BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY

(MGMT 4231)
Credit Hours:2 (3 ECTS)
Total Contact Hours:81

Program: BA Degree in Management

PPT Prepared BY: Gemechu S. (MBA)
UNIT 1: BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Introduction: The Nature of Ethics
Core Idea: This introduction defines what business ethics is by clearly distinguishing it from
what it is not.
 It establishes ethics as a critical, rational examination of existing rules and norms.
1. What Ethics Is NOT:
The text clarifies that ethics is often confused with several other concepts.
It is separate from:
A. Social Conventions & Morals
Common Misconception: Ethics is often seen as simply following social rules, customs, or
the prevailing moral judgments of a society.
The Reality: Ethics does not blindly accept these conventions.
Instead, it critically examines and tests them against more fundamental, universal
principles.
Implication for Business: Therefore, business ethics must study existing business codes and
practices to see if they are truly ethical or merely a form of "commercial etiquette" or a
narrow agreement among a specific group.
B. The Law
Relationship: The law often incorporates a society's ethical judgments
(e.g., laws against theft).
The Difference: Law and ethics are not the same (not coextensive).
Law sets a minimum standard required for public order.
 It asks, "What is the bare minimum we must do to avoid penalty?"
Ethics seeks a higher standard for the comprehensive good of both
the individual and society.
 It asks, "What is the right thing to do, even if it's not legally
required?"
C. Religious Morality/ Moral theology/
Common Misconception: Ethics is the same as religious morality.
The Reality: They are related but distinct fields.
 Religious Morality is often based on divine revelation (e.g., scriptures,
teachings) in addition to human experience.
 Ethics relies solely on human reason and rational argument.
The Connection: There should be no conflict.
 Ethics acknowledges that it may be incomplete and can guide a religious person to
their faith to complete their understanding of morality.
D. Personal Feelings
Common Misconception: Ethical decisions are based on vague feelings of approval
or disapproval.
The Reality: Ethics is not based on emotions.
It is a disciplined process grounded in the careful examination of facts and reality.
2. What Ethics IS:
Based on what it is not, we can define ethics as:
A critical and rational discipline that questions, tests, and evaluates
existing norms, customs, and laws.
A search for ultimate, well-founded principles of right and wrong
conduct.
A study concerned with the complete good of individuals and society,
going beyond minimum requirements.
A process that relies on human reason and a logical examination of the
world around us.
1.2 What is Ethics and Business Ethics?
1.2.1. Definitions
A. What is Ethics?
 Core Definition: Ethics is the science and art of judging human goals
(ends) and the relationship of the means used to achieve those ends.
As a science, it systematically studies values ("good," "bad,"
"ought," "right," "wrong") and the principles for applying them.
As an art, it involves techniques for decision-making, judgment,
and tools for social control and personal development.
 Etymological definition: The word originates from:
Latin: "Ethica"
Greek: "Ethikos," from ethos, meaning character or manners.
 Key Definitions from Sources:
Encyclopedia Britannica: The systematic study of the nature of
value concepts and the general principles that justify their
application.
Moral Philosophy: A branch of philosophy dealing with human
conduct concerning the rightness/wrongness of actions and the
goodness/badness of their motives and ends.
Webster’s Dictionary: A discipline dealing with good and bad,
moral duty, and obligation; a set of moral principles or a system of
moral values governing an individual or group.
B. What is Business Ethics?
 Core Definition: The application of general ethical principles specifically
to business activities.
 It is the standard by which the propriety of business conduct is judged.
 Primary Concern: The relationship between business goals/techniques
(means) and specifically human ends (goals).
 Focus Areas: It studies the impact of business acts on:
 The individual
 The firm
 The business community
 Society as a whole
 Special Obligation: It involves studying the unique moral duties a person
accepts upon becoming part of the business world.
1.2.2 Human Goals
A. The Complexity of Human Nature
Humans are complex beings in a complex world.
Simple answers about human purpose are frustrating and inaccurate.
A person is not made solely for power, pleasure, or money, nor are they purely a
social being.
They have individual worth and dignity.
All aspects of a person are relevant to ethics.
B. The Specifically Human Goal
The ultimate human goal is the full perfection and development of the human
being as a person.
The Individual is the End: The person is not a means to the perfection of
society or the state.
Instead, societies and institutions are means to the perfection of the individual.
 Subordination is Conditional: While the person is an end, some of their
possessions, talents, and activities (e.g., their work) can be subordinated
to a larger good (e.g., a company) provided that their personal dignity
and essential well-being are respected and protected.
 The Root of Unethical Behavior: Much unethical activity stems from
a lack of respect for one's own personal dignity.
 If a person equates their worth solely with their earning power, they will
likely view others the same way, leading to a neglect of others' rights.
 Why Study Ethics? Understanding what it means to be truly human
shows why ethics is necessary.
 The study and practice of ethics contribute to personal growth and help
create a society fit for humans.
 Instinct and good will are not enough; a deliberate study of goals and
means is required.
1.2.3. Evil and Consequences
A. The Problem of Unintended Harm
 Defining Evil: Anything that hurts an individual or the institutions
necessary for their growth can be considered an evil.
 Pervasiveness of Harm: Nearly every action has some harmful
impact.
 If we were held responsible for all foreseen and unforeseen evil
consequences, ethical action would feel impossible.
• Example: An advertiser knows their ad might deceive a few foolish
people.
• Example: An employer firing an incompetent employee knows the
employee's family will suffer.
B. The Principle of Limited Responsibility

 Core Principle: A person is responsible only for what they freely will (either as an end or
a means).

 They are not automatically responsible for all unintended side effects of their actions.
 Proportionality: One may ethically permit or risk foreseen but unwilled evil side effects if
and only if:
 The action itself (the means) is good.
 The intended end is good.
 There is a "proportionate reason" for allowing the side effect (the good achieved must
outweigh the unintended evil risked).
 Crucial Distinction: This principle does not mean "the end justifies the means." An evil
act (a bad means) can never be justified by a good end.
 Example: Deliberately killing an innocent person to save thousands is unethical because
the means (killing) is evil and willed.
C. Key Terminology: Permitting vs. Risking vs. Willing
 Will (as a means or end): You directly intend for it to happen. You are fully
responsible.
 Permit: You foresee an evil side effect as certain, but you do not will it. You
may allow it for a proportionate reason.
 Risk: You foresee an evil side effect as probable, but you do not will it. You
may chance it for a proportionate reason.
D. The "Miracle Test"
 To determine if an evil is a means (willed) or a side effect (unwilled),
ask: "Could I achieve my goal even if a miracle prevented the evil side
effect?"
 If YES, the evil is a side effect (not willed). The principle of
proportionality may apply.
 If NO, the evil is a means to your end (willed). The principle does not
apply, and the act is likely unethical.
Business Example:
 An honest advertiser permits a few people to be deceived (a
side effect) for the proportionate reason of providing a service
to thousands.
 They do not will the deception.
If they willed to deceive people as a means to profit, it would
be unethical.
1.3. Ethical Dimensions and Principles:
1.3.1. General Ethical Dimensions
 Business Ethics Defined: The process of evaluating decisions (before or after they
are made) against the ethical standards of a society's culture.
 The "Toolbox" Analogy: To evaluate decisions, we need a "toolbox" of different
ethical standards or yardsticks because no single standard fits every situation.
 Dimensions of a Decision: Business decisions are multi-faceted. Before making a
choice, managers consider various dimensions:
 Economic (cost, profit)
 Political (government regulations)
 Technological (feasibility, innovation)
 Social (impact on community)
 Ethical (right vs. wrong)
 Not all dimensions are relevant to every decision.
Proactive vs. Reactive Evaluation:
 It is best to evaluate the ethical dimension before a decision
is made.
 It is very difficult to justify a decision ethically after the fact,
though others will certainly judge it afterwards.
The Standard is Cultural, Not Governmental:
 Ethical standards are based on a society's culture, not
necessarily its government (e.g., Nazi Germany's government
standards did not reflect its culture's moral standards).
[Link]. Types of Ethical Theories
 Ethical theories are traditionally divided into two groups: Teleological
(consequence-based) and Deontological (duty-based).
I. Teleological Theories
 Core Idea: The ethical value of an action is determined solely by its
consequences. The end justifies the means
 Etymology: From the Greek telos, meaning "end" or "goal."
 Fundamental Concept: "Goodness" is primary. "Rightness" and "duty" are
defined in terms of what produces good.
 Key Example: Utilitarianism
 Principle: Our duty is to perform the action that results in the greatest
possible balance of good over evil (the "greatest good for the greatest
number").
 Defining Good: Classically, good = pleasure and evil = pain. More
broadly, good = human well-being, benefit; evil = harm.
 Subjectivity: Accepts that individuals may differ on what constitutes a
benefit or harm.
 Strengths of Teleological Theories:
 Matches Common Sense: Much of our everyday reasoning is
consequentialist (e.g., we consider the harm or benefit of an
action).
 Explains Why Actions Are Wrong: It can explain why lying or
stealing is wrong (they create false beliefs, erode trust, and reduce
overall welfare).
 Explains Exceptions: It can also explain when lying might be right
(e.g., lying to a murderer to save a life, where the good outcome
outweighs the bad).
 Precise & Objective: Offers a method for decision-making similar
to a cost-benefit analysis, calculating the consequences of each
option. This is attractive for public policy and economics.
 Weaknesses of Teleological Theories:
 Ignores Duties & Promises: It can justify breaking a promise if it
leads to slightly better, which clashes with our sense of duty (e.g., it
would be wrong to give away food you promised to store for
someone, even to feed the hungry, unless a stronger obligation like
saving a life overrides it).
 Measurement Problems: It can be difficult to measure and
compare different kinds of "good" and "bad" consequences for
different people.
II. Deontological Theories
Core Idea: Certain actions are inherently right or wrong by their very
nature, regardless of their consequences. The means matter, not just the
ends.
Etymology: From the Greek deon, meaning "duty."
Fundamental Concept: Obligation or duty is primary. "Goodness" is
defined in terms of doing one's duty.
Examples: Arguments based on the Golden Rule or basic human
dignity and respect.
KEY Example: W.D. Ross's Theory of Prima Facie Duties
Ross proposed a set of seven fundamental duties that we must
honor, unless they conflict with a stronger duty:
 Fidelity: Keep promises and tell the truth.
 Reparation: Compensate for injuries you wrongfully caused.
 Gratitude: Return favors.
 Justice: Distribute goods based on merit or desert.
 Beneficence: Help improve the condition of others.
 Self-Improvement: Improve your own virtue and intelligence.
 Non-maleficence: Avoid injuring others.
 Strengths of Deontological Theories:
 Explains Duty-Based Actions: Makes sense of cases where
consequences seem irrelevant (e.g., a manufacturer has a duty to honor a
warranty even if it's costly; an employee has a duty of loyalty to an
employer).
 Accounts for Motives: Evaluates actions based on the motives behind
them (e.g., giving to charity out of genuine concern is morally better than
giving to show off, even if the financial consequence is identical).
 Weaknesses of Deontological Theories:
 No Guidance on Conflict: Provides no clear way to prioritize duties when they
conflict (e.g., Should you keep a promise or tell the truth if it will harm someone?).
 No Justification for Rules: Offers no ultimate reason for why we should accept these
specific duties; they may be ethnocentric (specific to one culture) rather than
universal.
[Link]. Consequentialist Principles
 These principles (a subset of teleological theories) judge a decision
based entirely on its outcomes or consequences. A key question
is: Consequences for whom?
I. Egoism
 Core Idea: A decision is ethical if it provides the most favorable
consequences for the "party of interest" (oneself, one's firm, one's
community), regardless of the impact on others.
 Scope of Interest: The "self" can be an individual, a company, or a
community.
 Short-Run vs. Long-Run (Enlightened Self-Interest):
 Short-Run: Focuses on immediate benefits (e.g., cutting costs by unfair
wages).
 Long-Run (Enlightened): Considers indirect consequences and
stakeholder reactions. The same unfair wage decision would be rejected
because the long-term costs (low morale, high turnover) would outweigh
the short-term benefits.
 Adam Smith's "Invisible Hand": Smith argued that individuals
pursuing their own long-run self-interest are led by an "invisible hand"
to promote the good of society, often more effectively than if they
directly intended to.
 Smith's Crucial Conditions: Smith stated that for this to work, a society
must have:
 A regular administration of justice.
 Security of property.
 Enforcement of contracts.
 Enforcement of debt payments.
 Conflict with Societal Standards: A decision based on egoism might be
good for the decision-maker but violate the broader moral standards of
society's culture and thus be judged unethical by others.
II. Utilitarianism
Core Idea: A decision is ethical if it provides the greatest net utility (good)
for the greatest number of people. It requires a full cost-benefit analysis for
all stakeholders.
Two Types:
 Act Utilitarianism: Judges each individual act based on its specific
consequences. A lie could be ethical if its benefits outweigh its costs in
that one instance. (Similar to short-run perspective).
 Rule Utilitarianism: Asks what general rules would lead to the greatest
good if everyone followed them. The rule "do not lie" is adopted because
widespread lying erodes trust and reduces overall utility. We then follow
the rule. (Similar to long-run perspective).
Rule Conflicts: A weakness of rule utilitarianism is that rules can conflict,
requiring a priority system to resolve them.
Link to Egoism: Egoism that considers the self-interest of all
stakeholders equates to utilitarianism.
 The Principle of Utility (Formal Utilitarianism):
"An action is right if and only if it produces the greatest balance of
pleasure over pain for everyone.“ This formal definition involves four
key theses:

1. Consequentialism: Rightness is determined only by consequences.

2. Hedonism: Goodness is defined as pleasure and the absence of pain.
3. Maximalism: We must seek the greatest possible net good (pleasure
minus pain).
4. Universalism: We must consider the consequences
for everyone equally—no one's pleasure or pain counts more or less than
anyone else’s. It does not require making everyone happy, only that
everyone's interests are counted equally in the calculation.
[Link]. Non-consequentiality (Deontological) Principles

 Core Concept: Ethical decisions are based on sets of rules, not on the
outcomes or consequences of a specific action.
 The rightness or wrongness of an act is inherent in the act itself, according to
these rules.
 Contrast with Utilitarianism: Unlike rule utilitarianism (where rules are
based on maximizing good consequences), deontological rules are based on
reason.
 A Counter-Argument: It can be argued that the reasoning process used to
derive these rules must have considered the results of applying them, so
consequences are ultimately foundational.
 Two Main Classifications: Non-consequentialist principles are generally
divided into Rights-based and Justice-based principles.
I. Rights Principles
A. Basic Concept of Rights
Definition: Rights are entitlements you have simply because you are a
human being (ethical or human rights).
Correlative Duties: If you have a right, others have a duty not to
violate it. (e.g., Your right to free speech means I have a duty not to
silence you).
Disagreement: While the concept of human rights is widely accepted,
there is debate over the exact list of what constitutes these rights.
 Philosophical Foundation: Immanuel Kant (1724-1804)
 Kant's Categorical Imperative provides a foundation for moral rights.
 First Formulation (Universal Law): "Act only according to that maxim by
which you can at the same time will that it should become a universal law."
 An action is moral only if you would be willing for everyone to act the same
way in a similar situation.
 It provides universal and reversible criteria.
 Second Formulation (Means/Ends): "Act so that you treat humanity, whether in
your own person or in that of another, always as an end and never as a means
only."
 People must never be used only as a tool; they must be respected as
autonomous beings with their own goals.
 Using people requires also promoting their ability to achieve their ends.
 Nature of the Imperative: It is an unconditional, absolute moral law that must
be obeyed, independent of circumstances, results, or personal benefit.
 Moral acts are performed out of duty.
 Composition of Rights
 Though not absolute, useful lists are found in the U.S. Bill of Rights and
the UN Universal Declaration of Human Rights. Key rights include:
 Life and safety
 Truthfulness
 Privacy
 Freedom of conscience
 Free speech
 Private property
 These create prima facie duties (binding unless they conflict with a
stronger duty), with life and safety often being the strongest.
 Example Violation (Gaston and Copper): By mislabeling hazardous
waste as fertilizer, the firm violated the right to life/safety and the right to
truthfulness.
The Concept of a Right
 Rights are entitlements that allow us to act or claim
treatment from others, not as beggars asking for generosity,
but as creditors demanding what is owed.
 Claiming a right is often the beginning of ethical debate due
to:
 Conceptual confusion and different kinds of rights.
 Frequent conflicts between rights (e.g., employee mobility
vs. employer trade secrets).
 Tendency to stretch the concept, diluting its meaning (e.g.,
calling political goals "rights").
 Disagreement over the existence of certain rights.
 Kinds of Rights
[Link] vs. Moral Rights:
 Legal: Recognized and enforced by a legal system (e.g., constitutional rights).
 Moral: Exist independently of law; they are rights we ought to have, based on
ethical principles.
[Link] vs. General Rights:
 Specific: Involve identifiable individuals (e.g., rights from a contract).
 General: Claims against everyone (e.g., the right to free speech obligates the
whole community).
[Link] vs. Positive Rights:
 Negative: Obligate others to refrain from interfering (e.g., right to property
obligates others not to steal).
 Positive: Obligate others to provide a good or service (e.g., right to health care
obligates society to provide resources).
 Natural/Human Rights. Rights that belong to all persons purely by
being human. Key features:
 Universality: Possessed by all persons, regardless of race, sex,
nationality, etc.
 Unconditionality: Do not depend on any particular societal practices or
institutions. They are inalienable (cannot be relinquished or taken away).
 Historical Foundation (John Locke): Locke argued that rights
(especially property rights) exist even in a "state of nature." Governments
are formed primarily to protect these pre-existing rights. His theory was
crucial for the development of modern capitalism.
 Conflict with Utilitarianism: Rights protect individuals against claims
of the general welfare. A utilitarian would only support a right (e.g., free
speech) if respecting it produces good consequences overall, potentially
justifying censorship of "undesirable" speech.
II. Justice Principles
Core Concept: Justice is associated with rights, fairness, and
equality.
•A just act respects rights and treats people fairly.
•Divided into three types:
1. Distributive Justice
Concerns the fair distribution of society's benefits (income,
jobs, education) and burdens (taxes, work, obligations).
 Allocation Methods:
I. Equal shares to each person
II. Based on need
III. Based on effort
IV. Based on merit
V. Based on social contribution
 Formal Principle of Justice: Equals must be treated equally, and
unequal's must be treated unequally in proportion to relevant
differences.
 Example Violation (Insider Trading): Dennis Levine violated this
principle by using information (a relevant difference) not available to
his equals (other investors).
John Rawls's Theory of Justice
Rawls proposed a qualified egalitarian theory using the thought
experiment of the "original position" behind a "veil of ignorance."
Without knowing our own future traits (race, intelligence, wealth, etc.),
we would choose principles that are fair to all because we might end up
as the least advantaged.
Two Principles we would agree upon:
[Link] Principle: Each person is to have an equal right to the most
extensive basic liberty compatible with a similar liberty for others.
[Link] Principle: Social and economic inequalities are to be
arranged so that they are both
(a) to the greatest benefit of the least advantaged and
(b) attached to offices and positions open to all under conditions of fair
equality of opportunity.
John Rawls's Theory of Justice Summary
 Rawls proposed a theory to determine fair principles using the "veil of
ignorance."
 The Original Position: Imagine creating rules for society without
knowing your own future race, sex, wealth, or intelligence. This
ensures impartiality.
 Principles Agreed Upon Behind the Veil:
 Maximum Equal Basic Liberty: Each person has the most
extensive basic liberties compatible with similar liberties for others.
 Difference Principle: Social and economic inequalities are only
justified if they benefit the least advantaged members of society.
Robert Nozick's Entitlement Theory
 This is a historical theory of justice focused on how possessions are
acquired, not the final distribution.
 A distribution is just if everyone is entitled to their holdings based on:
 Justice in Acquisition: Justly acquiring unowned property.
 Justice in Transfer: Justly acquiring property from someone else
(e.g., through voluntary exchange or gift).
 If the process was fair, the resulting distribution is just, even if it is
unequal.
2. Retributive Justice: Concerned with the just punishment for
wrongdoing.
Conditions for Moral Responsibility (Aristotle): A person is
responsible unless:
They were forced to act.
They were ignorant of the act's negative consequences (if they could
not have been expected to know).
Principles of Just Punishment:
Certainty: Guaranteed through due process; the individual must be
proven guilty.
Proportionality: The severity of the punishment must fit the magnitude
of the crime.
Consistency: Punishment must be applied consistently across similar
cases and wrongdoers.
3. Compensatory Justice: Concerned with compensating the party
injured by a wrongful act.
The goal is to return the injured party to the condition they were in prior
to the injury.
 The principle Compensation should be equal to the loss suffered, and
no more, no less.
This includes medical treatment, services, and goods needed for
recovery.
1.3.2. Proportionality Principle
 This principle is used to evaluate actions that have both good and evil
effects.
 It judges whether the good effect is proportionate to (justifies) permitting the
evil effect.
 The judgment is based on five factors:

1. The Type of Goodness or Evil Involved:

 A necessary good outweighs a merely useful good.
 What is essential for existence takes precedence (e.g., meeting payroll vs.
funding research).
2. The Urgency of the Situation:
 A more immediate necessity takes precedence over a less urgent one, even
if both are important.
3. The Certainty or Probability of the Effects:
 A certain good can outweigh a serious harm that is only slightly probable
(e.g., a calculated business risk with a high probability of growth justifies
the risk of financial loss).
4. The Intensity of One's Influence on the Effects:
 If one's action is not the major cause of the evil side effect, a lesser good
may be sufficient to justify it (e.g., an employer firing an absentee
employee is not the primary cause of the resulting family hardship).
5. The Availability of Alternate Means:
 If the good effect can be achieved by a method that involves fewer or no
evil side effects, it is unethical not to choose that alternative (e.g., using
lesser disciplinary action instead of firing if it works).
All factors must be considered together to make a final judgment on
proportionality.
[Link]. Types of Evil
 The principle of proportionality applies only when what is willed is good,
but it involves permitting or risking an evil side effect for a proportionate
reason.
 Major (Moral) Evil: Involves the destruction of goods necessary for an
individual/society or the violation of rights.
 It is always unethical to will a major evil, either as a means or an
end.
 Minor (Physical) Evil: Involves harm to a purely physical good or to
something that is useful but not necessary.
 A minor evil can be permitted, risked, or even willed as a means if
there is a proportionate reason. In such a case, it is not a full-fledged
evil as it ultimately promotes human dignity.
Challenges in Business:
It is often difficult to objectively distinguish between major
and minor evils.
There is a constant danger of self-deception, where a
company rationalizes harm to others as "minor" and benefits to
itself as "necessary."
The cumulative, indirect effects of actions (e.g., on
community spirit or company morale) must also be
conscientiously considered
[Link]. Non-Ethical Determinants of Action
 Core Concept: While influential, external factors like law, custom, and
public opinion are not sufficient to determine the ethicality of an
action.
 They often reflect minimal societal standards rather than a complete
ethical analysis.
 Law
 Value: Enshrines the careful thinking of society's representatives and
generally forbids what sound ethics also forbids.
 Limitation: Can be outdated ("lags behind") and often permits
actions that are unethical. Compliance with the law is necessary
but not sufficient for ethical behavior.
 Trade Custom:
 Value: Often embodies sound historical practices.
 Limitation: May have developed to protect the interests of
only one group and can sometimes sanction or command
act harmful to other groups. Must be examined critically.
 Public Opinion & Professional Critics:
 Value: Can indicate that an ethical businessman has
overlooked a relevant factor.
 Limitation: Often based on a lack of awareness of the real
issues. Critics, even if ill-informed, may still offer valuable
perspectives that must be evaluated.
[Link]. Obligations
Positive vs. Negative Obligations
 Negative Obligations: Duties to avoid unethical acts (as defined by
the analysis of will, means, ends, and side effects). These are generally
absolute.
 Positive Obligations: Duties to bring something good into existence
(e.g., for human perfection, the dignity of others, or societal
operations).
 These are not absolute; they can be postponed for a proportionate
reason (e.g., a manager postponing a dividend to pay urgent worker
wages).
 This distinction makes positive obligations more flexible than
negative ones.
The Nature of Rights
 A right is a claim on other people that arises from an individual's
relationship to a good necessary or useful for their perfection.
 Quasi-Absolute Rights: Claims to things necessary to be human (e.g.,
not being forced to work inhumane hours). Violating these denies
human dignity.
 Relative Rights: Claims not to be unreasonably impeded in the
pursuit of useful goods (e.g., an employer's right to set a work start
time reasonably limits an employee's pursuit of extra sleep).

