Business Ethics

Business Ethics

OpenStax College

OpenStax College Business Ethics

Houston, TX

Business Ethics

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Acknowledgements

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Preface

2

Welcome to Business Ethics, an OpenStax resource. This textbook was written to increase student access to high-quality learning materials, maintaining highest standards of academic rigor at little to no cost.

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About Business Ethics

Business Ethics is designed to meet the scope and sequence requirements of the single-semester standardized business ethics course across all majors. This title includes innovative features designed to enhance student learning, including case studies, application scenarios, and links to video interviews with executives, all of which help instill in students a sense of ethical awareness and responsibility. The book provides an important opportunity for students to learn the core concepts of business ethics and understand how to apply those concepts to their professional lives.

Coverage and scope

Our Business Ethics textbook adheres to the scope and sequence requirements of introductory business ethics courses nationwide. We have endeavored to make the core theories and practical concepts of business ethics engaging, relevant, and accessible to students. The guiding themes of the textbook are to promote high ethical standards and to assist the integration of ethical thinking across the business school curriculum, with an end result of encouraging even greater ethical consciousness on the part of business practitioners beyond their graduation. We particularly emphasize the reality of today’s global business community and observe that geography, culture, and time contribute to ethical concepts and constructs. With awareness of these issues in mind, the content of this textbook has been developed and arranged to emphasize the necessity—and difficulty—of ethical decision-making. The authors seek to help students recognize legal and moral issues, reason through the consequences of different courses of action, and promote social responsibility. The text emphasizes connections between topics such as ethical theories, legal responsibilities, the prioritization of stakeholders, and corporate social responsibility. The organization and pedagogical features were developed and vetted with feedback from business ethics instructors dedicated to the project.

Engaging feature boxes

Throughout Business Ethics, you will find features that engage students by taking selected topics a step further. Each feature box contains either a link to a deeper exploration of the topic at hand or critical thinking questions that may be geared toward class discussion, student projects, or written essays. Our features include:

  • Cases from the Real World. This feature presents brief examples of real companies making ethical decisions in the midst of hectic competition. Each example includes follow-up critical thinking questions that encourage reflection on the case and how it relates to chapter concepts and themes.
  • What Would You Do? This feature presents brief, fact-based scenarios in which students are challenged to put themselves into the shoes of ranking executives and balance a host of interests—some conflicting—as they make decisions for their businesses. Students provide an answer to a practical problem or ethical issue, as well as their reasoning.
  • Ethics across Time and Cultures. This feature considers how geography, culture, and time influence the ethical values we have. Follow-up critical thinking questions allow for broader reflection on the chapter topics and encourage deeper integration of the chapter content.
  • Link to Learning. This feature provides a very brief introduction to online resources and videos that are pertinent to students’ exploration of the topic at hand. Link to Learning boxes allow students to connect easily to some of the most important thought leaders and concepts in the field of business ethics. The purpose is to highlight the complexities of ethical decision-making.

Module materials that reinforce key concepts

  • Learning Objectives. Every module begins with a set of clear and concise learning objectives. These objectives are designed to help the instructor decide what content to include or assign, and to guide students on what they can expect to learn. After completing the module and end-of-module exercises, students should be able to demonstrate mastery of the learning objectives.
  • Summaries. Section summaries distill the information in each module for both students and instructors down to key, concise points addressed in the section.
  • Key Terms. Key terms are bold and are followed by a definition in context. Definitions of key terms are also listed in the glossary, which appears at the end of the chapter.
  • Assessments. Multiple-choice and short-answer review questions provide opportunities to recall and test the information students learn throughout each module.

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About the authors

Senior contributing authors

Stephen M. Byars, USC Marshall School of Business

Stephen Byars received his BA from Claremont McKenna College, his MA from the University of San Diego, and his PhD from the University of Southern California. He teaches business ethics and oral and written communication at the Marshall School of Business at USC to both graduate and undergraduate business majors. He has served as associate director of the USC Writing Program, temporary director of the Writing Center within the Writing Program, and as director of the USC Marshall Consulting Program. His scholarly interests include business and professional ethics, the constructive mediation of disputes in the workplace, and those best practices that permit leaders to direct business in ways that engender community, social, and corporate good.

Kurt Stanberry, University of Houston–Downtown

Kurt Stanberry is a professor of legal studies in the College of Business at the University of Houston Downtown and has held the PLM Endowed Professorship since 2011. He is also a licensed attorney. He received his BA from Yale University, an MBA from the Graduate School of Business at Temple University, and a JD from the University of Houston College of Law.

Kurt teaches courses at the undergraduate and graduate level in business law, contracts, employment law, negotiations, ethics, and other related topics. He also conducts continuing education seminars in topics such as negotiations, leadership, diversity, and ethics for CPAs, CFPs, attorneys, and business executives, through organizations such as the AICPA, FEI, and TSCPA at the state and national levels. He has published numerous articles in scholarly journals, two textbooks, various practice manuals, and cases. Prior to joining the faculty at UHD, Kurt was a professor in the California State University System and was also a visiting professor in international programs in London, Bonn, Tokyo, and Seoul. He has been teaching and practicing law for over 30 years.

Contributing authors

Barbara Boerner, Brevard College

Robert Brancatelli, Fordham University

Wade Chumney, California State University, Northridge

Laura Dendinger, Wayne State College

Bill Nantz, Houston Community College

Mark Poepsel, Southern Illinois University Edwardsville

David Shapiro, Pennsylvania State University

Reviewers

Justin Bateh, Florida State College at Jacksonville

Ronald Berenbeim, New York University

Kenneth Bigel, Touro College

Cindy Briggs, Salt Lake Community College

Barbara Chappell, Walden University

Maureen Chisholm, Quincy College

Valerie Collins, Sheridan College

Dixon Cooper, Ouachita Baptist University

Anastasia Cortes, Virginia Polytechnic Institute

Sarah Esveldt, Carroll University

Rand Fandrich, New England College of Business

Charles Fenner, State University of New York Canton

Mehran Ferdowsian, Wilkes University

Betty Fitte, Tidewater Community College

Robert Freeborough, Berkeley College

Martha Helland, University of Sioux Falls

Amy Jordan, Loyola University Chicago

Stephanie Jue, University of Texas

Cheryl Keymer, North Arkansas College

Nai Lamb, University of Tennessee at Chattanooga

Jolene A. Lampton, Park University–Austin Campus

Barbara Limbach, Chadron State College

Marilyn Marousek, Barry University

Russ Meade, Husson University

Michael Pakaluk, Catholic University

Tatyana Pashnyak, Bainbridge State College

Roslyn Roberts, California State University, Sacramento

Amber Ruszkowski, Ivy Tech Community College

Richard Savior, State University of New York Empire State College

Lon Schiffbauer, Salt Lake Community College

Nathan Smith, Houston Community College

Anne Snell, Tulane University

Chris Suprenant, University of New Orleans

Glen Taylor, Paradise Valley Community College

Sonia Toson, Kennesaw State University

Joel Webb, Loyola University New Orleans

Andy Wible, Muskegon Community College

Jeffrey Yoder, Fairfield University

Why Ethics Matter

I

Introduction

1

Each of us makes innumerable decisions every day. In a business context, these choices have consequences for ourselves and others whom we must take into account in our decision-making process. (credit: modification of “business paper office laptop” by “rawpixel”/Pixabay, CC0)


Two hands shaking over a wooden surface.

Ethics consists of the standards of behavior to which we hold ourselves in our personal and professional lives. It establishes the levels of honesty, empathy, and trustworthiness and other virtues by which we hope to identify our personal behavior and our public reputation. In our personal lives, our ethics sets norms for the ways in which we interact with family and friends. In our professional lives, ethics guides our interactions with customers, clients, colleagues, employees, and shareholders affected by our business practices ((Figure)).

Should we care about ethics in our lives? In our practices in business and the professions? That is the central question we will examine in this chapter and throughout the book. Our goal is to understand why the answer is yes.

Whatever hopes you have for your future, you almost certainly want to be successful in whatever career you choose. But what does success mean to you, and how will you know you have achieved it? Will you measure it in terms of wealth, status, power, or recognition? Before blindly embarking on a quest to achieve these goals, which society considers important, stop and think about what a successful career means to you personally. Does it include a blameless reputation, colleagues whose good opinion you value, and the ability to think well of yourself? How might ethics guide your decision-making and contribute to your achievement of these goals?

Being a Professional of Integrity

2

Learning Objectives

By the end of this section, you will be able to:

  • Describe the role of ethics in a business environment
  • Explain what it means to be a professional of integrity
  • Distinguish between ethical and legal responsibilities
  • Describe three approaches for examining the ethical nature of a decision

Whenever you think about the behavior you expect of yourself in your personal life and as a professional, you are engaging in a philosophical dialogue with yourself to establish the standards of behavior you choose to uphold, that is, your ethics. You may decide you should always tell the truth to family, friends, customers, clients, and shareholders, and if that is not possible, you should have very good reasons why you cannot. You may also choose never to defraud or mislead your business partners. You may decide, as well, that while you are pursuing profit in your business, you will not require that all the money on the table come your way. Instead, there might be some to go around to those who are important because they are affected one way or another by your business. These are your stakeholders.

Acting with Integrity

Clients, customers, suppliers, investors, retailers, employees, the media, the government, members of the surrounding community, competitors, and even the environment are stakeholders in a business; that is, they are individuals and entities affected by the business’s decisions ((Figure)). Stakeholders typically value a leadership team that chooses the ethical way to accomplish the company’s legitimate for-profit goals. For example, Patagonia expresses its commitment to environmentalism via its “1% for the Planet” program, which donates 1 percent of all sales to help save the planet. In part because of this program, Patagonia has become a market leader in outdoor gear.

Stakeholders are the individuals and entities affected by a business’s decisions, including clients, customers, suppliers, investors, retailers, employees, the media, the government, members of the surrounding community, the environment, and even competitors. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


A diagram with “Company” labeled in the center, and “Clients”, “Customers”, “Suppliers”, “Investors”, “Retailers”, “Employees”, “Media”, “Government”, “Environment”, “Community”, and “Competitors” labeled clockwise around the “Company” label.

Being successful at work may therefore consist of much more than simply earning money and promotions. It may also mean treating our employees, customers, and clients with honesty and respect. It may come from the sense of pride we feel about engaging in honest transactions, not just because the law demands it but because we demand it of ourselves. It may lie in knowing the profit we make does not come from shortchanging others. Thus, business ethics guides the conduct by which companies and their agents abide by the law and respect the rights of their stakeholders, particularly their customers, clients, employees, and the surrounding community and environment. Ethical business conduct permits us to sleep well at night.

Nearly all systems of religious belief stress the building blocks of engaging others with respect, empathy, and honesty. These foundational beliefs, in turn, prepare us for the codes of ethical behavior that serve as ideal guides for business and the professions. Still, we need not subscribe to any religious faith to hold that ethical behavior in business is still necessary. Just by virtue of being human, we all share obligations to one another, and principal among these is the requirement that we treat others with fairness and dignity, including in our commercial transactions.

For this reason, we use the words ethics and morals interchangeably in this book, though some philosophers distinguish between them. We hold that “an ethical person” conveys the same sense as “a moral person,” and we do not regard religious belief as a requirement for acting ethically in business and the professions. Because we are all humans and in the same world, we should extend the same behavior to all. It is the right way to behave, but it also burnishes our own professional reputation as business leaders of integrity.

Integrity—that is, unity between what we say and what we do—is a highly valued trait. But it is more than just consistency of character. Acting with integrity means we adhere strongly to a code of ethics, so it implies trustworthiness and incorruptibility. Being a professional of integrity means consistently striving to be the best person you can be in all your interactions with others. It means you practice what you preach, walk the talk, and do what you believe is right based upon reason. Integrity in business brings many advantages, not the least of which is that it is a critical factor in allowing business and society to function properly.

Successful corporate leaders and the companies they represent will take pride in their enterprise if they engage in business with honesty and fair play. To treat customers, clients, employees, and all those affected by a firm with dignity and respect is ethical. In addition, laudable business practices serve the long-term interests of corporations. Why? Because customers, clients, employees, and society at large will much more willingly patronize a business and work hard on its behalf if that business is perceived as caring about the community it serves. And what type of firm has long-term customers and employees? One whose track record gives evidence of honest business practice.

Many people confuse legal and ethical compliance. They are, however, totally different and call for different standards of behavior. The concepts are not interchangeable in any sense of the word. The law is needed to establish and maintain a functioning society. Without it, our society would be in chaos. Compliance with these legal standards is strictly mandatory: If we violate these standards, we are subject to punishment as established by the law. Therefore, compliance in terms of business ethics generally refers to the extent to which a company conducts its business operations in accordance with applicable regulations, statutes, and laws. Yet this represents only a baseline minimum. Ethical observance builds on this baseline and reveals the principles of an individual business leader or a specific organization. Ethical acts are generally considered voluntary and personal—often based on our perception of or stand on right and wrong.

Some professions, such as medicine and the law, have traditional codes of ethics. The Hippocratic Oath, for example, is embraced by most professionals in health care today as an appropriate standard always owed to patients by physicians, nurses, and others in the field. This obligation traces its lineage to ancient Greece and the physician Hippocrates. Business is different in not having a mutually shared standard of ethics. This is changing, however, as evidenced by the array of codes of conduct and mission statements many companies have adopted over the past century. These have many points in common, and their shared content may eventually produce a code universally claimed by business practitioners. What central point might constitute such a code? Essentially, a commitment to treat with honesty and integrity customers, clients, employees, and others affiliated with a business.

The law is typically indebted to tradition and precedence, and compelling reasons are needed to support any change. Ethical reasoning often is more topical and reflects the changes in consciousness that individuals and society undergo. Often, ethical thought precedes and sets the stage for changes in the law.

Behaving ethically requires that we meet the mandatory standards of the law, but that is not enough. For example, an action may be legal that we personally consider unacceptable. Companies today need to be focused not only on complying with the letter of the law but also on going above and beyond that basic mandatory requirement to consider their stakeholders and do what is right.

Ends, Means, and Character in Business

How, then, should we behave? Philosophy and science help us answer this question. From philosophy, three different perspectives help us assess whether our decisions are ethical on the basis of reason. These perspectives are called normative ethical theories and focus on how people ought to behave; we discuss them in this chapter and in later chapters. In contrast, descriptive ethical theories are based on scientific evidence, primarily in the field of psychology, and describe how people tend to behave within a particular context; however, they are not the subject of this book.

The first normative approach is to examine the ends, or consequences, a decision produces in order to evaluate whether those ends are ethical. Variations on this approach include utilitarianism, teleology, and consequentialism. For example, utilitarianism suggests that an ethical action is one whose consequence achieves the greatest good for the greatest number of people. So if we want to make an ethical decision, we should ask ourselves who is helped and who is harmed by it. Focusing on consequences in this way generally does not require us to take into account the means of achieving that particular end, however. That fact leads us to the second normative theory about what constitutes ethical conduct.

The second approach does examine the means, or actions, we use to carry out a business decision. An example of this approach is deontology, which essentially suggests that it is the means that lend nobility to the ends. Deontology contends that each of us owes certain duties to others (deon is a Greek word for duty or obligation) and that certain universal rules apply to every situation and bind us to these duties. In this view, whether our actions are ethical depends only on whether we adhere to these rules. Thus, the means we use is the primary determinant of ethical conduct. The thinker most closely associated with deontology is the eighteenth-century German philosopher Immanuel Kant ((Figure)).

Immanuel Kant was an eighteenth-century philosopher, now associated with deontology, who spent nearly all his professional life teaching at the university in Königsberg (which today is Kaliningrad, the westernmost point in Russia). (credit right: modification of “Kant foto” by “Becker”/Wikimedia Commons, Public Domain)


An image of Immanuel Kant with the following text: “Kantianism (Deontology). Immanuel Kant (1724-1804). Human beings are creatures with reason. Reason depends on respect for rules. As creatures with reason, we are ‘duty bound’ to follow logical ethical principles and avoid contradiction.”

The third normative approach, typically called virtue theory, focuses on the character of the decision-maker—a character that reflects the training we receive growing up. In this view, our ethical analysis of a decision is intimately connected with the person we choose to be. It is through the development of habits, the routine actions in which we choose to engage, that we are able to create a character of integrity and make ethical decisions. Put differently, if a two-year-old is taught to take care of and return borrowed toys even though this runs contrary to every instinct they have, they may continue to perfect their ethical behavior so that at age forty, they can be counted on to safeguard the tens of millions of dollars investors have entrusted to their care in brokerages.

