Timmco Case Study
Timmco, Inc. is a publicly traded corporation located in Denton, Texas that makes and sells high pressure industrial spraying equipment used in all sorts of commercial liquid spraying applications. It prides itself on top quality and promotes its products as “100% made in the USA”.
Sales have been declining recently due to competition from lower priced competitors and Timmco is looking for ways to reduce costs. One option under consideration is to find a new source for the high-pressure valves used in its products. These valves are complicated mechanisms that operate under very high internal pressure. If the valve was to burst, it would spray pieces of metal in all directions and pose a significant hazard to anyone standing nearby including the operator of the equipment. Timmco currently has a contract to purchase 1,000 valves a year at $2,500 per valve from Blagg Industries, a small privately owned business located in Boone, North Carolina. The contract has been in place for three years and has two more years to run.
Blagg Industries has a dozen employees. Timmco is its primary customer. If Blagg Industries loses Timmco’s business, it will have to lay off employees and might even go out of business.
Timmco is considering outsourcing the valves from Sanco, an overseas supplier in the country of Slawrovia, instead of buying valves from Blagg Industries. The Sanco valves only cost $1,000 each, but are known to be of lower quality than the Blagg Industries valves and are more likely to burst. Sanco can supply these valves at such low cost because they pay their workers, including children, less than the equivalent of $5 per day and work them long hours in hot, dangerous conditions.
Slawrovia is a poor country, but it has a large government bureaucracy and there is a lot of red tape involved in getting approval to export manufactured goods to other countries. In fact, it might take more than a year for Sanco and Timmco to obtain the necessary approvals for Sanco to export the valves to Timmco. Fortunately, the CEO of Sanco is related to the Slawrovia Minister of Commerce and has told Timmco that the necessary approvals can be obtained in less than a week if Timmco makes a $20,000 “gift” to the Slawrovia Minister of Commerce.
In addition to finding a new, low cost valve supplier, Timmco plans to increase sales by running a new marketing campaign that focuses on their commitment to American made quality. The tagline will be “Made in the USA by Americans, for Americans.”
You are a high-level executive at Timmco. Analyze the legal and ethical issues presented by the Timmco scenario. Your legal and ethical analysis should include breach of contract and remedies, negligent torts, product liability, the Foreign Corrupt Practices Act, and deceptive advertising and should incorporate a discussion and application of one or more of the ethical theories from Chapter 4 of the course textbook
Business law: The Ethical, Global, and E-Commerce Environment
.
Your legal and ethical analysis should,
The Timmco Case Study Final Paper
Textbook Reference
Prenkert, J.D., Barnes, A.J., Perry, J.E., Haugh, T, & Stemler, A.R. (2022).
Business law: The ethical, global, and digital environment
(18th ed.). Retrieved from
https://www.vitalsource.com
CHAPTER 4
Business Ethics, Corporate Social Responsibility,
Corporate Governance, and Critical Thinking
W
hat 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
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:
1.
4-1Appreciate the strengths and weaknesses of the various ethical theories.
2.
4-2Apply the Guidelines for Ethical Decision Making to business and personal decisions.
3.
4-3Recognize critical thinking errors in your own and others’ arguments.
4.
4-4Utilize a process to make ethical decisions in the face of pressure from others.
5.
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 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.”
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
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.
page 4-3
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.
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
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.
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.
Ethics and Compliance in Action
American physicist, mathematician, and futurist Freeman Dyson provided insights into why we humans may have difficulty
determining which ethical viewpoint to embrace. His research also helps explain why different people have different ethical
leanings.
The destiny of our species is shaped by the imperatives of survival on six distinct time scales. To survive means to compete
successfully on all six time scales. But the unit of survival is different for each of the six time scales. On a time scale of years, the
unit is the individual. On a time scale of decades, the unit is the family. On a time scale of centuries, the unit is the tribe or nation.
On a time scale of millennia, the unit is the culture. On a time scale of tens of millennia, the unit is the species. On a time scale of
eons, the unit is the whole web of life on our planet. That is why conflicting loyalties are deep in our nature. In order to survive,
we need to be loyal to ourselves, to our families, to our tribes, to our culture, to our species, to our planet. If our psychological
impulses are complicated, it is because they were shaped by complicated and conflicting demands. 1
Dyson goes on to write, “Nature gave us greed, a robust desire to maximize our personal winnings. Without greed we would
not have survived at the individual level.” Yet he points out that Nature also gave us the connections and tools to survive at the
family level (Dyson calls this tool love of family), the tribal level (love of friends), the cultural level (love of conversation), the
species level (love of people in general), and the planetary level (love of nature).
If Dyson is correct, why are humans sometimes vastly different from each other in some of their ethical values? Why do
some of us argue, for example, that universal health care is a right for each citizen, while others believe health care is a privilege?
The answer lies in the degree to which each of us embraces, innately or rationally, Dyson’s six units of survival and the extent to
which each of us possesses the connections and tools to survive on each of those levels.
LO4-1
Appreciate the strengths and weaknesses of the various ethical theories.
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 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 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 4-5 company 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.
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
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.
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? Seventeenthcentury 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 4-6 around 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
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.
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
The Golden Rule in the World’s Religions and Cultures
Immanuel Kant’s categorical imperative, which is one formulation of rights theory, has its foundations in the Golden Rule. Note
that the Golden Rule exists in all cultures and in all countries of the world. Here is a sampling.
BUDDHISM: Hurt not others in ways that you would find hurtful.
CHRISTIANITY: Do to others as you would have others do to you.
CONFUCIANISM: Do not to others what you would not like yourself.
GRECIAN: Do not that to a neighbor which you shall take ill from him.
HINDUISM: This is the sum of duty: do nothing to others which if done to you would cause you pain.
HUMANISM: Individual and social problems can only be resolved by means of human reason, intelligent effort, and critical
thinking joined with compassion and a spirit of empathy for all living beings.