.
 Source of Rights:
 Inborn: Rights possessed simply by being human (e.g., right to
life).
 Acquired (Title): Rights created by an act like a purchase, gift, or
contract (e.g., right to a specific job or plot of land).
 Limits on Rights: The exercise of any right is limited by:
[Link] rights of others.
[Link] obligation to respect others' human dignity.
[Link] obligation to use things intelligently and respect oneself.
Example: The right to own property does not include the right to burn
it down if it endangers neighbors.
 Cooperation in Evil
 Occurs when one participates in or enables the unethical act of another.

 Formal Cooperation: Willing the evil as a means or an end. This is unethical unless
there is a proportionate reason for willing a minor evil.
 Material Cooperation: Not willing the evil, but one's actions help it happen. This may be
permitted if there is a proportionate reason (e.g., a secretary typing fraudulent reports to
keep her job, not because she wills the deception).
 Location of Responsibility
 Responsibility can be shared even if one is not the primary cause of an evil.

 "Buck-passing" is ignoble; we are responsible for our share of the evil we risk or permit
without a proportionate reason.
 If preventing evil comes at a disproportionate price, the obligation may be temporarily
excused but is often transformed into a duty to work toward correcting the
underlying situation.
 The "Gray Area"
 Acknowledges that not all ethical problems have immediately clear
solutions due to imperfect knowledge or complex tools.
 This is not an excuse for unethical conduct but a challenge to our
intelligence.
 We have a positive obligation to study ethics to narrow these gray
areas and bring them "into the light of reason." Progress may be slow,
but difficulty does not provide a permanent excuse.
[Link]. Practical Applications of Obligations:

A 3-Stage Analytical Procedure

 This procedure provides a systematic way to analyze the ethicality of a

proposed act.

Case Study: The Universal Company

A company in financial distress wants to market a new sleeping pill.
Research shows it causes birth defects. Management plans to use only
a small warning label, fearing that stronger controls would force a
closure (costing 500 jobs) or a merger.
Stage 1: Analyze What is Willed
A. What is willed as a means and as an end?
 Means: Marketing the drug with a small label.
 End: Keeping the company solvent and independent.
B. What objective evil or good is in the means/end?
 Everything willed is good (saving a company, jobs). No major evil is willed.
Decision 1: Since no major evil is willed, proceed to Stage 2.
Stage 2: Analyze Unintended Side Effects
A. What are the unintended side effects?
 Good: Saving 500 jobs.
 Evil: Risk of birth defects in children of pregnant users.
B. Objective good/evil of each?
 Saving jobs is a major good.
 Causing birth defects is a major evil.
C. Certitude/Probability?
 Good effect's probability is unknown (will the drug even save the company?).
 Evil effect is certain for some due to human carelessness with labels.
D. Urgency?
 Company's financial need is urgent.
 The need to protect mothers and children from certain, serious harm is equally
or more urgent.
E. Intensity of Influence?
 The company is a major influence (it markets the drug directly) but not the
sole cause (user carelessness is a factor).
Decision 2: Is there a proportionate reason to risk this major evil?
 Conclusion: With only a small label, NO. The company has not done enough
to reduce the risk. The lack of adequate controls and the certainty of harm mean
the risk is disproportionate.
 Hypothetical: If the company used very prominent warnings and sold
only through warned physicians (making user carelessness the primary
cause), it might have a proportionate reason. Proceed to Stage 3.
Stage 3: Analyze Alternate Means
 A. Is there an equally good method with less evil?
 Yes: Merging with the larger company. This alternative achieves the main
good (saving the company and jobs) with significantly less risk of the
major evil.
 Decision 3:
 Because a less harmful alternative exists, the company must pursue it.
The desire to maintain independent control carries little weight against
the risk of causing major harm.
Chapter 2: Ethics and Business Firms
Introduction
The fundamental purpose of a firm is to serve society.
A manager's authority is derived from their obligation to manage the firm and
is limited by this purpose (the good of the firm). A firm is not a manager's
"personal toy." Or It is not a right to use the firm for personal gain.
Managers can limit freedoms only for reasonable causes related to the firm's
good.
Common ethical issues in business fall into five major categories: Bribery,
Coercion, Deception, Theft, and Unfair Discrimination.
Ethical values are both prescriptive (what we should do) and proscriptive
(what we should not do). They form a chain: Values → Beliefs → Attitudes →
Behavior.
Business ethics deals with the additional obligations a person incurs
specifically from their role as a businessman, on top of their basic human
duties.
2.2 Business Firms Related Ethics
2.2.1 The Purpose of the Firm
 Dual Purpose:

[Link] Goal: To provide goods and services to consumers

efficiently, satisfying human needs and desires.

[Link] Goals: To provide income, power, prestige, and

creative satisfaction to those who work for or with the firm.
 Manager's Core Task: To run the firm as efficiently as possible
within ethical limits, reconciling and harmonizing these often-
intertwined goals.
2.2.2 Ethics, Economics, and Law
 Businesses operate within a framework of economics and law, but these are
not the only relevant considerations; ethics is essential.
 Ethics vs. Economics:
 Economic theory posits that firms and consumers act to maximize
utility (satisfaction of preferences).
 Ethics introduces other reasons for choice, such as rights, justice, and
non-economic values, which may seem to conflict with pure economic
reasoning.
 The common view is that government should ensure free market
conditions, allowing managers to decide on economic grounds. However,
government often fails to do this completely, creating an obligation for
business self-regulation.
 Role of Profit:

[Link] is a measure of performance, not the primary goal of the

firm itself.

[Link] can result from ethical practice or from unethical practices

like fraud, coercion, or exploitation. Therefore, profit alone is not a
measure of ethical success.
 Importance of Efficiency: Economic efficiency is crucial not just for
the firm's survival but also for the livelihood of employees, owners,
and managers. It is a necessity due to the scarcity of resources.
 Ethics vs. Law:
 Two Schools of Thought:
[Link] Realms: Law governs public life (minimal, enforceable standards); ethics is
a private, optional matter of personal opinion.

[Link] Embodies Ethics: Ethical rules for business have been codified into precise,
enforceable laws.
 Why Managers Must Consider Both:
 Law is inappropriate for regulating certain business activities.

 Law is slow to develop in new areas.

 Law uses moral concepts that require ethical interpretation.

 Law is often unsettled and requires court decisions.

 An exclusive reliance on law is inefficient and invites unnecessary legislation and

litigation.
2.2.3 Rights and Obligation of Management
 A manager's authority arises from their function to manage the firm, not merely from
ownership.
 Limits on Authority: Management authority is limited by the rights of:
 Employees (via the work contract, not absolute control over their dignity and energy).

 Other stakeholders: stockholders, suppliers, dealers, and the community.

 Gray Areas: The boundaries of these rights are often unclear ("under the smoke and
haze"). A manager must constantly ask if an act is a reasonable interference with
another's rights.
 Avoiding Unilateral Decisions: Experience shows that unilateral decisions by power
holders threaten rights and freedom. Sound management requires:
 Giving attention to the reasoned opinions of those affected.

 Developing systems with due process and checks and balances to remove suspicion
of arbitrary action.
2.2.4 Ethics and Management
 Specialized Knowledge Needed: Being an ethical person is not
enough; managers need specialized knowledge and skills in ethics
because business presents unique, complex situations.
 Managerial Responsibilities:
 Create and maintain an ethical corporate climate.
 Use a well-defined value system to guide the organization in
uncertainty and guard against unwise short-term gains.
 Global Business Challenge: Ethics is especially critical in global
business due to a lack of consensus on standards. Managers must
rethink their approach in countries with exploitative labor, lax
environmental rules, or pervasive corruption.
 Acting in a Role: Everyone in business occupies a role with specific rights
and obligations (e.g., an accountant's role requires objectivity, integrity, and
a specific process for reporting irregularities).
 Three Views on the Role of Top Managers:

1. Economic Actors: Their primary role is to make sound economic

decisions to ensure profitability and maximize return for shareholders
(their agents).

2. Trustees (Fiduciaries): They are entrusted with the firm's assets and
have a duty to balance the legitimate expectations of all stakeholders
(employees, suppliers, customers, investors).

3. Corporate Leaders: They wield significant power similar to government

officials and must legitimize this power by demonstrating how their
decisions serve accepted societal goals.
2.2.5 Firm and Its Relationships with Stakeholders
 A manager's rights are limited by the rights of stakeholders:
stockholders, suppliers, dealers, competitors, customers, unions, local
communities, and the broader economic system.
 The firm is a subsystem within a larger economic and political system,
not an isolated island.
 The manager's key task is to mediate, reconcile, and balance the
often-unclear rights and claims of these various groups to maximize
the good of the firm and the broader system.
 Managers must be aware that power, fraud, ignorance, and passion
can corrupt just relationships and destroy systems of cooperation.
2.2.6 Business Power and The Broader Society
 The classical economic theory that a firm's actions automatically
benefit society is based on outdated assumptions.
 Principles for Resolving Conflicts:

1. Primacy of the Individual: The quasi-absolute rights of real persons

always take precedence over the claims of the company or general
society. Organizations cannot justify deliberately destroying a person.
2. Primacy of Contract: Conflicts are settled in favor of the party whose
rights are clearly spelled out in a free contract. Without a clear
contract, resolve disputes by examining reasonably founded
expectations.
3. Primacy of National Need: The needs of the nation take
precedence over the needs of the firm, but national wants do not take
precedence over what is necessary for the firm to function.
 The Role of Institutions: Ethics alone is insufficient. Effective social
institutions (like laws and systems for fair contract enforcement) are
necessary to protect rights, prevent domination, and allow individuals
to realize their potential. There is a general obligation to work towards
creating such just systems.
2.3. Sources of Unethical Behavior
2.3.1. Common Ethical Problem
 Common ethical issues and problems that affect business
firms are more or less the same.
 The Common Ethical issues can be classified into five major
categories: bribery, coercion, deception, theft, and unfair
discrimination.
 These five categories include the most troubling and/or
reprehensible business practices cited by managers in
different empirical studies.
a) Bribery:
A bribe is used to manipulate people by buying influence.
Defined as "the offering, giving, receiving, or soliciting of something of
value for the purpose of influencing the action of an official in the
discharge of his or her public or legal duties."
The item of value may be direct payments of money or property. It may
also be in the form of a kickback after a deal has been completed.
A commercial bribe exists when a "consideration is given to an
employee by a person outside the firm with the understanding that, when
the employee transacts business for his or her own firm, the employee
will deal favorably with that person or with the person's firm for personal
advantage."
Bribes create a conflict of interest between the person receiving the bribe
and his or her organization.
b) Coercion:
Coercion controls people by force or threat.
Defined as "compulsion; constraint, compelling by force or arms or threat….
It may be actual, direct, or positive, as where physical force is used to compel
action against ones will or implied, legal or constructive, as where one party is
constrained by subjugation to another to do what his free will would refuse.”
The force is often the threat of the use of power upon the disadvantaged party.
Coercion may involve the threat of blocking a promotion, the loss of a job, or
blackballing an individual in the industry.
It may be forcing a person to act in a manner that is against the person’s
personal beliefs.
Coercion is used to compel an individual to act in a way that is against her or
his will.
Coercion may also be used against firms; for example, forcing a retailer to
handle specific products in order to obtain other desired products.
c) Deception:
Deception manipulates people and firms by misleading them.
Defined as “the act of deceiving; intentional misleading by falsehood
spoken or acted… knowingly and willingly making a false statement or
representation, expressed or implied, pertaining to a present or past
existing fact.”
This dishonest behavior is one of the most common ethical
transgressions.
Deception includes distorting or falsifying research or accounting data,
creating misleading advertising, and misrepresenting a product.
It also is involved in fake expense reports, fudged performance
appraisals, and misrepresented financial position.
Deception ranges from the small innocuous lie, which may cause little or
no harm, to significant schemes to deceive, which may cause major
economic or physical harm, including death.
d) Theft:
Theft is the taking of something that does not belong to you.
Defined as "the act of stealing. Taking of property without the owner's consent."
This does not apply to property that is lost due to competitive forces when play is according
to the economic or transactional rules of the culture.
However, if property is lost through a change in the rules, the loss may be considered theft if
it meets one of the following conditions:
1. It was not possible to take action that would comply with the new rules.
2. It was not possible to foresee the development of the new rules in time to comply with
them prior to the loss.
e) Unfair Discrimination:
Unfair discrimination is defined as "unfair treatment or denial of normal privileges to
persons because of their race, age, nationality or religion…. A failure to treat all persons
equally when no reasonable distinction can be found between those favored and those not
favored."
This is unfair discrimination in contrast to discrimination based upon relevant criteria that is
perfectly acceptable behavior to most people (e.g., hiring based on qualifications,
compensating based on contributions).
Unfair discrimination occurs when one individual or class is favored over another on the
basis of no criteria relevant to the requirements of the job or function.
2.3.2. The Importance of Ethics In Business

 Ethical behavior is essential for long-term business success from both a macro (economic
system) and micro (individual firm) perspective.

