AN INTRODUCTION TO BUSINESS ETHICS

1. AN INTRODUCTION TO BUSINESS ETHICS CHAPTER TWO: ETHICAL THEORY AND BUSINESS

2. This chapter seeks to • Introduce the basic categories and concepts of ethical theory • Identify the errors of ethical relativism and psychological egoism • Explain the ethical theory of utilitarianism • Explain how utilitarian ethics provides support for market economics and business policy • Clarify several major challenges to utilitarian ethics • Introduce the rights and duty-based ethics of deontology • Introduce the basic concepts of virtue ethics.

3. Discussion Case: Executive compensation • “Inside the Great CEO Pay Heist”, June 15, 2001 – Fortune magazine • CEO compensation has been increasing substantially since 1960; the factor difference between CEO compensation and the average pay of basic workers has increased to 500. • There is little correlation between CEO pay and CEO performance (Forbes, 1998)

4. Executive Compensation (cont.) • While CEO compensation has increased quickly over time, the U.S. minimum wage has not. • The corporate accounting scandals of 2001 and 2002 have not brought CEO compensation under control. • CEO compensation includes salary and stock options.

5. Executive Compensation (cont.) • Observers believe that stock options create a strong incentive to increase the company’s share value by whatever means possible – thus contributing to illegal and unethical behavior. • Distribution of wealth in the U.S. – 20 million households, accounting for 20% of the population, are classified as “poor”, earning less than $15,000 annually.

6. Executive Compensation (cont.) • 30% of the population are classified as “lower middle” class and earn between $15,000 and $30,000 annually. • Middle class families comprise 34% of the population and earn between $35,000 and $75,000 annually. • Approximately 85% of the U.S. population live in families earning less than $75,000 annually.

7. Executive Compensation (cont.) • Bill Gates’ net worth - $85 billion • Warren Buffett’s net worth - $31 billion • Median family net worth in the United States for 1999 - $55,000 • Are such inequalities of income just? • Sabo’s Income Equity Act would place a limit on tax deductions that a corporation can claim for executive compensation.

8. The Language of Ethics and Business • The language of ethics is part of business, therefore we need to understand the basics of philosophical ethics just as you understand basic Economics and Management. • Debates around CEO pay are debates about ethics: What do people deserve? What produces beneficial overall consequences? What is one’s duty? What is fair or unfair, just or unjust? What is wrong with greed?

9. The Language of Ethics and Business • Utilitarianism determines right and wrong in terms of consequences. • Deontological theories emphasize ethics as a matter of principle and offer ways to think about such ethical principles as dessert, duty, promises, property, rights, justice and fairness.

10. Ethical Relativism and Reasoning • In Ethics, who’s to say what is right and what is wrong? • In Ethics the “right” answer is not found in books; it can not be calculated like a math problem. • One cannot prove the truth of an ethical judgment in the way that one can offer a proof in geometry. • People differ about ethical judgments, and there seems to be no way to decide between competing conclusions.

11. Ethical Relativism and Reasoning • Ethical issues seem based on personal feelings and emotions. • Ethical relativism holds that ethical values and judgments are ultimately dependent upon, or relative to, one’s culture, society, or personal feelings. • Relativism denies that we can make rational or objective ethical judgments.

12. Ethical Relativism and Reasoning • If relativism is correct there is no reason to continue our study of ethics. All opinions are equally valid. • If relativism is correct, we can not evaluate the cultural or social values that underlie our ethical judgments. • Consider child labor…

13. Ethical Relativism and Reasoning • Some Western businesses have been criticized for using suppliers who rely on child laborers working under harsh conditions for long hours and very low wages. • Response: Such working conditions are accepted in the host country, therefore Western critics have no justification for imposing their own cultural values/norms on others.

14. Ethical Relativism and Reasoning • The relativist would argue that values such as equality, fairness, integrity, self-respect, and freedom are all a matter of personal or social opinion. • Let’s look at sexual harassment…

15. Ethical Relativism and Reasoning • Imagine a male manager telling a female job applicant that she would be hired IF she submitted to his sexual advances. • The relativist may argue that criticism of harassment is merely a matter of opinion. • While a woman may feel that harassment is wrong, the male manager may feel that it is right. • Each opinion or feeling is equally valid.