Virtue theory has its roots in the Greek philosophical tradition, whose followers sought to learn how to live a flourishing life through study, teaching, and practice. The cardinal virtues to be practiced were courage, self-control, justice, and wisdom. Socrates was often cited as a sage and a role model, whose conduct in life was held in high regard.

Aristotle and the Concept of Phronesis, or Practical Wisdom

Phrónēsis (fro-NEE-sis) is a type of practical wisdom that enables us to act virtuously. In “The Big Idea: The Wise Leader,” a Harvard Business Review article on leadership and ethical decision-making, Ikujiro Nonaka, a Japanese organizational theorist, and Hirotaka Takeuchi, a professor of Management Practice at Harvard Business School, discuss the gap between the theory and practice of ethics and which characteristics make a wise leader.

The authors conclude that “the use of explicit and tacit knowledge isn’t enough; chief executive officers (CEOs) must also draw on a third, often forgotten kind of knowledge, called practical wisdom. Practical wisdom is tacit knowledge acquired from experience that enables people to make prudent judgments and take actions based on the actual situation, guided by values and morals.”

The concept of practical wisdom dates back to Aristotle, who considered phronesis, which can also be defined as prudence, to be a key intellectual virtue. Phronesis enables people to make ethically sound judgments. According to the authors, phronetic leaders:

  • practice moral discernment in every situation, making judgments for the common good that are guided by their individual values and ethics;
  • quickly assess situations and envision the consequences of possible actions or responses;
  • create a shared sense of purpose among executives and employees and inspire people to work together in pursuit of a common goal;
  • engage as many people as possible in conversation and communicate using metaphors, stories, and other figurative language in a way that everyone can understand; and
  • encourage practical wisdom in others and support the training of employees at all levels in its use.

In essence, the first question any company should ask itself is: “Do we have a moral purpose?” Having a moral purpose requires focusing on the common good, which precedes the accumulation of profit and results in economic and social benefits. If companies seek the common good, profits generally will follow.

Critical Thinking

In the article cited, the authors stress the importance of being well versed in the liberal arts, such as philosophy, history, literature, and in the fine arts to cultivate judgment. How do you think a strong background in the liberal arts would impart practical wisdom or help you make ethical decisions?

Summary

Ethics sets the standards that govern our personal and professional behavior. To conduct business ethically, we must choose to be a professional of integrity. The first steps are to ask ourselves how we define success and to understand that integrity calls on us to act in a way that is consistent with our words. There is a distinct difference between legal compliance and ethical responsibility, and the law does not fully address all ethical dilemmas that businesses face. Sound ethical practice meets the company’s culture, mission, or policies above and beyond legal responsibilities. The three normative theories of ethical behavior allow us to apply reason to business decisions as we examine the result (utilitarianism), the means of achieving it (deontology), and whether our choice will help us develop a virtuous character (virtue ethics).

Assessment Questions

Which of these concepts relates to utilitarianism?

  1. consequences
  2. actions
  3. character
  4. duty

A

True or false? According to the Greek system of logic introduced by Socrates, normative ethical theories ultimately are grounded in reason.

True

Explain why ethical responsibilities go beyond legal compliance.

Behaving ethically requires that we meet the mandatory standards of the law and then go above and beyond them to recognize that an action may be legal but we personally may consider it unacceptable. Ethical reasoning often is more topical than law and reflects the changes in consciousness that individuals and society undergo. Often, ethical thought precedes and sets the stage for changes in the law.

Describe the difference between normative and descriptive ethical theories.

Normative ethical theories are philosophical theories based on reason that tell individuals how they ought to behave. Descriptive ethical theories are based on scientific evidence describing how people tend to behave in a particular context. The theories discussed in this book are normative.

Endnotes

1Ikujiro Nonaka and Hirotaka Takeuchi, “The Big Idea: The Wise Leader,” Harvard Business Review, May 2011. https://hbr.org/2011/05/the-big-idea-the-wise-leader.

Glossary

business ethics
the conduct by which companies and their agents abide by the law and respect the rights of their stakeholders, particularly their customers, clients, employees, and the surrounding community and environment
compliance
the extent to which a company conducts its business operations in accordance with applicable regulation and statutes
deontology
a normative ethical theory suggesting that an ethical decision requires us to observe only the rights and duties we owe to others, and, in the context of business, act on the basis of a primary motive to do what is right by all stakeholders
ethics
the standards of behavior to which we hold ourselves in our personal and professional lives
integrity
the adherence to a code of moral values implying trustworthiness and incorruptibility because there is unity between what we say and what we do
normative ethical theories
a group of philosophical theories that describe how people ought to behave on the basis of reason
stakeholders
individuals and entities affected by a business’s decisions, including customers, suppliers, investors, employees, the community, and the environment, among others
utilitarianism
a normative theory of ethics suggesting that an ethical act is the one whose consequences create the greatest good for the greatest number of people
virtue theory
a normative theory that focuses on proper conduct guided by the training we received growing up

Ethics and Profitability

3

Learning Objectives

By the end of this section, you will be able to:

  • Differentiate between short-term and long-term perspectives
  • Differentiate between stockholder and stakeholder
  • Discuss the relationship among ethical behavior, goodwill, and profit
  • Explain the concept of corporate social responsibility

Few directives in business can override the core mission of maximizing shareholder wealth, and today that particularly means increasing quarterly profits. Such an intense focus on one variable over a short time (i.e., a short-term perspective) leads to a short-sighted view of what constitutes business success.

Measuring true profitability, however, requires taking a long-term perspective. We cannot accurately measure success within a quarter of a year; a longer time is often required for a product or service to find its market and gain traction against competitors, or for the effects of a new business policy to be felt. Satisfying consumers’ demands, going green, being socially responsible, and acting above and beyond the basic requirements all take time and money. However, the extra cost and effort will result in profits in the long run. If we measure success from this longer perspective, we are more likely to understand the positive effect ethical behavior has on all who are associated with a business.

Profitability and Success: Thinking Long Term

Decades ago, some management theorists argued that a conscientious manager in a for-profit setting acts ethically by emphasizing solely the maximization of earnings. Today, most commentators contend that ethical business leadership is grounded in doing right by all stakeholders directly affected by a firm’s operations, including, but not limited to, stockholders, or those who own shares of the company’s stock. That is, business leaders do right when they give thought to what is best for all who have a stake in their companies. Not only that, firms actually reap greater material success when they take such an approach, especially over the long run.

Nobel Prize–winning economist Milton Friedman stated in a now-famous New York Times Magazine article in 1970 that the only “social responsibility of a business is to increase its profits.”

This concept took hold in business and even in business school education. However, although it is certainly permissible and even desirable for a company to pursue profitability as a goal, managers must also have an understanding of the context within which their business operates and of how the wealth they create can add positive value to the world. The context within which they act is society, which permits and facilitates a firm’s existence.

Thus, a company enters a social contract with society as whole, an implicit agreement among all members to cooperate for social benefits. Even as a company pursues the maximizing of stockholder profit, it must also acknowledge that all of society will be affected to some extent by its operations. In return for society’s permission to incorporate and engage in business, a company owes a reciprocal obligation to do what is best for as many of society’s members as possible, regardless of whether they are stockholders. Therefore, when applied specifically to a business, the social contract implies that a company gives back to the society that permits it to exist, benefiting the community at the same time it enriches itself.

In addition to taking this more nuanced view of profits, managers must also use a different time frame for obtaining them. Wall Street’s focus on periodic (i.e., quarterly and annual) earnings has led many managers to adopt a short-term perspective, which fails to take into account effects that require a longer time to develop. For example, charitable donations in the form of corporate assets or employees’ volunteered time may not show a return on investment until a sustained effort has been maintained for years. A long-term perspective is a more balanced view of profit maximization that recognizes that the impacts of a business decision may not manifest for a longer time.

As an example, consider the business practices of Toyota when it first introduced its vehicles for sale in the United States in 1957. For many years, Toyota was content to sell its cars at a slight loss because it was accomplishing two business purposes: It was establishing a long-term relationship of trust with those who eventually would become its loyal U.S. customers, and it was attempting to disabuse U.S. consumers of their belief that items made in Japan were cheap and unreliable. The company accomplished both goals by patiently playing its long game, a key aspect of its operational philosophy, “The Toyota Way,” which includes a specific emphasis on long-term business goals, even at the expense of short-term profit.

What contributes to a corporation’s positive image over the long term? Many factors contribute, including a reputation for treating customers and employees fairly and for engaging in business honestly. Companies that act in this way may emerge from any industry or country. Examples include Fluor, the large U.S. engineering and design firm; illycaffè, the Italian food and beverage purveyor; Marriott, the giant U.S. hotelier; and Nokia, the Finnish telecommunications retailer. The upshot is that when consumers are looking for an industry leader to patronize and would-be employees are seeking a firm to join, companies committed to ethical business practices are often the first to come to mind.

Why should stakeholders care about a company acting above and beyond the ethical and legal standards set by society? Simply put, being ethical is simply good business. A business is profitable for many reasons, including expert management teams, focused and happy employees, and worthwhile products and services that meet consumer demand. One more and very important reason is that they maintain a company philosophy and mission to do good for others.

Year after year, the nation’s most admired companies are also among those that had the highest profit margins. Going green, funding charities, and taking a personal interest in employee happiness levels adds to the bottom line! Consumers want to use companies that care for others and our environment. During the years 2008 and 2009, many unethical companies went bankrupt. However, those companies that avoided the “quick buck,” risky and unethical investments, and other unethical business practices often flourished. If nothing else, consumer feedback on social media sites such as Yelp and Facebook can damage an unethical company’s prospects.

Competition and the Markers of Business Success

Perhaps you are still thinking about how you would define success in your career. For our purposes here, let us say that success consists simply of achieving our goals. We each have the ability to choose the goals we hope to accomplish in business, of course, and, if we have chosen them with integrity, our goals and the actions we take to achieve them will be in keeping with our character.

Warren Buffet ((Figure)), whom many consider the most successful investor of all time, is an exemplar of business excellence as well as a good potential role model for professionals of integrity and the art of thinking long term. He had the following to say: “Ultimately, there’s one investment that supersedes all others: Invest in yourself. Nobody can take away what you’ve got in yourself, and everybody has potential they haven’t used yet. . . . You’ll have a much more rewarding life not only in terms of how much money you make, but how much fun you have out of life; you’ll make more friends the more interesting person you are, so go to it, invest in yourself.”

Warren Buffett, shown here with President Barack Obama in June 2010, is an investor and philanthropist who was born in 1930 in Omaha, Nebraska. Through his leadership of Berkshire Hathaway, he has become one of the most successful investors in the world and one of the wealthiest people in the United States, with an estimated total net worth of almost $80 billion. (credit: “President Barack Obama and Warren Buffett in the Oval Office” by Pete Souza/Wikimedia Commons, Public Domain)


An image of Warren buffet on the left and Barack Obama on the right. Both are seated and facing each other.

The primary principle under which Buffett instructs managers to operate is: “Do nothing you would not be happy to have an unfriendly but intelligent reporter write about on the front page of a newspaper.”

This is a very simple and practical guide to encouraging ethical business behavior on a personal level. Buffett offers another, equally wise, principle: “Lose money for the firm, even a lot of money, and I will be understanding; lose reputation for the firm, even a shred of reputation, and I will be ruthless.”

As we saw in the example of Toyota, the importance of establishing and maintaining trust in the long term cannot be underestimated.

Stockholders, Stakeholders, and Goodwill

Earlier in this chapter, we explained that stakeholders are all the individuals and groups affected by a business’s decisions. Among these stakeholders are stockholders (or shareholders), individuals and institutions that own stock (or shares) in a corporation. Understanding the impact of a business decision on the stockholder and various other stakeholders is critical to the ethical conduct of business. Indeed, prioritizing the claims of various stakeholders in the company is one of the most challenging tasks business professionals face. Considering only stockholders can often result in unethical decisions; the impact on all stakeholders must be considered and rationally assessed.

Managers do sometimes focus predominantly on stockholders, especially those holding the largest number of shares, because these powerful individuals and groups can influence whether managers keep their jobs or are dismissed (e.g., when they are held accountable for the company’s missing projected profit goals). And many believe the sole purpose of a business is, in fact, to maximize stockholders’ short-term profits. However, considering only stockholders and short-term impacts on them is one of the most common errors business managers make. It is often in the long-term interests of a business not to accommodate stockowners alone but rather to take into account a broad array of stakeholders and the long-term and short-term consequences for a course of action.

Here is a simple strategy for considering all your stakeholders in practice. Divide your screen or page into three columns; in the first column, list all stakeholders in order of perceived priority ((Figure)). Some individuals and groups play more than one role. For instance, some employees may be stockholders, some members of the community may be suppliers, and the government may be a customer of the firm. In the second column, list what you think each stakeholder group’s interests and goals are. For those that play more than one role, choose the interests most directly affected by your actions. In the third column, put the likely impact of your business decision on each stakeholder. This basic spreadsheet should help you identify all your stakeholders and evaluate your decision’s impact on their interests. If you would like to add a human dimension to your analysis, try assigning some of your colleagues to the role of stakeholders and reexamine your analysis.

Imagine you are the CEO of a mid-sized firm—about five hundred employees—and your company is publicly traded. To understand what matters most to all your stakeholders, complete the preceding exercise to evaluate the impact of a particular action or decision. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


An image of a legal pad with a drawn diagram. The diagram is labeled “Considering Stakeholder Impact” and divided into three columns. The first column is labeled “Stakeholders (in order of perceived priority)”. The second column is labeled “Interests and Goals of Stakeholder”. The third column is labeled “Impact of Action/Decision on Stakeholder”.

The positive feeling stakeholders have for any particular company is called goodwill, which is an important component of almost any business entity, even though it is not directly attributable to the company’s assets and liabilities. Among other intangible assets, goodwill might include the worth of a business’s reputation, the value of its brand name, the intellectual capital and attitude of its workforce, and the loyalty of its established customer base. Even being socially responsible generates goodwill. The ethical behavior of managers will have a positive influence on the value of each of those components. Goodwill cannot be earned or created in a short time, but it can be the key to success and profitability.

A company’s name, its corporate logo, and its trademark will necessarily increase in value as stakeholders view that company in a more favorable light. A good reputation is essential for success in the modern business world, and with information about the company and its actions readily available via mass media and the Internet (e.g., on public rating sites such as Yelp), management’s values are always subject to scrutiny and open debate. These values affect the environment outside and inside the company. The corporate culture, for instance, consists of shared beliefs, values, and behaviors that create the internal or organizational context within which managers and employees interact. Practicing ethical behavior at all levels—from CEO to upper and middle management to general employees—helps cultivate an ethical corporate culture and ethical employee relations.

Which Corporate Culture Do You Value?

Imagine that upon graduation you have the good fortune to be offered two job opportunities. The first is with a corporation known to cultivate a hard-nosed, no-nonsense business culture in which keeping long hours and working intensely are highly valued. At the end of each year, the company donates to numerous social and environmental causes. The second job opportunity is with a nonprofit recognized for a very different culture based on its compassionate approach to employee work-life balance. It also offers the chance to pursue your own professional interests or volunteerism during a portion of every work day. The first job offer pays 20 percent more per year.

Critical Thinking

  • Which of these opportunities would you pursue and why?
  • How important an attribute is salary, and at what point would a higher salary override for you the nonmonetary benefits of the lower-paid position?

Positive goodwill generated by ethical business practices, in turn, generates long-term business success. As recent studies have shown, the most ethical and enlightened companies in the United States consistently outperform their competitors.

Thus, viewed from the proper long-term perspective, conducting business ethically is a wise business decision that generates goodwill for the company among stakeholders, contributes to a positive corporate culture, and ultimately supports profitability.

You can test the validity of this claim yourself. When you choose a company with which to do business, what factors influence your choice? Let us say you are looking for a financial advisor for your investments and retirement planning, and you have found several candidates whose credentials, experience, and fees are approximately the same. Yet one of these firms stands above the others because it has a reputation, which you discover is well earned, for telling clients the truth and recommending investments that seemed centered on the clients’ benefit and not on potential profit for the firm. Wouldn’t this be the one you would trust with your investments?

Or suppose one group of financial advisors has a long track record of giving back to the community of which it is part. It donates to charitable organizations in local neighborhoods, and its members volunteer service hours toward worthy projects in town. Would this group not strike you as the one worthy of your investments? That it appears to be committed to building up the local community might be enough to persuade you to give it your business. This is exactly how a long-term investment in community goodwill can produce a long pipeline of potential clients and customers.

