SDSU Business Law Environmental Regulations and Ethics Discussion

Suppose a manufacturing facility emits into the air a chemical that it has reason to believe is inadequately regulated by the EPA and that poses a significant threat to nearby residents even at levels lower than permitted by the EPA. As manager of the facility, would you be satisfied to meet the EPA required level or would you install the additional controls you believe necessary to achieve a reasonably safe level? Keep in mind that installing these controls would be expensive and you can anticipate resistance from corporate executives as well as shareholders. Explain why or why not. Support your answer with one or more of the ethical theories from Chapter 4.

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Business Ethics, Corporate Social Responsibility, Corporate Governance, and Critical Thinking
What defines ethical behavior? Think of a time when you thought that someone or some business
did something ethical. Was it someone going out of her way to help another person? Was it, for
example, a young man—a customer at a store—helping an elderly woman carry heavy packages
to her car? Was it someone entering a building during a pouring rain and giving her umbrella to a
father and his small children who were waiting to leave until the rain stopped?
Was it a corporate executive speaking for an hour to a friend’s daughter—a young college
student—helping her understand how to seek an internship and prepare for a career in the
executive’s industry? Was it a business giving a second chance to a young man who fell in with
the wrong crowd, made a mistake, and served time in prison?
Was it a company recalling and repairing an allegedly defective product, even when not required
by the government, at great cost to its profits and shareholders? Was it a business that bought a
failing company in the solar industry? Was it a corporation buying a competitor, achieving
synergies, improving options and pricing for consumers, and increasing the company’s profits?
Was it a business that chose to upgrade its factories in a midwestern town instead of moving
manufacturing operations overseas? Was it a business that opened a new plant in Indonesia,
creating jobs for 1,000 workers? Was it a corporation with excess cash opting to increase its
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dividend by 25 percent and buy back 10 percent of its stock, thereby increasing returns to
shareholders and the price of the shareholders’ stock in the company?
In these and other situations in which you observed what you believed was ethical conduct, what
made you think the behavior was ethical? Was it that the ethical actor obeyed some fundamental
notion of rightness? Was it that the person treated someone the way you would want to be
treated? Was it that the actor gave an opportunity to someone who was in greater need than most
people? Was it that the company helped someone who deserved aid?
Was it that most people thought that it was the right thing to do or that the majority wanted it
done, whether right or not? Was it that the business took full advantage of the resources entrusted
to it by society? Was it that the business helped society use its scarce resources in a productive or
fair way?
What ethical responsibilities do businesses and business leaders have and to whom?
What defines ethical behavior?
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LO LEARNING OBJECTIVES
After studying this chapter, you should be able to:
4-1Appreciate the strengths and weaknesses of the various ethical theories.
4-2Apply the Guidelines for Ethical Decision Making to business and personal decisions.
4-3Recognize critical thinking errors in your own and others’ arguments.
4-4Utilize a process to make ethical decisions in the face of pressure from others.
4-5Be an ethical leader.
Why Study Business Ethics?
General Motors hiding that it sold cars with faulty ignitions. Target failing to protect customers’
credit card information. Enron maintaining its stock price by moving liabilities off balance sheet.
WorldCom using fraudulent accounting to increase its stock price. ImClone executives and their
family members trading on inside information. These business names and acts from the past two
decades conjure images of unethical and socially irresponsible behavior by business executives.
The U.S. Congress, employees, investors, and other critics of the power held and abused by some
corporations and their management have demanded that corporate wrongdoers be punished and
that future wrongdoers be deterred. Consequently, shareholders, creditors, and state and federal
attorneys general have brought several civil and criminal actions against wrongdoing
corporations and their executives. Congress has also entered the fray, passing the Sarbanes”
Oxley Act of 2002, which increased penalties for corporate wrongdoers and established rules
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designed to deter and prevent future wrongdoing. The purpose of the statute is to encourage and
enable corporate executives to be ethical and socially responsible.
But statutes and civil and criminal actions can go only so far in directing business managers
down an ethical path. And while avoiding liability by complying with the law is one reason to be
ethical and socially responsible, there are noble and economic reasons that encourage current and
future business executives to study business ethics.