 Unethical behavior distorts the market system (macro) and leads to decreased long-run
performance for the firm (micro).

Macro Perspective: Conditions for an effective market system:

1. The right to own and control private property.

2. Freedom of choice in buying and selling goods and services.

3. The availability of accurate information concerning those goods and services.

 Problems occur when buyers or sellers are not free to exchange, or when information is
incorrect.
 This leads to a sub-optimal allocation of resources where goods providing less satisfaction
are over-produced, and goods providing more satisfaction are under-produced.
[Link]. The Effect Of Ethical Problems From General Perspective
 Bribery: Reduces freedom of choice by altering decision conditions. Results in
allocating more resources to a less desirable alternative.

 Coercive Acts: Decrease effective competition (e.g., preventing dealings with

certain parties). This usually results in higher prices and possibly poorer
products/services.

 Deceptive information: Creates false impressions, leading buyers to select less

satisfying goods. Can also cause costly disruptions in production runs.

 Theft: Significantly increases the cost of providing products/services. Losses must

be covered by larger profit margins, which increase prices.

 Unfair Discrimination: Results in purchasing from less-capable people or selling

to people who value the goods less. Causes a misallocation of resources and a
lower level of satisfaction.
[Link]. The Effect Of Unethical Problem To Specific Firm
From the firm's perspective, ethics is closely associated with trust. Ethical
behavior is a necessary component of developing and maintaining trust.
Trust in Supplier Relations:
 Moves transactions to an ongoing exchange relationship based on trust
that each party will honor commitments.
 Reduces risk in the buying process and provides complex personal, non-
economic satisfactions and social exchange.
 Benefits: dependable supply, reduced need for quality checks, priority
during shortages.
Trust in Customer Relations:
 The supplier's contact is through its sales force.
 Honesty is expected and required to maintain trust.
 Customers rely on salespeople for information on products, services, and
shipping.
 A customer orientation increases buyer satisfaction and trust.
 Trust in Employee Relations:
 Applies to peers, superiors, and subordinates.
 A climate of trust provides:
 Improved communications.
 Greater predictability, dependability, and confidence.
 Reduction in employee turnover.
 Openness and willingness to listen and accept criticism non-defensively.
 Reduction of friction among employees.
Factors that promote trust (Jitendara Mishar and Molly Morrissey):
 Open communications
 Giving workers a greater share in the decision-making.
 Sharing of critical information
 True sharing of perceptions and feelings.
2.3.3. Handling Ethics through Value and Code of Ethics
A. Ethical Value
Definition: Explore the factors which influence organizational values
and the relationship between ethical values and ethical behavior.
 Leader's Focus: The impact of the organization's ethical values on its
reputation, and therefore on its competitive position.
Purposes of Ethical Values:
 They supply both prescriptive and proscriptive parameters for ethical
behavior.
 They are helpful in attracting suitable employees and in deterring
others.
 They generate mutual confidence among suppliers, customers and
shareholders.
Benefits of Explicit Values:
Supply behavioral and decisional frameworks for the organization's
mangers. As organizations grow, it is no longer sufficient to rely on the
chief executive to be the sole guardian.
Define action parameters for new employees and promote an ethical
culture, which becomes a way of life for the workforce across the board.
Younger employees in particular are likely to have received little or no
"training" in ethical behavior. Not only do they need clear guidelines, but
the organization has to generate such guidelines in order to prevent
misunderstandings about what is acceptable and unacceptable behavior.
Underpin the strategic direction of the organization. If vision and
ethics have to be in alignment with the corporate strategy, then the
organization's values must be similarly positioned.
 Convey expectations about the conduct of the organization's
stakeholders. By encouraging a high standard of behavior among
employees, companies signal to their shareholders, their suppliers, and
their customers the fact that they categorically reject illegal or
improper business activity.
 If published it will enhance the company's public image and raise
level of customer confidence. Once a strong ethical "credit balance"
has been secured, the organization benefits from its reputation assets.
Any transgression is likely to be perceived as a one-off accident, and
will be forgiven.
 Reduce and pre-empt the possibility of legal action. Corporate
values, especially when bolstered by an organizational code of
conduct, will contribute to the avoidance of aggressive litigation.
 Benefit the bottom-line results. Statements of corporate values raise the
important question of how values relate to profits. Profit is viewed with
disdain by many who fail to understand its role in the economy at large and
as a reward to the superior performer…. Values are the primary drivers or
motivators and profit the reward.
 Is powerful mechanism for integrating merged or acquired
organizations. Once employees become familiar with the surviving or
parent organization's ethical and business conduct guidelines-and are
persuaded to take them seriously then they can be speedily assimilated into
the new structure, or may elect to transfer their talent elsewhere.
 Deter mangers form issuing improper instructions to staff-and also
deter staff form making improper approaches to mangers. The vast
majority of corporate codes and ethical value statements will make it clear
that no one at any level in the organization has authority to require or request
people to behave in a manner contrary to the values and the code.
 Encourage open communications. It is common for direct and honest
communication to be presented as a key value in itself. Direct and honest
communications, once established, have obvious benefits over a situation
where views are suppressed, disagreement is interpreted as disloyalty, and
ideas remain stillborn.
B. The Links Between Values and Ethics
Values inspire ethical beliefs; ethical beliefs influence attitudes; attitudes
underpin behavior.
Behavior—what people do—is what matters for organizations, but
behavior is only the tip of an iceberg composed variously of ethical
values, ethical principles, attitudes, and all sorts of psychological or
philosophical assumption which we carry round with us as a kind of
psychic baggage.
In an ideal world, values, beliefs, attitudes, and behavior will propel
people in the same direction. Unfortunately, the world is not ideal. It is
possible for attitudes and values on the one hand, and actions and
behavior on the other, to generate oppositional tensions.
C. Guidelines for Managing Ethics
1. Recognize that managing ethics is a process.
The bottom line of an ethics program is accomplishing preferred behaviors in
the workplace. The best way to handle ethical dilemmas is to avoid their
occurrence in the first place.
Make ethics decisions in groups, and make decisions public, as appropriate.
Integrate ethics management with other management practices.
Use cross-functional teams when developing and implementing the ethics
management program.
2. Value forgiveness.
Note that trying to operate ethically and making a few mistakes is better than
not trying at all.
D. Code of Conduct
Definition (Craig Nordlund, HP): "Codes of conduct specify actions in the
workplace and codes of ethics are general guides to decisions about those
actions." He suggests that codes of conduct contain examples of appropriate
behavior to be meaningful.
How to Develop a Code of Conduct:
For Large Organizations: Develop an overall corporate code of
conduct, and then a separate code to guide each of your programs or
departments.
Guidelines:
I). Identify key behaviors needed to adhere to the ethical values
proclaimed in your code of ethics, including:
 Ethical values derived from review of key laws and regulations.
 Ethical behaviors needed in your product or service area.
 Behaviors to address current issues in your workplace.
 Behaviors needed to reach strategic goals.
II). Include wording that indicates all employees are expected to conform
to the behaviors specified in the code of conduct. Add wording that
indicates where employees can go if they have any questions.
III) Obtain review from key members of the organization. Be sure your legal
department reviews the drafted code of conduct.
IV). Announce and distribute the new code of conduct. Ensure each employee
has a copy and post codes in each employee's bay or office.
V). Examples of topics: preferred style of dress, avoiding illegal drugs,
following instructions of superiors, being reliable and prompt, maintaining
confidentiality, not accepting personal gifts from stakeholders as a result of
company role, avoiding racial or sexual discrimination, avoiding conflict of
interest, complying with laws and regulations, not using organization's property
for personal use, not discriminating against race or age or sexual orientation,
and reporting illegal or questionable activity.
 Go beyond these traditional legalistic expectations—adhere to what's
ethically sensitive in your organization.
 (Note: you may be better off to generate your own code of conduct
from scratch rather than reviewing examples from other
organizations.)
E. Resolving Ethical Dilemmas (as an Ethics Tool)
Definition of an Ethical Dilemma: Often, ethical dilemmas
are real-to-life and highly complex with no clear guidelines.
Signs of a significant ethical conflict (Doug Wallace):
 a) significant value conflicts among differing interests.
 b) real alternatives that are equality justifiable.
 c) significant consequences on "stakeholders" in the
situation.
An ethical dilemma exists when one is faced with having to
make a choice among these alternatives.
Real-to-Life Complex Dilemmas (Examples):
i) "A customer... couldn't afford it. I know he could get it cheaper from a competitor.
Should I tell him about the competitor...? What should I do?"
ii) "Our company prides itself on its merit-based pay system. One of my employees
has done a tremendous job... However, he's already paid at the top of the salary
range... What should I do?"
iii) "Our company prides itself on hiring minorities. One Asian candidate fully fits the
job requirements... However, we're concerned that our customers won't understand
his limited command of the English language. What should I do?"
Methods to Resolve Ethical Dilemmas:
 Organizations should develop and document a procedure.
 Ideally, resolved by a group (e.g., an ethics committee of top leaders/managers
and/or board members; consider having staff members on the committee).
 Three methods: an ethical checklist, a ten-step method and a list of key questions.
 (Note: The Golden Rule is probably the most common method... The rule exists in
various forms in many of the world religions.)
Unit 3: Employer's Obligation
Introduction
 The ethics of hiring and firing are based on:

 The dignity of the applicant/worker.

 The contractual employer-employee relation.

 The purpose of the firm.

 Personnel managers must guard against:

 Discrimination.

 Breach of contract.
 The primary purpose of hiring is to increase production and
productivity.
 Even in family companies, efficiency must be considered to avoid
harm to the firm, employees, and the public.
 The ethical norm for hiring is efficiency: selecting based on ability
and willingness to serve the social good of the company and
public.
 A manager hiring the best people within budget and salary
constraints is acting ethically.
 This unit focuses on ethical issues in the acquisition and
separation of employees.
3.2 Acquisition and Separation of Employee
[Link] Determining Job Qualifications
Managers must conduct proper job analysis to define concrete, genuine
job qualifications.
Qualifications include suitability for the immediate job and potential for
advancement.
Potential for advancement is a genuine qualification due to the high cost
of hiring and training.
Managers must decide on a combination of interviews and tests and
check their predictive value.
Pencil-and-paper tests are permitted by law if not intended to
discriminate, but may unfairly disadvantage culturally deprived groups if
the skills tested are not relevant to the job.
For jobs involving handling people, intangible qualifications (culture,
voice, diction, poise, social skills) are relevant but hard to define and test
for.
[Link]. Preferential Hiring
 Arguments for preferential hiring (e.g., for minority groups) are based on
restitution for past wrongs and solving national problems.
 However, these arguments contradict basic ethical principles:
a. Membership in a group should not help or hinder unless directly relevant to
the job.
b. Society's obligation to help the disadvantaged must respect the rights of others
and the common good. Help should be based on need, not on factors like color.
c. Individuals today cannot be held responsible for the acts of long-dead
individuals.
 Obligation to cooperate with society is based on present need, not inherited guilt.
 Preferential hiring is forbidden by ethics, law, and good business as it creates
opposition, reduces available jobs for others, weakens morale, and makes
integration harder.
[Link]. Nepotism
 Nepotism is a form of preferential hiring.
 It may be legitimate in a family firm where the purpose includes providing jobs for
relatives, but efficiency must still be considered.
 In all other cases, nepotism is unethical if it involves favoritism or discrimination.
 Managers must ask:
 Will it create jealousy and resentment?
 Will it discourage qualified outsiders?
 Will it create problems with firing/demoting?
 Will it inhibit the relative's development?
 Will it cause family problems?
 Hiring must be based on the candidate's qualifications and the potential impacts of
the decision.
[Link]. Promotion
 The same ethical principles for hiring apply to promotions: job qualifications and organizational
policies should dominate decisions.
 Seniority complicates promotions. It is not an index of competence or loyalty.