ISLAM: No one of you is a believer until he desires for his brother that which he desires for himself.
JAINISM: In happiness and suffering, in joy and grief, we should regard all creatures as we regard our own self.
JUDAISM: Whatever is hateful to you, do not to another.
NATIVE AMERICAN SPIRITUALITY: Respect for all life is the foundation.
PERSIAN: Do as you would be done by.
ROMAN: Treat your inferiors as you would be treated by your superiors.
SHINTOISM: The heart of the person before you is a mirror. See there your own form.
SIKHISM: As you deem yourself, so deem others.
TAOISM: Regard your neighbor’s gain as your own gain, and your neighbor’s loss as your own loss.
YORUBAN: One going to take a pointed stick to pinch a baby bird should first try it on himself to feel how it hurts.
ZOROASTRIANISM: That nature alone is good which refrains from doing to another whatsoever is not good for itself.
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.
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.
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 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 4-8 to 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 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.
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.
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 4-9 teleological- or
consequences-oriented ethical theory. It is closely related to utilitarianism, but it differs
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 wealth-maximizing
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 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 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 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 4-10 consumers 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
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 4-11 simply complied with the law and
maximized their firms’ long-run profits, none of those ethical debacles would have
occurred.
Ethics and Compliance in Action
Minimum Wage Laws
In recent years, debate has raged over whether governments in the United States should increase dramatically the federal or state
minimum wage that most employers must pay employees, from about $7 per hour to as much as $15 per hour. In 2015, the City of
Seattle increased its minimum wage of city workers to $15 per hour, and New York City followed suit in 2019. Between 2020 and
2025, Washington, D.C.; New Jersey; Massachusetts; Maryland; Illinois; and California are scheduled to see similar increases.
The efforts to increase the minimum wage are directed mostly against McDonald’s, Walmart, and other employers who
employ large numbers of low-skilled or inexperienced workers. For example, one 26-year-old woman who worked at a Chicago
McDonald’s as a cashier for 10 years claimed she could not support her two children on the wage paid by McDonald’s.
Should a government protect employees by increasing the minimum wage? If a minimum wage is imposed by government,
what is the right wage? A $15-per-hour wage translates into annual compensation of $30,000, hardly enough to support a family.
Should the minimum wage be $25 per hour? Why not make it $50 per hour, which would be $100,000 annual income, enough to
permit most families to survive quite well?
Why should government impose a minimum wage on private employers? Are employees without power to demand higher
wages? Will a minimum wage distort the employment market? Do employees deserve higher wages than the amount they and their
employers agree on? Does a high minimum wage encourage workers to remain in low-skill jobs rather than improving their skills
and qualifying for higher-wage jobs? Should a 42-year-old woman be required to improve her lot in life by increasing her education
rather than continuing to do a job that any 16-year-old can do? What social barriers or structural inequities might exist to hinder
some in society from gaining necessary skills and improving access to better employment options?
Do the answers to those questions depend on the ethical theory to which one subscribes?
Critics of profit maximization respond that the corporate crises at companies like Enron and
WorldCom prove that flaws in corporate governance encourage executives to act unethically.
These examples, critics say, show that many executives do not maximize profits for their firms.
Instead, driven by short-term, quarterly financial expectations, they maximize their own profits at
the expense of the firm and its shareholders. They claim that stock options and other incentives
intended to align the interests of executives with those of shareholders promote decisions that raise
short-term profits to the long-run detriment of the firms. They point out that many CEOs and other
top executives negotiate compensation plans that do not require them to stay with the firm long
term and that allow them to benefit enormously from short-term profit taking. Executive greed,
encouraged by these perverse executive compensation plans, also encourage CEOs and other
executives to violate the law.
Defenders of business, profit maximization, and capitalist economics point out that it is nearly
impossible to stop someone who is bent on fraud. A dishonest executive will lie to shareholders,
creditors, board members, and the public and also treat the law as optional. Yet enlightened
proponents of the modern corporation accept that there are problems with corporate management
culture that require changes. They know that an unconstrained CEO; ethically uneducated
executives; perverse compensation incentives; and inadequate supervision of executives by the
firm’s CEOs, board of directors, and shareholders present golden opportunities to the unscrupulous
person and make unwitting accomplices of the ignorant and the powerless. Such an awareness
highlights the role of corporate culture—for example, an ethical climate—in fostering an
environment in which individuals are supported in their desire to act and live according to their
moral compass.
Finally, divining the shareholders’ ethical viewpoint may be difficult. While nearly all
shareholders are mostly profit driven, a small minority of shareholders have other agendas, such
as protecting the environment or workers’ rights, regardless of the cost to the corporation. It is
often not possible to please all shareholders.
Nonetheless, increasing shareholder democracy by enhancing the shareholders’ role in the
nomination and election of board members is essential to uniting the interests of shareholders and
management. So is facilitating the ability of shareholders to bring proposals for ethical policy to a
vote of shareholders. In the past several years, for public companies at least, the Securities and
Exchange Commission has taken several steps to increase shareholder democracy. These steps,
which are covered fully in Chapter 45, are having their intended effect. For example, during the
2014 shareholder meeting season, shareholder proposals included requiring annual election of
directors and limiting corporate political lobbying and contributions. Moreover, the New York
Stock Exchange and NASDAQ require companies listed on those exchanges to submit for
shareholder approval certain actions, such as approval of stock option plans.
Virtue Theory Differing from both the deontological emphasis on rights and justice flowing from
duties and responsibilities, as well as the teleological focus on consequences and outcomes
(measured according to either a utilitarian or profit maximization calculus), is a third approach to
ethical analysis that highlights the importance of character—for both individuals and an
organization. Virtue theory demands that an individual know his values and how they correlate to
his identity, habits, and ways of engaging with others. Focusing on an intentional pursuit of virtues,
the theory emphasizes questions such as: Who are you? What values are most important to you?