Although it is tempting to paint all businesses and all managers with the same brush that colors
unethical and irresponsible corporations and executives, in reality corporate executives are little
different from you, your friends, and your acquaintances. All of us from time to time fail to do
the right thing, and we know that people have varying levels of commitment to acting ethically.
The difference between most of us and corporate executives is that they are in positions of power
that allow them to do greater damage to others when they act unethically or socially
irresponsibly. They also act under the microscope of public scrutiny.
It is also tempting to say that current business managers are less ethical than managers
historically. But as former Federal Reserve chair Alan Greenspan said, “It is not that humans
have become any more greedy than in generations past. It is that the avenues to express greed
have grown enormously.”
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This brings us to the first and most important reason we need to study business ethics: to make
better decisions for ourselves, the businesses we work for, and the society we live in. As you read
this chapter, you will not only study the different theories that attempt to define ethical conduct
but, more importantly, learn to use a strategic framework for making decisions. This framework
provides a process for systematic ethical analysis, which will increase the likelihood you have
considered all the facts affecting your decision. By learning a methodology for ethical decision
making and studying common thinking errors, you will improve your ability to make decisions
that build trust and solidify relationships with your business’s stakeholders.
Another reason we study ethics is to understand ourselves and others better. While studying the
various ethical theories, you will see concepts that reflect your own thinking and the thinking of
others. This chapter, by exploring ethical theories systematically and pointing out the strengths
and weaknesses of each ethical theory, should help you understand better why you think the way
you do and why others think the way they do. By studying ethical theories, learning a process for
ethical decision making, and understanding common reasoning fallacies, you should also be
better equipped to decide how you should think and whether you should be persuaded by the
arguments of others. Along the way, by better understanding where others are coming from and
avoiding fallacious reasoning, you should become a more rigorous, critical thinker, as well as
persuasive speaker and writer.
There are also pragmatic reasons for executives to study business ethics. By learning how to act
ethically and by, in fact, doing so, businesses forestall public criticism, reduce lawsuits against
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them, prevent Congress from passing onerous legislation, and make higher profits. For many
corporate actors, however, these are not reasons to act ethically, but instead the natural
consequences of so acting.
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While we are studying business ethics, we will also examine the role of the law and regulations
in defining ethical conduct. Some argue that it is sufficient for corporations and executives to
comply with the requirements of the law; commonly, critics of the corporation point out that
because laws cannot and do not encompass all expressions of ethical behavior, compliance with
the law is necessary but not sufficient to ensure ethical conduct. This introduces us to one of the
major issues in the corporate social responsibility debate.
The Corporate Social Responsibility Debate
Although interest in business ethics education has increased greatly in the last few decades, that
interest is only the latest stage in a long struggle to control corporate misbehavior. Ever since
large corporations emerged in the late 19th century, such firms have been heroes to some and
villains to others. Large corporations perform essential national and global economic functions,
including raw material extraction, energy production, transportation, and communication, as well
as providing consumer goods, professional services, and entertainment to millions of people.
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Critics, however, claim that in their pursuit of profits, corporations ruin the environment, mistreat
employees, sell shoddy and dangerous products, produce immoral television shows and motion
pictures, and corrupt the political process. Critics claim that even when corporations provide
vital and important services, business is not nearly as accountable to the public as are organs of
government. For example, the public has little to say about the election of corporate directors or
the appointment of corporate officers. This lack of accountability is aggravated by the large
amount of power that big corporations wield in America and throughout much of the world.
These criticisms and perceptions have led to calls for changes in how corporations and their
executives make decisions. The main device for checking corporate misdeeds has been the law.
The perceived need to check abuses of business power was a force behind the New Deal laws of
the 1930s and extensive federal regulations enacted in the 1960s and 1970s. Some critics,
however, believe that legal regulation, while an important element of any corporate control
scheme, is insufficient by itself. They argue that businesses should adhere to a standard of ethical
or socially responsible behavior that is higher than the law.