 In reality, seniority may indicate real job qualifications and worker expectations. Disregarding
seniority can injure morale, while over-reliance on it can discourage initiative and lose talented
young workers.

3.2.2. Separation of an Employee

 Beyond explicit contracts, implicit contracts based on common humanity and social context create
obligations for both employer and employee.
 Each must consider the legitimate interests and expectations of the other.

 Employer obligations for termination fall into three headings:

 Dismiss only for just cause.

 Observe due process.

 Mitigate the harmful effects of dismissal (proportionality).

[Link]. Just Cause
 "Just cause" is vague but includes only factors pertinent to running a
business, not an employer's whims, politics, or annoyance with an
employee's mannerisms.
 Just causes include: mechanization, reduced output, violation of discipline,
negligence, harmful conduct, old age, frequent illness, prolonged
absenteeism.
 An employer must often dismiss for just cause to protect the company and
other workers (e.g., a lazy or dishonest worker demoralizes others).
 Sentiment must give way to objective evaluation. Tacit consent to bad habits
harms both the firm and the worker.
 The reason for dismissal must be more serious for a veteran employee than
for an apprentice due to the changed implicit contract.
 Clear company policy can remove arbitrariness and reduce dissatisfaction.
[Link]. Due Process
 Due process safeguards employee rights and maintains morale.

 It ensures decisions are not arbitrary and appear just, reinforcing workforce
confidence.
 It involves checks and balances, increasing the objectivity of decisions.

 Employers must remember their obligation to all workers, customers, and owners.
Warnings should be given first, but firing may be the only remaining sanction.
[Link]. Mitigation of Harmful Effects
 Even when justified in firing, an employer must try to minimize the harm caused.
 Giving adequate notice is a key method: it costs little, lets the employee find
other work, and allows for appeals.
 The notice period should be explicitly stated in the work contract.
 The obligation is especially serious in cases of plant relocation, major layoffs, and
automation, which may result from management's own failures.
[Link]
[Link]. Fair Wages Versus Income
 Ethics of wages involve job qualifications, human needs, and the economy's
functioning.
 Fair Wage Concept: Assumes wages are the principal income source,
should be sufficient for a worker & family to live in decent comfort,
including provision for sickness, old age, and education.
 Problem: In reality, the ideal minimum wage may not be feasible for
businesses and may not guarantee a decent income due to poor money
management or inflation.
 Conclusion: Income is the significant concept, requiring broad social
cooperation (e.g., social security, unemployment compensation, public
education) to be adequate.
 Fairness of wages cannot be based solely on worker need. It must consider:
 Contribution to the firm.

 The labor and product markets.

 The firm's competitive position.

 Union power.

 Worker and family needs.

 Ignoring any factor can cause harm.

 A fair contract requires both sides to be free and conscious of implications.

Freedom is impaired by fraud, power, passion, or ignorance, leading to unfair
agreements.
 Power imbalances between companies and unions can destroy the freedom needed
for a fair contract, necessitating social control and representation for consumers.
 Practical checks for employers:
[Link] "just" going wage in the industry/area (unless set by
power/fraud).
[Link] adequacy of the worker's total income against minimum
standards.
[Link] concrete possibility of helping the worker to a more adequate
income.
 The businessman has two responsibilities:
[Link] with social programs to raise income sources.
[Link] for business efficiency to raise going rates to an adequate
level.
[Link]. Profit Sharing
 If an employee receives a fair wage, they are not entitled to a share of
profits as a matter of strict right, as they agreed to limit their claim to the
wage.
 An employee may seek to change the contract to include profit sharing, but
cannot use power or fraud.
 The employer is morally free to refuse, provided the base wage is just.
3.3.2. Working Conditions
[Link]. Stability of Work
 Job insecurity is a major fear and driver of unionization.
 Automation, seasonal industries, and plant relocations threaten security.
 Employers must cooperate in broader social planning to address this,
applying a rational approach at the societal level.
[Link]. Other Working Conditions
Working conditions are as significant as wages.
A worker must not be treated as a thing or exposed to physical,
psychological, or moral harm without a proportionate reason.
Physical risks are obvious (e.g., unsafe machinery).
Psychological/Moral risks can be overlooked (e.g., poor controls that
tempt theft, supervisors running fraudulent schemes or exploiting staff).
Working conditions can affect home life and finances. Employers should
consider these effects (e.g., job transfers involving expense and higher
living costs) and make appropriate allowances for fairness and good
relations.
[Link]. Work Satisfaction
Good wages prevent complaints, but work satisfaction is a better
motivator.
Work is a major part of life; if not humanly satisfying, it diminishes both
productivity and the worker's life.
Man needs to find significance, create, serve, and leave a mark. Work
should provide this opportunity for fulfillment.
Ignoring the human side can lead to technological innovations being
frustrated by unhappy workers.
[Link]
Key questions center on where an employee's company life ends and
private life begins, and to what extent a company can limit freedom in
private areas.
[Link] The Value of Privacy
 Privacy is important in three areas:

[Link]: The inner sphere of thoughts, feelings, ambitions. Most

sacred, protects from exploitation and disturbance.

[Link]: Necessary to protect psychic privacy. Allows for intimate

relationships (spouse, doctor, lawyer) without which necessary
goods are deprived. The right is based on protection of feelings, not
property.

[Link] Role: Necessary to play different roles (father, citizen,

employee) efficiently. Protects from self-incrimination and
destruction of reputation.
[Link] The Areas of Legitimate Interest
 A firm is legitimately interested in whatever significantly influences
work performance or the company image.
 Relevant: Heavy drinking, gambling by a controller, loose talk by
key employees.
 Not Relevant: Fidelity in marriage, membership in a nudist camp.

 Citizenship in the firm should not deprive a man of rights to fair

treatment or political participation.
 "Encouragement" of civic activities for company image can be a subtle
invasion of privacy.
 The general assumption is that the individual's right is primary.
Reasonableness of interference cannot be determined unilaterally
and may require collective bargaining.
 Travel requirements must be necessary; disregarding effects on
an employee's family is unethical.
[Link]. Garnishments
 A garnishment is a legal attachment of wages for debt payment.

 Companies may fire an employee after multiple garnishments

because it increases accounting costs. This is not an unwarranted
interference with private life if there is an explicit company
policy.
[Link]. The Means of Investigation
 Not all means of investigation are ethical. An employee surrenders some
privacy for ordinary supervision and suitability investigations.
 The line is between ordinary/reasonable and extraordinary/unreasonable
interference.
 Proportionate reason is needed for invasive methods (e.g., wiring a work
area to prevent uncontrolled theft). Employees should be informed.
 Use of spies, secret wiring, or devices in non-work areas (restrooms)
requires far more serious reasons. Neurotic suspicion is not a reasonable
ground.
 There is an obligation to protect workers from harmful side effects of
investigations (e.g., using skilled polygraph operators, interpreting results
cautiously, destroying data when no longer needed).
 Personality test data must be interpreted by competent people, used with
reserve, and destroyed when the employee leaves.
 The right to privacy is primary and yields only to proven reasonable
interference.
 The use of force or blackmail to interfere with privacy is unjust unless
granted by an explicit, free contract.
 Collective bargaining leading to an explicit contract is the best way to
handle gray areas of privacy, as neither side alone has all the information to
judge reasonableness.
 Contracts and bargaining may not be sufficient to guarantee due process and
fair treatment; further safeguards may be needed.
Unit 4 - Employee's Obligation to a Firm
Introduction: The Foundation of the Employment Contract
 Core Obligation: The fundamental obligation of an employee, stemming
from the employment contract, is to provide "an honest day's work for
an honest day's wages."
 Nature of the Contract: The employee agrees to contribute a specified
amount of time, energy, and intelligence to the firm in exchange for
income.
 Limitation of Rights: While the employee does not surrender their
fundamental human dignity, they do contract away some minor rights,
agreeing that their efforts will be used for the benefit of the company.
 Reciprocity is Key: This obligation is contingent on the employer
upholding their side of the agreement (e.g., providing wages, a safe work
environment). If the employer does so, the employee (from president to
office boy) must not use their position to seek personal advantages not
stipulated in the contract.
4.1. Obligations in General
Implicit and Explicit Duties: Beyond the formal contract,
employees have implicit obligations to consider the welfare of
the company and their fellow workers when making decisions.
Fair Dealing Upon Departure: Even if an employee is free to
quit at the end of a contract, fairness and ethics demand
providing adequate notice. This allows the employer a chance
to match a competing offer or address any causes of
dissatisfaction, respecting the employer's "reasonably founded
expectations."
Exception: The obligation to give notice may be waived if
there is a "grounded fear of unjust retaliations" from the
employer
 Some Points of Broader Significance
 The Critical Role of Policy:
 Prevention: Carefully crafted policies can prevent many ethical problems from arising.
 Bilateral Agreements for Fairness: For policies to be truly fair and effective, they should
ideally be the result of bilateral agreements (between management and employees), not
unilateral decrees from management.
 Clarity and Certainty: A clear policy regularizes expectations and provides assurance
that decisions will not be made arbitrarily, which is simply good business practice.
 Barriers to Good Policy: Often, managers avoid creating clear policies because they
confuse policy with burdensome, detailed rule-making, or due to an inability to deal with
complex problems or an unwillingness to limit their own arbitrary power. This failure
is a moral defect that breeds unethical conduct and worker dissatisfaction.
 The Ethical Basis for Bilateral Agreements: The push for bilateral agreements
challenges the traditional view that "management rights extend to everything not
explicitly denied by law or contract. "Increased Cohesion: People feel a greater
obligation to abide by agreements they had a part in creating. As Peter Drucker noted,
workers can be committed even to poor programs if they are their own.
 A Check on Power: The reasoning is ethical, not just economic. Mere ownership of
property does not grant absolute authority over the people working with it. The power to
demand consent to working conditions is not a legitimate right to extort them.
4.2. Conflicts of Interest and Secrecy
4.2.1. Conflicts Of Interest And Secrecy
Core Concept: The interests of an employee and the firm are not always
identical. The employment contract exists to define the rights and
interests of both parties, minimizing conflicts.
Nature of Conflict: Conflicts arise because employees seek maximum
reward, while employers seek maximum productivity.
Types of Conflict:
1. Actual Conflict: An employee violates their employment contract by
using their position for selfish purposes that harm the firm's best
interests.
Example: A purchasing agent paying a higher price to a supplier from
whom they've accepted a bribe.
2. Potential Conflict: An action is not immediately harmful but contains the potential
for a real conflict or could disrupt industry order.
Example: A strong-minded employee accepting large gifts; while they may never act on
it, the situation creates a temptation that most would succumb to.

Third Parties: Conflicts of interest often involve the rights of third parties (e.g.,
competitors, clients), so the external impact of practices must be considered.

Framework for Analysis: When studying conflicts of interest (and related issues like
extortion), consider:
[Link] position of the individuals involved.

[Link] intentions of all affected parties.

[Link] potential and actual impacts on the parties, company, and outside interests.

[Link] policy (written or oral).

