LSG: Ethics

Goals:
1. Recognizing moral issues
2. Being able to develop a moral vision
3. Understanding moral arguments
4. Knowing three general theories of ethics
5. How to apply these theories to the practice of businesses
6. Preparing discussion sessions

What is (business) ethics?

Ethics is concerned with the study of morality and the application

of reason to elucidate specific rules and principles that determine right
and wrong for a given situation. (Crane & Matten, 2011)

Ethical theories are the rules and principles that determine right
and wrong for a given situation. (Crane & Matten, 2011)

Morality is concerned with the norms, values, and beliefs

embedded in social processes which define right and wrong for an
individual or a community. (Crane & Matten, 2011)

The Three General Ethics Theories

INTENTION

Virtue
ethics

CONDUCT

Deontological
ethics

EFFECTS

Consequential
ethics
Consequence ethics: Moral content of an action is determined by the real and
expected
consequences of an action. (Impact).
Deontological ethics: Regard the action itself as an object of moral evaluation.
(Conduct)
Virtue ethics: Concerned with the intention behind the action. (Effect)

Consequential Ethics

Actions are taken to achieve a certain end, other with a view to a more distant
goal. Employs a certain standard against which the consequences of an action
are judged.
According to consequentialist ethics, the moral content of an action is determined
by the real and expected consequences of that action. An action is morally good
if its consequences are desirable and bad if they are not. Consequentialist ethics
employs a certain standard (the purpose or end) against which the consequences
of an action are judged.

The effect of behavior determines the moral content

An action is morally required when the expected effects lead to the

best results

Concern intrinsic goals (opposed to instrumental goals)

Types:
-

Number: monism, pluralism

Nature: pleasure, well-being, individual preferences

Whose goals: egoism, utilitarianism

Classical utilitarianism: Adam Smith; pursuit of individual self interest would

indirectly serve the common good.
According to utilitarianism, the criterion for evaluating actions is the welfare of
society. Utilitarianism is the general term for all ethical theories that hold that
actions should 3 be judged on the basis of their total costs and benefits for
society.

Bentham:
- Greatest pleasure for the greatest number
- Revolution:
o Everyone counts as one and no one counts as more than one
o Measuring and counting quantities of pleasure
o Application in criminal law
Mill: Pleasure is qualitative
Preference-utilism: Individual preferences

The way in which Bentham argues about the function and the severity of
punishment, is characteristic of the classical utilitarians. The aim of legislation
is to promote the well-being of citizens. Care must be taken that laws are not
used to other ends, such as to enforce divine or natural rights. Punishment is
suffering. Accordingly, the punishment should fit the crime: it may not cause
more suffering than that caused by the crime. Nor is punishment justified if no
one has suffered any damage caused by the crime.
Another significant feature of his theory is that punishment is not justified if
it is not effective in preventing the same offence from being committed

again. This also applies if other (cheaper) means are available for achieving
the same effect, such as corrective instruction. Most importantly, there must
always be a relation between the gravity of the crime and the severity of
punishment. The gravity of the crime is determined by the harm caused by the
crime.
Mill criticized Bentham. argues that it is not only intensity and duration that have
to be taken into account in measuring pleasure. The nature of the pleasure
itself is also relevant. Pleasure, according to Mill, is largely qualititative.

Preference utilitarianism says that people strive to achieve the greatest

satisfaction of their individual needs with as little as possible (the principle of
efficiency). Problems:
1. Not all needs are expressed in the system, such as love, health, etc..
2. Do all needs have to be satisfied?
Other types of utilitarianism:

Act-utilitarianism: Judges every action separately on basis on criterion of

common good.
Rule-utilitarianism: Well founded and accepted rules can be relied upon.

Advantages
Fits with reasoning of the market
Application in political context

Examples of codes of
business ethics
We offer our shareholders an optimal
return on investment.
We offer optimal employment.

