© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 17 - 1

Chapter 42Ethics and Social Responsibility of

Business

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 27 - 2

Businesses and Ethics• Businesses organized in the

United States are subject to its laws.

• They are also subject to the laws of other countries in which they operate.

• Business persons owe a duty to act ethically in the conduct of their affairs.

• Businesses owe a social responsibility not to harm society.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 37 - 3

Business Ethics• A set of moral principles or

values that governs the conduct of an individual or a group.

• What is lawful conduct is not always ethical conduct.– The law may permit

something that would be ethically wrong.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 47 - 4

Moral Theories and Business Ethics

Ethical RelativismEthical Relativism

Ethical Ethical FundamentalismFundamentalism

UtilitarianismUtilitarianism

Kantian EthicsKantian EthicsRawls’s Social Rawls’s Social Justice TheoryJustice Theory

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 57 - 5

Ethical Fundamentalism• When a person looks to an

outside source for ethical rules or commands.

• Critics argue that ethical fundamentalism does not permit people to determine right and wrong for themselves.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 67 - 6

Utilitarianism• A moral theory that dictates that

people must choose the action or follow the rule that provides the greatest good to society.

• This does not mean the greatest good for the greatest number of people.

• Has been criticized because it is difficult to estimate the “good” that will result from different actions.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 77 - 7

Kantian Ethics• A moral theory that says people

owe moral duties that are based on universal rules.

• Based on the premise that people can use reasoning to reach ethical decisions.

• This theory would have people behave according to the categorical imperative:

“Do unto others as you would have them do unto you.”

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 87 - 8

Kantian Ethics (continued)

• Deontology’s universal rules are based on two important principles:

1. Consistency – all cases are treated alike with no exceptions.

2. Reversibility – the actor must abide by the rule he or she uses to judge the morality of someone else’s conduct.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 97 - 9

Kantian Ethics (continued)

• If you are going to make an exception for yourself, that exception becomes a universal rule that applies to all others.

• A criticism of this theory is that it is hard to reach a consensus as to what the universal rules should be.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 107 - 10

Rawls’s Social Justice Theory• A moral theory that says each

person is presumed to have entered into a social contract, with all others in society, to obey moral rules that are necessary for people to live in peace and harmony.

• Fairness is considered the essence of justice.

• Rawls proposed that the least advantaged much receive special assistance to allow them to reach their potential.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 117 - 11

Rawls’s Social Justice Theory (continued)

– The principles of justice should be chosen by persons who do not yet know their station in society.

– This “veil of ignorance” would permit the fairest possible principles to be selected.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 127 - 12

Rawls’s Social Justice Theory (continued)

• There are two major criticisms of this theory:

1. Establishing the blind “original position” for choosing moral principles is impossible in the real world.

2. Many persons in society would choose not to maximize the benefit to the least advantaged persons in society.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 137 - 13

Ethical Relativism• A moral theory that holds that

individuals must decide what is ethical based on their own feelings as to what is right or wrong.

• There are no universal ethical rules to guide a person’s conduct.

• If a person meets his or her own moral standard in making a decision, no one can criticize him or her for it.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 147 - 14

Ethical Relativism (continued)

• A criticism of this theory is that an action usually thought to be unethical would not be unethical if the perpetrator thought it was in fact ethical.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 157 - 15

Summary of TheoriesTheory Description

Ethical fundamentalism

Persons look to an outside source or central figure for ethical guidelines.

Utilitarianism Persons choose the alternative that would provide the greatest good to society.

Kantian ethics A set of universal rules establishes ethical duties. The rules are based on reasoning and require (1) consistency in application and (2) reversibility.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 167 - 16

Summary of Theories (continued)

Theory Description

Rawls’s social justice theory

Moral duties are based on an implied social contract. Fairness is justice. Rules are established from an original position.

Ethical relativism

Individuals decide what is ethical based on their own feelings as to what is right or wrong.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 177 - 17

Social Responsibility of Business

• Business does not operate in a vacuum.

• Decisions made by business have far-reaching effects on society.

• In the past, many business decisions were made solely on a cost-benefit analysis.– “Bottom line” impact.

• Such decisions may cause negative externalities for others.

• Corporations owe some degree of social responsibility.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 187 - 18

Theories of Social ResponsibilityMaximizing Maximizing

ProfitsProfitsMoral Moral

MinimumMinimum

Stakeholder Stakeholder InterestInterest

Corporate Corporate CitizenshipCitizenship

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 197 - 19

Maximizing Profits• A theory of social

responsibility that says a corporation owes a duty to take actions that maximize profits for shareholders.

• The interests of other constituencies are not important in and of themselves.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 207 - 20

Moral Minimum• A theory of social responsibility that

says a corporation’s duty is to make a profit while avoiding harm to others.

• As long as business avoids or corrects the social injury it causes, it has met its duty of social responsibility.

• The legislative and judicial branches of government have established laws that enforce the moral minimum of social responsibility on corporations.– Occupational safety laws– Consumer protection laws for product

safety

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 217 - 21

Stakeholder Interest• A theory of social responsibility

that says a corporation must consider the effects its actions have on persons other than its stockholders.

• This theory is criticized because it is difficult to harmonize the conflicting interests of stakeholders.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 227 - 22

Other Stakeholders of a Business

CustomersCustomers

EmployeesEmployees SuppliersSuppliers

Local Local CommunityCommunity

CreditorsCreditors

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 237 - 23

Corporate Citizenship• A theory of responsibility that

says a business has a responsibility to do good.

• Business is responsible for helping to solve social problems.

• Corporations owe a duty to promote the same social goals as do individual members of society.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 247 - 24

Corporate Citizenship (continued)

• This theory argues that corporations owe a debt to society to make it a better place.– This duty arises because of

the social power bestowed on corporations.

• A major criticism of this theory is that the duty of a corporation to “do good” cannot be expanded beyond certain limits.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 257 - 25

Summary of Theories Theory Social Responsibility

Maximizing profits To maximize profits for stockholders.

Moral minimum To avoid causing harm and to compensate for harm caused.

Stakeholder interest To consider the interests of all stakeholders, including stockholders, employees, customers, suppliers, creditors, and local community.

Corporate citizenship

To do good and solve social problems