Are my stated values and the actions I take aligned? For an organization, the theory inquires: What
is your corporate purpose? What are your corporate values? Are our corporate actions and our
values integrated?
Virtue theory, therefore, approaches ethical dilemmas from a commitment to integrity and an
emphasis on character development. Deontological and teleological considerations are still
important components of the ethical analysis, but the starting point is different. Instead of focusing
on what action is right, virtue theory focuses on whether the individual (or the corporation) is
acting consistently with those virtues or values that will result in a life well lived.
As developed in the West, a virtue-oriented approach owes much to Aristotle and other Greek
philosophers, who explored practical notions of the good life and how best to achieve it. In the
East, virtue theory was largely cultivated by Confucius, who focused on the centrality of
benevolence and righteousness as hallmarks in the development of character. In short, a virtue
theory approach emphasizes the person and the daily struggle to become a better person through
identification and cultivation—or habituation—of virtues, such as wisdom or courage or
benevolence.
As an example, consider a person in need of help. A deontologist might offer assistance out
of a sense of duty or responsibility or allegiance to the Golden Rule. A utilitarian might offer aid
because the consequences would result in a maximization of overall well-being. One acting
according to virtue theory, however, would be helping out of desire to page 4-12 become a more
charitable or benevolent person. The giving of aid would flow from a commitment to becoming a
person who gives aid. In this instance, one might imagine that a virtue theorist would have
predetermined that she values the virtues of charity and benevolence. Upon confronting an
opportunity to help someone in need, she would simply have acted in a way that promoted these
virtues and made them more habitual in the person’s daily activity.
Strengths of Virtue Theory As noted in the previous discussion, acting with regard to one’s selfinterest is a hallmark of the human condition. Virtue theory offers an opportunity to convert
impulses at the heart of selfishness and greed into opportunities to act with a self-interested focus
to become more personally virtuous and integrated with regard to one’s values, actions, and the
habits we wish to cultivate. In organizations, virtue theory can create an aspirational climate and
an additional way of emphasizing the importance of manifesting those corporate values that may
otherwise be seen as mere words on a website or posters in the break room. Moreover, virtue
theory’s focus on the development of practical wisdom—that is, moral imagination and sound
judgment honed by experience—creates space and structure to encourage personal growth and
continuous teaching and training of employees.
Additional value brought by a virtue approach to ethics is its appreciation for the ambiguity
of dilemmas where simple maxims or principles are not adequate to the maintenance of human
relationships nor accommodating to the complexity of human emotions.
Criticisms of Virtue Theory Some critics argue that virtue theory is ultimately too subjective, too
limited in scope, and too difficult to codify to be useful, especially in the corporate context.
Certainly, those deontologists or teleologists seeking a universally applicable code of ethics may
be unsatisfied, but then any such code is probably unrealistic given the complexities of the 21stcentury global business environment. Other concerns have been raised about the inability of virtue
theory to apply in a diverse global business environment because virtues that might be recognized
and celebrated in one part of the world might be different from those virtues recognized elsewhere.
Indeed, cultural relativity is an important issue to be considered when conducting ethical analysis
using any theory or framework, as notions of what constitutes “right” and “wrong” are frequently
contested.
Improving Corporate Governance and Corporate Social Responsibility Even if we
cannot stop all fraudulent executives, we can modify the corporate governance model to educate,
motivate, and supervise executives and thereby improve corporate social responsibility. Corporate
critics have proposed a wide variety of cures, all of which have been implemented to some degree
and with varying degrees of success.
Ethics Codes Many large corporations and several industries have adopted codes of ethics or
codes of conduct to guide executives and other employees. The Sarbanes” Oxley Act requires a
public company to disclose whether it has adopted a code of ethics for senior financial officers and
to disclose any change in the code or waiver of the code’s application.
There are two popular views of such codes. One sees the codes as genuine efforts to foster
ethical behavior within a firm or an industry. The other view regards them as thinly disguised
attempts to make the firm function better, to mislead the public into believing the firm behaves
ethically, to prevent the passage of legislation that would impose stricter constraints on business,
or to limit competition under the veil of ethical standards. Even where the first view is correct,
ethical codes fail to address concretely all possible forms of corporate misbehavior. Instead, they
often emphasize either the behavior required for the firm’s effective internal function, such as not
accepting gifts from customers, or the relations between competitors within a particular industry,
such as prohibitions on some types of advertising.
Better corporate ethics codes make clear that the corporation expects employees not to violate
the law in a mistaken belief that loyalty to the corporation or corporate profitability requires it.
Such codes work best, however, when a corporation also gives its employees an outlet for dealing
with a superior’s request to do an unethical act. That outlet may be the corporate legal department,
a corporate compliance/ethics officer, or even an anonymous reporting procedure.
Ethical Instruction Some corporations require their employees to enroll in classes that teach
ethical decision making. The idea is that a manager trained in ethical conduct will recognize
unethical actions before they are taken and deter herself and the corporation from the unethical
acts.
While promising in theory, in practice, many managers are resistant to ethical training that
requires them to examine their principles. They are reluctant to question a set of long-held
principles with which they are comfortable. Therefore, there are some doubts whether managers
are receptive to ethical instruction. Even if the training is accepted, will managers retain the ethical
lessons of their training and use it, or will time and other job-related pressures force a manager to
think only of completing the job at hand?
page 4-13
Moreover, what ethical values should be emphasized? Is it enough to teach only one, a few,
or all the theories of ethical conduct? Corporations may favor the simplicity of a shareholder
orientation that focuses on maximization of profits. But should a corporation also teach rights
theory and expect its employees to follow it? How should concerns over justice and fair
distribution of benefits and burdens be addressed?