Deontological Ethics:

Problems
Practical: Problem of measurement
Practical: Problem of context
Fundamental: Problem of justice
Fundamental: Problem of rights

Examples of decisions
We increase salaries because our
employees deserve this
To meet the expectations of our
shareholders we will improve our
internal governance

The morality of an act is determined by the nature of the act: obligation

to behave in accordance with certain principles.

Foundation of principles: from above, from inside, from others

Monism, pluralism, prima facie principles

According to deontology, all persons have certain obligations. These

obligations are non-negotiable: they cannot be bought off or disposed of.
Different kinds of inalienable rights form the basis of these obligations. Don't do
to others what you would not like done to yourself. This principle is
known as the golden rule. It does not consider consequences of the action.
The act-deontologist holds that every situation is so unique that it is
undesirable or even impossible to formulate general rules of action. One
must determine in each individual situation which action is morally obligated and
how it should be judged. Act-deontology is generally seen as a weak basis for
normative judgments.
The rule-deontological variant holds that we should not evaluate actions
individually, but rather that we should judge types of actions on the basis of
general principles or rules. The advantage of the rule-deontological approach is
that it is much more practical for the purposes of decision-making.
In monistic theories, all moral judgments can ultimately be related back to one
universal principle. Kant's theory is an example of a monistic theory.
In opposition to this, pluralistic theories employ various principles - not
necessarily corresponding with one another - together. In each concrete situation,
we have to look at the most powerful obligation. "Prima facie" duty must
always be honored unless they conflict with other more important
obligations in a given situation. "Generally binding". Actual duties would be
more important once that over-rule the prima facie.

Immanuel Kant:
- Obligations
- Appeal for reason (Sapere Aude)
- Respect for the autonomy of others
- Categorical imperative as litmus test
- Holds for everyone in every situation

The categorical imperative applies to everyone in all situations. A categorical

imperative often takes the form of Thou shalt . . . for example, Thou shalt not
tell a lie. Commandments like these are unconditional. Kant formulates this
general moral law in several different ways. The most formal variant reads: Act
only in accordance with that maxim through which you can at the same time will
that it become a universal law. Moral rules are based on pure reasoning and
consequences of actions. Humans, unlike animals, are moral beings, and they
know and acknowledge moral law. Similar to the ten commandments.

Examples from codes of

business ethics:

Examples of decisions:

We respect the law

We will not pay this bribe, because it

violates fair competition.

We will never violate agreements

We inform customers about the

product defects because we are
obliged to do this.

We stick to our promises

We dismiss this manager because he

has undermined our rules.

Advantages

Problems

Clarity

Black-White
Effects are not taken into account
Attitudes are not take into account
Cannot deal with alturism
(Selflessness: caring about the welfare
of others)

John Rawls: Justice theory

- Principles described in a contract that is defined behind a veil of
ignorance are just.
- The principles of justice read as follows:
1. Each person has an equal right to the most extensive basic
liberties compatible with similar liberties for all (the principle of
equal liberty).
2. Social and economic inequalities are arranged so that they are both
o offices and positions open to all, under conditions of fair
equality of opportunity (the principle of fair equality of
opportunity) and
o to the greatest benefit of the least advantaged persons
(the difference principle).
- Justice theory does not look at the whole result, only that the least
advantages benefits.

With the view to formulating the fundamental principles for regulating society, he
constructs a hypothetical contracting situation called the original position in
which contracting parties set down the basic principles behind a veil of
ignorance. Parties behind the veil of ignorance are bereft of knowledge
about their position in society and the position they will occupy after the
contract has been concluded. Due to the veil of ignorance, the contracting parties
are free of unbridled self-interest. It is still assumed that they will do their
best to secure their own interests but with the qualification that they will take

into consideration all the possible positions they might occupy once the veil is
lifted.
Finally, the difference principle takes priority over the efficiency principle
and the principle of wealth maximization. Rawls holds that in sufficiently wealthy
societies, citizens are capable of making effective use of political and civil
rights. In this context, a rational agent has no interest in exchanging
political and civil rights for an increase in wealth.