16. Ethical Relativism and Reasoning Is there any way to defend the claim that harassment is unethical?

17. Ethical Relativism and Reasoning We might argue that sexual harassment would subject a woman to unfair workplace discrimination. The inequality of power in this situation places a woman in the unacceptable position of having to choose between her livelihood and her own sexual integrity. Such a choice is coercive and threatening.

18. Ethical Relativism and Reasoning • We could explain the psychological good of self-respect. • We could point out the crucial importance that jobs play in our lives. • We could take a social perspective and consider the present status of women in the workplace. • We would employ rules of logic in our reasoning.

19. Ethical Relativism and Reasoning • The cost of relativism – what you need to give up to maintain it – is very high: every principle, every belief, every logical reason we proposed. • A conclusion that is reached through careful logical analysis and reasoning is better than one that is simply asserted.

20. Ethical Relativism and Reasoning • The traps of relativism • We should be careful not to hold ethics to too high a standard of proof. • Do not confuse the fact that there is wide disagreement about values with the conclusion that no agreement is possible. • Do not confuse values such as respect, tolerance, and impartiality with relativism.

21. Psychological Egoism Human beings can not act but out of self-interest: a central tenet of psychological egoism.

22. Psychological Egoism • Psychological egoism is a descriptive, factual claim about how people do act and how they are motivated. • Ethical egoism is a normative theory that prescribes how people should act

23. Psychological Egoism • Two forms of ethical egoism: • People should pursue their self-interest, properly understood. The role of ethics, then, is to help people understand their best interests. • We can still arrange social institutions in a way that would channel individual egoism to the social good, i.e. social contracts.

24. Psychological Egoism • All ethical theories, including both forms of ethical egoism, argue that our ethical responsibilities will sometimes require us to act in ways that constrain our own behavior in the interest of others.

25. Psychological Egoism • If ethical egoism is to pose a threat to Business ethics, then ethical egoism has to become more than merely a tendency of humans. • Defenders of ethical egoism must claim that humans always and only act out of self-interest. • What about parenting and friendship?

26. Psychological Egoism • Egoists respond that as parents and friends we are doing what we want to do – so we are still acting selfishly. • As parents and as friends to others, we derive satisfaction out of these acts and this suggests that selfishness underlies even the most beneficent acts.

27. Psychological Egoism • These responses fail because • People do things they don’t necessarily want to do. • The responses confuse the intention or purpose for acting with the feelings or reactions that follow from the act itself.

28. Utilitarian Ethics • Roots of utilitarian thinking can be found in Thomas Hobbes (1588-1679), David Hume (1711-1776), and Adam Smith (1723-1790). • Classic formulations of Utilitarianism are found in the writings of Jeremy Bentham (1748-1832) and John Stuart Mill (1806-1873).

29. Utilitarian Ethics • The theory tells us that we can determine the ethical significance of any action by looking to the consequences of that act. • Maximizing the overall good or The Greatest Good for the Greatest Number of People • Utilitarianism provided strong support for democratic institutions and policies.

30. Utilitarian Ethics • Government and social institutions exist for the well-being of all people, not to further the interest of the monarch – or the wealthy elite. • The economy exists to provide the highest standard of living for the greatest number of people, not to create wealth for a privileged few.

31. Utilitarian Ethics • Utilitarianism looks at the consequences of actions. • Utilitarianism is pragmatic: no one is ever right or wrong in every situation. It all depends on the consequences. • Utilitarians acknowledge two kinds of value: instrumental value and intrinsic value. • If we judge our acts in terms of their consequences, then we must have some independent standard for deciding between good and bad consequences…There must be some intrinsic value by which we can judge the consequences of our acts.

32. Utilitarian Ethics • Jeremy Bentham argued that only pleasure, or at least the absence of pain was intrinsically valuable. • Happiness must be understood in terms of pleasure and the absence of pain. • Unhappiness must be understood to be the presence of pain and the absence of pleasure. • Pleasure and pain are the two fundamental motivational factors of human nature.

