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Chapter 3: Philosophical Ethics and Business Chapter Objectives After reading this chapter, you will be able to: 1. Explain the ethical framework of utilitarianism. 2. Describe how utilitarian thinking underlies much economic and business decision-making. 3. Explain how the free market is thought to serve the utilitarian goal of maximizing the overall good. 4. Explain some challenges to utilitarian decision-making. 5. Explain principle-based, or rights-based, frameworks of ethics. 6. Explain the concept of human rights and how they are relevant to business. 7. Distinguish moral rights from legal rights. 8. Explain several challenges to principle-based ethics. 9. Describe and explain virtue-based framework for thinking about ethical character. Opening Decision Point Executive Compensation: Needed Incentives, Justly Deserved, or Just Distasteful? In April 2011, Forbes magazine began its annual report on executive compensation with the following: “Our report on executive compensation will only fuel the outrage over corporate greed. In 2011, the chief executives of the 500 biggest companies in the U.S….got a collective pay raise of 16%, to $5.2 billion. This compares with a 3% pay raise for the average American worker. The total averages to $10.5 million apiece….So much for the moral suasion granted to shareholders last year with the first-ever say-on-pay votes for U.S. public companies” (Forbes, April 4, 2011). Public criticism of executive compensation, especially among top executives of U.S.-based publicly traded corporations, increased significantly following the economic collapse that began in 2008. For many observers, the magnitude of executive pay, both in absolute terms and relative to average workers, particularly needed to be addressed at a time when failed management was at fault for so much public and economic harm. Perhaps no part of the financial market collapse of late 2008, and the government bailout that followed, caused as much public outcry as did the financial bonuses and compensation paid to senior executives of failed companies. American International Group (AIG) became the target of much of this criticism. Persuaded that AIG was “too big to fail,” by March 2009 the U.S. federal government had committed $180 billion dollars to rescue AIG from bankruptcy. In early March of 2009, AIG announced that it was paying $165 million in bonuses to 400 top executives in its financial division, the very unit that was at the heart of the company’s collapse. AIG cited two major factors in the defense of these bonuses: they were owed as a result of contracts that had been negotiated and signed before the collapse, and they were needed to provide an incentive to retain the most talented employees at a time when they were most needed. Critics claimed that the bonuses were an example of corporate greed run amok. They argued that contractual obligations should have been over-ridden and renegotiated at the point of bankruptcy. They also dismissed the effectiveness of the incentive argument since this supposed “talent” was responsible for the failed business strategy that led to AIG’s troubles in the first place. As part of the government bailout of AIG, Edward M. Liddy, an associate of Secretary of the Treasury Henry Paulson, was named CEO of AIG in September of 2008. Former CEO Martin Sullivan resigned earlier in the summer as AIG’s financial troubles intensified, but he did not retire without first securing a $47 million severance package. In comparison, Liddy himself accepted a salary of $1, although his contract held out the possibility of future bonuses. In testimony before the U.S. Congress soon after being named CEO, Liddy was asked to explain the expense of a recent AIG-sponsored retreat for AIG salespeople. The retreat cost AIG over $400,000 and was, in Liddy’s words, a “standard practice within the industry.” Six months later, when news broke about the $165 million bonus payments, Liddy suggested that the executives consider doing “the right thing” and return the bonuses, describing them as “distasteful.” Within months of taking office, the Obama administration took steps to limit executive compensation at firms that accepted significant government bailout money, including the retirement packages of the former CEOs of Citigroup. General Motors, and Bank of America. Announcing this action, Treasury Secretary Timothy Geithner observed that "this financial crisis had many significant causes, but executive compensation practices were a contributing factor." How would you describe the bonuses paid to AIG executives in March of 2009? Is it an ethical issue at all? Why or why not? Are there any facts that you would want to know before making a judgment? What alternatives to paying the bonuses would have been available to Edward Liddy? Do you agree that AIG had an obligation to pay the bonuses? How strong is the duty to fulfill a contract, even one requiring payment of such bonuses? When should a contract be over-ridden by other concerns? Do you think the employees deserved the bonuses? How would you judge whether or not the bonuses were effective incentives? Do you agree with Liddy that they were “distasteful”? Is this judgment a matter of personal opinion and taste, or is it instead a reasonable and objective judgment? Who are the stakeholders in the decision to pay bonuses to AIG executives? How do their interests affect the contract between AIG and its employees? During the presidential debates in October 2008, then candidate Barack Obama said that "the Treasury should demand that money back and those executives should be fired." Do you agree? Is executive compensation purely a private matter between an employer and employee, or should it be a matter of public concern and government policy? Introduction: Ethical Frameworks: Consequences, Principles, Character Consider the reasons that you or others would offer to defend or criticize the payment of large bonuses to AIG executives. These reasons fall into three general categories: Some reasons appeal to the consequences of paying the bonuses (e.g., they either will or will not provide incentives for producing good work and beneficial future consequences). Other reasons appeal to certain principles, such as: one should not break a contractual promise, even if it has unpopular results; one should never benefit from serious harms that have been caused by one’s own actions. Other reasons cite maters of personal character: accepting bonuses is greedy, or distasteful; paying bonuses that were due in the face of public criticism was courageous and had to be done as a matter of integrity. Ethics involves what is perhaps the most significant question any human being can ask: How should we live our lives? Every major philosophical, cultural, political, and religious tradition in human history has grappled with this question. Barriers to Discussions of Philosophical Ethics: Discussions of philosophical ethics can appear intimidating or too abstract and discussions of ethical “frameworks” often seem to be too theoretical to be of much relevance to business. This chapter attempts to suggest a more accessible understanding of ethical frameworks and shed light on the practical and pragmatic application of these theories to actual problems businesspeople face. For an examination of a pragmatic application of these frameworks, see the end of chapter reading by Norman Bowie, “It Seems Right in Theory but Does It Work in Practice?” Ethical Framework: is an