Business Ethics - Lecture notes PDF

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Lecturer was Panikos Geogallis....

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Week 1 — Introduction to Business Ethics Introduction Views on morality Consequentialist moral reasoning — locates morality in the consequences of an act (in the state of the world that will result from the thing you do) — 5 lives saved vs 1. Categorical moral reasoning — locates morality in certain duties and rights — regardless of the consequences.

Unethical corporate actions • • • • •

Deceptive marketing of credit card products — citibank Failure to report safety defects — LG Electronics Illegal lobbying — Lockheed Martin Foreign bribery — Goodyear Environmental pollution — BP

What is business ethics? Business ethics — the study of business situations, activities and decisions where issues of right and wrong are addressed. • Includes not only commercial business, but also government organisations, pressure groups, not-for-profit organisations, charities, and others. • Multiple stakeholders; group decision-making The study of business ethics: • Gathering relevant evidence • Systematically analysing the evidence through relevant lenses/theories • Making better (not objectively right) decisions

Ethics applied, some examples • • • •

Executive compensation (e.g. CEOs being paid 2,000 times more than regular employees) Sweatshop working conditions (Legal) tax avoidance by large corporations Ethics for shareholders vs. employees (large vs. small firms)

Are entire industries unethical? Think about reasons for and against regarding a weapons manufacturer or an animal testing laboratory, as ‘ethical’. Animal testing: • Unethical — animals don't have a say, it’s animal cruelty • Ethical — in some cases it is needed to test medicine for example which could help to come up with the cure for a disease (e.g. cancer vs. male baldness) Weapons manufacturer: • Unethical — promotes violence (e.g. in America — gun violence)

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• Ethical — can help people such as soldiers/the army who need the weapons to protect their countries

Relationship between ethics and the law • Business ethics can be said to begin when the law ends • Not all ethical issues are covered by the law — for example there is no rule about cheating on your boyfriend/girlfriend but it is considered morally wrong. • Not all legal issues are ethical — for example the law prescribes whether we should drive to the right or left side of the road, but it is not an ethical decision. • Not always a ‘right answer’: the grey areas of business ethics

Why is business ethics important? 1. The power and influence of business in society is greater than ever before. Evidence suggests that many members of the public are uneasy with such developments. Research shows that many residents feel that large companies have too much influence on the decisions of their government. Business ethics helps us to understand why this is happening, what its implications might be, and how we might address this situation. 2. Business has the potential to provide a major contribution to our societies, in terms of producing the products and services we want, providing employment, paying taxes, etc. How, or indeed whether, this contribution is made raises significant ethical issues that go to the heart of the social role of business in contemporary society. Research sows that 50% of business executives think that corporations make a mostly or somewhat positive contribution to society, whilst 25% believe that their contribution is mostly or somewhat negative. 3. Business malpractices have the potential to inflict enormous harm on individuals, communities and the environment. Through helping us to understand more about the causes and consequences of these malpractices, business ethics seeks to ‘improve the human condition’. 4. The demands being placed on business to be ethical by its various stakeholders are constantly becoming more complex and more challenging. Business ethics provides the means to appreciate and understand these challenges more clearly, in order that firms can meet these ethical expectations more effectively. 5. Few businesspeople have received formal business ethics education or training. Business ethics can help to improve ethical decision-making by providing managers with the appropriate knowledge and tools to allow them to correctly identify, diagnose, analyse, and provide solutions to the ethical problems and dilemmas they are confronted with. 6. Ethical violations continue to occur in business, across countries and across sectors. For example, a recent survey showed that one in three workers did not consider their employers to be fair. Another study in Hong Kong showed that 40% of those with operations in China had encountered fraud. Business ethics provides us with a way of looking at the reasons behind such infractions, and the ways in which such problems might be dealt with by managers, regulators, and others interested in improving business ethics. 7. Business ethics can provide us with the ability to assess the benefits and problems associated with different ways of managing ethics in organisations. 8. Business ethics is also extremely interesting in that it provides us with knowledge that transcends the traditional framework of business studies and confronts us with some of the

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most important questions faced by society. The subject can therefore be richly rewarding to study because it provides us with knowledge and skills that are not simply helpful for doing business, but rather, by helping us to understand modern societies in a more systematic way, can advance our ability to address life situations far beyond the classroom or office desk. The skeptic’s point of view: “We do not need to study business ethics because business is amoral, like a game of poker.” “Frameworks are amoral tools that make problems clinically clean and thus may suppress one’s natural human instincts. Beneath any set of cash flows is a set of affected humans, many of whom are not represented at the table at which the decision is made. Focusing on NPV analysis and the cash flows can blind the decision maker (by providing a false sense of rational, systematic, comprehensive analysis) to all the other, human implications of the decision. The tools are clinical and amoral (NPV, five forces, etc.) but for precisely that reason the manager cannot afford to be so. Let your brain do the analysis but give your heart a veto. And if you think a major decision doesn’t seem to be morally ambiguous, think harder.”