Most major corporations today express their dedication to ethical decision making by having
an ethics officer who is not only responsible for ethical instruction, but also in charge of ethical
supervision. The ethics officer may attempt to instill ethical decision making as a component of
daily corporate life by sensitizing employees to the perils of ignoring ethical issues. The ethics
officer may also be a mentor or sounding board for all employees who face ethical issues.
Whether an ethics officer is effective, however, is determined by the level of commitment top
executives make to ethical behavior and the position and power granted to the ethics officer. For
example, will top executives and the board of directors allow an ethics officer to nix an important
deal on ethical grounds, or will they replace the ethics officer with another executive whose ethical
views permit the deal? Therefore, probably more important than an ethics officer is a CEO with
the character to do the right thing.
Consider All Stakeholders’ Interests Utilitarianism analysis clearly requires an executive to
consider a decision’s impact on all stakeholders. How else can one determine all the benefits and
costs of the decision? Likewise, modern rights theory also dictates considering all stakeholders’
rights, including not compromising an important right unless trumped by another. Kant’s
categorical imperative also mandates a concern for others by requiring one to act as one would
require others to act.
For those seeking to maximize profits, the wisdom of considering all stakeholders is apparent
because ignoring the interests of any stakeholder may negatively affect profits. For example, a
decision may affect a firm’s ability to attract high-quality employees, antagonize consumers,
alienate suppliers, and motivate the public to lobby lawmakers to pass laws that increase a firm’s
cost of doing business. This wisdom is reflected in the Guidelines for Ethical Decision Making,
which you will learn in the next section.
Nonetheless, there are challenges when a corporate manager considers the interests of all
stakeholders. Beyond the enormity of identifying all stakeholders, stakeholders’ interests may
conflict, requiring a compromise that harms some stakeholders and benefits others. In addition,
the impact on each stakeholder group may be difficult to assess accurately.
For example, if a manager is considering whether to terminate the 500 least productive
employees during an economic downturn, the manager will note that shareholders will benefit
from lower labor costs and consumers may find lower prices for goods, but the manager also knows
that the terminated employees, their families, and their communities will likely suffer from the
loss of income. Yet if the employees terminated are near retirement and have sizable retirement
savings or if the termination motivates employees to return to college and seek better jobs, the
impact on them, their families, and their communities may be minimal or even positive. On the
other hand, if the manager makes the decision to retain the employees, shareholder wealth may
decrease and economic inefficiency may result, which harms all society.
Independent Boards of Directors In some of the instances in which corporate executives
have acted unethically and violated the law, the board of directors was little more than a rubber
stamp or a sounding board for the CEO and other top executives. The CEO handpicked a board
that largely allowed the CEO to run the corporation with little board supervision.
CEO domination of the board is a reality in most large corporations because the market for
CEO talent has skewed the system in favor of CEOs. Few CEOs are willing to accept positions in
which the board exercises real control. Often, therefore, a CEO determines which board members
serve on the independent board nominating committee and selects who is nominated by the
committee. Owing their positions to the CEO and earning handsome fees sometimes exceeding
$100,000, many directors are reluctant to oppose the CEO’s plans.
For more than four decades, corporate critics have demanded that corporate boards be made
more independent of the CEO. The corporate ethical crises of recent years have increased those
calls for independence. The New York Stock Exchange and NASDAQ require companies with
securities listed on the exchanges to have a majority of directors independent of the company and
top management. Their rules also require independent management compensation, board
nomination, and audit committees. The Sarbanes” Oxley Act requires public companies to have
board audit committees comprising only independent directors.
One criticism of director independence rules is the belief that no director can remain
independent after joining the board because every director receives compensation from the
corporation. There is a concern that an independent director, whose compensation is high, will side
with management to ensure his continuing nomination, election, and receipt of high fees.
page 4-14
More extreme proposals of corporate critics include recommendations that all corporate
stakeholders—such as labor, government, environmentalists, and communities—have
representation on the board or that special directors or committees be given responsibility over
special areas, such as consumer protection and workers’ rights. Other critics argue for contested
elections for each board vacancy. Few corporations have adopted these recommendations.
While honestly motivated, these laws and recommendations often fail to produce greater
corporate social responsibility because they ignore the main reason for management’s domination
of the board: the limited time, information, and resources that directors have. One solution is to
give outside directors a full-time staff with power to acquire information within the corporation.
This solution, while providing a check on management, also may produce inefficiency by creating
another layer of management in the firm.
In addition, some of the recommendations complicate management by making the board less
cohesive. Conflicts between stakeholder representatives or between inside and outside directors
may be difficult to resolve. For example, the board could be divided by disputes among
shareholders who want more dividends, consumers who want lower prices, and employees who
want higher wages.
Changing the Internal Management Structure Some corporate critics argue that the historic
shift of corporate powers away from a public corporation’s board and shareholders to its managers
is irreversible. They recommend, therefore, that the best way to produce responsible corporate
behavior is to change the corporation’s management structure.
The main proponent of this view, Christopher Stone, recommended the creation of offices
dedicated to areas such as environmental affairs and workers’ rights, higher educational
requirements for officers in positions like occupational safety, and procedures to ensure that
important information inside and outside the corporation is directed to the proper person within
the corporation. He also recommended that corporations study certain important issues and create
reports of the study before making decisions.
These requirements aim to change the process by which corporations make decisions. The
objective is to improve decision making by raising the competency of decision makers, increasing
the amount of relevant information they hold, and enhancing the methodology by which decisions
are made.
More information held by more competent managers using better tools should produce better
decisions. Two of the later sections in this chapter in part reflect these recommendations. The
Guidelines for Ethical Decision Making require a decision maker to study a decision carefully
before making a decision. This includes acquiring all relevant facts, assessing a decision’s impact
on each stakeholder, and considering the ethics of one’s decision from each ethical perspective. In
addition, the Thinking Critically section will help you understand when fallacious thinking
interferes with a manager’s ability to make good decisions.