attempt to provide a systematic answer to the fundamental ethical question: How should human beings live their lives? Ethics can be understood as the practice of examining our decisions and thinking about answers to the question: Why? Ethics attempts to provide reasons to support the answers to this question. Ethics also seeks to provide a rational justification for why we should act and decide in a particular way. Philosophical and reasoned ethics must answer the “why?” question as well by connecting its prescriptions with an underlying account of a good and meaningful human life. Foundations of Ethical Views: Many people and cultures across the world would answer this “why” question in religious terms and would base their normative judgments on certain religious foundations. If ethics is based on religion, and if different cultures have widely divergent religious beliefs, it seems that ethics cannot escape the predicament of relativism. Decision Point Who is to Say What Is Right and Wrong? This Decision Point deals with ethical relativism and asks the question: Are you an ethical relativist? Ethical relativism holds that ethical values are relative to particular people, cultures or times. Relativism denies that there can be any rationally justified or objective ethical judgments. When there are ethical disagreements between people or cultures, the ethical relativist concludes that there is no way to resolve that dispute and prove one side is right or more reasonable than the other. Consider Edward Liddy’s description of the AIG bonuses as “distasteful.” Ordinarily, we think of matters of taste as personal, subjective things. You enjoy spicy Indian food, while I prefer simple, Midwestern meat and potatoes. It is all a matter of personal taste. Liddy may have found the bonuses distasteful, but others find them well-deserved. Ethical relativists believe that ethical values are much like tastes in food; it all depends on, or it is all relative to, one’s own background, culture, and personal opinions. Do you believe that there is no way to decide what is ethically right or wrong? Imagine a teacher returns an assignment to you with a grade of “F.” When you ask for an explanation, you are told that the teacher does not believe that people “like you” (e.g., men, Christians, African Americans) are capable of doing good work in this field (e.g., science, engineering, math, finance). When you object and say that this is unfair and wrong, the teacher then offers a relativist explanation. “Fairness is a matter of personal opinion,” the professor explains. “Who determines what is fair or unfair?” you ask. Your teacher claims that his view of what is fair is as valid as any other. Because everyone is entitled to his/her own personal opinion, he is entitled to fail you because, in his personal opinion, you do not deserve to succeed. Students are asked to consider the following questions related to this scenario: Would you accept this explanation and be content with your failing grade? If not, how would you defend your own, opposing view? Are there any relevant facts on which you would rely on to support your claim? What values are involved in this dispute? What alternatives are available to you? Besides you and your teacher, are there any other people who are or should be involved in this situation, any other stakeholders? What reasons would you offer to the dean in an appeal to have the grade changed? What consequences would this professor’s practice have on education? If reasoning and logical persuasion do not work, how else could this dispute be resolved? ** Teaching Note: Examples that speak directly to students are useful to counter the tendency towards relativism. Value-laden terms such as fairness, deserve, justice, equal treatment, merit are inescapable when discussing grades. This example can easily be transferred into an employment situation in which a manager conducts a performance appraisal of an employee. Other than reasoning and logical persuasion, what is the major alternative for resolving conflicts? Since at least the time that Thrasymachus informed Socrates that “justice is the advantage of the stronger,” the most common alternatives have been force and violence. Religious ethics explains human well-being in religious terms, while philosophical ethics provides justifications that must be applicable to all people, regardless of their religious starting points. Example of philosophical justification: “You should contribute to disaster relief because it will reduce human suffering.” Example of religious justification: “You should contribute to disaster relief because God commands it,” or “because it will bring you heavenly rewards.” Ethical frameworks evolved over time and have been refined and developed by many different thinkers. The insights of an ethical framework prove to be lasting because they truly do pick out some important elements of human experience. This chapter will introduce several ethical frameworks that have proven influential in the development of business ethics. Utilitarianism is an ethical tradition that directs us to decide based on overall consequences of our act. Principle-based ethical traditions direct us to act on the basis of moral principles such as respecting human rights. Virtue ethics direct us to consider the moral character of individuals and how various character traits can contribute to, or serve as an obstruction to, a happy and meaningful human life. The Caux Round Table (CRT) Principles for Responsible Business, provided at the end of the chapter, provide an interesting blend of utilitarian, principled, and virtue-based guidelines for business. Utilitarianism: Making Decisions Based on Ethical Consequences *Chapter Objective 1 Discussed Below* Background: Utilitarianism has its roots in eighteenth and nineteenth century social and political philosophy. Fundamental Insight of Utilitarianism: Begins with the conviction that we should decide what to do by considering the consequences of our actions. In this sense, utilitarianism has been called a consequentialist approach to ethics and social policy. Utilitarianism tells us that we should act in ways that produce better overall consequences than the alternatives we are considering. “Better” consequences are those that promote human well-being: the happiness, health, dignity, integrity, freedom, and respect of all the people affected. A decision that promotes the greatest amount of these values for the greatest number of people is the most reasonable decision from an ethical point of view. Emphasis of utilitarianism is on producing the greatest good for the greatest number. According to utilitarians, the ultimate ethical goal is to produce the best consequences for all parties affected by the decisions. Historically, utilitarianism has provided strong support for democratic institutions and policies and opposes those policies that aim to benefit only a small social, economic, or political minority. It could be said that the economy and economic institutions are utilitarian in that they exist to provide the highest standard of living for the greatest number of people, not simply to create wealth for a few. Example: In judging the ethics of child labor, utilitarian thinking would advise us to consider all the likely consequences of employing young children in factories. There are some obviously harmful consequences: children suffer physical and psychological harms, they are denied opportunities for education, their low pay is not enough to escape a life of