One such standard is the stakeholder theory of corporate social responsibility. It holds that rather
than merely striving to maximize profits for its shareholders, a corporation should balance the
interests of investors against the interests of other corporate stakeholders, such as employees,
suppliers, customers, and the community. In August 2019, the Business Roundtable endorsed the
stakeholder theory approach, noting the importance of delivering value to customers, investing in
employees, dealing fairly and ethically with suppliers, supporting local communities, and
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generating long-term value for shareholders. To promote such behavior, some corporate critics
have proposed changes that increase the influence of the various stakeholders in the internal
governance of a corporation. We will study many of these proposals later in the chapter in the
subsection on shareholder theory and its emphasis on profit maximization. You will also learn
later that an ethical decision-making process requires a business executive to anticipate the
effects of a corporate decision on the various corporate stakeholders.
Despite concerns about abuses of power, big business has contributed greatly to the
unprecedented abundance in America and elsewhere. Partly for this reason and partly because
many businesses attempt to be ethical actors, critics have not totally dominated the debate about
control of the modern corporation. Some defenders of business argue that in a society founded on
capitalism, profit maximization should be the main goal of businesses: The only ethical norms
firms must follow are those embodied in the law or those impacting profits. In short, they argue
that businesses that maximize profits within the limits of the law are acting ethically. Otherwise,
the marketplace would discipline them for acting unethically by reducing their profits.
Former Fed chair Alan Greenspan wrote in 1963 that moral values are the power behind
capitalism. He wrote, “Capitalism is based on self-interest and self-esteem; it holds integrity and
trustworthiness as cardinal virtues and makes them pay off in the marketplace, thus demanding
that [business persons] survive by means of virtue, not of vices.” Note that companies that are
successful decade after decade, like Procter & Gamble and Johnson & Johnson, adhere to
society’s core values.
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We will explore other arguments supporting and criticizing shareholder theory and its emphasis
on profit maximization later in the chapter, where we will consider proposals to improve
corporate governance and accountability. For now, however, having set the stage for the debate
about business ethics and corporate social responsibility, we want to study the definitions of
ethical behavior.
Ethical Theories
For centuries, religious and secular scholars have explored the meaning of human existence and
attempted to define a “good life.” In this section, we will define and examine some of the most
important theories of ethical conduct.
As we cover these theories, much of what you read will be familiar to you. The names may be
new, but almost certainly you have previously heard speeches and read writings of politicians,
religious leaders, and commentators that incorporate the values in these theories. You will
discover that your own thinking is consistent with one or more of the theories. You can also
recognize the thinking of friends and antagonists in these theories.
None of these theories is necessarily invalid, and many people believe strongly in any one of
them. Whether you believe your theory to be right and the others to be wrong, it is unlikely that
others will accept what you see as the error of their ways and agree with all your values. Instead,
it is important for you to recognize that people’s ethical values can be as diverse as human
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culture. Therefore, no amount of argumentation appealing to theories you accept is likely to
influence someone who subscribes to a different ethical viewpoint. The key, therefore, is to
understand the complexity of ethical perspectives so that you can better understand both your
viewpoint and the viewpoints of others. Only then is it possible to pursue common ground and
provide a rational explanation for the decision that must ultimately be made.
This means that if you want to be understood by and to influence someone who has a different
ethical underpinning than you do, you must first determine her ethical viewpoint and then speak
in an ethical language that will be understood and accepted by her. Otherwise, you and your
opponent are like the talking heads on nighttime cable TV news shows, whose debates often are
reduced to shouting matches void of any attempt to understand the other side.
LOG ON
Go to
www.iep.utm.edu
The Internet Encyclopedia of Philosophy gives you background on all the world’s great
philosophers from Abelard to Zizek. You can also study the development of philosophy from
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ancient times to the present. Many of the world’s great philosophers addressed the question of
ethical or moral conduct.
The five ethical theories we will highlight are rights theory, justice theory, utilitarianism,
shareholder theory, and virtue theory. Some of these theories focus on results of our decisions or
actions: Do our decisions or actions produce the right results? Theories that focus on the
consequences of a decision are teleological ethical theories. For example, a teleological theory
may justify a manufacturing page 4-5company laying off 5,000 employees because the effect is
to keep the price of manufactured goods low for consumers and to increase profits for the
company’s shareholders.
Other theories focus on the inherent rightness or wrongness of a decision or action itself,
irrespective of what results it produces. This rightness or wrongness can be determined by a rule
or principle or flow from a duty or responsibility. Theories that focus on decisions or actions
alone are deontological ethical theories. For example, a deontological theory may find
unacceptable that any competent employee loses his job, even if the layoff’s effect is to reduce
prices to consumers and increase profits. Or a deontological theory emphasizing the principle
that it is wrong to be dishonest might require that one never tell a lie, regardless of the
consequences. Deontological theories place great emphasis on the duties and responsibilities that
flow from rules, laws, policies, or social norms governing our actions.