The Equifax Data Breach

In 2017, from mid-May to July, hackers gained unauthorized access to servers used by Equifax, a major credit reporting agency, and accessed the personal information of nearly one-half the U.S. population.

Equifax executives sold off nearly $2 million of company stock they owned after finding out about the hack in late July, weeks before it was publicly announced on September 7, 2017, in potential violation of insider trading rules. The company’s shares fell nearly 14 percent after the announcement, but few expect Equifax managers to be held liable for their mistakes, face any regulatory discipline, or pay any penalties for profiting from their actions. To make amends to customers and clients in the aftermath of the hack, the company offered free credit monitoring and identity-theft protection. On September 15, 2017, the company’s chief information officer and chief of security retired. On September 26, 2017, the CEO resigned, days before he was to testify before Congress about the breach. To date, numerous government investigations and hundreds of private lawsuits have been filed as a result of the hack.

Critical Thinking

  • Which elements of this case might involve issues of legal compliance? Which elements illustrate acting legally but not ethically? What would acting ethically and with personal integrity in this situation look like?
  • How do you think this breach will affect Equifax’s position relative to those of its competitors? How might it affect the future success of the company?
  • Was it sufficient for Equifax to offer online privacy protection to those whose personal information was hacked? What else might it have done?

A Brief Introduction to Corporate Social Responsibility

If you truly appreciate the positions of your various stakeholders, you will be well on your way to understanding the concept of corporate social responsibility (CSR). CSR is the practice by which a business views itself within a broader context, as a member of society with certain implicit social obligations and environmental responsibilities. As previously stated, there is a distinct difference between legal compliance and ethical responsibility, and the law does not fully address all ethical dilemmas that businesses face. CSR ensures that a company is engaging in sound ethical practices and policies in accordance with the company’s culture and mission, above and beyond any mandatory legal standards. A business that practices CSR cannot have maximizing shareholder wealth as its sole purpose, because this goal would necessarily infringe on the rights of other stakeholders in the broader society. For instance, a mining company that disregards its corporate social responsibility may infringe on the right of its local community to clean air and water if it pursues only profit. In contrast, CSR places all stakeholders within a proper contextual framework.

An additional perspective to take concerning CSR is that ethical business leaders opt to do good at the same time that they do well. This is a simplistic summation, but it speaks to how CSR plays out within any corporate setting. The idea is that a corporation is entitled to make money, but it should not only make money. It should also be a good civic neighbor and commit itself to the general prospering of society as a whole. It ought to make the communities of which it is part better at the same time it pursues legitimate profit goals. These ends are not mutually exclusive, and it is possible—indeed, praiseworthy—to strive for both. When a company approaches business in this fashion, it is engaging in a commitment to corporate social responsibility.

Summary

A long-term view of business success is critical for accurately measuring profitability. All the company’s stakeholders benefit from managers’ ethical conduct, which also increases a business’s goodwill and, in turn, supports profitability. Customers and clients tend to trust a business that gives evidence of its commitment to a positive long-term impact. By exercising corporate social responsibility, or CSR, a business views itself within a broader context, as a member of society with certain implicit social obligations and responsibility for its own effects on environmental and social well-being.

Assessment Questions

Which of the following is not a stakeholder?

  1. the media
  2. corporate culture
  3. the environment
  4. customers

B

True or false? According to Milton Friedman, a company’s social responsibility consists solely of bettering the welfare of society.

False. In Friedman’s view, a company’s social responsibility consists of enhancing stockholder value.

What is corporate social responsibility (CSR)?

CSR is the practice of viewing a business within a broader context, as a member of society with certain implicit social obligations, rather than considering the maximization of shareholder wealth as a company’s sole purpose and objective.

Describe a practical way to prioritize the claims of stakeholders.

In three columns, list stakeholders in order of perceived priority, their perceived interests, and the likely impact of the business decision on them. This will aid comprehension of the decision’s impacts as well as provide justification for the course of conduct ultimately chosen.

Describe how a company’s ethical business practices affect its goodwill.

The ethical behavior of managers has a positive influence on the value of a variety of components affecting the company’s overall goodwill, including its brand, its workforce, and its customer relationships. Positive goodwill generated by ethical business practices, in turn, generates long-term business success.

Endnotes

1Jia Lynn Yang, “Maximizing Shareholder Value: The Goal That Changed Corporate America,” Washington Post, August 26, 2013. https://www.washingtonpost.com/business/economy/maximizing-shareholder-value-the-goal-that-changed-corporate-america/2013/08/26/26e9ca8e-ed74-11e2-9008-61e94a7ea20d_story.html?utm_term=.524082979f63.
2David Kocieniewski, “Whistle-blower Awarded 104 Million by IRS,” New York Times, September 11, 2012. http://www.nytimes.com/2012/09/12/business/whistle-blower-awarded-104-million-by-irs.html.
3Jeffrey Liker, The Toyota Way: Fourteen Management Principles from the World’s Greatest Manufacturer (New York: McGraw-Hill, 2005).
4Zameena Mejia and Margaret Ward, “Warren Buffett Says This One Investment ‘Supersedes All Others,’” CNBC Make It, October 4, 2017. https://www.cnbc.com/2017/10/04/warren-buffett-says-this-one-investment-supersedes-all-others.html.
5Laurence A. Cunningham, “The Philosophy of Warren E. Buffett,” New York Times, May 1, 2015. https://www.nytimes.com/2015/05/02/business/dealbook/the-philosophy-of-warren-e-buffett.html.
6Laurence A. Cunningham, “The Philosophy of Warren E. Buffett,” New York Times, May 1, 2015. https://www.nytimes.com/2015/05/02/business/dealbook/the-philosophy-of-warren-e-buffett.html.
7Peter Georgescu, “Doing the Right Thing Is Just Profitable,” Forbes, July 26, 2017. https://www.forbes.com/sites/petergeorgescu/2017/07/26/doing-the-right-thing-is-just-profitable/#360853967488.
8Tyler Durden, “Massive Data Breach At Equifax: As Many As 143 Million Social Security Numbers Hacked,” Zero Hedge, September 7, 2017. http://www.zerohedge.com/news/2017-09-07/massive-data-breach-equifax-many-143-million-social-security-numbers-hacked.
9Arezou Naeini, Auditee Dutt, James Angus, Sarkis Mardirossian, and Sebastian Bonfanti, “A Shoe for a Shoe, and a Smile,” Business Today, June 7, 2015. http://www.businesstoday.in/magazine/lbs-case-study/toms-shoes-shoes-for-free-cause-marketing-strategy-case-study/story/219444.html; TOMS.com, Giving shoes, https://www.toms.com/what-we-give-shoes.

Glossary

corporate culture
the shared beliefs, values, and behaviors that create the organizational context within which employees and managers interact
corporate social responsibility (CSR)
the practice in which a business views itself within a broader context, as a member of society with certain implicit social obligations and responsibility for its own effects on environmental and social well-being
goodwill
the value of a business beyond its tangible assets, usually including its reputation, the value of its brand, the attitude of its workforce, and customer relations
long-term perspective
a broad view of profit maximization that recognizes the fact that the impact of a business decision may not manifest for a long time
shareholder
an individual or institution that owns stock or shares in a corporation, by definition a type of stakeholder; also called stockholder
short-term perspective
a focus on the goal of maximizing periodic (i.e., quarterly and annual) profits
social contract
an implicit agreement among societal members to cooperate for social benefit; when applied specifically to a business, it suggests a company that responsibly gives back to the society that permits it to incorporate, benefiting the community at the same time that it enriches itself
stockholder
an individual or institution that owns stock or shares in a corporation, by definition a type of stakeholder; also called shareholder

Multiple versus Single Ethical Standards

4

Learning Objectives

By the end of this section, you will be able to:

  • Analyze ethical norms and values as they relate to business standards
  • Explain the doctrine of ethical relativism and why it is problematic
  • Evaluate the claim that having a single ethical standard makes behaving consistently easier

Business people sometimes apply different ethical standards in different contexts, especially if they are working in a culture different from the one in which they were raised or with coworkers from other traditions. If we look outside ourselves for ethical guidance, relying on the context in which we find ourselves, we can grow confused about what is ethical business behavior. Stakeholders then observe that the messages we send via our conduct lack a consistent ethical core, which can harm our reputation and that of the business. To avoid falling back on ethical relativism, a philosophy according to which there is no right or wrong and what is ethical depends solely on the context, we must choose a coherent standard we can apply to all our interactions with others.

Some people who adopt multiple ethical standards may choose to exhibit the highest standards with their families, because these are the people they most revere. In a business setting, however, this same person may choose to be an unethical actor whose sole goal is the ruthless accumulation of wealth by any means. Because work and family are not the only two settings in which we live our lives, such a person may behave according to yet another standard to competitors in a sporting event, to strangers on the street, or to those in his or her religious community.

Although the ethical standard we adopt is always a choice, certain life experiences can have more profound effects on our choice than others. Among the most formative experiences are family upbringing and cultural traditions, broadly defined here to include religious and ethnic norms, the standard patterns of behavior within the context in which we live. Culture and family also influence each other because the family exists in and responds to its cultural context, as well as providing us with the bedrock for our deepest values. Regardless of this initial coding, however, we can choose the ethical standards we apply in the business context.

Why should we choose a single ethical code for all the contexts in which we live? The Greek philosophers and later proponents of the normative ethical theories we discussed earlier would say that if you apply your reason to determine how to behave, it makes rational sense to abide by a single ethical code for all interactions with all persons in all contexts. By doing so, you maximize your ethical behavior no matter who the other party is. Furthermore, you have an internally consistent behavior for all family, friends, customers, clients, and anyone else with whom you interact. Thus, we need not choose different values in different contexts, and when people see us in different situations, they are more likely to trust us because they see we uphold the same values regardless of the context.

Indeed, proponents of all the normative ethical theories would insist that the only rational choice is to have a single ethical standard. A deontologist would argue that you should adhere to particular duties in performing your actions, regardless of the parties with whom you interact. A utilitarian would say that any act you take should result in the greatest good for the greatest number. A virtue ethicist would state that you cannot be virtuous if you lack integrity in your behavior toward all.

Adopting a consistent ethical standard is both selfless and in the manager’s self-interest. That is, would-be customers and clients are more likely to seek out a business that treats all with whom it interacts with honesty and fairness, believing that they themselves will be treated likewise by that firm. Similarly, business leaders who treat everyone in a trustworthy manner need never worry that they might not have impressed a potential customer, because they always engage in honorable commercial practices. A single standard of business behavior that emphasizes respect and good service appeals to all.

Normative ethics is about discovering right and delineating it from wrong; it is a way to develop the rules and norms we use to guide meaningful decision-making. The ethics in our single code are not relative to the time, person, or place. In this world, we all wear different hats as we go about our daily lives as employees, parents, leaders, students. Being a truly ethical person requires that no matter what hat we wear, we exhibit a single ethical code and that it includes, among others, such universal principles of behavior as honesty, integrity, loyalty, fairness, respect for law, and respect for others.

Yet another reason to adopt a universal ethical standard is the transparent character it nurtures in us. If a company’s leadership insists that it stands for honest business transactions at every turn, it cannot prosecute those who defraud the company and look the other way when its own officers do the same. Stakeholders recognize such hypocrisy and rightly hold it against the business’s leaders.

Business leaders are not limited to only one of the normative ethical theories we have described, however. Virtue theory, utilitarianism, and deontology all have advantages to recommend them. Still, what should not change is a corporate commitment to not make exceptions in its practices when those favor the company at the expense of customers, clients, or other stakeholders.

Moving from theory to daily life, we can also look at the way our reputation is established by the implicit and explicit messages we send to others. If we adopt ethical relativism, friends, family, and coworkers will notice that we use different standards for different contexts. This lack of consistency and integrity can alter their perception of us and likely damage our reputation.

Taking Advantage of an Employee Discount

Suppose you work in retail sales for an international clothing company. A perk of the job is an employee discount of 25 percent on all merchandise you purchase for personal use. Your cousin, who is always looking for a bargain, approaches you in the store one day and implores you to give him your employee discount on a $100 purchase of clothes for himself.

Critical Thinking

  • How would you handle this situation and why?
  • Would it matter if the relative were someone closer to you, perhaps a brother or sister?
  • If so, why?

Summary

The adoption of a single ethical code is the mark of a professional of integrity and is supported by the reasoned approach of each of the normative theories of business ethics. When we consistently maintain the same values regardless of the context, we are more likely to engender trust among those with whom we interact.

Assessment Questions

True or false? Family is generally a strong influence on our ethical standards.

True

Which normative ethical theory supports the idea of holding multiple ethical standards?

  1. deontology
  2. utilitarianism
  3. virtue ethics
  4. none of the above

D

Describe the benefits of having a single ethical standard.

Having a single ethical standard maximizes ethical behavior no matter who the other party is and supports an internally consistent rule of behavior toward all family, friends, customers, clients, and others with whom we interact.

Glossary

ethical relativism
a view that ethics depends entirely upon context

Ethics from Antiquity to the Present

II

Introduction

5

Their accuracy and practical use in the marketplace made scales, held aloft here by the figure of Justice in Bruges, Belgium, a common symbol in jurisprudence and law in the East and the West. Even today, the concept of counterbalancing different ideas and philosophies underlies many approaches to the law and ethics. (credit: modification of “Golden Lady Justice” by Emmanuel Huybrechts/Flickr, CC BY 2.0)


A photo of a statue depicting the figure of Justice.

From the time of barter to the age of bitcoin, most people engaged in business transactions have sought trust. Without trust, which is a fundamental outcome of ethical behavior, not just business relationships but all relationships would collapse. To develop insight into our own concepts of ethics, this chapter looks at how ethical systems have developed over time, beginning with the distinction between ethics and the law.

Ethics are the standards of behavior to which we hold ourselves accountable in our personal and professional lives. Laws and regulations set the minimal standards by which society lives out those ethical norms. Because laws are minimal standards, it is not uncommon for an act to be legal but generally deemed unethical. The fact is that law and ethics are not always the same. Always, however, they are in dialogue, and each informs the other. The greatest challenge in business decision-making is moving beyond the letter of the law to create a culture of ethics ((Figure)).

Can you identify a moment in your life when it was hard to follow your conscience, or your personal morality conflicted with societal norms? What was the nature of the conflict, and how did you approach it?

The Concept of Ethical Business in Ancient Athens

6

Learning Objectives

By the end of this section, you will be able to:

  • Identify the role of ethics in ancient Athens
  • Explain how Aristotelian virtue ethics affected business practices

It would be hard to overstate the influence of ancient Athens on Western civilization. Athenian achievements in the arts, literature, and government have molded Western consciousness. Perennial themes, such as the search for individual identity and each person’s place in the world, appear in countless novels and Hollywood screenplays. The role of Athenian ethical theories in philosophy has been profound, and Athenian principles continue to be influential in contemporary philosophy. Ethics, as a form of applied philosophy, was a major focus among the leaders of ancient Athens, particularly teachers like Socrates, Plato, and Aristotle. They taught that ethics was not merely what someone did but who someone was. Ethics was a function of being and, as the guiding principle for dealings with others, it naturally applied as well to the sensitive areas of money and commerce.

Ancient Athens

Like a modern metropolis, the city-state (polis) of Athens in the fifth century BCE drew people from far afield who wanted a better life. For some, that life meant engaging in trade and commerce, thanks to the openness of the new democracy established under the lawgiver Cleisthenes in 508 BCE. Others were drawn to Athens’ incredibly rich architecture, poetry, drama, religious practices, politics, and schools of philosophy. Youth traveled there hoping to study with such brilliant teachers as the mathematicians Archimedes and Pythagoras; dramatists like Sophocles and Euripides; historians Herodotus and Thucydides; Hippocrates, the father of medicine; and, of course, the renowned but enigmatic philosopher Socrates. More than being the equivalent of rock stars of their day, these thinkers, scholars, and artists challenged youth to pursue truth, no matter the cost to themselves or their personal ambitions. These leaders were interested not in fame or even in personal development but in the creation of an ideal society. This was the Golden Age of ancient Greece, whose achievements were so profound and enduring that they have formed the pillars of Western civilization for nearly two and a half millennia.