poverty, and so forth. But the consequences must be compared to the consequences of alternative decisions, such as if children in poor regions are denied factory jobs? These children would still be denied opportunities for education; they would be in worse poverty; and they would have less money for food and family support. In many cases, the only alternatives for obtaining income might include crime, drugs, and prostitution. We should also consider the consequences for the entire society. Child labor can have beneficial results for bringing foreign investment and money into a poor country. Thus, some would argue that allowing children to work for pennies a day under sweatshop conditions produces better overall consequences than the available alternatives. One might argue on utilitarian grounds that such labor practices are ethically permissible because they produce better overall consequences than the alternatives. Utilitarians tend to be very pragmatic thinkers. They decide on the basis of consequences and they believe that the consequences of our actions will depend on the specific facts of each situation. According to Utilitarianism: No act is ever absolutely right or wrong in all cases in every situation; it will always depend on the consequences. For example, lying is neither right nor wrong in itself, according to utilitarians. There might be situations in which lying will produce greater overall good than telling the truth. In such a situation, it would be ethically justified to tell a lie. Utilitarian reasoning also usually supplies some support for each competing available alternative (e.g., we can ban child labor as harmful to the overall good or allow child labor as contributing to the overall good). Ethical Legitimacy: Deciding on the ethical legitimacy of alternative decisions requires that we make judgments about the likely consequences of our actions. How do we do this? Within the utilitarian tradition, there is a strong inclination to turn to social science for help in making such predictions, since it studies causes and consequences of individual and social actions. In general, the utilitarian position is that happiness is the ultimate good, the only thing that is and can be valued for its own sake. The Goal of Ethics: Both individually and as a matter of public policy, the goal of ethics should be to maximize the overall happiness. *Reference: “Reality Check - Is Utilitarianism Egoistic?”* Students often have difficulty distinguishing egoism from utilitarianism. The difference is between seeking to maximize personal happiness and seeking to maximize overall happiness. To complicate matters, economic theory might suggest that the most efficient means to accomplishing the latter is to pursue the former. Utilitarianism judges actions by their consequences for the general and overall good and takes into consideration the well-being of each and every individual affected by an action. Thus, utilitarianism serves the impartial promotion of human well-being, while egoism serves to maximize only individual happiness. III. Utilitarianism and Business *Chapter Objective 2 Addressed Below* Utilitarianism’s greatest contribution to philosophical thought has come through its influence in economics. With roots in Adam Smith, the ethics which underlies much of twentieth century economics—essentially what we think of as the free market—is decidedly utilitarian. In this way, utilitarianism continues to have a very strong impact on business and business ethics. Utilitarianism answers the fundamental question of ethics: “What should we do?” by referring to the following rule: maximize the overall good. This is similar to the financial practice of conducting a cost-benefit analysis and making a decision based on maximizing the net benefits over costs. How do we achieve this goal? What is the best means for attaining the utilitarian goal of maximizing the overall good? Two versions of utilitarian policy have emerged: one involves free, competitive markets and the other involves administration. *Chapter Objective 3 Addressed Below* Free Markets: One movement within utilitarian thinking invokes the tradition of Adam Smith, and claims that free and competitive markets are the best means for attaining utilitarian goals. This version would promote policies that deregulate private industry, protect property rights, allow for free exchanges, and encourage competition. In such situations, decisions of rationally self-interested individuals will result, as if led by “an invisible hand,” in Adam Smith’s terms, to the maximum satisfaction of individual happiness. In classic free market economics, economic activity aims to satisfy consumer demand. Since people are made happy, and human welfare/well-being increases, when people get what they desire, overall human happiness is increased when the overall satisfaction of consumer demand increases. The goal of free market economics is to maximize the satisfaction of wants (happiness). Free markets accomplish this goal most efficiently by allowing individuals to decide what they most want and then bargain for these goods in a free and competitive market. This requires that business managers, in turn, should seek to maximize profits. By pursuing profits, business ensures that scarce resources go to those who most value them and thereby ensures that resources will provide optimal satisfaction. Competitive markets are seen as the most efficient means to the utilitarian end of maximizing happiness. A second influential version of utilitarian policy turns to policy experts who can predict the outcome of various policies and carry out policies that will attain utilitarian ends. Because utilitarian reasoning determines what to do on the basis of consequences, reasonable judgments must take into account the likely consequences of our actions. Policy experts, usually trained in the social sciences such as economics, political science, and public policy, are familiar with the specifics of how society works, and they therefore are in a position to determine which policy will maximize the overall good. *Reference: “Reality Check - Utilitarian Experts in Practice”* This approach to public policy underlies one theory of the entire administrative and bureaucratic side of government and organizations. From this view, the legislative body (from Congress to local city councils) establishes the public goals that we assume will maximize overall happiness. The administrative side (presidents, governors, mayors) executes (administers) policies to fulfill these goals. People working within the administration know how the social and political system works and use this knowledge to carry out the mandate of the legislature. This approach would be sympathetic with government regulation of business, on the grounds that such regulation will ensure that business activities do contribute to the overall good. Dispute Between Versions of Utilitarian Policy: The dispute between what we might call the “administrative” and the “market” versions of utilitarianism, characterize many disputes in business ethics. One example concerns regulation of unsafe or risky products: One side argues that questions of safety and risk should be determined by experts who then establish standards that business is required to meet. Government regulators (for example, the Consumer Products Safety Commission) are then charged with enforcing safety standards in the marketplace. The other side argues that the best judges of acceptable risk and safety are consumers themselves. A