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First, we will cover rights theory, which is a deontological theory. Next will be justice theory,
which has concepts common to rights theory but with a focus primarily on outcomes. Our study
of ethical theories will then turn to two additional teleological theories, utilitarianism and
shareholder theory. Finally, we’ll consider virtue theory, which places the issue of one’s character
and core virtues at the fore, instead of focusing first on rules and responsibilities or the
consequences that inevitably flow from all of our actions.
Rights Theory Rights theory encompasses a variety of ethical philosophies holding that certain
human rights are fundamental and must be respected by other humans. The focus is on each
individual member of society and her rights. As an ethically responsible individual, each of us
faces a moral compulsion not to harm the fundamental rights of others, especially stakeholders
impacted by our business activity.
Kantianism Few rights theorists are strict deontologists, and one of the few is 18th-century
philosopher Immanuel Kant. Kant viewed humans as moral actors who are free to make choices.
He believed humans are able to judge the morality of any action by applying his famous
categorical imperative. One formulation of the categorical imperative is, “Act only on that
maxim whereby at the same time you can will that it shall become a universal law.” This means
that we judge an action by applying it universally.
Suppose you want to borrow money even though you know that you will never repay it. To
justify this action using the categorical imperative, you state the following maxim or rule: “When
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I want money, I will borrow money and promise to repay it, even though I know I won’t repay.”
According to Kant, you would not want this maxim to become a universal law because no one
would believe in promises to repay debts and you would not be able to borrow money when you
want. The ability to trust others in society would be completely impossible, and relationships
would deteriorate. Thus, your maxim or rule fails to satisfy the categorical imperative. You are
compelled, therefore, not to promise falsely that you will repay a loan.
Kant had a second formulation of the categorical imperative: “Always act to treat humanity,
whether in yourself or in others, as an end in itself, never merely as a means.” Thus arises a rule
or principle creating a duty not to use or manipulate others in order to achieve our own
happiness. In Kant’s eyes, if you falsely promise a lender to repay a loan, you are manipulating
that person’s trust in you for your own ends because she would not agree to the loan if she knew
all the facts.
Modern Rights Theories Strict deontological ethical theories like Kant’s face an obvious
problem: The duties are often viewed as absolute and universally applicable. A deontologist
might argue that one must never lie or kill, even though most of us find lying and killing
acceptable in some contexts, such as in self-defense. Responding to these difficulties, some
modern philosophers have proposed mixed deontological theories. There are many theories here,
but one popular theory requires us to abide by a moral rule unless a more important rule conflicts
with it. In other words, our moral compulsion is not to compromise a person’s right unless a
greater right takes priority over it.
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For example, members of society have the right not to be lied to. Therefore, in most contexts you
are morally compelled not to tell a falsehood. That is an important right because it is critical in a
community or marketplace that one be able to rely on another’s word. If, however, you could
save someone’s life by telling a falsehood, such as telling a lie to a criminal about where a
witness who will testify against him can be found, you probably will be required to save that
person’s life by lying about his whereabouts. In this context, the witness’s right to live is a more
important right than the criminal’s right to hear the truth. In effect, one right “trumps” the other
right.
What are these fundamental rights? How do we rank them in importance? Seventeenth-century
philosopher John Locke argued for fundamental rights that we see embodied in the constitutions
of modern democratic states: the protection of life, liberty, and property. Libertarians and others
include the important rights of freedom of contract and freedom of expression. Modern liberals,
like Bertolt Brecht, argued that all humans have basic rights to employment, food, housing, and
education. In much of the ongoing debate page 4-6around health care policy in the United States,
a key question is whether or not every citizen has a right to health care.
