans (Rank-and-file vs. Executive
plan)
• Organization’s Responsibility to its Shareholders Ford’s decision re: fuel efficient SUV
(Environmentalist)
• Organization’s Responsibility OverseesSweat shops in developing countries
• Employees’ Responsibility to their OrganizationDishonesty among managers (False info
provided)

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THINKING CRITICALLY: EVALUATING ARGUMENTS LOGICALLY

• Non Sequiturs = A conclusion that does not follow from the facts or premises
one sets out.

• Appeals to Pity = Generate support for a proposition by focusing on a victim’s

predicament.

• False Analogies = An analogy essentially argues that since something is like

something else in one or more ways, it is also like it in some other respect. We should
make sure that the two situations are similar enough to make the analogy valid.

• Begging the Question = Taking for granted or assuming the thing you are trying
to prove; circular reasoning.

• Argumentum ad Populum = Argument to the people. An emotional appeal to

popular beliefs, values or wants. The fallacy is that just because many or all people
believe something does NOT mean it is true.

• Bandwagon Fallacy = Similar to argumentum ad populum. States that we should

do (or not do) something merely because one or more other people or firms do it.

• Argumentum ad Baculum = Argument to the club. The arguer uses threats or

fear to bolster his position.

• Argumentum ad Hominem = Argument against the man. This tactic attacks the
speaker, NOT his reasoning.

• Argument from Authority = Arguments from authority rely on the quality of an

expert or person in position of authority, NOT the quality of the individuals
argument. Similar is the argument to reverence or respect.

• False Cause = This fallacy results from observing two events and concluding that
there is a causal link between them when there is no such link. This occurs b/c we do
not attempt to find all the evidence proving or disproving the causal connection.

• The Gambler’s Fallacy = Results from the mistaken belief that independent prior
outcomes affect future outcomes.

• Reductio ad Absurdum = “Slippery Slope” argument. Carries an argument to its

“logical” end without considering whether it is an inevitable or probable result.

• Appeals to Tradition = Infer that because something has been done a certain way
in the past, it should be done the same way in the future.

• The Lure of the New = Opposite of “appeals to tradition”. The idea that we
should buy something merely because it is “just released” or “improved”.

• Sunk Cost Fallacy = An attempt to recover invested time, money and other
resources by spending still more time, money and resources. “Throwing Good Money
After Bad”

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HOW TO RESIST REQUESTS TO ACT UNETHICALLY

• Recognize Unethical Requests and Bosses

• Buy Time

• Find a Mentor & Peer Support Group

• Find “Win-Win” Solutions

• Work Within the Firm to Stop the Unethical Act

• Prepare to Lose Your Job (Last resort b/c it’s difficult to make change effectively
from the outside.)

Web sites to Review

• People of good character are “TRRFCC”. (Pronounced “terrific”)

Can you identify these “Six Pillars of Character”? Go to
http://www.charactercounts.org/defsix.htm.

• The Josephson Institute of Ethics http://www.josephsoninstitute.org/. Scroll down

and select the “Making Ethical Decisions – A Step-by-Step Guide” link at the bottom
of the page.

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GROUP EXERCISE: Critical Thinking and Rationalizing Pirating Digital Music

Let’s apply what you’ve learned from the chapter to a context many of you may be
familiar with: Downloading Copyrighted Music Files from the Internet at sites like
Napster, Kazaa and Morpheus.

At the height of Napster’s popularity, 100 users a second downloaded copyrighted music
for free. In 2002, each month, nearly 20 million consumers used the digital underground
to download bootlegged copies of music, games, movies and software.

Downloading copyrighted music files without permission of the copyright owner is

clearly illegal, yet the practice continues. Why? Because downloaders use five common
rationalizations to justify stealing music files. Consider the following excuses and
identify the possible fallacies in each.

Excuse #1: Everybody does it.

Excuse #2: It’s the music labels’ fault. They release albums with only one good track
per album, yet charge 15 to 20 dollars at retail.

Excuse #3: I wouldn’t buy the CD anyway.

Excuse #4: Musicians and labels make enough money already.

Excuse #5: I’m merely sampling the music to decide if I like it, just as I test drive a
car before I buy it.

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