Movie:

Different forms of compensation in different countries

Refers to consequences, competition and added value, intentions, moral
authority
Dilemma: Salaries between employees and managers

Virtue Ethics:

Requirements regarding attitude/character of actor

Foundations of moral requirements:
- Well-being: requirements regarding the consequences of the act
- Respect: requirements regarding the nature of the act itself
- Character: requirements regarding the actor

Instead of judging what people do, it looks to who people are. The object of
analysis is the qualities of a person. People can be honest, just or reliable.
These are moral traits that are traditionally designated as moral virtues. Virtue =
Excellence.
Virtue ethics refers to every ethical theory that formulates norms on basis of
human characteristics or qualities. People can stand out in various ways, but
an object may only excel in one particular manner. A virtue is a state of
character, a necessary condition of being happy. Virtues are acquired by
using them, as is the case with all skills.
A virtue is a mean between two undesirable extremes. The two extreme vices,
which are diametrically opposed to each other and which, together, stand in the
way of virtue. Courage is the mean between fear and recklessness. What a moral
virtue precisely consists of in a concrete situation, cannot be described in general
terms. That depends on the nature of the person involved. Depending on the
indication towards a given extreme, one must strive in the direction of the
opposite extreme.

In the middle ages, just like classical thought, virtues were viewed as those
qualities that make a person fit for his destination. Christian theologises thought
that human kind's destination was divine in nature.
Hume: Every quality of the spirit which results in "love and pride" a virtue. Among
the vices, those qualities of the spirit that foster hatred and cause humiliation.
MacIntyre: Virtues are a type of "obtainable human qualities".

Tactics:
- Increasing pressure to violate principles by increasing utility
- Exchanging positions
- Exchanging issues
- If everyone would do this
- If others would know this
- Evoking emotions

Not what they do, who they are

Requirements regarding attitude/character
Development on good/bad characteristics based on qualities when the
person works at its best

Moral virtues are characteristis or qualities. These qualities:

1. are desirable, they are perceived as worthy of pursuing and therefore
apply a moral norm.
2. are expressed in action.
3. have a more or less stable, durable character.
4. are constantly present and - if needed they can and will be used
5. can be influenced by the subject. - parent raising children

Summary: Foundation of Ethical Requirements

Virtuous: requirements regarding the character of the actor

Respect/principled: requirements regarding the nature of the act itself

Prosperity: requirements regarding the consequences of the act

Just: requirements regarding the nature and consequences of the act

Integrity: requirements regarding the intention, nature and consequences

of the act

Application of Virtue Ethics to

Business

Three models to locate moral

responsibility:
1. Amoral model
2. Functional model
3. Autonomy model

Amoral model:

Adam Smith: People act in own selfinterest.

Milton Friedman: The only
responsibility of a business is to
make profit.

5 Principles of Ethical Leadership,

according to Northouse (p. 431)

Respect others

Serve others

Show justice

Manifests honesty

Builds community

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Bad Apple/Bad Barrel Theory

It is sometimes less difficult for a new police officer to become corrupt

than to remain honest. (Knapp Commission, 1973)

Causes of unethical actions are not simply the result of rotten apples in
the corporate barrel. (Hoffman, 1990)

Virtue of orgainzation on how the organization is structured and how it

stimulates its employees.

Corporate virtuousness (Important!):

1.
CLARITY
7.
SANCTIO
NABILITY

6.
DISCUSS
-ABILITY

2.
CONGRUENC
Y

Corporat
e
virtuousness

5.
TRANSPARENCY

3.FEASI
BILITY

4.
SUPPORT
-ABILITY

1. Clarity:

What: ethical standards are concrete, comprehensive, and

understandable for them.
Relevance: vagueness and ambiguity is potential antecedent to
unethical behavior Ethical issues that managers and employees
encounter in business environment differ from those confronted in
other social settings.
Theory: Rational-bureaucratic control theory: managers and
employees behave unethically because they lack clear understanding
of what is expected of them.