free and competitive consumer market will ensure that people will get the level of safety that they want. Individuals calculate what risks they wish to take and what trade-offs they are willing to make in order to attain safety. Market-based solutions will prove best at optimally satisfying these various and competing interests and will thereby serve the overall good. Decision Point Should Financial Markets Face Greater Government Regulation? In the aftermath of the financial meltdown of 2008-09, many people believe that a lack of regulation and oversight by government agencies such as the Federal Reserve Bank and the Securities and Exchange Commission (SEC) played a major role in causing the crisis. From this perspective, the financial crisis was hastened by more than two decades of U.S. public policy that moved away from regulation in the name of less government, fewer regulations, and a more free economy. Critics argue that a de-regulated market allowed a wide range of suspect financial practices that are associated with some of the largest business failures in world history. Weak or nonexistent government regulation failed to protect the economy from the “off-book partnerships” made famous by Enron, the sub-prime mortgages that led to the collapse of three of the largest investment banks in the world, Lehman Brothers, Bear Stearns and Merrill Lynch; and credit-default swaps that were central to the problems of AIG. Of equal importance, failure to police mergers and acquisitions by enforcing anti-trust regulations created a number of firms that were judged to be “too big to fail,” leading to huge government bailouts. Indeed, many critics claim that the deep recession of 2008-09 was directly related to the failure of unregulated markets in such fields as finance, real estate, and the auto industry. Defenders and critics of de-regulation agree that a healthy and efficient economy is the best means for maximizing the overall social good. They disagree on whether that a healthy economy is one that leaves the market free of government regulation, or one in which government regulators play an active role. Given that this issue isn’t a simple matter of regulations or not, but involves a range of options along a continuum of less-to-more regulation, do you generally support more or less government regulation of economic markets? What facts are relevant in answering this question? Does it depend on the type of regulation, or the industry being regulated? How would you decide if a regulation is successful? A failure? What values support a policy of de-regulation? What values count against it? Other than the industry regulated, who are other stakeholders that might be affected by government regulation? What alternative might to government regulations? Can professional codes and standards play a role? ** Teaching Note: “Letting the market decide” is a common approach in several areas of business ethics. In terms of the logical structure and ethical values, disputes about consumer product safety, workplace health and safety, and environmental protection raise identical questions. A useful study question or assignment for a writing exercise or exam would ask students to trace the logic of this perspective across such issues as product safety, workplace safety, and environmental protection. Challenges to Utilitarian Ethics *Chapter Objective 4 Addressed Below* Reviewing some challenges to utilitarianism can guide us in evaluating later applications of utilitarian decision making. Counting, Measuring, Comparing and Quantifying Consequences: If utilitarianism advises that we make decisions by comparing the consequences of alternative actions, then we must have a method for making such comparisons. In principle, utilitarianism tells us that the interests of all stakeholders who will be affected by a decision ought to be included in calculating the consequences of a decision. But, there is no consensus among utilitarians on how to measure and determine the overall good. For example: Imagine trying to calculate the consequences of a decision to invest in construction of a nuclear power plant whose wastes remain toxic for tens of thousands of years. A second challenge relates to utilitarianism’s reliance on consequences. Ethical and unethical acts are determined by their consequences. In short, the end justifies the means. But this seems to deny one of the earliest ethical principles that many of have learned: the ends do not justify the means. When we say that the ends do not justify the means, what we are saying is that there are certain decisions we should make or certain rules we should follow no matter what the consequences. We have certain duties or responsibilities that we ought to obey, even when doing so does not produce a net increase in overall happiness. Examples of such duties are those required by such principles as justice, loyalty, and respect, as well as the responsibilities which flow from our roles as parent, spouse, friend, citizen, employee, or professional. Since utilitarianism focuses on the overall consequences, utilitarianism seems willing to sacrifice the good of individuals for the greater overall good. For example, it might turn out that the overall happiness would be increased if children were held as slave labor. Utilitarians would object to slavery or to child labor, not as a matter of principle, but only if and to the degree that it detracts from the overall good. If it turns out that slavery and child labor increases the net overall happiness, then utilitarianism would have to support these practices. In the judgment of many people, such a decision would violate fundamental ethical principles of justice, equality, and respect. Rights function to protect individuals from being sacrificed for the greater overall happiness. For example, it is often argued that child labor is ethically wrong in principle, even if it contributes to the overall social happiness. A similar example cites those principles that arise from commitments that we all make and the duties that flow from them. For example, as parents we love our children and have certain duties to them. Violating such commitments and duties would require individuals to sacrifice their own integrity for the common good. Commitments and duties play a large role in business life. Contracts and promises are exactly the commitments that one ought to honor even if the consequences turn out unfavorably. The duties that one takes on as part of a professional role function in a similar way: AIG defended their payment of bonuses to executives, citing the contractual duty to pay them. Arthur Andersen’s auditors should not have violated their professional duties simply to produce greater overall beneficial consequences. Lawyers have a duty not to help their clients find ways to violate the law, even if they are offered a high salary to do so. Teachers should not violate their professional duties by failing students whom they do not like. ** Teaching Note: This notion of specific relationships and commitments can be used to introduce professional responsibilities and examine how they may function within business settings. While a certain decision may work towards maximizing the overall good, one’s role as a lawyer, and accountant, a banker might create special responsibilities that trump the greater overall good. Benefits of Utilitarian Reasoning: Responsible decision-making requires that we consider the consequences of our acts, but this is only part of the ethical landscape. Responsible ethical