Strengths of Rights Theory The major strength of rights theory is that it recognizes the moral
worth of each individual and the importance of protecting fundamental rights. This means that
members of modern democratic societies have extensive liberties and rights around which a
consensus has formed and citizens need not fear the removal of these rights by their government
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or other members of society. In the U.S. context, one need look no further than the Declaration of
Independence and its emphasis on “life, liberty, and the pursuit of happiness” as those
“unalienable rights” that lie beyond the reach of government interference. In the global context,
the Universal Declaration of Human Rights was adopted by the United Nations in 1948 as an
expression of fundamental rights to which many people believe all are entitled.
Criticisms of Rights Theory Most of the criticisms of rights theory deal with the near absolute
yet relative value of the rights protected, sometimes making it difficult to articulate and
administer a comprehensive rights theory. First, it is difficult to achieve agreement about which
rights are protected. Rights fundamental to modern countries like the United States (such as
many women’s or GLBT rights) are more limited in other countries around the world. Even
within one country, citizens disagree on the existence and ranking of rights. For example, as
noted earlier, some Americans argue that the right to health care is an important need that should
be met by government or a person’s employer. Other Americans believe funding universal health
care would interfere with the libertarian right to limited government intervention in our lives.
Balancing rights in conflict can be difficult.
In addition, rights theory does not concern itself with the costs or benefits of requiring respect for
another’s right. For example, rights theory probably justifies the protection of a neo-Nazi’s right
to spout hateful speech, even though the costs of such speech, including damage to relations
between ethnic groups, may far outweigh any benefits the speaker, listeners, and society receive
from the speech.
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Moreover, in the context of discussions around public policy and political economy, some argue
that rights theory can be perverted to create a sense of entitlement reducing innovation,
entrepreneurship, and production. For example, if one is able to claim an entitlement to a job, a
place to live, food, and health care—regardless of how hard he is expected to work—motivations
to pull one’s own weight and contribute to society and the greater good may be compromised,
resulting in a financially unsustainable culture of dependency. The overlap between theories of
ethics and their political policy implications is explored further as we turn our attention to justice
theory.
The Global Business Environment
Justice Theory In 1971, John Rawls published his book A Theory of Justice, the philosophical
underpinning for the bureaucratic welfare state. Based upon the principle of justice, Rawls
reasoned that it was right for governments to redistribute wealth in order to help the poor and
disadvantaged. He argued for a just distribution of society’s resources by which a society’s
benefits and burdens are allocated fairly among its members.
Rawls expressed this philosophy in his Greatest Equal Liberty Principle: Each person has an
equal right to basic rights and liberties. He qualified or limited this principle with the Difference
Principle: Social inequalities are acceptable only if they cannot be eliminated without making the
worst-off class even worse off. The basic structure is perfectly just, he wrote, when the prospects
of the least fortunate are as great as they can be.
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Rawls’s justice theory has application in the business context. Justice theory requires decision
makers to be guided by fairness and impartiality and to take seriously what outcomes these
principles produce. In the business context, justice theory prompts leadership to ask: Are our
employees getting what they deserve? It would mean, for example, that a business deciding in
which of two communities to build a new manufacturing plant should consider which
community has the greater need for economic development.
Chief among Rawls’s critics was his Harvard colleague Robert Nozick. Nozick argued that the
rights of the individual are primary and that nothing more was justified than a minimal
government that protected against violence and theft and ensured the enforcement of contracts.
Nozick espoused a libertarian view that unequal distribution of wealth is moral if there is equal
opportunity. Applied to the business context, Nozick’s formulation of justice would permit a
business to choose between two manufacturing plant sites after giving each community the
opportunity to make its best bid for the plant. Instead of picking the community most in need, the
business may pick the one offering the best deal.
Strengths of Justice Theory The strength of Rawls’s justice theory lies in its basic premise that
society owes a duty to protect those who are least advantaged—that is, positioned unfairly vis-àvis the distribution of social goods. Its motives are consistent with the religious and secular
philosophies that urge humans to help those in need. Many religions and cultures hold basic to
their faith the assistance of those who are less fortunate.
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Criticisms of Justice Theory Rawls’s justice theory shares some of the criticisms of rights theory.
It treats equality as an absolute, without examining the potential costs of producing equality,
including reduced incentives for innovation, entrepreneurship, and production. Moreover, any
attempt to rearrange social benefits requires an accurate measurement of current wealth. For
example, if a business is unable to measure accurately which employees are in greater need of
benefits due to their wealth level, application of justice theory may make the business a Robin
Hood in reverse: taking from the poor to give to the rich.