Eliminating Perverse Incentives and Supervising Management Even if a corporation
modifies its internal management structure by improving the decision-making process, there are
no guarantees more responsible decisions will result. To the extent unethical corporate behavior
results from faulty perception and inadequate facts, a better decision-making process helps. But if
a decision maker is motivated solely to increase short-term profits, irresponsible decisions may
follow. When one examines closely recent corporate debacles, three things are clear: The corporate
wrongdoers acted in their selfish interests; the corporate reward system encouraged them to act
selfishly, illegally, and unethically; and the wrongdoers acted without effective supervision. These
facts suggest other changes that should be made in the internal management structure.
During the high-flying stock market of the 1990s, stock options were the compensation
package preferred by high-level corporate executives. Shareholders and boards of directors were
more than willing to accommodate them. On one level, stock options seem to align the interests of
executives with those of the corporation and its shareholders. Issued at an exercise price usually
far above the current market price of the stock, stock options have no value until the corporation’s
stock price exceeds the exercise price of the stock options. Thus, executives are motivated to
increase the corporation’s profits, which should result in an increase in the stock’s market price.
In the 1990s stock market, in which some stock prices were doubling yearly, the exercise price of
executives’ stock options was quickly dwarfed by the market price. Executives exercised the stock
options, buying and then selling stock and, in the process, generating profits for a single executive
in the tens and hundreds of millions of dollars. Shareholders also benefited from the dramatic
increase in the value of their stock.
So what is the problem with stock options? As executives accepted more of their
compensation in the form of stock options and became addicted to the lifestyle financed by them,
some executives felt pressure to keep profits soaring to ever-higher levels. In companies like Enron
and WorldCom, which had flawed business models and suspect accounting practices, some
executives were encouraged to create business deals that had little, if any, economic justification
and could be accounted for in ways that kept profits growing. page 4-15 In what were essentially
pyramid schemes, once the faulty economics of the deals were understood by prospective partners,
no new deals were possible, and the schemes crashed like houses of cards. But until the schemes
were discovered, many executives, including some who were part of the fraudulent schemes,
pocketed tens and hundreds of millions of dollars in stock option profits.
The Sarbanes” Oxley Act, as amended by the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, addressed this issue by requiring executive officers to disgorge any bonus
and incentive-based or equity-based compensation received during the three-year period prior to
which the corporation was required to restate its financial statements.
It is easy to see how fraudulent actions subvert the objective of stock options to motivate
executives to act in the best interests of shareholders. Adolph Berle, however, has argued for more
than 50 years that stock options are flawed compensation devices that allow executives to profit
when stock market prices rise in general, even when executives have no positive effect on
profitability. He proposed that the best way to compensate executives is to allow them to trade on
inside information they possess about a corporation’s prospects, information they possess because
they helped produce those prospects. His proposal, however, is not likely ever to be legal
compensation because insider trading creates the appearance that the securities markets are rigged.
Even with incentives in place to encourage executives to inflate profits artificially, it is
unlikely that the recent fraudulent schemes at Enron, WorldCom, and other companies would have
occurred had there been better scrutiny of upper management and its actions by the CEO and the
board of directors. At Enron, executives were given great freedom to create partnerships that
allowed Enron to keep liabilities off the balance sheet yet generate income that arguably could be
recognized in the current period. It is not surprising that this freedom from scrutiny, when
combined with financial incentives to create the partnerships, resulted in executives creating
partnerships that had little economic value to Enron.
Better supervision of management is mostly the responsibility of the CEO, but the board of
directors bears this duty also. We addressed earlier proposals to create boards of directors that are
more nearly independent of the CEO and, therefore, better able to supervise the CEO and other
top managers. Primarily, however, better supervision is a matter of attitude, or a willingness to
devote time and effort to discover the actions of those under your charge and to challenge them to
justify their actions. It is not unlike the responsibility a parent owes to a teenage child to scrutinize
her actions and her friends to make sure that she is acting consistent with the values of the family.
So, too, boards must make the effort to scrutinize their CEOs and hire CEOs who are able and
willing to scrutinize the work of the managers below them.
Yet directors must also be educated and experienced. Poor supervision of management has
also been shown to be partly due to some directors’ ignorance of business disciplines like finance
and accounting. Unless board members are able to understand accounting numbers and other
information that suggests management wrongdoing, board scrutiny of management is a process
with no substance.
The Law The law has been the primary means of controlling corporate misdeeds. Lawmakers
usually assume that corporations and executives are rational actors that can be deterred from
unethical and socially irresponsible behavior by the threats law presents. Those threats are fines
and civil damages, such as those imposed and increased by the Sarbanes” Oxley Act. For
deterrence to work, however, corporate decision makers must know when the law’s penalties will
be imposed, fear those penalties, and act rationally to avoid them.
To some extent, the law’s ability to control executive misbehavior is limited. As we discussed
earlier in this chapter, corporate lobbying may result in laws reflecting the views of corporations,
not society as a whole. Some corporate executives may not know the law exists. Others may view
the penalties merely as a cost of doing business. Some may think the risk of detection is so low
that the corporation can avoid detection. Other executives believe they are above the law, that it
does not apply to them out of arrogance or a belief that they know better than lawmakers. Some
rationalize their violation of the law on the grounds that “everybody does it.”
Nonetheless, for all its flaws, the law is an important means by which society controls business
misconduct. Of all the devices for corporate control we have considered, only market forces and
the law impose direct penalties for corporate misbehavior. Although legal rules have no special
claim to moral correctness, at least they are knowable. Laws also are the result of an open political
process in which competing arguments are made and evaluated. This cannot be said about the
intuitions of a corporate ethics officer, edicts from public interest groups, or the theories of
economists or philosophers, except to the extent they are reflected in law. Moreover, in mature
political systems like the United States, respect for and adherence to law is a well-entrenched
value.