decision making also involves matters of duties, principles and personal integrity. An Ethics of Principles and Rights *Chapter Objective 5 Addressed Below* Consequences: should be considered as part of responsible ethical decision making, but must be supplemented with the recognition that some decisions should be a matter of principle, not consequences. Principle-based, ethical frameworks address questions such as, “Which principles should we follow and how do we decided when a principle should trump beneficial consequences?” As an example: Consider the relationship between the legislative and judicial branches of government found in constitutional democracies. The legislative role can be thought of as pursuing the utilitarian goal of creating policies to produce the greatest good for the greatest number. The judiciary’s rule is to enforce basic principles of justice and fairness. The essential insight of constitutional democracies is that majority-rule decisions that seek the greatest overall happiness should be restricted by constitutional limits that reflect fundamental principles of human rights. This political example reflects the ethical axiom that a utilitarian framework should be supplemented by a framework that also accounts for fundamental ethical principles. In other words, utilitarian ends do not justify any and all means to those ends. “Following Rules”: Ethical principles can be thought of as a type of rule. This approach to ethics tells us that there are some rules that we ought to follow, even if doing so prevents good consequences from happening, or even if it results in some bad consequences. Rules or principles create ethical duties that bind us to act or decide in certain ways. For example, many would argue that there is an ethical rule prohibiting slave labor, even if this practice would have beneficial economic consequences for society. What principles or rules should guide our decisions? Legal rules are one major set of rules that we ought to follow. Example: We have a duty to pay our taxes, even if the money might be more efficiently spent on our children’s college education. We ought to stop at a red light, even if there are no other cars coming and you could get to the destination more quickly. Decision-making within a business context will involve many situations in which one ought to obey legal rules even when the consequences, economic and otherwise, seem to be undesirable. Other rules are derived from various institutions in which we participate or from various social roles that we fill. Example: As a teacher, I ought to read each student’s research paper carefully and diligently, even if they will never know the difference and their final grade will not be affected. In the role of teacher and university faculty member, I have the duty to enforce the rules fairly, even when it would be easier not to do so. Similar rule-based duties follow from our roles as friends, family members, students, church members, citizens, and good neighbors. Role-based Duties arise on many occasions in business. As an employee, one takes on a certain role that creates duties and every business will have a set of rules that employees are expected to follow. Sometimes rules are explicitly stated in a code of conduct, other times rules are included in employee handbooks, still others are simply stated by managers. *Reference: “Reality Check - Ethical and the UN Global Compact”* As a business manager, there are many rules that one ought to follow with respect to stockholders, employees, suppliers and other stakeholders. “Gatekeeper functions” are performed by lawyers, accountants, auditors, financial analysts, and bankers in their roles within political and economic institutions. Many of these roles ensure the integrity and proper functioning of the economic, legal or financial system. *Chapter 2 introduced the idea of professional responsibilities in the workplace and this theme will be further developed in Chapter 10. Professional Duties – An Illustration: While examining Enron’s financial reports, the auditors at Arthur Andersen knew that diligent application of strict auditing standards required one decision, but that the consequences of this diligent application would be harmful to Arthur Andersen’s business interests. A fair analysis of this aspect of the Enron–Arthur Andersen scandal would point out that Andersen’s auditors failed in their ethical duties precisely because they did not follow the rules governing their professional responsibilities and allowed beneficial consequences to override their professional principles. *Reference: “Reality Check - Ethical Rules as a Check on Misguided Consequences”* Legal rules, organizational rules, role-based rules, and professional rules are part of a social agreement, or social contract, which functions to organize and ease relations between individuals. No group could function if members were free at all times to decide for themselves what to do and how to act. By definition, a cooperative activity requires cooperation, meaning it requires rules that each member follows. Many philosophers believe there are ethical duties that are more fundamental and that bind us in a stricter way than the way we are bound by contracts or professional duties. You should not be able to “quit” ethical duties and walk away from them in the same way that one can dissolve a contract or walk away from professional duties by quitting the profession. Philosophers would say that ethical duties should be categorical imperatives, rather than hypothetical ones: “I should or must (an imperative) obey a fundamental ethical rule no matter what (a categorical).” *Chapter Objective 6 Addressed Below* Human Rights and Duties: Are there any such fundamental duties? Are there any rules we should follow or decisions we should make, no matter what the consequences? Many ethical traditions agree that each and every human being possesses an intrinsic value, or essential dignity, that should never be violated. A common way of expressing this is to say that each and every human being possesses a fundamental human right to be treated with respect, and that this right creates duties on the part of every human to respect the rights of others. Kant expressed this as the fundamental duty to treat each person as an end in themselves and never only as means to our own ends. Human rights, or moral rights, have played a central role in the development of modern democratic political systems. The U.S. Declaration of Independence speaks of “inalienable rights” that cannot be taken away by government. Following World War II, the United Nations created the U.N Declaration of Human Rights as a means for holding all governments to fundamental standards of ethics. This rights-based framework of ethics would object to child labor because such practices: Violate our duty to treat children with respect. Violate the rights of children by treating them as mere means to the ends of production and economic growth and as children, they have not rationally and freely chosen their own ends, so they are used as tools or objects. Even if child labor produced beneficial consequences, it would be considered ethically wrong because it violates a fundamental human right. The concept of a human or moral rights is central to the principled-based ethical tradition: The inherent dignity of each individual means that we cannot do just anything at all to another person. Human rights protect individuals from being treated in ways that would violate their dignity and that