Evidence: (1) In laboratory experiment with students, Hegarty and Sims

(1979) found that clear ethical standards reduced frequency of kickbacks
being paid. (2) Schnatterly (2003) found among 57 companies that
clarification of policies and procedures reduced white-collar crime by 26%.
Absence: Ambiguity

2. Congruency of Ethical role-modeling

What: The extent to which managers show to employees the right

example regarding ethics.
Relevance: Managers are important role models within organizations.
Ethical standards are undermined when managers communicate
contradictory or inconsistent signals to subordinates. Behavior that
is consistent with ethical standards of organization reinforces message of
compliance with these standards.
Theory: Social learning theory: people learn what behavior is expected
by observing behavior of role models.
Evidence: Shows that behavioral integrity a pattern of worddeed
alignment of managers is negatively related to the tendency among
employees to engage in unethical behavior. Shows that employees
often imitate the ethical or unethical behavior of their managers
and supervisors.
Absence: Subversiveness

3. Feasibility of Ethics

What: managers and employees believe that they have sufficient time,
budgets, equipment, information, and authority at their disposal to fulfill
their ethical responsibilities.
Relevance: People under great time pressure are less inclined to
pay attention to ethical standards than those who have sufficient time
to carry out their responsibilities.
Theory: Strain theory: people resort to unethical behavior when they
are unable to achieve their goals through legitimate means.
Evidence: The more limited means managers and employees have at
their disposal to behave ethically, the higher frequency of unethical
behavior.
Absence: Scantiness

4. Supportability for Ethics

What: employees feel that they are stimulated by organization to be

committed to ethics
Relevance: A workplace characterized by demotivation, mistrust, and
dissatisfaction can be a breeding ground for unethical behavior

Theory: Social bond theory: people engage in unethical behavior

because they no longer feel attached or committed to a given
community.
Evidence: Found that when employees are encouraged to identify with
values of their organization, they are intrinsically motivated to comply
with ethical standards of organization.
Absence: Animosity

5. Visibility of (un)ethical Behavior

What: (un)ethical behavior and its consequences are observable to

those who can act upon it the perpetrators as well as their colleagues,
supervisor, manager, and subordinates.
Relevance: Managers and employees who are hardly aware of nature or
seriousness of consequences of their behavior, are deprived of opportunity
to account for, modify, or alter their behavior.
Theory: Deterrence theory: unethical behavior to be inhibited, potential
perpetrators must believe that they will be caught.
Evidence: Many studies emphasize importance of perceived visibility
because of its potential to expose unethical behavior and for acting as
deterrent owing to increased likelihood of getting caught.
Absence: Opaqueness

6. Discussability of ethics

What: managers and employees experience in their organization room to

discuss ethical dilemmas and alleged unethical behavior.

Relevance: In a closed culture, criticism is neither encouraged nor

accepted, ideas are not exchanged and readiness to discuss ethical issues
is limited or even absent. Bird and Waters (1989): the persistent
avoidance of moral talk reinforces an amoral organizational
culture.

Theory: Communication theory: through sharing and discussing

issues people learn from each other, create and better understand
their context, and are more motivated to honor agreements (Craig,
1999).

Evidence: From four large companies showed that the degree to which
managers and employees can openly talk about ethics is a good
predictor of the frequency of unethical behavior. Schnatterly (2003):
partial empirical support that increase in intensity of communication
reduces fraudulent behavior.

Absence: Muteness

7. Sanctionability

What: managers and employees are being punished for behaving

unethically and rewarded for behaving ethically.

Relevance: Reward and punishment are important behavioral stimuli,

managers and employees will steer clear of unethical behavior if
they expect to be punished and if severity of punishment
outweighs potential reward. When people are not punished for
unethical behavior or even rewarded for such behavior, the message is
that unethical behavior is acceptable or even desirable (Ball et al., 1994).

Theory: Reinforcement theory: consequences of a decision made in

past influence decision-making in future. Rewards will therefore lead
to repetition and punishment to avoidance (Luthans & Kreitner, 1985).

Evidence: the more ethical behavior is rewarded, the less people

behave unethically.

Absence: Laxity