Where markets fail to promote socially responsible conduct, the law can do the job. For
example, the antitrust laws discussed in Chapter 49, while still controversial, have eliminated the
worst anticompetitive business practices. The federal securities laws examined in Chapters 45 and
46 arguably restored investor confidence in the securities markets after page 4-16 the stock market
crash of 1929. Although environmentalists often demand more regulation, the environmental laws
treated in Chapter 52 have improved the quality of water and reduced our exposure to toxic
substances. Employment regulations discussed in Chapter 51—especially those banning
employment discrimination—have forced significant changes in the American workplace. Thus,
the law has an accomplished record as a corporate control device.
Indeed, sometimes the law does the job too well, often imposing a maze of regulations that
deter socially valuable profit seeking without producing comparable benefits. Former Fed chair
Greenspan once wrote, “Government regulation is not an alternative means of protecting the
consumer. It does not build quality into goods, or accuracy into information. Its sole ” contribution’
is to substitute force and fear for incentive as the ” protector’ of the consumer.”
The hope was that the Sarbanes” Oxley Act would restore investor confidence in audited
financial statements and corporate governance. A 2007 survey by Financial Executives
International found that 69 percent of financial executives agreed that compliance with SOX
section 404 resulted in more investor confidence in their companies’ financial reports. Fifty
percent agreed that financial reports were more accurate. As for the cost of SOX compliance, a
2014 Protiviti report found that more than one-third of large companies (at least $10 billion in
annual revenue) spent less than $500,000, while 30 percent spent more than $2 million.
Guidelines for Ethical Decision Making
Now that you understand the basics of ethical theories and the issues in the corporate governance
debate, how do you use this information to make decisions for your business that are ethical and
socially responsible? That is, what process will ensure that you have considered all the ethical
ramifications and arrived at a decision that is good for your business, good for your community,
good for society as a whole, and good for you.
Apply the Guidelines for Ethical Decision Making to business and personal decisions.
Figure 4.1 lists nine factors in the Guidelines for Ethical Decision Making. Let’s consider
each Guideline and explain how each helps you make better decisions.
Figure 4.1 Guidelines for Ethical Decision Making
1. What Facts impact my decision?
2. What are the Alternatives?
3. Who are the Stakeholders?
4. How do the alternatives impact Society as a Whole?
5. How do the alternatives impact My Business Firm?
6. How do the alternatives impact Me, the Decision Maker?
7. What are the Ethics of each alternative?
8. What are the Practical Constraints of each alternative?
9. What Course of Action should be taken and how do we Implement it?
What Facts Impact My Decision? This is such an obvious component of any good decision
that it hardly seems necessary to mention. Yet it is common that people make only a feeble attempt
to acquire all the facts necessary to a good decision.
Many people enter a decision-making process biased in favor of a particular option. As a
result, they look only for facts that support that option. You have seen this done many times by
your friends and opponents, and because you are an honest person, you have seen yourself do this
as well from time to time. In addition, demands on our time, fatigue, laziness, ignorance of where
to look for facts, and aversion to inconveniencing someone who has information contribute to a
reluctance or inability to dig deep for relevant facts.
Because good decisions cannot be made in a partial vacuum of information, it is important to
recognize when you need to acquire more facts. That is primarily the function of your other classes,
which may teach you how to make stock market investment decisions, how to audit a company’s
financial records, and how to do marketing research.
For our purposes, let’s consider this example. Suppose we work for a television manufacturing
company that has a factory in Sacramento, California. Our company has placed page 4-17 you in
charge of investigating the firm’s decision whether to move the factory to Juarez, Mexico. What
facts are needed to make this decision, and where do you find those facts?
Among the facts you need are: What are the firm’s labor costs in Sacramento, and what will
those costs be in Juarez? How much will labor costs increase in subsequent years? What is the
likelihood of good labor relations in each location? What is and will be the productivity level of
employees in each city? What are and will be the transportation costs of moving the firm’s
inventory to market? What impact will the move have on employees, their families, the
communities, the schools, and other stakeholders in each community? Will Sacramento employees
find other jobs in Sacramento or elsewhere? How much will we have to pay in severance pay?
How will our customers and suppliers be affected by our decision? If we move to Juarez, will
our customers boycott our products even if our televisions are better and cheaper than before? If
we move, will our suppliers’ costs increase or decrease? How will our profitability be affected?
How will shareholders view the decision? Who are our shareholders? Do we have a lot of Mexican
shareholders, or do Americans dominate our shareholder list? What tax concessions and other
benefits will the City of Sacramento give our firm if we promise to stay in Sacramento? What will
Ciudad Juarez and the government of Mexico give us if we move to Juarez? How will our decision
impact U.S.” Mexican economic and political relations?
This looks like a lot of facts, but we have only scratched the surface. You can probably come
up with another 100 facts that should be researched. To give you another example of how thorough
managers must be to make prudent decisions, consider that the organizers for the Olympics and
Boston Marathon must attempt to predict and prevent terrorist attacks. For the 2000 Summer
Olympics in Sydney, Australia, organizers created 800 different terrorist scenarios before
developing an antiterrorism plan.
You can see that, to some extent, we are discussing other factors in the Guidelines as we
garner facts. The factors do overlap to some degree. Note also that some of the facts you want to
find are not facts at all, but estimates, such as cost and sales projections. We’ll discuss in the Eighth
Guideline the practical problems with the facts we find.
What Are the Alternatives? A decision maker must be thorough in listing the alternative
courses of actions. For many of us, the temptation is to conclude that there are only two options:
to do something or not to do something. Let’s take our decision whether to move our factory to
Juarez, Mexico. You might think that the only choices are to stay in Sacramento or to move to
Juarez. Yet there are several combinations that fall in between those extremes.
For example, we could consider maintaining the factory in Sacramento temporarily, opening
a smaller factory in Juarez, and gradually moving production to Mexico as employees in
Sacramento retire. Another alternative is to offer jobs in the Juarez factory to all Sacramento
employees who want to move. If per-unit labor costs in Sacramento are our concern, we could ask
employees in Sacramento to accept lower wages and fringe benefits or to increase their
productivity.