would treat them as mere objects or means. Rights imply that some acts and some decisions are “off limits.” Our fundamental moral duty (the “categorical imperative”) is to respect the fundamental human rights of others. Our rights establish limits on the decisions and authority of others. Consider how rights function relative to the utilitarian goal of maximizing the overall good: Example: Supposed you owned a local business and the local government decided that your property would be a great location for a city park, but you disagree. On utilitarian grounds, it might seem that your land would best serve the overall good by being used for a park. However, your property rights prevent the community from taking your land to serve the public. Human rights are meant to offer protection of certain central human interests, prohibiting the sacrifice of these interests merely to provide a net increase in the overall happiness. The standard account of human rights offered through the Western ethical tradition connects basic human rights to some theory of a basic human nature. Human nature provides the grounds for distinguishing central interests from mere wants. The Kantian tradition claims that our fundamental human rights, and the duties that follow from them, are derived from our nature as free and rational beings. Humans act not only out of instinct and conditioning; they make free choices about their own lives and their own ends. In this sense, humans are said to have a fundamental right of autonomy, or “self-rule.” Human Rights and Social Justice Two related rights have emerged as fundamental components of social justice: Autonomy, or self-rule, is a fundamental characteristic of human nature Liberty to make our own choices also deserves special protection as a basic right. Because all humans possess liberty, equal treatment and equal consideration must also be fundamental rights. Liberty and equality are “natural rights” that are more fundamental and persistent than the legal rights created by governments and social contracts. *Reference: “Reality Check - Are Fundamental Human Rights Universally Accepted?”* Liberty and equality are also fundamental to the theories of social justice upon which democratic societies and capitalist economies have been built – thus, they are crucial to an understanding of business ethics. Libertarian versions of social justice argue that individual liberty (the freedom from coercion by others) is the most central element of social justice. Political perspectives that seek to reduce the size of government and limit government regulation of the market typically cite individual liberty as their ethical justification. If we acknowledge liberty as the most basic human right, it would be easy to generate an argument for a more laissez-faire, free-market system: As long as individuals are not harming others, they should be free to engage in any voluntary economic exchange. Government’s only role is to ensure that there is free and open competition and that economic transactions are free from coercion, fraud, and deception. From the libertarian perspective, businesses should be free to pursue profit in any voluntary and non-deceptive manner. Unethical business practices would include: fraud, deception, and anti-competitive behavior. Government activity to enforce contracts and compensate for harms would be considered just. Other government regulation would be seen as unjust interference. Egalitarian versions of justice argue that equality is the most central element of social justice, arguing that equal distribution of basic economic goods and services is at the heart of social justice. Egalitarian theories of social justice typically support greater governmental responsibility in the economy as a necessary means to guarantee equality. Other theories argue that equal opportunity, rather than equality of outcome, is crucial. “Justice as fairness”: John Rawls developed an account of justice called “justice as fairness,” that combines respect for both liberty and equality. Rawls offers a contemporary version of the social contract theory that understands basic ethical rules as part of an implicit contract necessary to ensure social cooperation. Two major components of Rawls’ theory of justice: 1) a method for determining the principles of justice that should govern society and 2) the specific principles that are derived from the method. Imagine rational and self-interested individuals having to choose and agree on the fundamental principles for their society. The image of members of a constitutional convention is a helpful model for the idea. To ensure that the principles are fair and impartial, imagine that these individuals are, in Rawls’s terms, behind a veil of ignorance, where they are unaware of their own position in the social structures of society or their own abilities/disabilities, strengths, weaknesses or details of their own lives. To ensure that each individual is treated as an end and not as a means, imagine that these individuals must unanimously agree on the principles. Rawls calls these original conditions of impartiality the “original position.” They guarantee that the principles chosen are fair. Rawls contends that our decisions ought to be made in such a way, and our social institutions ought to be organized in such a way, that they would prove acceptable to us no matter whose point of view we take. He argues that we should strive for impartiality. Rawls derives two fundamental principles of justice from this “original position”: The first principle states that each individual is to have an equal right to the most extensive system of liberties. This principle argues that equal rights are a fundamental element of social justice. The second principle holds that benefits and burdens of a society should generally be distributed equally, unless an unequal distribution would benefit the least advantaged members of society, and only if each person has an equal opportunity to obtain those benefits. Rawls’s theory of justice could support a market-based, private-property economy as long as there are programs in place that would provide a safety net of social and economic goods to the least advantaged as long as there is a real opportunity of attaining higher levels of such goods. Human Rights and Legal Rights *Chapter Objective 7 Addressed Below* It is helpful to distinguish between human rights and legal rights. In business, employees typically have three types of rights: First, there are legal rights, granted to employees on the basis of legislation or judicial rulings, such as minimum wage or equal opportunity. Second, employee rights might refer to the goods that employees are entitled to on the basis of contractual agreements with employers, such as specific health care packages or paid holidays. Finally, employee rights might refer to those moral entitlements to which employees have a claim, independently of any particular legal or contractual factors, originating with the respect owed to them as human beings. Consider how legal and contractual rights interact: In general, both parties to an employment agreement bargain over the conditions of work: Employers offer certain wages, benefits, and working conditions and in return seek worker productivity. Employees offer skills and abilities and seek wages and benefits in return. Thus, employment rights emerge from contractual promises. However, legal rights exempt certain interests from the employment contract. Such legal rights set the basic legal framework in