[Link]. Payola
Definition: A loosely used term covering bribery, extortion,
fiduciary violations, and some legitimate exchanges.
Key is to look beyond the label to the reality:
Ethical Example: A promotion man supplying a car for a
movie benefits both his client and the producer without harming
any third party.
Unethical Example: A disk jockey accepting a personal "gift"
to promote a song. This deceives listeners and denies fair
treatment to competing songwriters and record companies.
[Link]. Financial and Other Interests
Goal: Sound ethics and company policies aim to minimize potential
conflicts in supplier-producer and agent-client relationships.
Example Policy (International Harvester Co.): It is considered a
conflict of interest for an employee or their immediate family to:
(a) Benefit personally from any company purchase or derive personal gain
from actions taken as an employee.
(b) Have any interest (direct/indirect) in an organization doing business
with the company, except for:
 Small holdings (<1%) in widely-traded, publicly-held corporations.
Disclosed interests approved by the company president.
(c) Serve as an officer, director, etc., for a competitor or a company
seeking to do business with the company.
(d) Serve as an officer, director, etc., for another company doing or seeking to
do business with the company (even non-competitors), unless approved by a
manager where no competitive situation exists.

[Link]. Moonlighting
Definition: Holding a second job (outside employment).

Conflict: Moonlighting can be hostile to company interests, especially if the

second job is with a competitor or business partner. Even unrelated jobs can
drain energy, impair efficiency, and divide interests.

Not Necessarily Unethical: Often, employees have valid reasons (e.g., family
obligations). It is ethical if there is no actual conflict of interest.

Risk: Studies show moonlighting can severely reduce efficiency in an

employee's primary job.
[Link]. Preventing Conflicts of Interest
Explicit Policy: Clear company policies are crucial. They may not deter
the dishonest but provide concrete norms for decent employees to form
values and resist pressures.

Full Disclosure: Many companies require employees to disclose

ownership in outside companies or relationships that might influence
judgment. This needs to be reinforced by periodic independent checks.

Limitation: It is impossible to legislate against all personal friendships

and family ties, but companies should try to explicate dangerous areas
requiring disclosure.
4.2.2. Executive Piracy And Secrecy
Core Concept: "Executive piracy" (poaching employees) is placed here
because it often involves inducing a breach of contract or violating a
fiduciary relationship.
Clearly Unethical: Piracy aimed at stealing secrets or crippling a competitor's
business.

Gray Areas:
Asking for Reconsideration: It can be ethical for a recruiter to ask an
employee to reconsider and possibly seek a release from a contract, as an
employee retains the right to renegotiate.

Violated Spirit of Contract: If an employer fulfills the technical terms but

violates the spirit of the contract, the employee may be ethically free to leave
(though legal aspects need review).
Vague Understandings: Without a formal contract, ethical obligations
are based on "reasonable expectations" from both sides (employer
expects employees won't leave without reason; employee expects not to
be fired without cause).

Non-Recruiting Pacts: Agreements between companies not to hire each

other's employees (like blacklists) are socially harmful, potentially
illegal, and unjust to employees. They prevent a free market for talent
and can lead to companies underpaying staff.

Root Cause: Companies that fear piracy should self-examine. A

contented, well-paid employee with satisfying work and prospects is
not easy to lure away. Underpaying or stifling growth invites trouble.
[Link]. Secrecy (General Definition)
A secret is knowledge which a person has a right and/or
an obligation to keep hidden.
The most important secrets involve both a right and an obligation, where
revelation would cause serious harm or violate a contract.
Three Categories of Obligatory Secrets (Ascending Significance):
Natural Secret: Knowledge that by its nature will cause harm if revealed
(e.g., an employee's criminal record). The duty to keep it exists
regardless of how the information was obtained.
Promised Secret: Involves a natural secret, but the primary obligation
comes from a promise or contract (explicit or implicit in the work
contract). Many business secrets fall here.
Professional Secret: Involves an implied promise, a natural secret, and the
reputation of a group essential to society (e.g., clergy, doctors, lawyers,
accountants). Society relies on the confidentiality of these relationships.
Rules for Revealing Obligatory Secrets:
May be revealed when silence would cause more harm than
good (proportionality).

1. Even when justified, revelation must be done to minimize harm (e.g., report
a disease to authorities, not to the public).

2. Can reveal to protect oneself from proportionate harm, but not to gain an
unfair advantage.

3. A secret can be revealed by action (e.g., using insider information for

personal gain) as well as by words.
[Link]. Non-Obligatory Secrets
Information one has a right but not an obligation to keep (e.g., personal
family history, a privately invented process, business cost figures).

Limits on this Right:

The right can create an obligation to reveal in certain situations (e.g., a
seller must reveal substantial defects to a buyer; a citizen must reveal
income to the government).

Others may have a right to seek this information through ethical

means (e.g., a competitor can try to discover a customer list without
stealing, trespassing, or violating privacy).
[Link]. Insider Information
 Arises from the fiduciary relationship and work contract. Employees (especially
officers/managers) promise to protect information that could harm the firm or violate the
trust of stockholders.

Unethical Use: Using confidential information (gained by virtue of one's job) for personal
profit is a violation. Example: An employee using knowledge of a company's land purchase
plans to buy the property themselves first and resell it to the company at a higher price.
[Link]. Obligation of Former Employees
Cannot use or sell:
Information that is the property of the former employer (this is stealing).

Information they contractually agreed not to use after employment.

Can use or sell: Knowledge that is not the former employer's property and is not covered by a
contract.

Challenge: The difficulty lies in applying these principles due to vague contracts or
determining what constitutes a "property right" in information.
[Link]. Secrecy and the Public Interest
 Tension: Society benefits from the wide diffusion of knowledge. Secrecy
and exclusive possession of information can give groups power over others
and stifle progress (as seen in open scientific communities).

Social Cost of Business Secrecy:

 Burying knowledge to protect obsolete products robs society of benefits.

 Secret cost figures protect a company but prevent society from judging its
true efficiency and price fairness.
 Concealing plans (e.g., relocation) can leave a community unprepared for a
crisis.

Question: This raises significant questions about what should legitimately be

considered a business secret and the extent of property rights over ideas.
[Link]. Commercial Espionage
Growth: The increasing utility of information has led to growth in espionage
services.
Unethical/Ethical Distinction:
 Unethical (& Stealing): Buying/using information to which someone else has a
strict property right without permission. Hiring an employee solely to obtain
protected information.
 Ethical Means: Gathering information that is not protected by property rights or
contract through legitimate means:
 Talking to a competitor's customers or suppliers (unless they are bound by
agreements).
 Ordinary surveillance that does not involve fraud, trespass, or violation of privacy.
 Gray Areas: Technological advances (e.g., listening devices) create new ethical
problems that may require careful legislation. In the absence of law, companies
must proactively protect their secrets.
4.3. Honesty And Expense Accounts
4.3.1 Core Definition & Principles of Theft

Definition of Theft: "Taking what belongs to another when he is reasonably
unwilling."

Key Elements:

"Another": Refers to both real persons and moral persons (e.g.,
companies). A company is a moral being with a right to its own property.

"Belongs": The item must be the property of another.

"Reasonably Unwilling": The owner's unwillingness must be
reasonable. It is not theft to take something from someone who is
unreasonably unwilling (e.g., a dangerous object from a child) or to take
an item of such little value that the owner would not reasonably object.

Permission & Consent:

Theft does not occur if the owner freely permits the taking. Permission
can be explicit or expressed through knowing toleration of a custom.

Managers' Limitations: Non-owner managers are merely agents and
typically do not have the right to give away company property. Their
"willingness" without that right is often cooperation in theft, not valid
permission.

Misinterpreting Consent: Employees often mistake an owner's silence
(e.g., to avoid discontent) for willingness. Custom must be scrutinized to
ensure it is not just an accumulated bad habit mistaken for authorization.

Broader Harm of Theft: The evil of theft is not just the violation of
property rights but also the damage to the essential fabric of trust in business
and society.
4.3.1. Obligations of Owners and Managers

Lead by Example: Owners/managers must set a good example. A
double standard encourages employees to imitate petty theft ("what's
sauce for the goose is sauce for the gander").

Articulate Policies Clearly: Policies must be forcefully articulated
because silence is often taken as consent.

Enforce Consequences: When theft is detected, serious consideration
should be given to firing and prosecution. Lack of stern measures
encourages continued dishonesty.

Avoid Complicity: It is harmful to give recommendations to dishonest
employees, as it passes the problem to another company.
4.3.2. Expense Accounts: General Overview

Expense account issues are a matter of stealing ethics, often concealed by lack of
face-to-face contact and complex bookkeeping.

Problems arise from three relationships:
1. Recipient to the company.

2. Grantor to the recipient and the company.

3. Recipient and the company to tax laws.


Three General Policies:
 Flat Allowance: A set sum (annual or per trip/diem) given to the employee.

 Direct Reimbursement: Employee is repaid for expenses already incurred.

 Direct Payment: Employee charges expenses, and company pays the seller
directly (often combined with #2).
4.3.3. Flat Allowance and Reimbursement

Flat Allowance:

No accounting is required from the employee.

The allowance is to be used for the company's good. Skimming to
hurt the company's reputation violates an implied contract.

Sometimes the allowance is intended as hidden compensation,
allowing the employee to pocket the difference between the
allowance and actual expenses.

Important: This leftover difference (residue) must be reported
as taxable income.

Reimbursement for Incurred Expenses:

Ethical problems involve truthful reporting and having a just title to the
money.

Company policy is crucial: It sets the contract terms, informing the
employee how to report and what they can claim.

The core principle: The employee should not suffer monetary loss and
should live as comfortably on the road as at home.

Claiming More Than Spent: Some argue that if they were entitled to
spend more and the company doesn't object, pocketing the savings is not
theft. This is only justified if explicitly approved by proper authorities.

Tax Law Connection: Companies can only claim tax deductions for
expenses that are reasonable and necessary for business. Therefore,
abstractly ethical practices may be concretely impermissible due to law.
4.3.4. Double Expense Accounts

Case Study: A recruiter bills two different companies for the full cost of a
single trip to Addis Ababa, making a profit.

His Justification: Both companies were willing to pay, and if he made two
trips, he could claim twice.

Ethical Analysis (Author's View): This is stealing. The title to
reimbursement arises from the incurrence of expenses, not the trip itself.
One is entitled to have expenses covered, not to make a profit.

Exception: If one company's offer is a clear gift, then he may bill the other
for expenses, as he has two separate titles (gift + incurred expenses).
However, the intention to make a gift must be proven, not assumed.

Solution for Common Cases: (e.g., in advertising, PR) Companies need a
policy to prorate expenses or assign them based on factors like the trip's
primary purpose or which client requested it.
4.3.5. The Wife on the Expense Account

Policies vary widely.

Underlying Principle: The company will pay for a spouse when she
is performing a service for the company (making the expense tax-
deductible).

Even if not tax-deductible, a company can reasonably authorize the
expense if long/frequent absences from home may damage
the employee's morale.
4.3.6. Company Policy

 A good policy helps employees make ethical judgments and controls

expenses. It must respect tax laws, employee needs, and the company's best
interests.

Forbid Salary through Expense Account:
1. Prevents employees from cheating the government by underreporting
income.

2. Ensures direct and transparent compensation, preventing deception of

stockholders about true salary costs.

Ensure Equitable Reimbursement: Policy must forbid practices that force
the employee to pay costs that should be borne by the firm. This
requires constant updating of allowances to account for inflation and rising
costs of living.
4.3.7. Cooperation in Theft

Theft often requires cooperation from individuals inside or outside the
company.

Examples of Cooperation:

A restaurant providing a salesman with a fake, inflated bill is cooperating
in theft, even if the restaurant gets its normal price.

A supervisor who is careless or deliberately looks the other way when an
employee pads an expense account is cooperative.

Levels of Obligation:

Those in charge of money/property (fiduciary relationship) have a strong
obligation to prevent theft.

Other employees have a general obligation not to permit evil without
a proportionate reason, but their duty is less strict.

Types of Cooperation:

Active/Direct Cooperation: Willing the evil as a means to one's
own end (e.g., advancement, helping a friend). This is always
unethical. Benefiting from the act is a strong sign it is active
cooperation.

Passive Cooperation: Permitting or risking harm. May be justified
only by a proportionate reason for someone without a fiduciary
duty. Even then, the cooperator has a duty to work to correct the
situation.