Philosophy, in particular, flourished during the Golden Age, with various schools of thought attempting to make sense of the natural and human worlds. The human world was thought to be grounded in the natural world but to transcend it in striking ways, the most obvious being humans use of reason and deliberation. Philosophers like Socrates, Plato, and Aristotle tackled fundamental questions of human existence with such insight that their ideas have remained relevant and universal even at the dawn of artificial intelligence. As British mathematician and philosopher Alfred North Whitehead (1861–1947) observed, “the safest general characterization of the European philosophical tradition is that it consists of a series of footnotes to Plato.”

Why are the insights of these Greek philosophers still relevant today? One reason is their development of the ancient concept of virtue. The person most closely associated with virtue in the West, and the development of what is now known as virtue ethics—that is, an ethical system based upon the exercise of certain virtues (loyalty, honor, courage) emphasizing the formation of character—is Plato’s famous pupil Aristotle (384–322 BCE) ((Figure)).

Nicomachean Ethics, by the ancient Greek philosopher Aristotle (a), is a rough collection of Aristotle’s lecture notes to his students on how to live the virtuous life and achieve happiness; it is the oldest surviving treatment of ethics in the West. The collection was possibly named after Aristotle’s son. This 1566 edition (b) was printed in both Greek and Latin. (credit a: modification of “Aristotle Altemps Inv8575” by “Jastrow”/Wikimedia Commons, Public Domain; credit b: modification of “Aristotelis De Moribus ad Nicomachum” by “Aavindraa”/Wikimedia Commons, Public Domain)


Part A is a statue depicting Aristotle. Part B shows a print copy of Aristotle’s Nicomachean Ethics.

Aristotelian Virtue Ethics

For Aristotle, everything that exists has a purpose, or end, and has been designed to meet that end. For instance, the proper end of birds is to fly, that of fish to swim. Birds and fish have been designed with the appropriate means (feathers, fins) to achieve those ends. Teleology, from the Greek telos meaning goal or aim, is the study of ends and the means directed toward those ends. What is the telos of human beings? Aristotle believed it to be eudaimonia, or happiness. By this, he did not mean happiness in a superficial sense, such as having fun or being content. Rather, he equated happiness with human flourishing, which he believed could be attained through the exercise of the function that distinguishes humans from the natural world: reason.

For Aristotle, reason was supreme and best used to increase not wealth but character. “But what is happiness?” he asked. “If we consider what the function of man is, we find that happiness is a virtuous activity of the soul.”

However, because humans are endowed not only with reason but also with the capacity to act in an honorable and ethical manner, they may reject their end, either intentionally or by default. The great task of life, then, is to recognize and pursue happiness, no matter the constraints placed on the individual, the most dramatic of which are suffering and death. Birds and fish have little difficulty achieving their ends, and we can assume that much of this is due to their genetic coding. Because happiness might not be genetically encoded in human beings, they must learn how to be happy. How do they do that? According to Aristotle, eudaimonia is achieved by leading a virtuous life, which is attained over time. “Happiness is a kind of activity; and an activity clearly is developed and is not a piece of property already in one’s possession.”

Aristotle identified two types of virtues, which the philosophical community of his day agreed were objective and not subjective. The two types were intellectual and moral. Intellectual virtues—including knowledge (epistḗmē), wisdom (sophíā), and, most importantly for Aristotle, prudence (phrónēsis), or practical wisdom—served as guides to behavior; that is, a person acted prudently based on the wisdom gained over time through the ongoing acquisition and testing of knowledge. To give an oversimplified but practical application of Aristotelian thinking, a hiring manager acts prudently when assessing a pool of candidates based on knowledge of their backgrounds and on insight gained after years of working in that role. The manager may even use intuitive reason regarding a candidate, which Aristotle believed was another way of arriving at truth. Understood in this way, the manager’s intuition is an impression regarding character and someone’s potential fit in an organization. Among the intellectual virtues, prudence played the major role because it helped individuals avoid excess and deficiency and arrive at the golden mean between the two. Prudence has been translated as “common sense” and “practical wisdom” and helps individuals make the right decision in the right way at the right time for the right reason. In Aristotle’s view, only the truly prudent person could possess all the moral virtues.

The distinction Aristotle made is that the intellectual virtues are acquired purely through learning, whereas the moral virtues are acquired through practice and the development of habits. In contrast to the intellectual virtues, which focused on external acts, the moral virtues had to do with character. They included courage, self-control, liberality, magnificence, honor, patience, and amiability. Some of these virtues had different meanings in ancient Greece than they do today. “Liberal,” for instance, referred not to a political or economic stance but rather to an aspect of personality. Someone would be considered liberal who was open and sharing of him- or herself and his or her talents without fear of rejection or expectation of reciprocity. The paragon of these virtues was the magnanimous individual, someone for whom fame and wealth held little attraction.

This person had self-knowledge; was not rash, quick to anger, or submissive to others; and acted with self-respect, control, and prudence. The magnanimous individual achieved happiness by leading a life characterized by reason and will. He or she remained in control of self and did not hand over his or her authority—or moral agency—to others, whether in judgment or in decision-making. “So, magnanimity seems to be a sort of crown of the virtues, because it enhances them and is never found apart from them. This makes it hard to be truly magnanimous, because it is impossible without all-round excellence,” according to Aristotle.

The relationship between the intellectual and the moral virtues was not as clear cut as it may appear, however, because Aristotle believed that action preceded character. In other words, the primary way to change character was through consistent, intentional behavior in the direction of virtue. Aristotle gave the example of courage. A person was not courageous first and then went about performing acts of courage. Rather, courage resulted from incremental change, small steps taken over time that molded the person’s character. It relied on a recognition of justice, so that courage was directed toward the right end. The important task was developing the habit of leading the virtuous life. Anyone could do this; however, it was a discipline that had to be learned and practiced with dedication. We can see that this habit of virtue is especially relevant for business today, when the temptation to conform to an established organizational culture is overwhelming even when that culture may permit and even encourage questionable practices. Add the seductive power of money, and anyone’s courage might be tested.

The most notable feature of virtue ethics is that it viewed the basic ethical unit—the fundamental agent of morality—as the individual, who lived out his or her worldview publicly. A life of virtue, therefore, took place in the economic and political spheres so that others might participate in and benefit from it. In Athenian society, it was important for business to be conducted competently and ethically. Even though Aristotle was suspicious of business, he acknowledged its importance in preserving and nurturing Athenian democracy. He also praised the creation of money to further the goal of justice, so that a shoemaker and a housebuilder, for instance, could trade their wares on an equal basis. Virtue in the marketplace was demonstrated through ethical behavior, according to Aristotle: “People do in fact seek their own good, and think that they are right to act in this way. It is from this belief that the notion has arisen that such people are prudent. Presumably, however, it is impossible to secure one’s own good independently of domestic and political science.”

This belief in the public nature of virtue was crucial for the flourishing of the city-state and also has implications for contemporary business, which must consider the individual, organization, industry, and society in its development and planning.

Athenian Democracy

Just as time and place influence people’s perception of ethics, so is their understanding of democracy also subjective.

You might be surprised to learn the Athenian version of democracy was significantly different from our own. For instance, although the word “democracy” comes from the Greek for people (dêmos) and power (krátos), only adult men who owned property could vote, and voting was direct; Athens was not a republic with elected representatives, like the United States. Resident aliens, or metics—those who change their home—were not eligible for citizenship and could not vote. They had limited rights and their status was second class, although this did not stop many of them from attaining wealth and fame. They were often among the best artisans, craftspeople, and merchants in the city-state. Metics were able to conduct business in the marketplace (agora) provided they paid special taxes yearly. One of the most famous was Aristotle, who was born outside Athens in northern Greece.

Women, even those who were citizens, were not allowed to vote and had limited rights when it came to property and inheritance. Their primary function in Athenian society was the care and management of the home. “The Athenian woman must be the perfect Penelope—a partner to the husband, a guard of the house, and one who practices the virtues defined by her husband. Physical beauty was not to be a goal, nor was it even a primary valued attribute. Total dedication to the welfare of husband, children, and household was the ultimate virtue”

((Figure)).

Penelope and Odysseus in a scene from Homer’s Odyssey, as depicted in 1802 by the German painter Johann Tischbein. For the ancient Greeks, Penelope represented all the virtues of a loving, dutiful partner. She remained faithful to her husband Odysseus despite his absence of some twenty years during and after the Trojan War. (credit: “Odysseus and Penelope” by H. R. Wacker and James Steakley/Wikimedia Commons, Public Domain)


A painting depicting a woman on the left, Penelope, and a man on the right, Odysseus. Another person is behind Odysseus looking back at them.

Finally, not all transactions were as straightforward as selling Egyptian linen, dried fruit, or spices. Slave traders, too, brought their “wares” to market. Slavery was a customary part of many cultures throughout the ancient world, from Persia to Arabia and Africa and China. In Athens and its surrounding area, it is estimated that during the Golden Age (fifth century BCE) there were 21,000 citizens, 10,000 metics (non-native Athenians who still shared some of the benefits of citizenship), and 400,000 slaves.

Despite the Athenian emphasis on virtue and honor, there was little or no objection to owning slaves, because they formed an indispensable part of the economy, providing the labor for agriculture and food production.

Slavery persists even today. For instance, it is believed that nearly thirty million people worldwide are living and working as slaves, including three million in China and fourteen million in India.

Servitude also exists for migrant workers forced to live and work in inhuman conditions without recourse to legal help or even the basic necessities of life. Such conditions occur in industries as diverse as commercial fishing in Southeast Asia and construction in Qatar.

Critical Thinking

  • Consider how democracy has expanded since the Golden Age of Greece, eventually including universal suffrage and fundamental rights for everyone. Although we try not to judge cultures today as having right or wrong practices, we often judge earlier cultures and civilizations. How might you assess a practice like slavery in antiquity without imposing modern values on a civilization that existed more than two and a half millennia ago?
  • Are there absolute truths and values that transcend time and space? If yes, where might these come from? If not, why not?

Honorable Behavior in Business

The common belief in ancient Greece that business and money were somehow tainted reflected Plato’s concept that the physical world was an imperfect expression, or shadow, of the ideal. Everything in the physical world was somehow less than the ideal, and this included the products of human thought and labor. For example, a cow exists in the physical world as an imperfect and temporary expression of the ideal essence of a cow, what we might call “cowness.” (This imperfection accounted for the many variations found in the earthly creature.) Business, as a human invention based on self-interest, also had no appreciable ideal or end. After all, what was the purpose of making money if not having more money? Any end beyond that was not evident. In other words, money existed simply to replicate itself and was fueled by avarice (the love of money) or greed (the love of material goods). “As for the life of the businessman, it does not give him much freedom of action. Besides, wealth is obviously not the good that we are seeking, because it serves only as a means; i.e., for getting something else,” said Aristotle.

Yet, business had an interesting effect that helped invigorate Athenian life and encouraged those engaged in it to be virtuous (or else risk their reputation). This effect was association. Business was based on the free and fair exchange of goods, which brought not only items of merchandise into association with each other but also buyers, sellers, and public officials. The way to ensure ethically sound association was through the exercise of prudence, especially in its demand that people act not rashly but deliberately. This deliberative aspect of prudence provided a way for buyers, sellers, and everyone engaged in a transaction to act honorably, which was of the utmost importance. Honor was not only a foundational virtue but the cultural environment in which the ancient world existed. One of the worst offenses anyone could commit, whether man, woman, free, or slave, was to act in a dishonorable way. Of course, although acting deliberately does not guarantee that one is acting honorably, for Athenians, acting in a calculated way was not an indication of dishonor. Dishonorable acts included any that disturbed the basic order (dikē) of life in which everyone had a role, including the gods.

Interestingly, the Aristotelian approach to business did not condemn money making or the accumulation of riches. What concerned Aristotle, particularly because of its harmful effects on the individual and the city-state, was greed. Aristotle considered greed an excess that tipped the scales of justice and led to scandal. Money might constitute the bait, but greed causes the person to reach out and grab as much as possible, falling into the trap of scandal. The Greeks considered the exercise of greed an irrational, and therefore ignoble, act. Only attention to honor and deliberative prudence could save someone from acting so foolishly.

Honor in ancient Greece was not just an individual characteristic but also a function of the group to which an individual belonged, and the person derived self-esteem from membership in that group. Civic virtue consisted of honorable living in community. Business scandals today often arise not from conflicts of interest but from conflicts of honor in which employees feel torn by their allegiance to a coworker, a supervisor, or the organization.

Although few people would use the term honor to describe contemporary workplace culture or corporate mission, nearly everyone understands the importance of reputation and its impact, positive or negative, on a business. Reputation is no accident. It is the product of a culture formed by individual and group effort. That effort is directed, intentional, and ongoing.

According to Aristotle, and later thinkers who expanded upon his work, such as thirteenth-century philosopher and theologian Thomas Aquinas, to act dishonorably casts disrepute on all concerned. Ends and means had to be aligned, particularly in business, which provided people’s livelihoods and secured the economic health of the city-state. Acting honorably meant trying to be magnanimous in all transactions and rising above obsession with baser instincts. The honorable person was magnanimous, prudent, fair, and interested in self-advancement as long as it did not injure personal integrity or the body politic. The importance of prudence is evident because, said Aristotle, it is “concerned with human goods, i.e., things about which deliberation is possible; for we hold that it is the function of the prudent man to deliberate well; and nobody deliberates about things that cannot be otherwise, or that are not means toward an end, and that end is a practical good. And the man who is good at deliberation generally is the one who can aim, by the help of his calculation, at the best of the goods attainable.”

Aquinas further divided Aristotelian prudence into memory, reason, understanding, docility, shrewdness, foresight, circumspection, and caution.

To use these qualities in a constructive way, a business person had to direct them toward an appropriate end, which applies to business today just as it did in fourth-century Athens. A merchant could not make money in a random way but had to keep the needs of customers in mind and conduct business with fair prices and fees. This exercise of prudence was part of the cosmic order that ensured the right management of the home, the marketplace, and civilization itself. Similarly, committing fraud or deception to achieve an end, even if that end were good or just, was not considered an honorable act. Only when ends and means were aligned and worked in harmony were those engaged in the transaction considered virtuous. This virtue, in turn, would lead to the happiness Aristotle envisioned and toward which his entire system of virtue ethics aimed.

Three Forms of Justice

Along with honor, justice—as depicted in the image at the beginning of this chapter—formed part of the cultural environment of Athenian society. Citizens often relied on litigation to settle disputes, particularly conflicts over business transactions, contracts, inheritance, and property. Justice existed in three forms, as it does today: legal, commutative, and distributive. In legal justice, the city-state was responsible for establishing fair laws for the welfare of its citizens. Commutative justice characterized relationships among individuals. Courts attempted to correct harms inflicted and return what had been unlawfully taken away from plaintiffs. Distributive justice governed the duty of the city-state to distribute benefits and burdens equitably among the people.

We can see these forms of justice at work today in very practical ways. For instance, within the framework of commutative justice, businesses are often held responsible ethically and financially for any harm caused by their products. And distributive justice is debated in such hotly contested issues as corporate and individual tax rates, universal health coverage, state and federal income assistance, subsidized housing, social security eligibility, college tuition aid (e.g., Pell grants), and similar programs designed to create a “safety net” for those least fortunate. Some safety net programs have been criticized for their excessive cost, inefficiency, and unfairness to those who pay into them while receiving no benefit or say in their administration.

Critical Thinking

  • How is the ancient concept of distributive justice understood in today’s political debate?
  • What are the underlying values that inform each side of the debate (e.g., values like wealth maximization and corporate social responsibility)?
  • Can these sides be reconciled and, if so, what must happen to bring them together? Does virtue have a role to play here; if so, how?

How, exactly, did honor and deliberative prudence prevent someone from acting foolishly in life and unethically in business? And what does it look like to follow these virtues today?

Summary

The role of ethics in Athens during Greece’s Golden Age (fifth century BCE) was substantial. Aristotle focused on the role of virtue in developing individual character and social stability. He believed a person’s actions determined whether he or she was virtuous, and the point of the virtuous life was happiness, or eudaimonia.

Aristotle identified two types of virtues: intellectual and moral. Intellectual virtues were acquired through learning and served as guides to behavior by helping the individual discover truth. Moral virtues were acquired through habit and built character by helping someone pursue what is beneficial and avoid what is harmful in daily life. Aristotle considered phrónēsis, or prudence, the most important virtue, because of its practical application.

The thirteenth-century philosopher and theologian Thomas Aquinas agreed with Aristotle that to act dishonorably casts disrepute on all concerned. Ends and means had to be aligned, particularly in business, which provided people’s livelihoods and secured the economic health of the city-state.

