Business and Ethical

Relativism
• Business Ethics and Corporate Social Responsibility
• Shareholder view/Theory
• Stakeholder view/ Theory
 Business and Ethical Relativism
• There are certain cultural differences that create a special problem for
managers. Managers of multinationals often find it hard to know
what to do when they encounter moral standards that are different
from the ones they personally hold and that are accepted in their
home country.

• Nepotism and sexism, although condemned as morally wrong in the

United States, for example, are accepted as a matter of course in
some foreign business environments.

• The fact that different cultures have different moral standards, leads
many people to adopt the theory of ethical relativism.
 Ethical or moral relativism
• The theory that there are no ethical standards that are absolutely true and
that apply or should be applied to the companies and people of all
societies.

• The ethical relativist will say, for example, that it is wrong for a U.S.
manager to engage in nepotism in the United States because everyone
there believes that it is wrong, but it is not wrong for a person in Thailand,
for example, to engage in nepotism there because people there do not see
it as wrong.

• The ethical relativist would advise the manager of a multinational who

works in a society whose moral standards are different from her own, that
she should follow the moral standards prevalent in the society in which she
works.
Since moral standards differ and since there are no absolute
standards of right and wrong, the best a manager can do is follow
the old saying, “When in Rome, do as the Romans do.” But is
ethical relativism a reasonable view to hold?

Discussion from pdf

Business Ethics and Corporate Social Responsibility

Business ethics is sometimes confused with “corporate

social responsibility” or “CSR.”

The phrase “corporate social responsibility” refers to a

corporation’s responsibilities or obligations toward
society.
There is some disagreement about what those obligations
include.

Do companies have a responsibility to donate to charities or to

give their employees higher wages and customers safer
products?

Or are they obligated to maximize profits for their

shareholders or stockholders?
 Shareholder view/Theory
At one extreme is the view of the late economist Milton Friedman.
Friedman argues that in a “free enterprise, private-property system,”
corporate executives work for the “owners” of the company, and today
these “owners” are the company’s shareholders. As their employee, the
executive has a “direct responsibility” to run the company “in
accordance with their desires, which generally will be to make as much
money as possible while conforming to the basic rules of the society,
both those embodied in law and those embodied in ethical custom.”

On Friedman’s view a company’s only responsibility is to legally and

ethically “make as much money as possible” for its owners, i.e., to
maximize shareholder returns. We can call his view the “shareholder
view” of corporate social responsibility.
The main reason why Friedman holds this theory is that, in his
view, shareholders own the company. Since the company is their,
and only their, property, only they have the moral right to decide
what it should be used for. These “owners” hire executives to run
the business for them, so the executives have a moral obligation
to do what the stockholders want, which, he claims, is to make
them as much money as possible.

According to Friedman’s shareholder view of corporate social

responsibility, a manager has no right to give company money to
social causes when doing so will reduce shareholder’s profits,
because that money does not belong to the manager but to
shareholders.
For example, higher wages might make employees work harder, better
products may increase customer sales, and giving to the local
community may lead to lower taxes or better city services. But if using
company resources to benefit employees, customers, or the community
reduces the profits that would have gone to shareholders, then doing so
is wrong because those resources belong to stockholders and should be
used as they want them to be used, i.e., to make them more money. It is
always wrong for managers to use company resources to help others at
the expense of shareholders.
Although Friedman does not think managers should use
company resources to benefit others at the expense of
shareholders, he does think that companies ultimately provide
great benefits for society.

So when managers aim at maximizing profits for stockholders in

competitive markets, the companies they run will end up
benefiting society.
Criticism
Friedman has had many critics.

 Some object to his claim that the manager or

executive is the employee of shareholders. Legally,
these critics point out, the executive is the employee
of the corporation and so the executive is legally
required to serve the interests of the corporation—
his true employer—not of its shareholders.
Criticism (Contd.)
 Others have criticized Friedman’s claim that stockholders are
the “owners” of the corporation and that the corporation is
their “property.”

Critics point out that shareholders only own stock and this gives
them a few limited rights, such as the right to elect the board of
directors, the right to vote on major company decisions, and the
right to whatever remains after the corporation goes bankrupt
and pays off its creditors. But shareholders do not have all the
other rights that true owners would have and so they are not
really owners of the corporation.
 Criticism (Contd.)

 Third objection criticizes his claim that the executive’s core

responsibility is to run the corporation as stockholders
want it to be run.

Legally, the executive, is required to run the company in ways

that serve many other interests (including employee interests
and consumer interests) besides those of stockholders.
Criticism (Contd.)
 Finally, some have argued against Friedman’s view that
by seeking to maximize shareholder returns, the
corporation will best serve society.

Sometimes competitive forces fail to operate companies in

a socially beneficial way and, instead, lead them to act in a
socially harmful manner. For example, a company might
knowingly pollute a neighborhood with substance that is
not yet illegal, in order to save the costs of reducing its
pollution and thereby be more competitive.
 Stakeholder view/ Theory

According to Edward Freeman and David Reed, the

two scholars who pioneered this view, a
stakeholder is “any identifiable group or individual
who can affect the achievement of an
organization’s objectives or who is affected by the
achievement of an organization’s objectives.”
In other words, a stakeholder is anyone the corporation can
harm, benefit, or influence,

as well as anyone that can harm, benefit, or influence the

corporation.

A stakeholder, in short, is anyone who has a “stake” in what

the company does.
For example,
 General Motors impacts the lives of its customers when it
decides how much safety it will build into its cars,

 it impacts employees when it sets salaries,

 it impacts the local community when it shuts down a plant,

 and it impacts its stockholders when it increases their

dividends.