which business operates. Legal rights are established by the legal system in which business operates and, in this sense, are part of the price of doing business. Human rights lie outside of the bargaining that occurs between employers and employees. Unlike legal rights, such as minimum wage, moral rights are established and justified by moral, rather than legal considerations. Moral rights establish the basic moral framework for the legal environment itself, and more specifically for any contracts that are negotiated within business. As described in the United States Declaration of Independence, governments and laws are created in order to secure more fundamental natural moral rights. The rights outlined in the U.N.’s Universal Declaration of Human Rights fit this conception of fundamental moral rights. Decision Point: Do Employees have Moral Rights? Employees certainly have legal rights, such as the right to be paid a minimum wage, to enjoy equal opportunity in the workplace, and to be free from sexual harassment. Many employees also have contractual rights, such as the right to an employer contribution to a retirement plan, health care, or certain number of vacation and sick days. But do employees really have rights against their employer that are not specified in the law or in the employment contract? Do employers have duties to their employees other than what is required by law and the employment contract? If every human has a right to health care, do employers have a moral duty to provide health insurance for every employee? Do employers have a duty to provide a just wage? Do employers have a duty to respect employee’s right to privacy? Challenges to an Ethics of Rights and Duties: *Chapter Objective 8 Discussed Below* So what rights do we have and what does that mean for the duties of others? In the U.S. Declaration of Independence, Thomas Jefferson claimed that we have “inalienable rights” to life, liberty, and the pursuit of happiness. Jefferson was influenced by the British philosopher John Locke, who spoke of “natural rights” to life, health, liberty, and possessions. The U.N Universal Declaration of Human Rights lists more than twenty-six human rights that are universal. *Reference: “Reality Check - Are Fundamental Human Rights Universally Accepted?”* Acknowledging this diversity of rights makes it easy to understand the two biggest challenges to this ethical tradition: What rights truly are basic human rights? How should we apply this approach to practical situations, especially in cases where rights seemingly conflict? Consider a possible right to health care: During debates over health care reform in the U.S. Congress in 2009, many claimed that humans have a right “to a standard of living adequate for the health and well-being” and that this right includes medical care. Many disagree and point out that such a right would carry significant costs for others. This raises many questions, such as: If every human has a right to health care, who has the duty to provide it and at what costs? Critics charge that unless there is a specific person of institution that has a duty to provide the goods identified as “rights,” talk of rights amounts to little more than a wish-list of things that people want. More relevant to business is UN Declaration’s Article 23, that everyone has a “right to work and free choice of employment,” as well as a “right to just and favourable remuneration.” But, who has the duty to provide jobs to every unemployed person? What is a just wage and who gets to decide? The first major challenge to an ethics based on rights is that there is no agreement about the scope and range of such rights. Which good things qualify as rights, and which are merely things that people want? Unless there is some clear way to distinguish the two, the list of rights will only grow to unreasonable lengths and the corresponding duties will unreasonably burden everyone. A second challenge to an ethics based on rights points to practical problems in applying a theory of rights to real-life situations. With a long list of human rights, all of which are claimed to be basic and fundamental, we need a practical guide to decide what to do when rights come into conflict. For example, how would we decide between one individual’s right to medical care and the physician’s right to just remuneration of his/her work? Suppose the person needing medical care could not afford to pay a just fee for the care? In a business setting, a conflict would occur when an employer’s rights to property came into conflict with an employee’s alleged rights to work, just wages and health care. Granting economic rights to employees would seem to create numerous conflicts with the property rights of employers. The ethical tradition of rights and duties has not been able to provide a persuasive and systematic account for how these conflicts should be resolved. Virtue Ethics: Making Decisions based on Integrity and Character *Chapter Objective 9 Discussed Below* Virtue Ethics: is a tradition within philosophical ethics that seeks a full detailed description of those character traits, or virtues, that would constitute a good and full human life. *Reference: “Reality Check - Virtues in Practice”* Perhaps the best place to see the ethics of virtue is in the goal of every good parent who hopes to raise happy and decent children. To understand how the virtue ethics differs from utilitarian and principle-based frameworks, consider the problem of egoism: Egoism is a view which holds that people act only out of a self-interest. The biggest challenges posed by egoism, and according to some, the biggest challenge to ethics, is the apparent gap between self-interest and altruism, or between motivation that is “self-regarding” and motivation that is “other-regarding.” Ethics requires us, at least at times, to act for the well-being of others, yet some claim that this is not possible because humans act only from self-interested motives. An ethics of virtue shifts the focus from questions about what a person should do, to a focus on who that person is. This shift requires a different view of ethics, as well as a different view of ourselves. According to virtue ethics, a person’s character – those dispositions, relationships, attitudes, values and beliefs that might be called a “personality” - is not some feature that remains independent of that person’s identity. The self is identical to a person’s most fundamental and enduring dispositions, attitudes, values and beliefs. The shift changes the nature of justification in ethics. If an ethical justification of some act requires that it be tied to self-interest, we should not be surprised that this justification often fails. Ethical controversies often involve a conflict between self-interest and ethical values. Example: Why should an executive turn down a multi-million dollar bonus? The only way to answer this question appears to be to show how it would be in his/her self-interest to do so. *Reference Reality Check - Is Selfishness a Virtue?