Invalid Excuses: Fear, cowardice, or lack of skill in handling a
problem are not proportionate reasons exempting one from blame;
they are signs of incompetence and weak character.
Preventive Ethics & Case Studies
I. Core Concept: Preventive Ethics
Main Idea: Employers have an ethical and practical responsibility to
create an environment that minimizes employee temptation to steal or act
dishonestly. This is not just about catching wrongdoing but about
preventing it.
Key Strategies to Minimize Temptation:
1. Adequate Company Policy:
o
The first crucial step is to have clear, well-defined policies regarding
expenses, cash handling, and ethical conduct.
o
Critical Limitation: This policy is useless if higher management does
o
not follow it themselves. Their actions set the cultural tone for the entire
company. ("good example is a powerful force").
2. Adequate Pay:
 Pay should be sufficient not only for an employee's basic needs but
also commensurate with the importance of their position.
 Rationale: Underpaid employees can more easily rationalize theft
by telling themselves they are only taking what is rightfully owed to
them. Good pay removes this "easy excuse."
3. Adequate Supervision:
 While policy and pay work for most employees, they are not enough
for the "morally marginal" employee.
 For these individuals, strong supervision and oversight are
necessary deterrents (though not foolproof).
 Example: Regulations like those from the Internal Revenue Agency
(requiring proof for expenses beyond a certain point) are cited as
tools that enforce this necessary supervision.
II. Framework for Ethical Decision-Making
The text provides a universal framework to cut through complex situations and
justifications.
 Three Basic Questions to Ask in Any Situation Involving Honesty:
1. Ownership: "To whom does the item belong?" This establishes the
fundamental right to the property in question.
2. Permission & Perspective:
 "Is the owner reasonably unwilling that the item pass on to you?"
 This is explored through three sub-questions:
a. Clear Title: "Do I have a clear title to the item?" (Is it unquestionably
mine?)
b. Policy: "What is the company policy?" (Does it allow this?)
c. Reversal: "What would my opinion be, if roles were reversed?"
(The classic Golden Rule test)
3. Proportionate Reason:
 "In case of doubt or of unwilling cooperation with others, do I
have a proportionate reason for risking or permitting the
harm?"
 This asks if the potential negative consequences (the "harm") are
justified by an exceptionally good reason.
III. Case Studies and Analysis
Case 1: Abebe
Situation: A wealthy bachelor is not paid owed wages. He decides to
"borrow" the money via a padded expense account instead of going to
court, citing laziness and enjoyment of the job.
Employer's Situation: Business is fair, but cash-poor due to recent
lavish office upgrades.
Key Ethical Conflict: The right to owed money vs. the method of
obtaining it.
Guiding Questions:
1. Does he have a right to the money? (Likely yes).
2. Even with that right, is padding his expense account
a proportionate action before exhausting legal channels?
 Case 2: Senayet
 Situation: A financially strapped employee (due to family medical
bills) and a colluding colleague steal petty cash. Senayet takes the
majority, justified by extreme need.
 Key Ethical Conflict: Extreme personal hardship vs. the theft of
company funds and corruption of a colleague.
 Guiding Questions:
1. Would the boss, knowing her situation, be "reasonably
unwilling" for her to take the money? (Tests the "owner's
perspective").
2. Does Senayet's difficult situation justify or influence her friend's
decision to participate for a cut of the money?
 Case 3: Bereket
 Situation: An employee is explicitly authorized to hide gambling
losses (with customers) under false expense categories (e.g., cabs,
tips). He pads these categories even when he has no losses to avoid
looking suspicious and because he hates losing.
 Key Ethical Conflict: Following ambiguous and unethical orders vs.
committing outright fraud.
 Guiding Questions:
1. Is he cheating the government (tax fraud) and/or forcing the
company to commit fraud?
2. Could the gambling with customers be a form of commercial
espionage (e.g., bribing or compromising clients)?
3. Setting those questions aside, does he have any clear title (right) to
the money he is padding?
 Case 4: Beletech
 Situation: An employee is ordered by her superior not to check a
specific colleague's (Yohannes) expense account. She suspects
wrongdoing due to his friendship with the boss but remains silent to
"not rock the boat," approving all accounts.
 Key Ethical Conflict: Following orders vs. upholding ethical
responsibility and fiduciary duty.
 Guiding Questions:
1. Has she neglected an alternative means of action (e.g., a
confidential report to the honest head of operations)?
2. Is her feeling or suspicion that "something is wrong"
a pertinent factor that should have compelled her to act, rather
than remain complacent?
Chapter 5 - Organizational Obligation to Customers
Introduction
 This chapter focuses on the ethical obligation's businesses have
towards their customers, who are the ultimate consumers.
 The buyer-seller relationship is central to business.
 The core of the business-customer relationship is the act of selling,
which involves:-
 product development,
 pricing,
 advertising, and
 sales, all of which raise significant ethical questions.
 Key areas of ethical concern are product safety, advertising honesty,
and pricing fairness.
5.2 Organization Relations With Customers
5.2.1 Health and Safety

Core Principle: Consumers have a right to be protected from harmful
products.

Seller's Duty: Must respect the rights of buyers and users. Cannot willfully
harm or risk harm without a proportionate reason.

Legal Foundation: These principles underpin laws for drugs, cosmetics,
and food.

Challenge: Determining what constitutes a "proportionate reason" for risk
in the absence of clear legal guidelines.