Assessment Questions

Which of the following is not an intellectual virtue according to Aristotle?

  1. the basic order of life
  2. knowledge
  3. wisdom
  4. prudence

A

Deliberative prudence does all the following except ________.

  1. align ends and means
  2. encourage prodigality
  3. avoid conflict
  4. prevent rash behavior

B

True or false? According to Aristotle, happiness is a virtuous activity of the soul.

True

True or false? It is possible to act deliberately and shrewdly in a good way or toward a good end.

True

How might virtue ethics apply to contemporary business?

Because virtue ethics emphasizes individual character and conscience, it can have a tremendous influence on organizational culture by encouraging individuals to stand up for sound, ethical, and responsible business practices.

Endnotes

1Alfred North Whitehead, Process and Reality. An Essay in Cosmology. Gifford Lectures Delivered in the University of Edinburgh During the Session 1927–1928. (Cambridge, UK: Cambridge University Press, 1929).
2Robert C. Solomon, “Business and the Humanities: An Aristotelian Approach to Business Ethics” in Business as a Humanity, eds. Thomas J. Donaldson, R. Edward Freeman. The Ruffin Series in Business Ethics, ed. R. Edward Freeman. (New York: Oxford University Press, 1994), 66-67.
3Aristotle, The Nicomachean Ethics, translated by J.A.K. Thomson. (New York: Penguin Books, 2004), 1097b.
4Aristotle, The Nicomachean Ethics, translated by J.A.K. Thomson. (New York: Penguin Books, 2004), 1169b.
5Aristotle, The Nicomachean Ethics, translated by J.A.K. Thomson. (New York: Penguin Books, 2004), 1124b–1125a.
6Aristotle, The Nicomachean Ethics, translated by J.A.K. Thomson. (New York: Penguin Books, 2004), 1123b.
7Aristotle, The Nicomachean Ethics, translated by J.A.K. Thomson. (New York: Penguin Books, 2004), 1142a.
8William O’Neal, “The Status of Women in Ancient Athens,” International Social Science Review 68, no. 3 (1993): 118.
9Nigel Wilson, ed., s.v. “Demography” in Encyclopedia of Ancient Greece. (New York: Routledge, 2006), 213–216.
10South Morning China Post, “2.9 Million Trapped in Modern-Day Slavery in China, 30 Million Worldwide,” October 17, 2013; updated October 18, 2013. http://www.scmp.com/news/world/article/1333894/29-million-trapped-modern-day-slavery-china-30-million-worldwide.
11Patrick Winn, “Slavery on Thai Fishing Boats Is Straight from the 18th Century,” June 23, 2013. http://www.businessinsider.com/thailand-slavery-fishing-boats-2013-6; Amar Toor, “Soccer and Slavery: World Cup Dogged by Reports of Labor Abuse in Qatar,” October 3, 2013. https://www.theverge.com/2013/10/3/4797842/qatar-faces-allegations-of-slave-migrant-labor-ahead-of-world-cup-2022.
12Aristotle, The Nicomachean Ethics, translated by J.A.K. Thomson. (New York: Penguin Books, 2004), 1096a.
13Solomon, “Business and the Humanities: An Aristotelian Approach to Business Ethics,” 70.
14Aristotle, The Nicomachean Ethics, translated by J.A.K. Thomson. (New York: Penguin Books, 2004), 1141b.
15Marta Rocchi et al, “Margin Call: What if John Tuld Were Christian? Thomistic Practical Wisdom in Financial Decision-Making,” Working Paper no. 01/17 (Pamplona: Universidad de Navarra, Facultad de Ciencias Económicas y Empresariales, 2017), 6. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2936288.

Glossary

eudaimonia
the happiness or human flourishing that results from virtuous activity; it is more than contentment or satisfaction
golden mean
in Aristotelian virtue ethics, the aim of ethical behavior, a value between excess and deficiency
phrónēsis
prudence or practical wisdom; the intellectual virtue Aristotle considered most important
virtue ethics
an ethical system based on the exercise of certain virtues (loyalty, honor, courage) emphasizing the formation of character

Ethical Advice for Nobles and Civil Servants in Ancient China

7

Learning Objectives

By the end of this section, you will be able to:

  • Identify the key features of Confucian virtue ethics
  • Explain how Confucian virtue ethics can be applied to contemporary business

The teachings and writings of Confucius (551–479 BCE; also called Kung Fu Tzu or Master Kung) not only have endured more than two and a half millennia but have influenced Chinese culture to such a degree that they remain part of the national character. In classical Confucianism, the practice of virtue constitutes the essence of governance. Differing from Aristotelian virtue (arête), Confucian virtue emphasizes relationships. Aristotle shows how a self-determining person might live well in society. Confucius showed how a relationship-determining person can live well with others. The reasons for this distinction will become clearer throughout the section.

As an iconic figure, Confucius had an impact on politics, literature, civil administration, diplomacy, and religion in China. Yet, by most accounts, he considered himself a failure, never having achieved the position and security he sought during his lifetime. However, his story is a testament to the reward of a life lived with integrity and simplicity.

Social Upheaval in Ancient China

More than a century and a half before Aristotle and on the other side of the globe, Confucius, a wandering preacher from the principality of Lu in China, also struggled to answer life’s questions, although in a practical rather than a philosophical way. Confucius committed himself to healing the social divisions that were tearing China apart under the declining Zhou Dynasty. Those divisions led to what historians call the “Period of the Warring States,” which persisted for two hundred years after Confucius’s death. It was a time of constant warfare and violence.

To counter the social disintegration he found everywhere, Confucius looked to the past, or “the wisdom of the ancients.” He called for a “return to li,” which was the proper order of the universe in which everyone had a role to play and there was harmony in the world.

We might see this harmony in a contemporary business setting as a team of people bringing different talents to bear on a specific project for the good (and profit) of the company. In this sense, li refers to doing those tasks in collaboration with others to achieve the mission of the organization. For Confucius, li was expressed through ritual acts. When the correct rituals were followed in the right way with the right intention for the right end, all was well. Of course, corporate rituals also exist, and like all ritual acts, they reinforce cohesion and identity within the group. Identifying them helps improve employee awareness, productivity, and, perhaps, happiness. One example of this would be new-employee orientation, which is intended to acclimate newcomers to the corporate culture, the company ethos, and the traditions associated with the way the firm does business. Finally, anticipating Aristotle’s golden mean, li emphasized the middle ground between deficiency and excess. “Nothing in excess” was its guiding principle.

Huston Smith, noted historian of world religions, has observed that the widespread adoption of Confucius’s teachings within a generation of his death was not due to the originality of his ideas.

What made the humble scholar the greatest cultural force in China’s history was chance. Confucius appeared on the scene at the right time, offering a fractured country an alternative to two extremes, neither of which was working. These were a realism that was tyrannical and relied on brute force to restrain the rivaling factions, and an idealistic approach called Mohism that was based on universal love and mutual aid. Confucius rejected the first as crude and the second as utopian.

Instead, he offered a practical but empathetic approach, a sort of tough love for the times.

Confucian Virtue Ethics

Scholars believe that, like Aristotle, Confucius stressed the virtuous life in his ethical system, with the goal of creating a junzi, or a person who was gracious, magnanimous, and cultured: in other words, a flourishing human being. A junzi exhibited refinement, self-control, and balance in all things, acting neither rashly nor timidly. Such a person was the opposite of a “small” individual, who spent his or her time embroiled in petty rivalries and for whom power was the ultimate measure of success.

The concept of junzi and the Aristotelian magnanimous individual have much in common, except that for Confucius, there was added urgency. To be a junzi was a matter not just of honor but of survival. It is no exaggeration to say that China’s very existence depended upon the ability of individuals—nobles and peasants alike—to rise above the barbarity around them and embrace a way of life directed both outward toward social, political, and administrative reform and inward toward spiritual development. Confucius ((Figure)) believed that living the virtues he taught would achieve both these ends.

Confucius (Kung Fu-tzu or Master Kung), depicted here in front of the Confucius Temple in Beijing, lived during a turbulent period in China’s history. He sought to end violence and chaos through a return to order, harmony, and reverence, especially within the family. (credit: “KongZi, Confucius Temple with Gold Roof, Main Statue” by “klarititemplateshop.com”/Flickr, CC BY 2.0)


A photo of a statue depicting Confucius that is in front of the Confucius Temple.

The keystone of Confucius’s deliberate tradition was the dao of humanity, or the Way, which established humanity as the answer to rampant lawlessness.

Confucius believed people were inherently good and that the way to stop inhuman behavior was to make them even better, or more human. He identified three means to do this, which we explore next: “whole-hearted sincerity and truthfulness,” the “constant mean,” and “expediency” (quan).

Specific virtues like moral character, righteousness, wisdom, courage, respect, filial piety, and simplicity formed part of these means. Someone who lived virtuously became more human, which resulted in a flourishing individual and an ordered world.

“Whole-hearted sincerity and truthfulness” meant more than sincerity, because even liars can be convincing. The sincerity Confucius had in mind was closer to loyalty, and the thing to which humans had to be loyal was truth. Confucius intended to counter the blind loyalty that had contributed to the eruption of anarchy throughout China. For instance, if a subject were called upon to offer advice, the subject had to be truthful, even though the ruler might not like the advice, which actually happened to Confucius, causing him to resign his post as minister of justice in Lu.

What a subject owed the ruler was not cloying deference but the truth, which would benefit everyone in the long run. The implications for ethical behavior in modern corporations may be obvious. Reporting unethical behavior as a whistleblower or even standing up for truth in a meeting is sometimes easier said than done, which is why living virtuously requires disciplined practice and the support of like-minded individuals.

The “constant mean” refers to balance between excess and deficiency in an existential and in a practical sense. We are to follow the middle path, avoiding extremes of thought and action through ritual acts. We cannot claim to lead a balanced life; we must show it by performing acts that maintain personal and collective order. The Book of Li catalogues many of these acts, which form a guide for proper living, indicating the correct way to maintain the five great relationships that support Chinese society: parent/child, husband/wife, elder/junior sibling, master/apprentice, and ruler/subject. Confucius and his peers believed that properly observing these key five relationships was essential for social good and would invoke divine favor on the people.

Note that three of these are relationships within the family. The family was the basic unit of society and Confucius’s hope for reform, because it was the primary and most influential school of character, virtue, and conscience. Thus, the return to li takes on greater significance than a simple longing for an idyllic past. As Huston Smith noted, “that three of the Five Relationships pertain within the family is indicative of how important Confucius considered this institution to be. In this he was not inventing but continuing the Chinese assumption that the family is the basic unit of society. This assumption is graphically embedded in Chinese legend, which credits the hero who ‘invented’ the family with elevating the Chinese from the animal to human level.”

Yijing

The five great relationships upon which Chinese civilization is built prescribed definite roles for the social classes and sexes. As in ancient Greece, women in ancient China were in charge of domestic duties and care of the family. They were neither expected nor believed able to assume duties outside the home and certainly not in the competitive world of business. Yet consider the fictional case of Yijing.

Yijing was the daughter of the merchant Bei Li, who sold farming tools and agricultural products in Cao, which bordered Lu. Bei Li’s business was very successful and he took great pride in it. He had three sons who worked with him, but none had the head for business that his daughter Yijing had. Moreover, none of them wanted to take over the business after his death. When Yijing begged for a chance to run the business for her father, he agreed, but he insisted she disguise herself as a man when traveling and doing business in the family name. If people knew she was a woman, they would ridicule the family and take advantage of her. Although surprised by her father’s request, Yijing agreed and eventually took over the business, making it extremely prosperous.

Critical Thinking

If you were Yijing, what would you have done?

For Confucius, the third approach to the Way of humanity was the doctrine of expediency. Where Buddhism and Taoism advocated compassion and Mohism advocated universal love, Confucianism defined righteousness as the virtue that would temper compassion and love so that people could live together not just peacefully but justly.

Righteousness included a practical approach to problem solving that helped politics, diplomacy, and civil administration to flourish. This expediency, or quan, is a noteworthy feature of Confucianism. Originally referring to a piece of metal used in balancing scales, quan is applied when weighing options in a moral dilemma and acts as a counterbalance to achieve fairness, enabling parties in a transaction to arrive at an equitable agreement. Ultimately, quan allows people and institutions to prioritize responsive action over ritual and serves as the way to align what people do with who they are, thus allowing them to become more human. For the businessperson, it might mean not fleeing the “tawdry” world of the marketplace but recognizing the humanity within it.

One example of the use of quan is the Broad Group, a Chinese manufacturer of central air conditioning products. The company produces clean energy systems and has developed an alternative to Freon. The new coolant has changed the way energy is delivered to such an extent that Zhang Yue, the company’s chief executive officer, was awarded the Champions of the Earth prize by the United Nations in 2011 for his work in green energy.

Certainly, there is more opportunity for sustainable manufacturing and ethical business practices throughout China, and the state is attempting to promote such efforts.

A Confucian Business Model

The spirituality that emerges from quan as righteousness is not solely about the individual; it is about the act itself, that is, the transaction, whether that takes place in a market, shop, or loading dock. When righteousness is directed outward in this way, it becomes justice, compelling all parties in a transaction to act in good faith or risk upsetting the proper order of things. Justice in this sense allows for wealth creation, investment, and strategic planning as long as all fulfill their roles and act in the manner of a junzi. An overarching spirituality of business may even develop, arising from the people who collectively make up the company. This is a traditionally Confucian way of looking at corporate culture, as the reflection of a larger network of relationships.

The other two Confucian ways of humanity also relate to business, because wholeheartedness and sincerity can serve as models of risk assessment, requiring clearheaded thinking and action balanced with respect for markets, competitors, and stakeholders. The dao of humanity rejects the premise that greed reigns supreme by itself. Instead, its ethical counterpart is truth. Both qualities exist within business practices. In this ethical framework, loyalty to truth is not just a stock phrase but a commitment to value in all aspects of an enterprise, such as sales, finance, marketing, and the employment and hiring chain. An investment advisor might recommend the constant mean to clients so their money is in a diversified portfolio with a long-term strategy. The dao of humanity, wholeheartedness, sincerity, and the other virtues are treated in The Analects ((Figure)).

The Analects of Confucius is a collection of Confucius’s teachings and sayings regarding the virtuous life and how to attain harmony. They were compiled by his followers and written with ink and brush on strips of bamboo. (credit: “Rongo Analects 02” by “Fukutaro”/Wikimedia Commons, Public Domain)


A piece of bamboo has Chinese characters written in ink that are organized into columns.

Some have criticized Confucianism for impeding progress in China in areas like education, the natural sciences, and business, because it has failed to adapt to the modern context. High-frequency trading, blockchain technology, artificial intelligence, and robotics do not work with cultural values thousands of years old, these critics say, so what we need is a new consciousness for a new era in human history. However, these criticisms miss the point. Confucius was interested in the same thing that concerned Aristotle—namely, the character of the person or persons making decisions rather than the decisions themselves. The importance of character has been proven repeatedly through business scandals like Enron, LIBOR, and the 2008 financial crisis, as well as the recent problems of Uber and Volkswagen, in which personal irresponsibility resulted in disaster. Indeed, business schools now offer seminars for executives integrating virtue ethics—both Aristotelian- and Confucian-inspired models—in leadership development.

The recent campaign of China’s central government against unethical business practices has made a point of prosecuting executives for corruption in the form of bribery, kickbacks, and embezzlement, demonstrating that some Confucian thought has survived from ancient times. Jack Ma, cofounder of the giant Chinese ecommerce site Alibaba, has called this “clean communism,” which might be another way of characterizing the form of state-sponsored capitalism that exists in China.

Of course, the former Communist regime did not embrace Confucian virtue. Mao Zedong was deeply suspicious of Confucius, holding him to be a relic of the Imperial Era and having little value for the new China he intended to create with the founding of the People’s Republic of China in 1949.

Summary

Confucius (551–479 BCE) attempted to revise ancient Chinese traditions and mores to counter the social chaos of his times. His system of virtue ethics emphasized relationships and, when followed faithfully, led to the dao of humanity, that is, true harmonious living. There were three ways to achieve dao: “whole-hearted sincerity and truthfulness,” the “constant mean,” and “expediency” (quan). Someone who lived virtuously became more humane, which resulted in a flourishing individual and an ordered nation.

In Confucian virtue ethics, business was viewed as a network of relationships dependent on trust and righteousness. Righteousness was a form of justice that compelled everyone to act in good faith. Considered in this way, justice allows for wealth creation, investment, and strategic planning as long as everyone fulfills his or her role and acts in accordance with the basic pattern of relationships Confucius identified.