Globalisation Globalisation — the ongoing integration of political, social, and economic interactions at the transnational level, regardless of physical proximity or distance. Events, people or ideas from faraway places can have a very palpable effect on people in otherwise unconnected locations and situations. Globalisation has resulted from a few main developments: • Modern communications technology, from the telephone, to radio and television and now the internet, have open up the possibility of connecting and interacting with people despite the fact that there are large geographical distances between them • Global transportation technologies allows people to easily connect with other people all over the globe • Many national borders have been eroded and in some cases abolished, which has allowed territorial borders to open up worldwide connections between people

Globalisation and business ethics Cultural issues What is ‘right’ or ‘wrong’ may depend on culture. CSR initiatives need to be tailored to the local context. For example, attitudes to racial and gender diversity in Europe may differ significantly to those in Middle Eastern countries. Similarly, Chinese people might regard it as more unethical to sack employees in times of economic downturns than would be typical in Europe. On one hand, globalisation makes regional difference less important since it brings regions together and encourages a more uniform ‘global culture’. On the other hand, in eroding the divisions of geographical distances, globalisation reveals economic, political and cultural differences and confronts people with them. Legal issues The more economic transactions lose their connection to a certain regional territory, the more they escape the control of the respective national governments. This is especially the case when businesses changes territories — e.g. from their country to a third-world country, where the legal framework is completely different. Consequently, managers can no longer simply rely on their own country’s legal framework when deciding on the right or wrong of certain business practices.

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As mentioned earlier, business ethics begins where the law ends, then this deterritorialisation increases the demand for business ethics because deterritorialized economic activities are beyond the control of national governments. Examples of legal issues that interlink with ethics includes tax rates, worker’s rights, pollution control, etc. Accountability issues The more economic activities get deterritorialized, the less governments can control them, and the less they are open to democratic control by the affected people. Consequently, the call for direct (democratic) accountability of MNCs has become louder in recent years, evidenced, for example, by anti-globalization protests. Put simply, globalization leads to a growing demand for corporate accountability. It is exactly here where business ethics is increasingly in demand since it offers the potential for corporations to examine and respond to the claims made on them by various stakeholders. Indeed, globalization can be seen to affect all stakeholders of the corporation. E.g. Who controls MNCs (multinational corporations)? Who is accountable for (un)ethical behaviour in global supply chains?

Sustainability Environmentally ethical companies: Greenpeace, Adidas, Primark Socially ethical companies: Bodyshop, Lush, Innocent smoothies Sustainability — “development that meets the needs of today without compromising the ability of future generations to meet their own needs” (WCED — 1987) Sustainability refers to the long-term maintenance of systems according to environmental, economic and social considerations.

Corporate Social Responsibility (CSR) • “…The economic, legal, ethical and discretionary expectations that society has of organizations" (Carroll, 1979) • Adopts a ‘stakeholder perspective’ — CSR is the “discernment of issues, expectations and claims on business organisations regarding the consequences of policies and behavior on internal and external stakeholders” (Epstein, 1978) Recognises social ‘cost’ of business activity • Ethical behaviour • Why bother? • Pressure from government • Pressure from consumers • Level of adoption — remains a challenge for retailers The measurement for this is known as the triple bottom line: economic, environmental and social sustainability.

Triple bottom line: planet, people, profit The TBL represents the idea that business do not have just one single goal — namely adding economic value — but that it has an extended goal set which necessitates adding environmental and social value too. From this perspective, it should be clear why sustainability is an important new goal for business ethics.

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Environmental perspective The effective management of physical resources so that they are conserved for the future. All biosystems are regarded as having finite resources and finite capacity, and hence sustainable human activity must operate at a level that does not threaten the health of those systems. These are critical problems: • Impacts of industrialisation on biodiversity • The continued use of non-renewables e.g. oil, steel, coal • Production of damaging environmental pollutants e.g. greenhouse gases and CFCs from industrial plants and consumer products Economic perspective The economic perspective of sustainability initially emerged from economic growth models that assessed the limits imposed by the carrying capacity of the earth. The recognition that continued growth in population, industrial activity, resource use, and pollution could mean that standards of living would eventually decline led to the emergence of sustainability as a way of thinking about ensuring that future generations would not be adversely disadvantaged due to the choices of the present generation. It focuses on: • The economic performance of the corporation itself: the responsibility of management to develop, produce and market products that secure long-term economic performance for the firm • The company’s attitude towards and impacts upon the economic framework in which it is imbedded Social perspective The explicit integration of social concerns into the business discourse around sustainability has emerged in response to concerns regarding the impacts of business activities on indigenous communities in less developed countries and regions. The key issue includes: • Social justice — despite the impressive advances in standards of living, a recent UN report on the World Social Situation identified persistent and deepening inequality across the globe — disparities in health, education and opportunities for social and political participation Your choices and the planet The decisions which you make can have a massive impact on the environment. For example, after a car crash and considering which parts to reconstruct your car from: new parts or old parts from a car which was also involved in a crash? Economically, environmentally and socially, the old parts would be better for the environment. However, it is very important to consider all factors (especially businesses).