Quality Control: Is obligatory when risk is high; its cost is a necessary
business expense, not just a reputation-builder.
 Legislation: Despite existing laws, product safety cases are numerous
and complex. More legislation is likely needed to prevent health from
being sacrificed for profit. Past experience shows both the public and
business benefit from such laws, even if imperfect.
 Scale of Obligation: The greater the danger and the more people
affected, the greater the obligation to:
Give warnings
Control sale and use
Remedy defects
 Cumulative Risk: A product that is safe alone or in small amounts
may not be justified if its risk comes from cumulative or simultaneous
use with other products.
5.2.2 Fair Sales Contract
Economic Justice: A just economy must protect the dignity of buyers,
not just be efficient. Unrestricted seller freedom is an "economic
dictatorship."
Historical Context: Economic exploitation (slavery) historically gave
rise to communism/socialism. Continued exploitation invites increased
government intervention.
Foundation: Sellers must view buyers as human beings, not enemies or
sheep to be shorn. A fair contract respects the dignity and rights of both
parties.
 Definition of a Fair Contract: It must be a free agreement based
on knowledge. It cannot be the result of:
Fraud (deception)
Ignorance (lack of knowledge)
Power (coercion forcing someone to disregard their own interest)
Irrational desire/passion (causing one to act against their
knowledge)
 Unethical Behavior: A seller is unethical if they deliberately use
fraud, power, or create ignorance/passion for gain.
 Systemic Problem: Often, the issue isn't deliberate exploitation but
sellers benefiting from an existing power structure that causes unfair
agreements.
5.2.3 Fraud, Lying, and Deception
Definitions:
Fraud: Deliberate attempt to deceive about a material
fact (important for the buying decision).
Lying: Speaking against one's own mind when the other person has
a reasonable expectation of the truth.
Deception: Can result from fraud, lying, ignorance, or negligence.
Its ethical quality depends on more than just intent.
Ethical Condemnation: Ethics condemns not only the intent to deceive
but also risking or permitting deception without a proportionate reason.
Duty to Clarify: If deception can be prevented by speaking more clearly
or removing misleading implications, one has an obligation to do so.
 Legal vs. Ethical: Fraud and lying can be unethical even if not
provable in a court of law (e.g., ads designed to imply false medical
endorsement).
 Proportionate Reason & Audience: The honest advertiser isn't
responsible for deception resulting from a buyer's carelessness or
wishful thinking. However, courts are increasingly protecting the
gullible and ignorant.
 Industry Jargon: Terms clear to professionals can confuse ordinary
consumers.
 Standardization: Sellers often object to standardized
terminology/grades that help consumers compare values, arguing it
hinders promoting innovations. While a real difficulty, it should not
override the buyer's need for information.
5.2.4 Disclosure
Consumer Need: Consumers need information to make rational choices, which
is often hard to obtain.
Core Obligation: Sellers must disclose latent material defects (those not
discoverable by ordinary inspection) for a contract to be valid. This does not
apply to genuine "as is" sales.
Modern Challenge: Modern packaging and processing (e.g., supermarket
goods) make ordinary inspection difficult or impossible, practically preventing
consumers from getting necessary information.
Limits of Right: The consumer's right to information is not unlimited. If
information is readily available, the producer's duty is limited. The consumer
must take reasonable steps to remedy their own ignorance.
Credit Cost: Honest credit agencies disclose true borrowing costs. Opposition
to laws requiring this is unethical, as it uses power to profit from ignorance.
Realistic Limit: The obligation is to use reasonable means to inform, not any
and all means, as some people cannot or do not want to be informed.
Methods of Disclosure: Can be done via salespeople, labeling, or advertising.
5.2.5 Advertising
Pervasiveness: Advertising is ubiquitous /everywhere/ in modern life.
Core Ethical Principle: Advertising must not deceive the viewer about the
true nature of the product.
Technical Challenges (e.g., TV): Sometimes techniques are needed to
accurately represent a product (e.g., using hot wine for steam instead of coffee
that doesn't steam well on camera). This is ethical if the intent is truthfulness.
Unethical Practices:
 Pre-ticketing: Manufacturers placing inflated "suggested retail prices" on
products to allow retailers to create a false impression of a deep discount. This
deceives consumers and harms honest competitors.
 "Bait and Switch": Advertising a bargain item with no intention of selling
it, aiming to lure customers in and switch them to a more expensive product.
 "Loss Leader": Selling a product at a loss to attract customers who will then
buy other, profitable items. This is ethical if the seller has a reasonable stock of
the advertised item and does not deceive customers about its availability.
5.2.6 Packaging and Labeling
Function of packaging: Packages protect products, facilitate
use, provide information, and serve as advertising.
The main ethical problem is often a failure to provide
adequate information, not outright deception.
Common Unethical Practices:
 "Large economy size" that costs more per unit than the
regular size.
 "Cents off" sales without stating the original price.
 Reducing product content without reducing package size
("slack fill").
 Using small, hard-to-read type for essential information.
 Two Key Questions:
1. Is the package intended to deceive or exploit?
2. If no intent, is there a proportionate reason for risking
deception? (e.g., a handle distorting bottle shape, product
settling causing slack fill).
 Unjustifiable Practices: Terms like "giant" or "super quart"
are misleading. Excessive packaging (e.g., a small deodorant
in a huge box) or using small print on a package with ample
space is deceptive.
 Most Deceptive Practice: Reducing contents without
prominently stating the new amount.
 Legislation: Existing laws forbid abuses, but more are
probably needed.
Ethics of Buyers
The Flip Side: Buyers also have ethical obligations not to
exploit sellers through fraud, power, or passion.
Key Difference: The seller must disclose hidden defects; the
buyer generally does not have to reveal hidden virtues (the
assumption is the seller should know their product's worth).
Buyer's Responsibility: The buyer has an obligation to gather
information and compare products. Careless buyers enable
dishonest sellers.
5.3. Pricing Related Issues
Reality of Power: Prices are often not set by free interchange but by power and
a variety of goals, for both products and labor.
5.3.1 Price Fixing
Conspiratorial price fixing is illegal and unethical because:
 It uses power to destroy equality.
 It involves fraud (buyers believe they are seeing independent offers).
 It can constitute theft or unjustified loss for the buyer.
 It interferes with the economic mechanism of supply and demand.
Common in Industries with: Overcapacity, special buyer specs, and buyer
power.
A Complication: Real price competition can also lead to problems (antitrust
prosecution, wasted resources). While protecting marginal producers can be a
societal interest, conspiracy is an unethical and illegal method to achieve it.
5.3.2. Price Leadership
Not illegal like conspiracy, but can have similar effects:
customers pay more than in a free market, effectively "taxed" to
support marginal firms and boost profits of efficient ones.
The Evil: Often stems from fear of retaliation from the price
leader, destroying business freedom.
Ethical Ambiguity: In many industries, followers may have
little real choice but to follow the leader to avoid retaliation
from competitors or the government.
5.3.3. Administered Price
Definition: A price set by producers/sellers, not by short-term supply and
demand. Producers favor it for stability and planning.
Not Easily Condemned: Some firms use the extra profit for R&D and
expansion, potentially benefiting the consumer long-term. The higher price
could be seen as a consumer "investment" in the economy's future.
The Problem: It allows firms to accumulate capital and power not through
efficiency but through financial position. This unchecked power leads to more
government regulation.
Power Imbalance: Power neutralizes power, but the powerless (e.g.,
unorganized consumers) remain exploited.
Shared Blame: Society and business share blame for this situation. The
obligation is not to stop immediately but to seek a solution involving all
parties.
Wage Consideration: Companies with administered prices often pay high
wages, but this may result from a power struggle between big companies and
big unions where the consumer ultimately pays.
5.3.4. Resale Price Maintenance
What it is: Manufacturers setting a minimum retail price for their
products (vertical price fixing).
Effect: Reduces price competition, forces higher prices on
consumers, and protects dealer profit margins.
Manufacturer's Motive: To protect the product's image from
being eroded by use as a "loss leader" or heavily discounted item.
Dealer's Benefit: Protects dealers from competition, allowing
inefficient, low-volume dealers to survive. This means consumers
cannot benefit from economies of scale.
The "Service" Argument: The claim that high margins are needed
to ensure service is unethical if it forces consumers to buy a
service they may not want.
5.3.5. Price And Advertising
False Advertising: Leads directly to unfair prices, as customers pay
more than they would for the true product.
Honest Illusions: Even technically honest advertising can create
illusions that lead consumers to overpay. This is partly the fault
of careless buyers who equate branding and high price with quality.
Savings: Buying generic drugs or private-label brands (often made by
the same company to the same specs) can save money, as the price
differential often reflects more than just cost (e.g., advertising, illusion).
The Challenge: It is nearly impossible for advertisers to avoid creating
some illusion, especially when buyers are careless. This is
a proportionate reason for permitting some inevitable deception,
but not an approval of deliberate illusion-building.
5.3.6. Price And Passion
Exploiting Emotion: Unjust prices can result from exploiting a
customer's passion or irrational desire (e.g., funeral directors selling to
the bereaved, loan companies dealing with desperate people).
Obligation: The businessman is not the customer's conscience but has
an obligation to use reasonable means to prevent self-harm (e.g.,
informing a borrower of the true cost of a loan).
Creating Passion: The intention to create irrational passion for
exploitation is unethical. However, advertising's power to
consistently create (not just exploit) demand is limited and marginal.
Clear Examples: Ticket scalpers and those who initiate scare buying
exploit inequality and passion for profit.
Consumer Complicity: In some sectors (e.g., toiletries, proprietary
drugs), high prices are partly the fault of consumers who "want to be
fooled" or irrationally believe high price equals high quality.
Discriminatory Pricing
Definition: Charging different prices to different customers.
Ethical Standard: It is unethical only if based on factors not
relevant to the transaction (similar to discrimination in hiring).
Complexity: It is difficult to determine what factors are
relevant in pricing. It also injures buyers and competitors.
Measurement Challenge: The "price" is complex due to
discounts, allowances, and services (e.g., a trade-in allowance
could hide a price increase). For ethical analysis, price is treated
as the actual money cost to the buyer.
UNIT 6: ORGANIZATIONAL OBLIGATION TO OTHER
STAKEHOLDERS
6.1. Introduction
The ethics of a business's relations with competitors is distinct from the ethics of
competitors themselves; it involves studying the effect of actions on the
competitive system.
Organizations have responsibilities towards:
Stockholders: They expect adequate information about the firm's position.
Dealers: They face ethical problems arising from the buyer-seller
relationship and their relationship with the consuming public.
Suppliers: They are also significantly affected.
Managerial decisions about earnings distribution (dividends) have ethical
implications.
This unit covers ethical issues in a firm's relationships with competitors,
stockholders, dealers, and suppliers.
6.2. Organizational Relations with Competitors
6.2.1. General Principles
A competitor is a rival, not an enemy.
Relations should be governed by basic ethics and fair play, not the ethics
of self-defense and warfare.
An unethical competitor can turn rivalry into a ruthless battle. In such
cases, after all legal remedies are exhausted, the ethics of self-defense
become applicable.
Winning customers by offering truly superior services and lower
prices based on efficiency is ethical.
Any practice unfair to customers is also unfair to competitors because it
takes away customers unethically.
6.2.2. Unfair Interference and Related Practices
Harm can be caused by interfering with a competitor's production and
distribution (e.g., historical fomenting of labor disputes, boycotts).
Modern cases involve hiring away key employees or using market
power to marginalize a competitor's products in retail.
The key is to distinguish between unfair interference and legitimate
competitive practices. The problem is usually the method and intention,
not the interference itself.
Hiring Employees:
Unethical: If the intention is harassment and crippling the
competitor's operation.
Ethical: If the intention is to enlarge and improve one's own
operation. The effect on the competitor may be the same, but the
intention and benefit to consumers make it ethical (assuming no
breach of contract).
 Employees should be wary of job offers that demand the
revelation of trade secrets, as it risks cooperation in theft and
personal loss.
 Competing for Shelf Space:
Ethical: Gaining favor based on product merit or
legitimate service (better design, packaging, price,
advertising support, delivery).
Unethical: Using extortion, bribery, kickbacks, or
discriminatory advertising allowances.
 Complex Cases: Some practices harm a competitor but
benefit consumers (e.g., advertising a price reduction on a
"fair traded" product). This may be unethical if it breaks a
contract or law, but not merely because it hurts a competitor.
This leads to the question of price cutting.
6.2.3. Price Cutting
Price competition is the heart of a market economy, yet many fear it.
The ethics depend on intention and means, not just the effect on a competitor.
Generally ethical: Price cuts are a legitimate and desirable competitive tool
that benefits consumers and the economy, offsetting harm to competitors.
Unethical: When price cuts are backed by power and used as a "club" to gain
advantages unrelated to quality or service, with the intention to harm a
competitor or establish exploitative market power.
 Test: "Is this price cut calculated to help the business without exploiting
consumers either now or in the future?"
Selling Below Cost:
 Often a sign of unethical intention but not always.
 Ethical reasons: Liquidating inventory, using "loss leaders" (if overall
prices cover expenses), recouping fixed costs during hard times. These are
ethical because they are not aimed at harming competitors or exploiting
buyers.
 Laws on Sales Below Cost: Exist to prevent monopoly, diverted
trade, or lessened competition. Ethical exceptions mirror legal
exceptions (e.g., clearance sales, perishable goods, damaged
goods, discontinued lines, liquidation, charitable sales, meeting
competition).
 Case Studies:
1. Desperate Low Bidder: A builder in bad financial condition
makes a low bid to recoup fixed costs and stay in business.
Risks: Makes buyers unwilling to pay reasonable prices,
tempts bid-rigging, risk of bankruptcy and unfinished
work, temptation to cut corners.
Ethics: The intention may be ethical (to fulfill the
contract), and it can be a reasonable means of cutting
losses. The individual may have a proportionate reason, but
the situation creates an obligation for broader industry
control to minimize harm.
2. Fear of Retaliation: A small, efficient firm wants to cut
prices to increase volume but fears larger, less efficient
competitors will retaliate with below-cost pricing.
 Result: The small firm is justified in not cutting prices. The
larger firms' mere potential power (even without an explicit
threat) deters competition, robbing a competitor of freedom
and depriving the public of benefits. This is an evil without
a clear unethical act, requiring social cooperation and
legislation to solve.
3. Administered Prices: A large, efficient company could
lower prices and increase volume (driving out inefficient
competitors) but chooses not to for fear of antitrust lawsuits.
 Result: The public pays more. The businessman is not
acting unethically by not competing on price under the
current legal framework. The solution requires changing
laws and understanding true competition.
6.2.4 Cooperation among Competitors
Anti-trust laws forbid cooperation detrimental to consumers or the economy.
However, cooperation can be in the best interests of all parties (e.g., trade
associations for sharing information on maintenance, safety, standardized
terminology, packaging, licensing patents).
Cooperation becomes illegal/unethical when it is a conspiracy or informal
venture to exploit buyer weakness through power and fraud, not to improve
productive/distributive efficiency.
Underlying Cause: Sellers dislike true competition, especially those with high
fixed costs, as it disciplines them. They seek to insulate themselves from price
competition and uncertainty.
Sympathy for Goals: While the means of insulation are often unethical,
the goal of avoiding evils that harm the company, industry, and public (e.g.,
chaotic price changes, monopoly) can be understandable.
The decision on whether stability outweighs competition should not be
unilaterally and unethically enforced by businesses.
6.3 Organizational Relations With Other Stakeholders
6.3.1 Reporting (to Stockholders)
Management has a social obligation to provide adequate information
to potential and current stockholders for efficient market functioning.
Problems:
 Accepted accounting principles allow too much leeway, leading to
non-comparable profit figures.
 Reports often don't use the same "cost-level" accounting
management uses internally.
 The true value of companies with intangible assets (e.g., research)
is hard to know.
 Annual reports omit social costs, making it hard to tell if profit is
real or from exploitation of privilege.
 Progress is slow due to public ignorance, but the obligation to
provide better information is growing.
 Management's concrete obligations are difficult to define
without uniformity or new regulation.
 CPAs must approve reports that follow accepted procedures,
even if they disagree.
 Better reporting is not a perfect solution but plays a role in
moving the economy toward greater efficiency and justice.
6.3.2 Managerial Compensation
Managers have broad powers that can be abused due to their relationship
with directors and freedom from stockholder control.
Ethical Questions:
Paying handsome salaries when operations have stopped.
Granting stock options that dilute shareholder equity.
Inventing generous pensions at the moment of retirement.
Precise norms are difficult. Compensation may be justified to attract
skilled executives.
Key Principle: Fairness requires full disclosure to stockholders about
compensation and its potential impact on earnings and stock value. There
must be actual, not theoretical, accountability.
6.3.3 Dividends and Retained Earnings
Decisions on distributing earnings are ethical because managers are
handling other people's money.
Managerial Motives: Can be mixed and at odds with sound practice
(e.g., expanding for personal pride/flattery, not profitability).
Retained Earnings: Can be seen as a low-obligation source of capital,
but this may not be in the stockholder's interest if they could invest
dividends more profitably elsewhere.
Executives tend to overestimate the profitability of reinvestment in their
own firm, leading to ineffective resource allocation in the broader
economy.
Solution: A reasonably clear-cut dividend policy. Management must
have a profitable use for retained earnings and foresee reasonable future
dividends from them.
6.3.4 Relationship with Dealers
The dealer is not a member of the firm but is closely related
and acts as the manufacturer's "face to the public."
Ethical problems arise from the manufacturer-dealer
relationship and their joint relationship to the public.
Manufacturer Power: Can use legal tactics unethically to
enforce provisions not in the original contract (e.g.,
withdrawing advertising/financing, delaying deliveries at peak
season).
Dealer Misconduct: Can provoke retaliation by not honoring
contracts (e.g., tampering with car odometers, charging for
warranty service not performed, diverting hot items to second-
hand lots).
 Unfair Practices:
Tie-in Contracts: Forcing a dealer to carry a full line or inferior
merchandise to get desired brands (theoretically illegal but persists).
Full Line Forcing: Refusing to sell unless the dealer agrees not to
trade with competitors.
Exclusive Agency (Ethical): Granting exclusive rights in a territory is
a good exchange of value.
Fair Trade Prices: Agreements that limit consumer freedom by
reducing competition; often undermined by public pressure.
 General Principle: Standard buyer-seller ethics apply. Violations by
either party are unethical (e.g., manufacturer selling in an exclusive
territory, dealer padding cooperative advertising bills).
 Solutions:
Dealers combining to trade can create more equitable (but not always
cheaper) outcomes.
Due Process: Providing a formal, low-cost channel for dealers to bring
complaints prevents arbitrary, unilateral judgments.
6.3.5 Relations with Suppliers
The supplier is an external stakeholder who can be dependent on or inferior in
power to a firm.
Unethical Practices by Powerful Buyers:
 Threatening to withdraw business to extort contributions to an advertising
budget.
 Forcing suppliers to assume promotion costs or finance the buyer's
operation by pushing credit costs back onto them.
 Using power to get special prices, scheduling, or specifications that harm
the supplier and the buyer's competitors (e.g., forcing delays on other
orders).
 Using fictitious low bids from potential suppliers to trap a "hungry"
supplier into an unprofitable contract.
These unfair advantages harm the competitors of the favored buyer.
Courts are suspicious of reciprocal purchasing arrangements (e.g., selling to a
company while buying from its subsidiary), as they can be used to extort or
attract business.