Utilitarianism Utilitarianism requires a decision maker to maximize utility for society as a whole.
Maximizing utility means achieving the highest level of satisfactions over dissatisfactions. This
means that a person must consider the benefits and costs of his actions to everyone in society.
A utilitarian will act only if the benefits of the action to society outweigh the societal costs of the
action. Note that the focus is on society as a whole. This means a decision maker may be
required to do something that harms her if society as a whole is benefited by her action. A
teleological theory, utilitarianism judges our actions as good or bad depending on their
consequences. This is sometimes expressed as “the ends justify the means.”
Utilitarianism is most identified with 19th-century philosophers Jeremy Bentham and John Stuart
Mill. Bentham argued that maximizing utility meant achieving the greatest overall balance of
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pleasure over pain. A critic of utilitarianism, Thomas Carlyle, called utilitarianism “pig
philosophy” because it appeared to base the goal of ethics on the swinish pleasures of the
multitude.
Mill thought Bentham’s approach too narrow and broadened the definition of utility to include
satisfactions such as health, knowledge, friendship, and aesthetic delights. Responding to
Carlyle’s criticisms, Mill also wrote that some satisfactions count more than others. For example,
the pleasure of seeing wild animals free in the world may be a greater satisfaction morally than
shooting them and seeing them stuffed in one’s den.
How does utilitarianism work in practice? It requires that you consider not just the impact of
decisions on yourself, your family, and your friends, but also the impact on everyone in society.
Before deciding whether to ride a bicycle page 4-8to school or work rather than to drive a car, a
utilitarian would consider the wear and tear on her clothes, the time saved or lost by riding a
bike, the displeasure of riding in bad weather, her improved physical condition, her feeling of
satisfaction for not using fossil fuels, the cost of buying more food to fuel her body for the bike
trips, the dangers of riding near automobile traffic, and a host of other factors that affect her
satisfaction and dissatisfaction.
But her utilitarian analysis doesn’t stop there. She has to consider her decision’s effect on the rest
of society. Will she interfere with automobile traffic flow and decrease the driving pleasure of
automobile drivers? Will commuters be encouraged to ride as she does and benefit from doing
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so? Will her lower use of gasoline for her car reduce demand and consumption of fossil fuels,
saving money for car drivers and reducing pollution? Will her and other bike riders’ increased
food consumption drive up food prices and make it less affordable for poor families? This only
scratches the surface of her utilitarian analysis.
The process we used earlier, act utilitarianism, judges each act separately, assessing a single act’s
benefits and costs to society’s members. Obviously, a person cannot make an act utilitarian
analysis for every decision. It would take too much time and many variables are difficult to
calculate.
Utilitarianism recognizes that human limitation. Rule utilitarianism judges actions by a rule that
over the long run maximizes benefits over costs. For example, you may find that taking a shower
every morning before school or work maximizes society’s satisfactions, as a rule. Most days,
people around you will be benefited by not having to smell noisome odors, and your personal
and professional prospects will improve by practicing good hygiene. Therefore, you are likely to
be a rule utilitarian and shower each morning, even though some days you may not contact other
people.
Many of the habits we have are the result of rule utilitarian analysis. Likewise, many business
practices, such as a retailer’s regular starting and closing times, also are based in rule
utilitarianism.
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Strengths of Utilitarianism What are the strengths of utilitarianism as a guide for ethical conduct?
It is easy to articulate the standard of conduct: You merely need to do what is best for society as a
whole. Moreover, many find it intuitive to employ an ethical reasoning that seeks to maximize
human flourishing and eliminate harm or suffering.
Criticisms of Utilitarianism Those strengths also expose some of the criticisms of utilitarianism
as an ethical construct. It is difficult to measure one’s own pleasures and pains and satisfactions
and dissatisfactions, let alone those of all of society’s members. In short, how does one
adequately and accurately measure human flourishing? In addition, those benefits and costs are
inevitably distributed unequally across society’s members. It can foster a tyranny of the majority
that may result in morally monstrous behavior, such as a decision by a 100,000-person
community to use a lake as a dump for human waste because only one person otherwise uses or
draws drinking water from the lake.