There are many other alternatives that you can imagine. It is important to consider all
reasonable alternatives. If you do not, you increase the risk that the best course of action was not
chosen only because it was not considered.
Who Are the Stakeholders? In modern societies, where diversity is valued as an independent
virtue, considering the impacts of your decision on the full range of society’s stakeholders has
taken on great significance in prudent and ethical decision making. While a public corporation
with thousands of shareholders obviously owes a duty to its shareholders to maximize shareholder
wealth, corporate managers must also consider the interests of other important stakeholders,
including employees, suppliers, customers, and the communities in which they live. Stakeholders
also include society as a whole, which can be defined as narrowly as your country or more
expansively as an economic union of countries, such as the European Union of 27 countries, or
even the world as a whole.
Not to be omitted from stakeholders is you, the decision maker who is also impacted by your
decisions for your firm. The legitimacy of considering your own selfish interests will be considered
fully in the Sixth Guideline.
Listing all the stakeholders is not a goal by itself but helps the decision maker apply more
completely other factors in the ethical Guidelines. Knowing whom your decision affects will help
you find the facts you need. It also helps you evaluate the alternatives using the next three
Guidelines: how the alternatives we have proposed impact society as a whole, your firm, and the
decision maker.
How Do the Alternatives Impact Society as a Whole? We covered some aspects of this
Guideline earlier when we made an effort to discover all the facts that impact our decision. We
can do a better job discovering the facts if we try to determine how our decision impacts society
as a whole.
For example, if the alternative we evaluate is keeping the factory in Sacramento after getting
property tax and road building concessions from the City of Sacramento, how is society as a whole
impacted? What effect will tax concessions have on the quality of Sacramento schools (most
schools are funded with property taxes)? Will lower taxes page 4-18 cause the Sacramento
infrastructure (roads and governmental services) to decline to the detriment of the ordinary citizen?
Will the economic benefits to workers in Sacramento offset the harm to the economy and workers
in Juarez?
Will our firm’s receiving preferential concessions from the Sacramento government
undermine the ordinary citizen’s faith in our political and economic institutions? Will we
contribute to the feelings of some citizens that government grants privileges only to the powerful?
Will our staying in Sacramento foster further economic growth in Sacramento? Will staying in
Sacramento allow our suppliers to stay in business and continue to hire employees who will buy
goods from groceries and malls in Sacramento?
What impact will our decision have on efforts to create a global economy in which labor and
goods can freely travel between countries? Will our decision increase international tension
between the United States and Mexico?
Note that the impact of our decision on society as a whole fits neatly with one of the ethical
theories we discussed earlier: utilitarianism. Yet profit maximization, rights theory, and justice
theory also require a consideration of societal impacts.
How Do the Alternatives Impact My Business Firm? The most obvious impact any
alternative has on your firm is its effect on the firm’s bottom-line profitability. Yet that answer
requires explaining because what you really want to know is what smaller things leading to
profitability are impacted by an alternative.
For example, if our decision is to keep the factory in Sacramento open temporarily and
gradually move the plant to Juarez as retirements occur, what will happen to employee moral and
productivity in Sacramento? Will our suppliers in Sacramento abandon us to serve more permanent
clients instead? Will consumers in Sacramento and the rest of California boycott our televisions?
Will they be able to convince other American laborers to boycott our TVs? Will a boycott generate
adverse publicity and media coverage that will damage our brand name? Will investors view our
firm as a riskier business, raising our cost of capital?
Again, you can see some redundancy here as we work through the Guidelines, but that
redundancy is all right because it ensures that we are examining all factors important to our
decision.
How Do the Alternatives Impact Me, the Decision Maker? At first look, considering
how a decision you make for your firm impacts you hardly seems to be a component of
ethical and responsible decision making. The term selfish probably comes to mind.
Many of the corporate ethical debacles of the last few years comprised unethical
and imprudent decisions that probably were motivated by the decision makers’ selfish
interests. Mortgage brokers’ desires to earn large fees encouraged them to falsify
borrowers’ financial status and to make imprudent loans to high-risk clients. Several of
Enron’s off-balance-sheet partnerships, while apparently helping Enron’s financial
position, lined the pockets of conflicted Enron executives holding stock options and
receiving management fees from the partnerships.
Despite these examples, merely because a decision benefits you, the decision
maker, does not always mean it is imprudent or unethical. Even decisions by some
Enron executives in the late 1990s, while motivated in part by the desire to increase the
value of the executives’ stock options, could have been prudent and ethical if the offbalance-sheet partnerships had real economic value to Enron (as they did when Enron
first created off-balance-sheet partnerships in the 1980s) and accounting for them
complied with the law.
At least two reasons explain why you can and should consider your own interest
yet act ethically for your firm. First, as the decision maker, you are impacted by the
decision. Whether deservedly or not, the decision maker is often credited or blamed for
the success or failure of the course of action chosen. You may also be a stakeholder in
other ways. For example, if you are an executive in the factory in Sacramento, you and
your family may be required to move to Juarez (or El Paso, Texas, which borders
Juarez) if the factory relocates. It is valid to consider a decision’s impact on you and
your family, although it should not be given undue weight.
A second, and more important, reason to consider your own interest is that your
decision may be better for your firm and other stakeholders if you also consider your
selfish interest. For example, suppose when you were charged to lead the inquiry into
the firm’s decision whether to move to Juarez, it was made clear that the CEO preferred
to close the Sacramento factory and move operations to Juarez.