Assessment Questions

Quan means which of the following?

  1. adherence to the past
  2. philosophic tradition
  3. practicality
  4. insistence on protocol

C

The Analects of Confucius ________.

  1. are similar to Aristotle’s Nicomachean Ethics
  2. represent an oral tradition
  3. reflect Buddhist ideals
  4. codify a system of virtue ethics

D

True or false? Confucian virtue ethics is similar to the Aristotelian version in that both are very practical.

True

True or false? According to Confucius, the hope for reform of Chinese society was a centralized planning system.

False. Confucius’s hope for reform was the five great relationships that support Chinese society:

parent/child, husband/wife, elder/junior sibling, master/apprentice, and ruler/subject.

How can wholeheartedness and sincerity serve as models of risk assessment?

Wholeheartedness and sincerity require not just competence but compassion when dealing with stakeholders and making executive decisions. Reflecting the overall Confucian concern for balance, they temper initiative and boldness with self-regulation.

Endnotes

1Huston Smith, ed., “Confucianism” in The World’s Religions. (New York: HarperCollins, 1991), 160.
2Daryl Koehn, “East Meets West: Toward a Universal Ethic of Virtue for Global Business,” Journal of Business Ethics 116, no. 4 (2013): 712.
3Huston Smith, ed., “Confucianism,” in The World’s Religions. (New York: HarperCollins, 1991), 175.
4Huston Smith, ed., “Confucianism,” in The World’s Religions. (New York: HarperCollins, 1991), 158–159.
5Huston Smith, ed., “Confucianism,” in The World’s Religions. (New York: HarperCollins, 1991), 166–167.
6Chichung Huang, The Analects of Confucius: A Literal Translation with Introduction and Notes. (New York: Oxford University Press, 1997), 14.
7Chichung Huang, The Analects of Confucius: A Literal Translation with Introduction and Notes. (New York: Oxford University Press, 1997), 23.
8Chichung Huang, The Analects of Confucius: A Literal Translation with Introduction and Notes. (New York: Oxford University Press, 1997), 22 (16.1).
9Huston Smith, ed., “Confucianism” in The World’s Religions. (New York: HarperCollins, 1991), 176.
10Chichung Huang, The Analects of Confucius: A Literal Translation with Introduction and Notes. (New York: Oxford University Press, 1997), 6.
11UBS, “You May Be Surprised at Which Country Is Setting an Example for the Future of Sustainable Cities,” January 8, 2018. https://mashable.com/2018/01/08/china-sustainable-cities/#qTP12grk4uqc.
12Josh Horwitz, “Jack Ma Has Some Thoughts on China’s ‘Clean’ Communism and the US’s Divided Politics,” November 30, 2017. https://qz.com/1142604/jack-ma-has-some-thoughts-on-chinas-clean-communism-and-the-uss-divided-politics/.

Glossary

junzi
a person who is gracious, magnanimous, and cultured; a flourishing human being
li
the proper order of the universe and the customs and rituals that support order and harmony on Earth
quan
expediency; a practical consideration of the relative rightness of options when considering a moral dilemma

Comparing the Virtue Ethics of East and West

8

Learning Objectives

By the end of this section, you will be able to:

  • Compare the origins and goals of virtue ethics in the East and the West
  • Describe how these systems each aimed to establish a social order for family and business
  • Identify potential elements of a universally applied business ethic

Aristotle and Confucius each constructed an ethical system based on virtue, with Aristotle’s ultimate aim being happiness and Confucius’s being harmony. Each addressed a particular problem. For Aristotle, happiness consisted of the search for truth, which, in turn, required a centered, stable individual who could surmount misfortune or weak character. Confucius looked to settle the soul of the Chinese people by creating a system that reflected the heavenly order on Earth. Both systems rely on reasoned means to achieve reasoned ends.

East Meets West

Given the vastly different cultural and historical settings of ancient Greece and China, you may be surprised to find similarities between the Aristotelian and Confucian systems of virtue ethics. Yet not only are there similarities but the two systems share the theme of control. For Aristotle, control manifested itself through the deliberative process of phrónēsis, resulting in virtuous living, harmony, and happiness. This application of practical wisdom was related to self-restraint, or temperance. In Confucian virtue ethics, control was a function of self-regulation; primitive instincts were held at bay and the person gained the capacity and courage to act more humanely ((Figure)). This achievement of control benefited not only the individual but also the family and, by extension, the nation. Self-regulation was Confucius’s way of establishing order.

The Aristotelian and Confucian systems of virtue ethics have in common the theme of control, as this comparison shows. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


A chart has four rows and three columns. The first row is a header and labels the table as “Control.” The second row is a header row. The first column header is blank, the second is “Aristotle” and the third is “Confucius.” Under the first column, the categories are “Characteristics” and “Behavior.” Under the column “Aristotle” are the words “phrónēsis, self-restraint, temperance” and “virtuous living, harmony, happiness.” Under the column “Confucius” are the words “self-regulation, ability, courage” and “junzi, ru (humanity).”

In a business context, control bears directly on managerial ethics, which is a way of relating to self, employees, and the organization that balances individual and collective responsibility, and in which management also includes planning, organizing, and leading to achieve organizational goals.

A self-controlled, disciplined manager is able to work through layers of bureaucracy and the complexities of human interaction to attain goals in a way that is responsible and profitable and that enhances the organization’s mission and culture. These goals are achieved not at the expense of stakeholders but in a way that is fair for all. We might even say that righteousness leads to justice, which includes profit. We saw earlier that neither Aristotle nor Confucius disapproved of profit as long as it benefitted humanity in some way. Both men would have a very definite opinion about the optimization of shareholder wealth.

Despite these similarities between the two traditions, there are differences—the most notable being the locus of ethics. Aristotle placed this locus on individuals, who were called to fulfill their purpose honorably, accepting fate with dignity and aplomb. The basis of this acceptance was reason. For Confucius, reflecting the historical plight of China, the locus was the family, which he envisioned as putting an end to anarchy and setting the nation on its proper course by providing the basic pattern of relationships for personal and professional life. To be sure, family counted for Aristotle just as the individual counted for Confucius, but the emphasis in each system was different. Aristotle acknowledged that “a solitary man has a hard life, because it is not easy to keep up a continuous activity by oneself; but in company with others and in relation to others it is easier.”

Regardless of the source of ethical behavior, those engaged in business were required to act with accountability and responsibility. They were accountable to customers and suppliers when delivering commodities like figs, pottery, or olive oil. And they had to conduct themselves responsibly to maintain their personal and professional reputation. Thus, business was the perfect expression of ethics in both East and West, because it provided a forum within which virtues were tested in very real ways. Confucius urged each follower to be a great or humane person, or ru, not a small one.

This was so important that the school established after his death was known as the Ru School, and the principles it taught are called Ruism.

Personal and Professional Roles

Another important characteristic of Eastern and Western systems of virtue ethics is the integration of personal and professional life. A person could not act one way at home and a completely different way in public, especially civic leaders, merchants, teachers, and rulers. The modern tendency to compartmentalize various aspects of ourselves to accommodate circumstances would have puzzled those living in ancient Greece or China. A retail manager who contributes generously to help protect endangered species but thinks nothing of working the sales staff to the point of burnout to achieve monthly goals has not successfully integrated the personal and the professional, for instance, and even poses obstacles to individual happiness and life in the community. Everyone desires efficiency in business, but compartmentalizing our personal and professional ideals can lead to “dispersed personal accountability” in an organization and the kind of financial meltdown that occurred, through greed and rule-breaking, in the housing and financial industries and led to the worldwide recession of 2008.

What might the integration of personal and professional life look like, and how can we apply it within the relationships that are the foundation of business? To answer this question, consider the essence of the virtuous person that each ethical system strove to create. For Aristotle, the virtuous person saw the truth in every kind of situation. Once acknowledged and recognized, the truth could not be denied without compromising honor. Similarly, Confucius taught that “A gentleman will not, for the space of a meal, depart from humanity. In haste and flurry, he adheres to it; in fall and stumble, he adheres by it.”

Despite the emphasis these systems placed on character, however, character was not ultimately what defined the virtuous individual, family, city-state, or nation. Instead, it was the individual’s transformation, through education, into a different kind of being who will act virtuously even if no one is watching. When the person concentrates on the means used to achieve an end, eventually the means become a way of life even more important than the end itself. It is not merely that the means must match the end, but that they come to define the virtuous person.

The integration of personal and professional lives has two effects: motive and awareness. Motive is the willingness to do the right thing because it is the right thing, even though there may be no perceived benefit. Arguably, it is here that the individual’s true nature is revealed. The other effect, awareness, is the ability to see the ethical dimension in all events, choices, decisions, and actions. Many business scandals could be avoided if more people understood the value of human capital and the need to see the larger picture; to put it differently: responsibility over profitability. Or, as Confucius would say, it is the person who can broaden the Way, not the Way that broadens the person.

Is There a Universal Ethics?

A fundamental question in the study of ethics is whether we can identify universal, objective moral truths that cut across cultures, geographic settings, and time. At the most foundational level, the answer might be yes. As Aristotle noted, ethics is not a science but an art.

Perhaps the best way to answer the question is to consider the methods used for moral decision-making. This strategy would be in line with Aristotelian and Confucian models if we assume that once they attain insight, most people will follow their conscience and act in reasonable, responsible ways. Methods of decision-making then could be adapted to any context or dilemma. But what constitutes a reasonable, responsible method, and who gets to choose it?

It is possible that standards of ethical conduct could be created to guide business affairs fairly and justly. Such standards already exist in most industries and professions. The Generally Accepted Accounting Principles (GAAP) give direction to those working in accounting and finance in the United States. The International Standards Organization offers guidelines and protocols for many industries. Together with governmental regulation, these might serve as the basis for ethical behavior, perhaps even globally. Of course, those fashioning guidelines would have to be sensitive to individual autonomy and national sovereignty, especially when it comes to international jurisdiction, privacy, and human rights. For example, the International Financial Reporting Standards serve as a kind of international GAAP to help companies report financial results in a common accounting language across national boundaries.

Despite our best efforts, someone who wishes to conduct business selfishly and unethically always will be drawn to do so unless given a compelling incentive not to. It is evident why Aristotle and Confucius stressed the importance of schooling. Perhaps what is needed now, building on these two ancient approaches, is business education focused on transformation rather than on conformity to guidelines. This proposal touches the core of both Aristotelian and Confucian teachings: training and education. Training and education help internalize in us more altruistic business practices. They also permit greater integration between our personal and professional understandings of the way we should treat friends, family, customers, and clients. No matter the context, we are then encouraged to treat others with honesty and respect, so that even someone certain to get away with the most outrageous corruption or money-laundering scheme would not do it. Why not? Because doing so would be a betrayal of the person’s conscience and identity. A business education that is truly effective—one for the twenty-first century—would produce a graduate who could stand up and say no to that kind of self-betrayal.

Scenario with Aristotle and Confucius

Imagine a scenario in which Aristotle and Confucius sit down to discuss Chiquita Brands International, a global produce conglomerate that paid “protection” money to right-wing and Marxist guerrilla groups in Colombia between 1997 and 2004 to ensure there would be no violence against its employees, banana plantations, and facilities. The payment violated the U.S. Foreign Corrupt Practices Act (1977), which prohibits bribes and kickbacks to foreign officials. Chiquita claimed it was the victim of extortion and had no choice. However, for its actions, it eventually paid $25 million in fines to the U.S. government. In 2007, a group of Colombians filed a lawsuit against the company under the Alien Tort Claims Act, alleging that, because of its illegal payments, Chiquita was “complicit in extrajudicial killings, torture, forced disappearances, and crimes against humanity” perpetrated against plantation workers by the guerilla “death squads.”

The case went to the U.S. Supreme Court in 2015, but the Court declined to hear it.

Critical Thinking

  • What do you suppose Confucius and Aristotle, teachers of virtue ethics, would say about the Colombians’ case, and how would they go about assessing responsibility? What would they identify as the crime committed? Would they think the executives at Chiquita had acted prudently, cravenly, or deceitfully?
  • What would you do if confronted with this case?

Summary

Aristotle and Confucius each constructed an ethical system based on virtue, with Aristotle’s anticipated result being happiness and Confucius’s being harmony. For Aristotle, happiness consisted of the search for truth. Confucius looked to create a system that put an end to civil chaos. Although both systems relied on reason and control to achieve their ends, Aristotle placed the locus of ethical behavior on individuals, but he held that a moral upbringing and good political governance also contributed to the formation of moral character. Confucius saw this locus in the family, which provided the basic pattern of relationships for personal and professional life. Reason prevailed throughout, as in the cultivation of a more just and humane person.

In a business context, reason and control bear directly on management, leadership, and corporate culture. They constitute a way of cultivating individual virtue and corporate ethos such that the two go hand in hand. The environment or culture of an organization needs individuals of character who can follow their conscience and experience moral conversion. We might envision the emergence of universal values like reason and control that nurture both the individual and the organization.

Assessment Questions

“Control” as used in this section does not refer to which of the following?

  1. reverence
  2. phrónēsis
  3. temperance
  4. Confucian self-regulation

A

Managerial ethics is related to which of the following?

  1. shareholder wealth
  2. righteousness
  3. bureaucracy
  4. honor

B

True or false? In both East and West, the means used to achieve a certain end are often more important than the end.

True

True or false? Individualism was the greatest value in Confucian ethics.

False. In Confucian ethics, the locus of ethics and moral decision making was the family rather than the individual. The most important value was the development of humanity and putting an end to anarchy, and this was done best in the context of the family.

Endnotes

1Peter R. Woods and David A. Lamond, “What Would Confucius Do?: Confucian Ethics and Self-Regulation in Management,” Journal of Business Ethics 102, no. 4 (2011): 670.
2Aristotle, The Nicomachean Ethics, translated by J.A.K. Thomson. (New York: Penguin Books, 2004), 1170a.
3Chichung Huang, The Analects of Confucius: A Literal Translation with Introduction and Notes. (New York: Oxford University Press, 1997), 6.13.
4Chichung Huang, The Analects of Confucius: A Literal Translation with Introduction and Notes. (New York: Oxford University Press, 1997), 34.
5Robert Hinkley, Time to Change Corporations: Closing the Citizenship Gap. (New York: CreateSpace Independent Publishing Platform, 2011), 53.
6Chichung Huang, The Analects of Confucius: A Literal Translation with Introduction and Notes. (New York: Oxford University Press, 1997), 4.5.
7Chichung Huang, The Analects of Confucius: A Literal Translation with Introduction and Notes. (New York: Oxford University Press, 1997), 15.29.
8Aristotle, The Nicomachean Ethics, translated by J.A.K. Thomson. (New York: Penguin Books, 2004), 1140b.
9Business & Human Rights Resource Centre, “Chiquita Lawsuits (re Columbia).” https://business-humanrights.org/en/chiquita-lawsuits-re-colombia (accessed November 7, 2017).

Glossary

managerial ethics
a way of relating to self, employees, and the organization that balances individual and collective responsibility

Utilitarianism: The Greatest Good for the Greatest Number

9

Learning Objectives

By the end of this section, you will be able to:

  • Identify the principle elements of Jeremy Bentham’s utilitarianism
  • Distinguish John Stuart Mill’s modification of utilitarianism from Bentham’s original formulation of it
  • Evaluate the role of utilitarianism in contemporary business

Although the ultimate aim of Aristotelian virtue ethics was eudaimonia, later philosophers began to question this notion of happiness. If happiness consists of leading the good life, what is good? More importantly, who decides what is good? Jeremy Bentham (1748–1842), a progressive British philosopher and jurist of the Enlightenment period, advocated for the rights of women, freedom of expression, the abolition of slavery and of the death penalty, and the decriminalization of homosexuality. He believed that the concept of good could be reduced to one simple instinct: the search for pleasure and the avoidance of pain. All human behavior could be explained by reference to this basic instinct, which Bentham saw as the key to unlocking the workings of the human mind. He created an ethical system based on it, called utilitarianism. Bentham’s protégé, John Stuart Mill (1806–1873), refined Bentham’s system by expanding it to include human rights. In so doing, Mill reworked Bentham’s utilitarianism in some significant ways. In this section we look at both systems.