That example exhibits how utilitarianism differs from rights theory. While rights theory may
protect a person’s right to clean drinking water regardless of its cost, utilitarianism considers the
benefits and costs of that right as only one factor in the total mix of society’s benefits and costs.
In some cases, the cost of interfering with someone’s right may outweigh the benefits to society,
resulting in the same decision that rights theory produces. But where rights theory is essentially a
one-factor analysis, utilitarianism requires a consideration of that factor and a host of others as
well, in an attempt to balance pleasure over pain.
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A final criticism of utilitarianism is that it is not constrained by law. Certainly, the law is a factor
in utilitarian analysis. Utilitarian analysis must consider, for example, the dissatisfactions
fostered by not complying with the law and by creating an environment of lawlessness in a
society. Yet the law is only one factor in utilitarian analysis. The pains caused by violating the
law may be offset by benefits the violation produces. Rational actors may ultimately determine
that the cost” benefit analysis justifies deviation from a law or rule. Most people, however, are
rule utilitarian when it comes to law, deciding that obeying the law in the long run maximizes
social utility.
Shareholder Theory Premised on the concept that corporate leaders are agents who owe
contractual obligations to investors, shareholder theory argues that ethical dilemmas should be
resolved with a focus on maximizing the firm’s long-term profits within the limits of the law. It is
based in the laissez faire theory of capitalism first expressed by Adam Smith in the 18th century
and more recently promoted by the Nobel Prize” winning economist Milton Friedman. Laissez
faire economists argue total social welfare is optimized if humans are permitted to work toward
their own selfish goals. The role of government, law, and regulation is solely to ensure the
workings of a free market by not interfering with economic liberty, by eliminating collusion
among competitors, and by promoting accurate information in the marketplace.
By focusing on results—maximizing total social welfare through a corporate focus on profit
maximization—a shareholder theory approach to ethical decisions is a page 4-9teleological- or
consequences-oriented ethical theory. It is closely related to utilitarianism, but it differs
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fundamentally in how ethical decisions are made. While utilitarianism considers all stakeholders
as it seeks to maximize social utility by focusing the actor on a broad-based creation of social
value and reduction in social harm, a shareholder approach to profit maximization optimizes total
social utility by narrowing the actor’s focus, requiring the decision maker to make a wealthmaximizing decision that is focused on enhancing profits for those investors or shareholders who
can claim a direct financial interest in the organization’s bottom line.
Strengths of Focusing on Profit Maximization By working in our own interests, we compete for
society’s scarce resources (iron ore, labor, and land, to name a few), which are allocated to those
people and businesses that can use them most productively. By allocating society’s resources to
their most efficient uses, as determined by a free market, shareholder theory claims to maximize
total social utility or benefits. Thus, in theory, society as a whole is bettered if all of us compete
freely for its resources by trying to increase our personal or organizational profits. If we fail to
maximize profits, some of society’s resources will be allocated to less productive uses that
reduce society’s total welfare.
In addition, shareholder theory emphasizes that a commitment first and foremost to profit
maximization must always be constrained by what is permitted under the law. A profit maximizer
theoretically acts ethically by complying with society’s mores as expressed in its laws.
Moreover, the emphasis on profit maximization requires the decision maker and business to be
disciplined according to the dictates of the marketplace. Consequently, an analysis of the ethical
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issue pursuant to shareholder theory probably requires a decision maker to consider the rights
protected by rights theory, especially the shareholder’s or investor’s contractual rights to a return
on investment, as well as fairness dictates embedded in justice theory. Ignoring important rights
of employees, customers, suppliers, communities, and other stakeholders may negatively impact
a corporation’s long-term profits. A business that engages in behavior that is judged unethical by
consumers and other members of society is subject to boycotts, adverse publicity, demands for
more restrictive laws, and other reactions that damage its image, decrease its revenue, and
increase its costs.
Consider, for example, the reduced sales of Martha Stewart” branded goods at Kmart after Ms.
Stewart was accused of trading ImClone stock while possessing inside information. Consider
also the fewer number of college graduates willing to work for Waste Management Inc. in the
wake of adverse publicity and indictments against its executives for misstating its financial
results. Note also the higher cost of capital for firms like Dell as investors bid down the stock
price of companies accused of accounting irregularities and other wrongdoing.