Suppose also that you would be required to move to Juarez. Your spouse has a wellpaying job in Sacramento, and your teenage children are in a good school system and
have very supportive friends. You have a strong relationship with your parents and
siblings, who also live within 50 miles of your family in Sacramento. You believe that
you and your family could find new friends and good schools in El Paso or Juarez, and
the move would enhance your position in the firm and increase your chances of a
promotion. Nonetheless, overall you and your spouse have determined that staying in
the Sacramento area is best for your family. So you are considering quitting your job
with the firm and finding another job in the Sacramento area rather than make an
attempt to oppose the CEO’s preference.
If you quit your job, even in protest, you will have no role in the decision and your resignation
will likely have no impact on the firm’s Sacramento” Juarez decision. Had you stayed with the
firm, you could have led a diligent inquiry into all the facts that may have concluded that the
prudent and ethical decision for the firm was to stay in Sacramento. Without your input and
guidance, the firm may make a less prudent and ethical decision.
You can think of other examples where acting selfishly also results in better decisions.
Suppose a top-level accounting executive, to whom you are directly responsible, has violated
accounting standards and the law by pressuring the firm’s auditors to book as income in the current
year a contract that will not be performed for two years. You could quit your job and blow the
whistle, but you may be viewed as a disgruntled employee and your story given no credibility.
You could confront the executive, but you may lose your job or at least jeopardize your chances
for a promotion while tipping off the executive, who will cover her tracks. As an alternative, the
more effective solution may be to consider how you can keep your job and prospects for promotion
while achieving your objective to blow the whistle on the executive. One alternative may be to go
through appropriate channels in the firm, such as discussing the matter with the firm’s audit
committee or legal counsel.
Finding a way to keep your job will allow you to make an ethical decision that benefits your
firm, whereas your quitting may leave the decision to someone else who would not act as
prudently. The bottom line is this: While, sometimes, ethical conduct requires acting unselfishly,
in other contexts, consideration of your self-interest is not only consistent with ethical conduct,
but also necessary to produce a moral result.
What Are the Ethics of Each Alternative? Because our goal is to make a decision that is not
only prudent for the firm, but also ethical and defensible in the event we are required to give an
accounting for our actions, we must consider the ethics of each alternative, not from one but a
variety of ethical viewpoints. Our stakeholders’ values comprise many ethical theories; ignoring
any one theory will likely cause an incomplete consideration of the issues and may result in
unforeseen, regrettable outcomes.
What Would a Utilitarian Do? A utilitarian would choose the alternative that promises the
highest net welfare to society as a whole. If we define our society as the United States, moving to
Juarez may nonetheless produce the highest net benefit because the benefits to American citizens
from a lower cost of televisions and to American shareholders from higher profits may more than
offset the harm to our employees and other citizens of Sacramento. Another benefit of the move
may be the reduced cost of the U.S. government dealing with illegal immigration as Mexican
workers decide to work at our plant in Juarez. Another cost may be the increased labor cost for a
Texas business that would have hired Mexican workers had we not hired them.
If we define society as all countries in the North American Free Trade Agreement (NAFTA
was signed by the United States, Mexico, and Canada), the benefit to workers in Juarez may
completely offset the harm to workers in Sacramento. For example, the benefit to Juarez workers
may be greater than the harm to Sacramento employees if many Juarez employees would otherwise
be underemployed and Sacramento employees can find other work or are protected by a severance
package or retirement plan.
As we discussed earlier in the discussion of ethical theories, finding and weighing all the
benefits and costs of an alternative are difficult tasks. Even if we reject this theory as the final
determinant, it is a good exercise for ensuring that we maximize the number of facts we consider
when making a decision.
What Would Someone Focused on Maximizing Profits Do? One following traditional
shareholder theory and its emphasis on profit maximization would choose the alternative that
produces the most long-run profits for the company, within the limits of the law. This may mean,
for example, that the firm should keep the factory in Sacramento if that will produce the most
profits for the next 10 to 15 years.
This does not mean that the firm may ignore the impact of the decision on Juarez’s community
and workers. It may be that moving to Juarez will create a more affluent population in Juarez and
consequently increase the firm’s television sales in Juarez. But that impact is judged not by whether
society as a whole is bettered (as with utilitarian analysis) or whether Juarez workers are more
deserving of jobs (as with justice theory analysis), but is solely judged by how it impacts the firm’s
bottom line.
Nonetheless, profit maximization may compel a decision maker to consider stakeholders other
than the corporation and its shareholders. A decision to move to Juarez may mobilize American
consumers to boycott our TVs, for example, or cause a public relations backlash if our Juarez
employees receive wages far below our Sacramento workers. These and other impacts on corporate
stakeholders may negatively impact the firm’s profits.
Although projecting profits is not a precise science, tools you learned in finance classes should
enhance your ability to select an alternative that maximizes your firm’s profits within the limits of
the law.
page 4-20
What Would a Rights Theorist Do? A follower of modern rights theory will determine whether
anyone’s rights are negatively affected by an alternative. If several rights are affected, the rights
theorist will determine which right is more important or trumps the other rights, and choose the
alternative that respects the most important right.
For example, if the alternative is to move to Juarez, the Sacramento employees, among others,
are negatively affected. Yet if we do not move, potential employees in Juarez are harmed. Are
these equal rights a mere wash, or is it more important to retain a job one already has than to be
deprived of a job one has never had?
Are other rights at work here, and how are they ranked? Is it more important to maintain
manufacturing production in the firm’s home country for national security and trade balance
reasons than to provide cheaper televisions for the firm’s customers? Does the right of all citizens
to live in a global economy that spreads wealth worldwide and promotes international harmony
trump all other rights?
While apparently difficult to identify and rank valid rights, this theory has value even to a
utilitarian and a profit maximizer. By examining rights that are espoused by various stakeholders,
we are more likely to consider all the costs and benefits of our decision and know which rights can
adversely affect the firm’s profitability if we fail to take them into account.
What Would a Justice Theorist Do? A justice theorist would choose the alternative that
allocates society’s benefits and burden most fairly. This requir…