Maximizing Utility

During Bentham’s lifetime, revolutions occurred in the American colonies and in France, producing the Bill of Rights and the Déclaration des Droits de l’Homme (Declaration of the Rights of Man), both of which were based on liberty, equality, and self-determination. Karl Marx and Friedrich Engels published The Communist Manifesto in 1848. Revolutionary movements broke out that year in France, Italy, Austria, Poland, and elsewhere.

In addition, the Industrial Revolution transformed Great Britain and eventually the rest of Europe from an agrarian (farm-based) society into an industrial one, in which steam and coal increased manufacturing production dramatically, changing the nature of work, property ownership, and family. This period also included advances in chemistry, astronomy, navigation, human anatomy, and immunology, among other sciences.

Given this historical context, it is understandable that Bentham used reason and science to explain human behavior. His ethical system was an attempt to quantify happiness and the good so they would meet the conditions of the scientific method. Ethics had to be empirical, quantifiable, verifiable, and reproducible across time and space. Just as science was beginning to understand the workings of cause and effect in the body, so ethics would explain the causal relationships of the mind. Bentham rejected religious authority and wrote a rebuttal to the Declaration of Independence in which he railed against natural rights as “rhetorical nonsense, nonsense upon stilts.”

Instead, the fundamental unit of human action for him was utility—solid, certain, and factual.

What is utility? Bentham’s fundamental axiom, which underlies utilitarianism, was that all social morals and government legislation should aim for producing the greatest happiness for the greatest number of people. Utilitarianism, therefore, emphasizes the consequences or ultimate purpose of an act rather than the character of the actor, the actor’s motivation, or the particular circumstances surrounding the act. It has these characteristics: (1) universality, because it applies to all acts of human behavior, even those that appear to be done from altruistic motives; (2) objectivity, meaning it operates beyond individual thought, desire, and perspective; (3) rationality, because it is not based in metaphysics or theology; and (4) quantifiability in its reliance on utility.

The “Auto-Icon”

In the spirit of utilitarianism, Jeremy Bentham made a seemingly bizarre request concerning the disposition of his body after his death. He generously donated half his estate to London University, a public university open to all and offering a secular curriculum, unusual for the times. (It later became University College London.) Bentham also stipulated that his body be preserved for medical instruction ((Figure)) and later placed on display in what he called an “auto-icon,” or self-image. The university agreed, and Bentham’s body has been on display ever since. Bentham wanted to show the importance of donating one’s remains to medical science in what was also perhaps his last act of defiance against convention. Critics insist he was merely eccentric.

At his request, Jeremy Bentham’s corpse was laid out for public dissection, as depicted here by H.H. Pickersgill in 1832. Today, his body is on display as an “auto-icon” at University College, London, a university he endowed with about half his estate. His preserved head is also kept at the college, separate from the rest of the body.) (credit: “Mortal Remains of Jeremy Bentham, 1832” by Weld Taylor and H. H. Pickersgill/Wikimedia Commons, CC BY 4.0)


A drawing depicting Jeremy Bentham’s corpse laid out on a table and mostly covered by a sheet.

Critical Thinking

  • What do you think of Bentham’s final request? Is it the act of an eccentric or of someone deeply committed to the truth and courageous enough to act on his beliefs?
  • Do you believe it makes sense to continue to honor Bentham’s request today? Why is it honored? Do requests have to make sense? Why or why not?

Bentham was interested in reducing utility to a single index so that units of it could be assigned a numerical and even monetary value, which could then be regulated by law. This utility function measures in “utils” the value of a good, service, or proposed action relative to the utilitarian principle of the greater good, that is, increasing happiness or decreasing pain. Bentham thus created a “hedonic calculus” to measure the utility of proposed actions according to the conditions of intensity, duration, certainty, and the probability that a certain consequence would result.

He intended utilitarianism to provide a reasoned basis for making judgments of value rather than relying on subjectivity, intuition, or opinion. The implications of such a system on law and public policy were profound and had a direct effect on his work with the British House of Commons, where he was commissioned by the Speaker to decide which bills would come up for debate and vote. Utilitarianism provided a way of determining the total amount of utility or value a proposal would produce relative to the harm or pain that might result for society.

Utilitarianism is a consequentialist theory. In consequentialism, actions are judged solely by their consequences, without regard to character, motivation, or any understanding of good and evil and separate from their capacity to create happiness and pleasure. Thus, in utilitarianism, it is the consequences of our actions that determine whether those actions are right or wrong. In this way, consequentialism differs from Aristotelian and Confucian virtue ethics, which can accommodate a range of outcomes as long as the character of the actor is ennobled by virtue. For Bentham, character had nothing to do with the utility of an action. Everyone sought pleasure and avoided pain regardless of personality or morality. In fact, too much reliance on character might obscure decision-making. Rather than making moral judgments, utilitarianism weighed acts based on their potential to produce the most good (pleasure) for the most people. It judged neither the good nor the people who benefitted. In Bentham’s mind, no longer would humanity depend on inaccurate and outdated moral codes. For him, utilitarianism reflected the reality of human relationships and was enacted in the world through legislative action.

To illustrate the concept of consequentialism, consider the hypothetical story told by Harvard psychologist Fiery Cushman. When a man offends two volatile brothers with an insult, Jon wants to kill him; he shoots but misses. Matt, who intends only to scare the man but kills him by accident, will suffer a more severe penalty than his brother in most countries (including the United States). Applying utilitarian reasoning, can you say which brother bears greater guilt for his behavior? Are you satisfied with this assessment of responsibility? Why or why not?

Synthesizing Rights and Utility

As you might expect, utilitarianism was not without its critics. Thomas Hodgskin (1787–1869) pointed out what he said was the “absurdity” of insisting that “the rights of man are derived from the legislator” and not nature.

In a similar vein, the poet Samuel Taylor Coleridge (1772–1834) accused Bentham of mixing up morality with law.

Others objected that utilitarianism placed human beings on the same level as animals and turned people into utility functions. There were also complaints that it was mechanistic, antireligious, and too impractical for most people to follow. John Stuart Mill sought to answer these objections on behalf of his mentor but then offered a synthesis of his own that brought natural rights together with utility, creating a new kind of utilitarianism, one that would eventually serve to underpin neoclassical economic principles.

Mill’s father, James, was a contemporary and associate of Bentham’s who made sure his son was tutored in a rigorous curriculum. According to Mill, at an early age he learned enough Greek and Latin to read the historians Herodotus and Tacitus in their original languages.

His studies also included algebra, Euclidean geometry, economics, logic, and calculus.

His father wanted him to assume a leadership position in Bentham’s political movement, known as the Philosophical Radicals.

Unfortunately, the intensity and duration of Mill’s schooling—utilitarian conditions of education—were so extreme that he suffered a nervous breakdown at the age of twenty years. The experience left him dissatisfied with Bentham’s philosophy of utility and social reform. As an alternative, Mill turned to Romanticism and poets like Coleridge and Johann Wolfgang Goethe (1749–1832).

What he ended up with, however, was not a rejection of utilitarianism but a synthesis of utility and human rights.

Why rights? No doubt, Mill’s early life and formation had a great deal to do with his championing of individual freedom. He believed the effort to achieve utility was unjustified if it coerced people into doing things they did not want to do. Likewise, the appeal to science as the arbiter of truth would prove just as futile, he believed, if it did not temper facts with compassion. “Human nature is not a machine to be built after a model, and set to do exactly the work prescribed for it, but a tree, which requires to grow and develop itself on all sides, according to the tendency of the inward forces which make it a living thing,” he wrote.

Mill was interested in humanizing Bentham’s system by ensuring that everyone’s rights were protected, particularly the minority’s, not because rights were God given but because that was the most direct path to truth. Therefore, he introduced the harm principle, which states that the “only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant.”

To be sure, there are limitations to Mill’s version of utilitarianism, just as there were with the original. For one, there has never been a satisfactory definition of “harm,” and what one person finds harmful another may find beneficial. For Mill, harm was defined as the set back of one’s interests. Thus, harm was defined relative to an individual’s interests. But what role, if any, should society play in defining what is harmful or in determining who is harmed by someone’s actions? For instance, is society culpable for not intervening in cases of suicide, euthanasia, and other self-destructive activities such as drug addiction? These issues have become part of the public debate in recent years and most likely will continue to be as such actions are considered in a larger social context. We may also define intervention and coercion differently depending on where we fall on the political spectrum.

Considering the social implications of an individual action highlights another limitation of utilitarianism, and one that perhaps makes more sense to us than it would to Bentham and Mill, namely, that it makes no provision for emotional or cognitive harm. If the harm is not measurable in physical terms, then it lacks significance. For example, if a reckless driver today irresponsibly exceeds the speed limit, crashes into a concrete abutment, and kills himself while totaling his vehicle (which he owns), utilitarianism would hold that in the absence of physical harm to others, no one suffers except the driver. We may not arrive at the same conclusion. Instead, we might hold that the driver’s survivors and friends, along with society as a whole, have suffered a loss. Arguably, all of us are diminished by the recklessness of his act.

The Role of Utilitarianism in Contemporary Business

Utilitarianism is used frequently when business leaders make critical decisions about things like expansion, store closings, hiring, and layoffs. They do not necessarily refer to a “utilitarian calculus,” but whenever they take stock of what is to be gained and what might be lost in any significant decision (e.g., in a cost-benefit analysis), they make a utilitarian determination. At the same time, one might argue that a simple cost-benefits analysis is not a utilitarian calculus unless it includes consideration of all stakeholders and a full accounting of externalities, worker preferences, potentially coercive actions related to customers, or community and environmental effects.

As a practical way of measuring value, Bentham’s system also plays a role in risk management. The utility function, or the potential for benefit or loss, can be translated into decision-making, risk assessment, and strategic planning. Together with data analytics, market evaluations, and financial projections, the utility function can provide managers with a tool for measuring the viability of prospective projects. It may even give them an opportunity to explore objections about the mechanistic and impractical nature of utilitarianism, especially from a customer perspective.

Utilitarianism could motivate individuals within the organization to take initiative, become more responsible, and act in ways that enhance the organization’s reputation rather than tarnish it. Mill’s On Liberty ((Figure)), a short treatment of political freedoms in tension with the power of the state, underscored the importance of expression and free speech, which Mill saw not as one right among many but as the foundational right, reflective of human nature, from which all others rights derive their meaning. And therein lay the greatest utility for society and business. For Mill, the path to utility led through truth, and the main way of arriving at truth was through a deliberative process that encouraged individual expression and the clash of ideas.

In On Liberty (1859) (a), John Stuart Mill (b) combined utility with human rights. He emphasized the importance of free speech for correcting error and creating value for the individual and society. (credit a: modification of “On Liberty (first edition title page via facsimile)” by “Yodin”/Wikimedia Commons, Public Domain; credit b: modification of “John Stuart Mill by London Stereoscopic Company, c1870” by “Scewing”/Wikimedia Commons, Public Domain)


Part A shows a print copy of John Stuart Mill’s On Liberty. Part B shows John Stuart Mill.

As for Mill’s harm principle, the first question in trying to arrive at a business decision might be, does this action harm others? If the answer is yes, we must make a utilitarian calculation to decide whether there is still a greater good for the greatest number. Then we must ask, who are the others we must consider? All stakeholders? Only shareholders? What does harm entail, and who decides whether a proposed action might be harmful? This was the reason science and debate were so important to Mill, because the determination could not be left to public opinion or intuition. That was how tyranny started. By introducing deliberation, Mill was able to balance utility with freedom, which was a necessary condition for utility.

Where Bentham looked to numerical formulas for determining value, relying on the objectivity of numbers, Mill sought value in reason and in the power of language to clarify where truth lies. The lesson for contemporary business, especially with the rise of big data, is that we need both numbers and reasoned principles. If we apply the Aristotelian and Confucian rule of the mean, we see that balance of responsibility and profitability makes the difference between sound business practices and poor ones.

Summary

Jeremy Bentham developed a quantifiable method for determining what was beneficial and what was detrimental. He called this method utilitarianism, because its basic unit, the “util,” acted like a monetary unit. Bentham’s protégé, John Stuart Mill, refined this system to include human rights. His “harm principle” is an outstanding element in his version of utilitarianism.

Utilitarianism in business can lead to a bottom-line mentality in which decisions are based on achieving the greatest good for the organization as it pertains to the greatest number of stakeholders, including shareholders and all others affected by the actions of the organization The outcome is the determining factor, not the intent of the actors or whether people are treated humanely.

Assessment Questions

Utilitarianism is a system that ________.

  1. considers historical conditions
  2. approaches Aristotelian deliberation
  3. builds on natural law theory
  4. attempts to quantify the good

D

In On Liberty, John Stuart Mill ________.

  1. proposes a harm principle
  2. exalts libertarianism
  3. prescribes a consequentialist answer to ethical crises
  4. rejects rights

A

True or false? John Stuart Mill’s emphasis on human rights distinguishes him from Jeremy Bentham.

True

How does utilitarianism affect contemporary business practice?

Utilitarianism is pervasive in contemporary business practice, management theory, and decision-making through cost-benefit analysis. Decisions are often made based on the “bottom line” of profit, numbers of stakeholders affected, or overall utility to the organization. Utilitarianism is reflected in this abiding emphasis on efficiency, often to the neglect of other factors.

Does the value that John Stuart Mill placed on the deliberative process and individual expression as the main ways of arriving at truth have any relevance for political debate today?

Certainly there exists a need today to engage in political debate that includes all sides of an issue in respectful ways. Mill’s teaching on the role of free speech in society can be a starting point and a reminder of the importance of civil debate and freedom.

Endnotes

1R.J.W. Evans and Hartmut Pogge von Strandmann, “1848–1849: A European Revolution?” in The Revolutions in Europe 1848–1849: From Reform to Reaction, eds. R.J.W. Evans, Hartmut Pogge von Strandmann. (Oxford: Oxford University Press, 2000), 1–8.
2David Armitage, The Declaration of Independence: A Global History. (Cambridge, MA: Harvard University Press, 2007), 80.
3Michael Quinn, “Jeremy Bentham, ‘The Psychology of Economic Man,’ and Behavioural Economics,” Oeconomia 6, no. 1 (2016): 3–32.
4Jeremy Bentham, An Introduction to the Principles of Morals and Legislation. (London: Clarendon Press, 1823), 30.
5Max H. Bazerman and Ann E. Tenbrunsel, “Ethical Breakdowns,” Harvard Business Review, April 2011.
6Thomas Hodgskin, The Natural and Artificial Right of Property, Contrasted. (London: R. Steil, 1832). http://oll.libertyfund.org/titles/hodgskin-the-natural-and-artificial-right-of-property-contrasted.
7Encyclopedia of Philosophy, s.v. “Coleridge, Samuel Taylor (1772–1834),” (by Michael Moran). http://www.encyclopedia.com/humanities/encyclopedias-almanacs-transcripts-and-maps/coleridge-samuel-taylor-1772-1834 (accessed November 13, 2017).
8Ian Shapiro, “Lecture 7 – The Neoclassical Synthesis of Rights and Utility.” http://oyc.yale.edu/political-science/plsc-118/lecture-7 (accessed November 14, 2017).
9John Stuart Mill, “Autobiography.” I. http://www.gutenberg.org/cache/epub/10378/pg10378-images.html (accessed November 13, 2017).
10John Stuart Mill, “Autobiography.” I. http://www.gutenberg.org/cache/epub/10378/pg10378-images.html (accessed November 13, 2017).
11The Stanford Encyclopedia of Philosophy, s.v. “John Stuart Mill. 1. Life,” (by Christopher Macleod). https://plato.stanford.edu/entries/mill/ (accessed November 13, 2017).
12The Stanford Encyclopedia of Philosophy, s.v. “John Stuart Mill. 1. Life,” (by Christopher Macleod). https://plato.stanford.edu/entries/mill/ (accessed November 13, 2017).
13John Stuart Mill, “On Liberty,” p. 111. http://www.gutenberg.org/files/34901/34901-h/34901-h.htm (accessed November 14, 2017).
14John Stuart Mill, “On Liberty,” p. 18. http://www.gutenberg.org/files/34901/34901-h/34901-h.htm (accessed November 14, 2017).