All these reactions to perceived unethical conduct impact the business’s profitability in the short
and long run, motivating that business to make decisions that comply with ethical views that
transcend legal requirements.
Criticisms of Focusing on Profit Maximization The strengths of shareholder theory’s emphasis
on profit maximization as a model for ethical behavior also suggest criticisms and weaknesses of
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the theory. Striking at the heart of the theory is the criticism that corporate managers are subject
to human failings that make it impossible for them to maximize corporate profits. The failure to
discover and process all relevant information and varying levels of aversion to risk can result in
one manager making a different decision than another manager. Group decision making in the
business context introduces other dynamics that interfere with rational decision making. Social
psychologists have found that groups often accept a higher level of risk than they would as
individuals. There is also the tendency of a group to internalize the group’s values and suppress
critical thought.
Furthermore, even if an emphasis on profit maximization results in an efficient allocation of
society’s resources and maximization of total social welfare, it does not concern itself with how
wealth is allocated within society. In the United States, the top wealthiest 1 percent own more
than 40 percent of the nation’s wealth, and globally, it is estimated that 26 individuals control
more wealth than the combined wealth of 50 percent of the global population. To some people,
those levels of wealth disparity are unacceptable. To laissez faire economists, wealth disparity is
an inevitable component of a free market that rewards hard work, acquired skills, innovation, and
risk taking. Yet critics of shareholder theory’s emphasis on profit maximization respond that
market imperfections, structural barriers, and a person’s position in life at birth interfere with his
ability to compete.
Critics charge that the ability of laws and market forces to control corporate behavior is limited
because it requires lawmakers, consumers, employees, and other constituents to detect unethical
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corporate acts and take appropriate steps. Even if consumers notice irresponsible behavior and
inform a corporation, a bureaucratic corporate structure may interfere with the information being
received by the proper person inside the corporation. If, instead, page 4-10consumers are silent
and refuse to buy corporate products because of perceived unethical acts, corporate management
may notice a decrease in sales, yet attribute it to something other than the corporation’s unethical
behavior.
Critics also argue that equating ethical behavior with legal compliance is a tautology in countries
like the United States where businesses distort the lawmaking process by lobbying legislators
and making political contributions. It cannot be ethical, they argue, for businesses to merely
comply with laws reflecting the interests of businesses and over which corporations have
enormous influence post” Citizens United.
Proponents of the emphasis on profit maximization respond that many laws restraining
businesses are passed despite businesses lobbying against those laws. The Sarbanes” Oxley Act,
which increases penalties for wrongdoing executives, requires CEOs to certify financial
statements, and imposes internal governance rules on public companies, is such an example. So
are laws restricting drug companies from selling a drug unless it is approved by the Food and
Drug Administration and requiring environmental impact studies before a business may construct
a new manufacturing plant. Moreover, businesses are nothing other than a collection of
individual stakeholders, which includes employees, shareholders, and their communities. When
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they act to influence political policies or lobby for legal or regulatory change, their advocacy is
arguably in the best interests of all these stakeholders.
Critics respond that ethics transcends law, requiring, in some situations, that businesses adhere to
a higher standard than required by law. We understand this in our personal lives. For example,
despite the absence of law dictating, for the most part, how we treat friends, we know that ethical
behavior requires us to be loyal to friends and to spend time with them when they need our help.
In the business context, a firm may be permitted to release employees for nearly any reason,
except the few legally banned bases of discrimination (such as race, age, and gender), yet some
critics will argue businesses should not terminate an employee for other reasons currently not
banned by most laws (such as sexual orientation or appearance). Moreover, these critics further
argue that businesses—due to their influential role in a modern society—should be leaders in
setting a standard for ethical conduct.
Those who emphasize profit maximization respond that such an ethical standard is difficult to
define and hampers efficient decision making. Moreover, they argue that experience shows the
law has been a particularly relevant definition of ethical conduct. Consider that many corporate
scandals would have been prevented had the executives merely complied with the law and had
existing regulations been enforced. For example, Enron executives illegally kept some liabilities
off the firm’s financial statements, while regulatory oversight also failed. Tyco and Adelphia
executives illegally looted corporate assets. Had these executives page 4-11simply complied with
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the law and maximized their firms’ long-run profits, none of those ethical debacles would have
occurred.