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What are the implications of triple bottom line for supply chain management?

Food miles This is the distance that food travels between the point of production and the point of consumption. Consumption of local produce in season will hence reduce the environmental cost of transportation (local sourcing). In the winter months, imported, field-grown Spanish tomatoes, which benefit from ‘free’ sunlight may generate less CO2 than their UK hot-house equivalents, even once the additional transport is taken into account. What are the pros and cons of sourcing commodity items in low wage economies?

Pros • Cheaper for host country • Provides labour in low-income economies

Cons • Air freight pollution • Working conditions are not ideal for laborers (in Kenya — warm conditions, too much physical exhaustion)

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Week 2 — Modern business ethical theories: Why should business be ethical? Corporations What is a corporation? Most dominant form of business entity in the modern global economy A corporation is a “legal person”. The purpose of a corporation is to make profit Limited liability It has all the rights of a person except for the right to vote Legally, corporations are regarded as independent from those who work in them, manage them, invest in them, or receive products and services from them Corporations are separate entities in their own right — for this reason, corporations are regarded • as having perpetual succession, i.e. as an entity, they can survive the death of any individual investors, employees, or customers — they simply need to find new ones • The corporation itself own its assets • Shareholders own a share that entitles them to a dividend and some say in certain decisions that affect the company • • • • • •

Can a corporation be morally responsible? Milton Friedman (1970) published an article questioning the social role of corporations: 1. Only human beings have a moral responsibility for their actions — corporations are not human beings and therefore cannot assume true moral responsibility for their actions. Since corporations are set up by individuals, it is those people who are then individually responsible for the actions of the corporation. 2. The first and foremost responsibility of business is to make profit — managers should act solely in the interest of shareholders as this is what the company has been set up for. Acting for any other purpose constitutes betrayal of their special responsibility to shareholders. 3. Social issues are the proper province of the government rather than corporations — managers should not, and cannot, decide what is in society’s best interests, as this is the government’s job. Corporate managers are neither trained to set and achieve social goals, nor are they democratically elected to do so. Counter arguments to 1st point: • Legal identity: a “legal person” — corporations pay taxes, can sue, claim rights, etc. • Functional identity: corporations present themselves and interact with customers as if they were a distinct person e.g. McDonalds “I’m loving it” • Agency: corporations make decisions independently of their members through an internal decision structure, and hence decisions can often be traced back to individual actors • Organisational culture: a set of beliefs and values stipulating what is right or wrong in the corporation Counter arguments to 2nd point: • Corporations cause social problems • Corporations are powerful —> they should use their power responsibly

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Counter arguments to 3rd point: • Corporations rely on the contribution of a wide set of stakeholders in society, not just shareholders Corporations’ actions have impact on a wide set of stakeholders • Business reasons (‘enlightened self-interest’) • Extra and/or more satisfied customers • • Employees may be more attracted/committed • Forestall legislation (e.g. to avoid Dodd-Frank Act)

Discussion: did Facebook elect Trump? “Facebook’s fake news threatens democracy” — news.sky.com “[Marc Zuckerberg] knows, and those of us at the company know, that fake news ran wild on our platform during the entire campaign season” — member of the Facebook task force Is Facebook morally responsible for fake news and their consequences to society? On one hand: • It is the responsibility of the reader to be educated enough to determine which articles are real and which are not There is also freedom of speech • Facebook cannot possibly control how much feed is • being posted on a constant basis On the other hand: • If this headline was major, employees could have done something about it to stop this fake news from spreading even further

Beyond Capitalism “Everybody is doing it. In Capitalism, you try to get the highest price.” — Martin Shkreli Businesses should pursue more than just their bottom line, they should have a higher purpose. Conscious capitalism is primarily doing business in a conscious way. This term has four key themes to it: • Every business has the potential of a higher purpose, other than just making money • It should create value for all of the interdependent stakeholders, not just investors, customers, employees, etc • There is a different type of leadership involved — one which is focused on the higher purpose of the business and serving the stakeholders Create a culture in the organisation that allows people to flourish and helps them to reach their • higher potential in their lives

Corporate Social Responsibility Corporate social responsibility — the attempt by companies to meet the economic, legal, ethical and philanthropic demands of a given society at a particular point in time.

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The CSR pyramid

• Economic responsibilities — companies have shareholders who demand a reasonable return on their investments, they have employees who want safe and fairly paid jobs, they have customers who demand good quality products at a fair price, etc. This is, by definition, the reason why businesses are set up in society and so the first responsibility of business is to be a properly functioning economy unit and to stay in business. This first layer of CSR is the basis for all the subsequent responsibilities. • Legal responsibility — the legal responsibility of corporations demands that businesses abide by the law and ‘play the rules of the game’. Laws are the codification of society’s moral views, and therefore abiding by these standards is a necessary pr...