 On the other hand, government can impact General Motors

through the laws and regulations it passes,
 Creditors can impact it by raising their interest rates or
calling back a loan, and suppliers can impact it by raising
their prices or lowering the quality of the car parts they
provide.

 General Motors’ stakeholders, then, include customers,

employees, local communities, stockholders,
government, creditors, and suppliers.

BUT
Of course, the influences between the company and its
stakeholders can go both ways.
For example,
 Although General Motors influences its customers and
employees, customers can also influence General Motors
by refusing to buy its cars and employees can impact
General Motors by going on strike.

 Other groups also are sometimes able to influence General

Motors. For example, environmental activists or the media
can impact General Motors by organizing demonstrations
or by reporting on a safety defect of General Motors’ cars.

 Thus, activist organizations, the media, and other interest

groups can also become stakeholders of General Motors.
 Unlike Friedman’s shareholder view, which
says the corporation should be run for the
benefit only of its shareholders, “stakeholder
theory” says it should be run for the benefit
of all stakeholders.
According to stakeholder theory, a manager should take all
stakeholder interests into account when making decisions.

Managers should try to “balance” the interests of stakeholders

so each stakeholder gets a fair share of the benefits the
corporation produces.

The manager, then, has the responsibility of running the

company in a way that will best serve the interests of all
stakeholders.
The stakeholder theory does not claim that managers should
not try to make a profit; it does not even claim that
managers should not try to maximize profits.

The claims of stakeholder theory are about who should get

the profits.

Friedman’s shareholder view says that the manager should

try to maximize what goes to the stockholder, which means it
should try to minimize what goes to other stakeholders
(except, of course, when giving some stakeholders more
would make even more profits for stockholders).
Stakeholder theory, on the other hand, says that the manager
should give stockholders a fair share of profits, but in a way
that allows all other stakeholders to also get their fair share.

Two main kinds of arguments support the “stakeholder” view

of corporate social responsibility:

 “instrumental” arguments

 and “normative” arguments.

Instrumental Arguments

 Instrumental arguments claim that being responsive to

all of its stakeholders is in the best interests of the
corporation even though it may not be in the best
interests of shareholders.

 The idea here is that if a company takes the interests of

all its stakeholders into account, those stakeholders will
be favorably disposed to do their part to support the
company and its interests.
 Treating employees decently while paying them good
salaries, for example, will make employees more loyal
to the company, while treating them poorly may lead
to shirking or even destructive behavior.

 Similarly, when a company is responsive to

environmentalists or other activists, these groups are
less likely to engage in activities that can damage the
company’s image or its reputation.
 Yet paying employees higher wages and investing in
meeting environmentalists’ demands may force a
company to reduce shareholder dividends.

In short, instrumental arguments for

stakeholder theory claim that being
responsive to all stakeholders is good for
the business even though it may reduce
the profits shareholders end up with.
 Normative Arguments
Normative arguments for stakeholder theory claim that the
company has a moral or ethical obligation to be responsive
to all its stakeholders. One such argument, developed by
Robert Phillips, is based on the “principle of fairness.”

The principle of fairness says that if a group of people

works together to provide some benefits at some cost to
themselves, then anyone who takes advantage of those
benefits has an obligation to contribute his or her share
to the group.
Which of these two views is correct:
stakeholder theory or shareholder theory?

Today, many businesses accept stakeholder theory, and

most of the fifty U.S. states have passed laws that
recognize business’ obligations to its many stakeholders
even at the expense of stockholder interests.

But readers will have to decide for themselves which

theory makes the most sense and seems most
reasonable.
 How are business ethics and corporate social
responsibility related?
 Being ethical, according to most scholars, is one of the
obligations companies owe to society.
 In this respect, business ethics is a part of corporate social
responsibility.

 Archie Carroll writes: “The social responsibility of business

encompasses the economic, legal, ethical, and discretionary
expectations that society has of organizations . . . ”

 Corporate social responsibility, then, is the larger more

inclusive notion and business ethics is just one part of this
larger notion.
Both the shareholder view and the stakeholder view can accept
this way of defining what corporate social responsibility
includes.

For example, Friedman explicitly says that a company should

live up to the ethical and legal expectations of society, that by
pursuing shareholder profits it will make the greatest economic
contribution to society, and that it should make whatever other
discretionary contributions it needs to make so that society will
enable it to operate profitably.
Stakeholder theory says that companies should be
responsive to all its stakeholders and that would include
making the economic and discretionary contributions
society expects, as well as behaving ethically and legally
toward its stakeholders.

All of these concepts—rights, obligations, and fairness—are

ethical concepts so ethics is not only part of a company’s
social responsibilities. Ethics also provides the basic
normative reasons for corporate social responsibility.
Paradoxically, then, ethics is one of business’ social
responsibilities, but business has these responsibilities to
society because it is what ethics demands.
WHAT IS CORPORATE SOCIAL RESPONSIBILITY (CSR)?

Corporate social responsibility (CSR) is the idea that a business

has a responsibility to the society that exists around it.

Firms that embrace corporate social responsibility are typically

organized in a manner that empowers them to be and act in a
socially responsible way to have a positive impact on the world.
It’s a form of self-regulation that can be expressed in initiatives
or strategies, depending on an organization’s goals.
TYPES OF CORPORATE SOCIAL RESPONSIBILITY

Along with the responsibility towards owners, managers,

customers and employees, firms also have some social
responsibilities which may include:
environmental, philanthropic, ethical, and economic
responsibility.