33. Utilitarian Ethics Bentham reasoned: Only pleasure and the absence of pain is valued for its own sake. Only pleasure and the absence of pain are good; more pleasure (or less pain) is better and maximum pleasure (or minimum pain) is best. Therefore, maximizing pleasure is the fundamental, objective, and indisputable ethical principle.

34. Utilitarian Ethics Utilitarianism differs from egoism: Utilitarian acts are judged by their consequences for the general and overall good. The good includes the well-being of each individual affected by the action. Egoism focuses only on individual self-interests.

35. Utilitarian Ethics Mill defended a different understanding of happiness: There is a qualitative dimension to happiness: Happiness is not hedonism. Humans are capable of enjoying a variety of experiences that produce happiness – social and intellectual pleasures in addition to physical.

36. Utilitarian Ethics To decide which pleasures and what type of happiness is better we should consult with someone with the experience of both. Thus Mill acknowledges that not all opinions are equal. Some people are more competent to decide what is good than others.

37. Utilitarian Ethics Mill’s utilitarianism does not support an uncritical majority rule in which every opinion is treated equally. The best way to develop competent judges is through experience and education. Once people are educated and experienced, then majority-rule democracy is the best way to make decisions.

38. Utilitarian Ethics Implications for Business and Economics: Economic transactions occur when people seek their own happiness. If people make mistakes and buy products that fail to bring them satisfaction, they learn from those mistakes and no longer buy the product. Market forces eventually eliminate unsatisfactory products.

39. Utilitarian Ethics • Free market economics is a form of “preference utilitarianism” where the utilitarian goal is the maximum satisfaction of preferences. • Efficiency structures our economy. • We allow individuals the freedom to bargain for themselves. • Agreements occur only when both parties believe a transaction will improve their own position. • Competition works to improve the overall good.

40. Challenges to Utilitarianism • Problems from within • Finding ways to measure happiness • Differing versions of the good and implications for human freedom • Problem from outside • The principle of consequentialism means that the ends justify the means, but there are certain rules we must follow no matter what the consequences.

41. Utilitarianism and Business Policy • Utilitarianism is a social philosophy. • There are disputes between two versions of utilitarian policy: expert and market. • The utilitarian emphasis on measuring, comparing and quantifying re-enforces the view that policy makers should be neutral.

42. Deontological Ethics • Sometimes the correct path is determined not by consequences but by certain duties. • Duties = Obligations, Commitments, and Responsibilities • Deontology denies the utilitarian belief that the ends do justify the means. There are just some things we should do, or should not do, regardless of the consequences.

43. Deontological Ethics • Deontological Ethics focuses on the dignity of individuals. Individuals have rights that should not be sacrificed simply to produce a net increase in the collective good. • Immanuel Kant and the Categorical Imperative: Our primary duty is to act only in those ways in which the maxim of our acts could be made a universal law. • Maxim = Intention: What am I doing?

44. Deontological Ethics • Kant: Ethics requires us to treat all people as ends, not as means to ends. Humans are subjects that have their own purposes and ends, and should not be treated merely as the means to the ends of others. Our ultimate ethical duty is to treat people with respect.

45. Deontological Ethics • If our duty is to treat every person with respect, then we can argue that each person has a right to be treated in a respectful fashion. • My rights establish your duties and my duties correspond to the rights of others. • Duties establish the ethical limits of our behavior. Duties are what we owe to other people. • Others have a claim upon our behavior.

46. Deontological Ethics How would Immanual Kant respond to child labor?

47. Deontological Ethics • Rights are protecting interests. • Wants and interests are different from each other. Wants are desires. Interests work for a person’s benefit and are objectively connected to what is good for that person. • People don’t always want what is good for them.

48. Deontological Ethics • What rights do we have? • What human characteristic justifies the assumption that humans possess a special dignity? • Why would it be wrong to treat people as mere means or objects, rather than as ends or subjects?

49. Deontological Ethics • Humans make free choices. • Humans have autonomy. • Humans originate action for their own ends. • To treat someone as a means to an end is to negate their autonomy – their ability to make free choices.

50. Virtue Ethics • Virtue ethics is the tradition within philosophical ethics that seeks a full and detailed description of those character traits, or virtues, that would constitute a good and full human life. • Rather than describing people as good or bad, Virtue ethics encourages a fuller description.