* However, if I am the type of person who had moderate and restrained desires for money, then there is no temptation to be unethical for the sake of a large bonus. For many people, the “self” of self-interest is a caring, modest, unaffected, altruistic self. For those people there simply is no conflict between self-interest and altruism. The degree to which we are capable of acting for the well-being of others, therefore, seems to depend on our character or the type of person we are. If people are caring, empathetic, charitable, and sympathetic, then the challenge of selfishness or egoism is not a factor in their decision making. Virtue ethics recognizes that our motivations are not the sorts of things that each one of us chooses anew each morning, rather, human beings act in and from character. Virtue ethics seeks to understand how those traits are formed and which traits bolster and which undermine a meaningful, worthwhile, and satisfying human life. A Fuller Description: Rather than simply describing people as good or bad, right or wrong, an ethics of virtue encourages a fuller description. For example: We might describe Aaron Feuerstein from Malden Mills as heroic and courageous, a man of integrity who sympathizes with his employees and cares about their well-being. Other executives, however, might be described as greedy or ruthless, proud or competitive. Faced with a difficult dilemma, we might ask what a person with integrity would do. What would an honest person say? What would a virtuous person do? Virtue ethics also reminds us to examine how character traits are formed and conditioned. Much of our character is formed by such factors as our parents, schools, church, friends, and society. Powerful social institutions such as business and our places of employment, as well as our particular social roles within them, have profound influence on shaping our character. Consider an accounting firm that hires a group of trainees, fully expecting that fewer than half will be retained and where only a very small group will make partner. This corporate environment encourages motivations and behavior very different than one would find at a firm where a few trainees are hired and given a greater chance for long-term success. Virtue ethics reminds us to look at current business practices and ask: What types of people are being created? *Reference: “Reality Check - Can Virtue Be Taught?”* Example: A study within marketing firms and advertising agencies revealed that on several occasions, advertising agents said that they would never allow their own children to watch the very television shows and advertisements that their own firms were producing. A virtue ethics approach would look at the type of person who is able to disassociate himself and his own values from his work, and the social institutions and practices that encourage it. What kind of person is willing to subject others’ children to marketing practices that are unacceptable for his own children? Such a person seems to lack even the most elementary form of personal integrity. ** Teaching Note: Perhaps nowhere is virtue ethics more relevant than in discussion about how one would wish to raise one’s children. Students will often respond well to questions about how they intend to raise their children. What type of person do they want their children to become? What habits and character traits are likely to lead to happy lives? Which are likely to lead to unhappiness? How does one encourage a child to be cheerful, courteous, positive? How does one discourage a child from being selfish, gloomy, and cruel? Again, this discussion can easily be translated into the workplace context: what type of employees would you want? How does one encourage creativity and discourage acrimony? A Decision Making Model for Business Ethics Revisited Understanding the philosophical basis of ethics will enable you to become more aware of ethical issues, better able to recognize the impact of your decisions, and more likely to make better informed and more reasonable decisions. Ethical theories allow us to better and more articulately explain why we have made or wish to make a particular decision. Developing a Decision-Making Model: These ethical theories and traditions provide important ways in which to develop the decision-making model introduced in Chapter 2. Ethical theories and traditions provide systematic and sophisticated ways to think and reason about ethical questions. A more detailed version of the decision making model from Chapter 2 aims, above all else, to help individuals make ethically responsible business decisions. *Reference: "Reality Check – Nash’s 12 Questions”* Detailed account of the decision-making process: Determine the facts. Gather all of the relevant facts. It is critical at this stage that we do not unintentionally bias our later decision by gathering only those facts in support of one particular outcome. Identify the ethical issues involved. What is the ethical dimension? What is the ethical issue? Often we do not even notice the ethical dilemma. Avoid normative myopia. Identify stakeholders. Who will be affected by this decision? What are their relationships to me, and what is their power over my decision or results? Who has a stake in the outcome? Do not limit your inquiry only to those stakeholders to whom you believe you owe a duty; sometimes a duty arises as a result of the impact. For instance, you might not necessarily first consider your competitors as stakeholders; however, once you understand the impact of your decision on those competitors, an ethical duty may arise. Consider the available alternatives. Exercise “moral imagination.” Are there creative ways to resolve conflicts? Explore not only the obvious choices, but also those that are less obvious and that require some creative thinking or moral imagination to create. Imagine how the situation appears from other points of view. Consider how a decision affects stakeholders. Take the point of view of other people involved. How is each stakeholder affected by my decision? Compare and weigh the alternatives: ethical theories and traditions can help here. Consequences Beneficial and harmful consequences Duties, rights, principles What does the law say? What are the professional duties involved? Which principles are most obligatory? Are people being treated fairly, with respect for their autonomy and equality? Implications for personal integrity an character What type of person am I becoming through this decision? What are my own principles and purposes? Can I life with public disclosure of this decision? How are people being treated? Guidance. Can you discuss the case with relevant others? Can you gather additional opinions or perspectives? Are there any guidelines, codes, or other external sources that might shed light on the dilemma? Assessment. Have you built in mechanisms for assessment of your decision and making possible modifications, if necessary? Make sure that you learn from each decision and move forward with that increased knowledge as you are then faced with similar decisions in the future or to make changes to your current situation. *Reference: Opening Decision Point Revisited – Executive Compensation* Students should consider the appointment of Kenneth Feinberg, dubbed the “compensation czar,” to oversee compensation packages offered to executives at firms that received significant government bailout money: What consequences, good and bad, short-term and long-term, can you reasonably forsee from this appointment? What principles might be cited to defend this position? What principles might it violate? What would be the virtues necessary for someone to be a good compensation czar? What vices would make such a person bad in this position? Should government set a “maximum wage” limit in the way that it sets a minimum wage? Instructor Manual for Business Ethics: Decision Making for Personal Integrity and Social Responsibility Laura P. Hartman, Joseph R. Desjardins, Chris MacDonald 9780078029455, 9781259060588, 9781259417856