Glossary

consequentialism
an ethical theory in which actions are judged solely by their consequences without regard to character, motivation, or absolute principles of good and evil and separate from their capacity to produce happiness and pleasure
harm principle
the idea that the only purpose for which the power of the state can rightly be used is to prevent harm to others
utility function
a measure, in “utils,” of the value of a good, service, or proposed action relative to the utilitarian principle of the greater good, that is, increasing happiness or decreasing pain

Deontology: Ethics as Duty

10

Learning Objectives

By the end of this section, you will be able to:

  • Explain Immanuel Kant’s concept of duty and the categorical imperative
  • Differentiate between utilitarianism and deontology
  • Apply a model of Kantian business ethics

Unlike Bentham and Mill, Immanuel Kant (1724–1804) was not concerned with consequences of one’s actions or the harm caused to one’s individual interests. Instead, he focused on motives and the willingness of individuals to act for the good of others, even though that action might result in personal loss. Doing something for the right reason was much more important to Kant than any particular outcome.

Aroused From “Dogmatic Slumber”

In 1781, at the age of fifty-six years, Kant published Critique of Pure Reason (Kritik der Reinen Vernunft) in Königsberg, Prussia ((Figure)).

Almost immediately, it transformed him from an obscure professor of metaphysics and logic into a preeminent figure in the world of philosophy. In the 800-page tome, Kant criticized the way rationalism (“pure reason”) had assumed the mantle of absolute truth, supplanting both religious faith and empirical science. Kant referred to the unquestioned acceptance of rationalism as dogmatism. Whether Christian or revolutionary, dogmatic thinking was to be avoided because it obscured the truths of science and religion through flawed logic.

First published in 1781, Immanuel Kant’s Critique of Pure Reason provided a new system for understanding experience and reality. It defended religious faith against atheism and the scientific method against the skepticism of the Enlightenment. (credit a: modification of “Immanuel Kant (1724-1804)” by “Daube aus Böblingen”/Wikimedia Commons, Public Domain; credit b: modification of “Title page of 1781 edition of Immanuel Kant’s Critique of Pure Reason” by “Tomisti”/Wikimedia Commons, Public Domain)


Part A shows a painting depicting Immanuel Kant. Part B shows a print copy of Immanuel Kant’s Critique of Pure Reason, written in German.

Kant credited the skepticism of empirical philosopher David Hume (1711–1776) with awakening him from “dogmatic slumber,” although he disagreed with Hume, who claimed that the mind did not exist at all but was the result of mental associations derived from sensory experience.

For Kant, reality could be discerned not through reasoning or sensory experience alone but only by understanding the nature of the human mind. Kant argued that sensory experience did not create the mind but rather that the mind created experience through its internal structures. And within the mind’s complex structures there also existed an inherent and unconditional duty to act ethically, which Kant called the “categorical imperative,” first outlined in Groundwork of the Metaphysic of Morals (1785).

In its initial form, Kant’s described his concept of the categorical imperative as follows: “Act only according to that maxim whereby you can, at the same time, will that it should become a universal law.”

Kant’s categorical (or unconditional) imperative has practical applications for the study of ethics. The categorical imperative contains two major suppositions: (1) We must act on the basis of goodwill rather than purely on self-interested motives that benefit ourselves at the expense of others; (2) we must never treat others as means toward ends benefitting ourselves without consideration of them also as ends in themselves. Kant held that observing the categorical imperative as we consider what actions to take would directly lead to ethical actions on our part.

In Kant’s view, rationalism and empiricism prevented people from perceiving the truth about their own nature. What was that truth? What was sufficient to constitute it? Kant identified an a priori world of knowledge and understanding in which truth lay in the structures and categories of the mind that were beyond perception and reason. This was a radical concept for the times.

In the end, Kant’s systematic analysis of knowing and understanding provided a much-needed counterweight to the logic of Enlightenment rationalism. The existence of the mental structures he proposed has even been confirmed today. For instance, the scientific consensus is that humans are born with cognitive structures designed specifically for language acquisition and development. Even more surprising, there may be similar cognitive structures for morality, conscience, and moral decision-making.

So, it is quite possible that conscience, if not happiness, may have a genetic component after all, although Kant himself did not believe the categories of the understanding or the a priori structures of the mind were biological.

Utilitarianism and Deontology

From a Kantian perspective, it is clear that adherence to duty is what builds the framework for ethical acts. This is in direct contradiction of Bentham’s view of human nature as selfish and requiring an objective calculus for ethical action to result. Kant rejected the idea of such a calculus and believed, instead, that perceptions were organized into preexisting categories or structures of the mind. Compare his notion of an ordered and purposeful universe of laws with the similar logos, or logic, of the ancient Greeks. One of those laws included implementation of the categorical imperative to act ethically, in accordance with our conscience. However, even though that imperative ought to be followed without exception, not everyone does so. In Kant’s moral teachings, individuals still had free will to accept or reject it.

There is a definite contrast between utilitarianism, even Mill’s version, and Kant’s system of ethics, known as deontology, in which duty, obligation, and good will are of the highest importance. (The word is derived from the Greek deon, meaning duty, and logos again, here meaning organization for the purpose of study.

) An ethical decision requires us to observe only the rights and duties we owe to others, and, in the context of business, act on the basis of a primary motive to do what is right by all stakeholders. Kant was not concerned with utility or outcome—his was not a system directed toward results. The question for him was not how to attain happiness but how to become worthy of it.

Rather like Aristotle and Confucius, Kant taught that the transcendent aspects of human nature, if followed, would lead us inevitably to treat people as ends rather than means. To be moral meant to renounce uninformed dogmatism and rationalism, abide by the categorical imperative, and embrace freedom, moral sense, and even divinity. This was not a lofty or unattainable goal in Kant’s mind, because these virtues constituted part of the systematic structuring of the human mind. It could be accomplished by living truthfully or, as we say today, authentically. Such a feat transcended the logic of both rationalism and empiricism.

Les Misérables

You may have seen the very popular Broadway show or movie Les Misérables, based on Victor Hugo’s epic nineteenth-century French novel of the same name. The main character, Jean Valjean, steals a loaf of bread to feed his sister’s starving family and is arrested and sent to prison. If we apply conventional reasoning and principles of law to his crime, Valjean genuinely is guilty as charged and we do not need to consider any extenuating circumstances. However, in a Kantian ethical framework, we would take into account Valjean’s motives as well as his duty to treat his sister’s family as ends in themselves who deserve to live. Valjean’s fate demonstrates what might occur when there is a gap between the legal and the moral. Clearly, Valjean broke the law by stealing the bread. However, he acted morally by correcting a wrong and possibly saving human lives. According to Kantian ethics, Valjean may have been ethical in stealing bread for his family, particularly because the action was grounded in good will and provided benefit to others more than to himself.

Critical Thinking

  • It has been said that in Kantian ethics, duty comes before beauty and morality before happiness. Can you think of other instances when it is appropriate to break one moral code to satisfy another, perhaps greater one? What are the deciding factors in each case?
  • What would you do if you were Jean Valjean?

Kantian Business Ethics

Unlike utilitarianism, which forms the philosophical foundation for most cost-benefit analysis in business, Kantian ethics is not so easily applied. On one hand, it offers a unique opportunity for the development of individual morality through the categorical imperative to act ethically, which emphasizes humanity and autonomy.

This imperative addresses one major side of business ethics: the personal. Character and moral formation are crucial to creating an ethical culture. Indeed, business ethics is littered with cases of companies that have suffered damaging crises due to their leaders’ lack of commitment to act on the basis of a good will and with regard for what benefits others. Recent examples include Uber, where a toxic work environment was allowed to prevail, and Volkswagen, which knowingly misrepresented the emissions level of its cars.

Such examples exist in government as well, as the recent Theranos and “Fat Leonard” scandals confirm.

The latter consisted of graft and corruption in the U.S. Navy’s Pacific fleet and has been a continual source of embarrassment for an institution that prides itself on the honorable conduct of its officers. One person can make a difference, either positively or negatively.

On the other hand, Kant’s categorical imperative is just that: categorical or unconditional. It calls for morally upright behavior regardless of external circumstance or the historical context of a proposed act or decision. Kant affirmed that “the moral law is an imperative, which commands categorically, because the law is unconditioned.”

Unconditional ethics could be a challenge for a global organization dealing with suppliers, customers, and competitors in sometimes vastly different cultures. It raises a larger philosophical issue: namely, was Kant correct in believing that morality and mental categories are independent of experience? Or can they be culturally conditioned, and, if so, does that make them relative rather than absolute, as Kant believed them to be?

This question whether ethics is universal is distinctly Kantian, because Kant believed that not only must a moral agent act with others’ interests in mind and have the right intentions, but also that the action be universally applicable. Think of how Kantian ethics might be applied not just on an individual level but throughout an organization, and then society. Kant would judge a corporate act to be ethical if it benefitted others at the same time it benefitted company leadership and stockholders, and if it did not place their interests above those of other stakeholders. If loyalty to a coworker conflicted with loyalty to a supervisor or the organization, for instance, then acts resulting from such loyalty might not meet the conditions of deontology. Either the supervisor or the company would be treated as a means rather than an end. Although the qualitative or humanizing element of Kantian ethics has broad appeal, it runs into limitations in an actual business setting. Whether the limitations have good or bad effects depends on the organization’s culture and leadership. In general, however, most companies do not adhere to strict Kantian theories, because they look to the outcome of their decisions rather than focusing on motives or intentions.

Samsung

In the fall of 2016, Samsung Electronics experienced a massive public relations disaster when its Galaxy Note 7 smartphones started exploding due to faulty batteries and casings. Initially, the company denied there were any technical problems. Then, when it became obvious the exploding phones posed a safety and health threat (they were banned from airplanes), Samsung accused its suppliers of creating the problem. In reality, the rush to beat Apple’s iPhone 7 release date was the most likely reason corners were cut in production. Samsung finally owned up to the problem, recalled more than two million phones worldwide, and replaced them with new, improved Galaxy Note 7s.

The company’s response and its replacement of the phones went a long way toward defusing the disaster and even boosting the company’s share price. Whether management knew it, its response was Kantian. Samsung focused on the end (i.e., customer safety and satisfaction) with the motive of doing the ethically responsible thing. Although some might argue the company could have done far more and much more quickly, perhaps it still acted in accordance with the categorical imperative. What do you think?

Critical Thinking

  • How might the categorical imperative become a part of organizational culture? Could it ever work in business?
  • Do you see the categorical imperative as applicable to your own interests and hope for a career?

Summary

Rejecting dogmatic thinking of all kinds, Kant believed people were not the sum total of reactions to stimuli but complex beings with innate structures of understanding and inborn moral sensitivity. In his view, everyone had a duty to obey a categorical imperative to do the just and moral thing, regardless of the consequences. The outcome of an act was not as important as the intent of the actor and whether the act treated others as ends or means. Here, Kant reflected Aristotelian virtue ethics in seeing people as ends in themselves and not as “living tools” or human resources.

This view does not typically govern most management decisions in business; arguably, utilitarianism is the efficient, go-to theory on which corporate leaders often rely. Yet a Kantian understanding of business ethics remains viable even today and sometimes displays itself in the most compassionate and humane actions that evolving commercial organizations take.

Assessment Questions

Immanuel Kant objected to dogmatism in ________.

  1. religion
  2. science
  3. both A and B
  4. neither A nor B

C

True or false? Immanuel Kant contended that people often interpret reason subjectively.

True

True or false? A criticism of Immanuel Kant’s categorical imperative is that its refusal ever to permit exceptions in acting ethically is impossible to observe in life.

True

What are the essential differences between John Stuart Mill’s version of utilitarianism and Immanuel Kant’s deontology?

Utilitarianism is a consequentialist philosophy dependent solely on outcomes. Although focused on rights, Mill’s utilitarianism also depends on results. Deontology is concerned with motive, duty, and one’s obligation to act regardless of circumstances or outcomes.

How does Kantian ethics work in a business setting?

Because Kantian ethics is about treating people not as means but as ends, this philosophy can influence nearly every aspect of business, from research and development to production, manufacturing, marketing, and consumption. It may be difficult to implement, however, because many businesses are focused on efficiency and production to the near-exclusion of other factors.

Endnotes

1Immanuel Kant, Critique of Practical Reason. http://www.gutenberg.org/cache/epub/5683/pg5683-images.html (accessed November 19, 2017).
2David Hume, A Treatise of Human Nature, Section I. https://www.gutenberg.org/files/4705/4705-h/4705-h.htm#link2H_4_0042 (accessed November 18, 2017), I.
3Immanuel Kant, Critique of Practical Reason, I. http://www.gutenberg.org/cache/epub/5683/pg5683-images.html (accessed November 19, 2017).
4Immanuel Kant, Grounding for the Metaphysics of Morals. On a Supposed Right to Lie Because of Philanthropic Concerns, translated by James W. Ellington. (Indianapolis, IN: Hackett, 1993), 30.
5Edward O. Wilson, “The Biological Basis of Morality,” The Atlantic, April 1998; Internet Encyclopedia of Philosophy, s.v. “Morality and Cognitive Science” (by Regina A. Rini). https://www.iep.utm.edu/m-cog-sc/.
6Stanford Encyclopedia of Philosophy, s.v. “Deontological Ethics” (by Larry Alexander and Michael Moore). https://plato.stanford.edu/entries/ethics-deontological/ (accessed November 19, 2017).
7Immanuel Kant, Critique of Practical Reason, Preface. http://www.gutenberg.org/cache/epub/5683/pg5683-images.html (accessed November 19, 2017).
8Biz Carson, “Cocaine and Groping—Bombshell Report on Uber’s Work Environment Makes It Sound Awful and Full of Bros,” Business Insider, February 22, 2017. http://www.businessinsider.com/another-negative-report-about-uber-work-environment-2017-2; Jack Ewing, “Engineering a Deception: What Led to Volkswagen’s Diesel Scandal,” New York Times, March 16, 2017. https://www.nytimes.com/interactive/2017/business/volkswagen-diesel-emissions-timeline.html.
9Mark D. Faram,“2 Navy Officers Sentenced in ‘Fat Leonard’ Case,” Navy Times, March 7, 2018. https://www.navytimes.com/news/your-navy/2018/03/07/o-6-and-o-5-sentenced-in-fat-leonard-case/ (accessed March 8, 2018); Sarah Ashley O’Brien, “Theranos Founder Elizabeth Holmes Charged With Massive Fraud,” CNN, March 14, 2018. http://money.cnn.com/2018/03/14/technology/theranos-fraud-scandal/index.html.
10Immanuel Kant, Critique of Practical Reason, VII. http://www.gutenberg.org/cache/epub/5683/pg5683-images.html (accessed November 19, 2017).

Glossary

categorical imperative
Kant’s unconditional precept that we must “act only according to that maxim whereby you can, at the same time, will that it should become a universal law”; to act on the basis of good will rather than purely self-interested motives and never treat others as means toward an end without consideration of them as ends in themselves

A Theory of Justice

11

Learning Objectives

By the end of this section, you will be able to:

  • Evaluate John Rawls’s answer to utilitarianism
  • Analyze the problem of redistribution
  • Apply justice theory in a business context

This chapter began with an image of Justice holding aloft scales as a symbol of equilibrium and fairness. It ends with an American political philosopher for whom the equal distribution of resources was a primary concern. John Rawls (1921–2002) wanted to change the debate that had prevailed throughout the 1960s and 1970s in the West about how to maximize wealth for everyone. He sought not to maximize wealth, which was a utilitarian goal, but to establish justice as the criterion by which goods and services were distributed among the populace. Justice, for Rawls, had to do with fairness—in fact, he frequently used the expression justice as fairness—and his concept of fairness was a political one that relied on the state to take care of the most disadvantaged. In his justice theory, offered as an alternative to the dominant utilitarianism of the times, the idea of fairness applied beyond the individual to include the community as well as analysis of social injustice with remedies to correct it.

Justice Theory

Rawls developed a theory of justice based on the Enlightenment ideas of thinkers like John Locke (1632–1704) and Jean-Jacques Rousseau (1712–1778), who advocated social contract theory. Social contract theory held that the natural state of human beings was freedom, but that human beings will rationally submit to some restrictions on their freedom to secure their mutual safety and benefit, not subjugation to a monarch, no matter how benign or well intentioned. This idea parallels that of Thomas Hobbes (1588–1679), who interpreted human nature to be selfish and brutish to the degree that, absent the strong hand of a ruler, chaos would result. So people willingly consent to transfer their autonomy to the control of a sovereign so their very lives and property will be secured. Rousseau rejected that view, as did Rawls, who expanded social contract theory to include justice as fairness. In A Theory of Justice (1971), Rawls introduced a universal system of fairness and a set of procedures for achieving it. He advocated a practical, empirically verifiable system of governance that would be political, social, and economic in its effects.

Rawls’s justice theory contains three principles and five procedural steps for achieving fairness. The principles are (1) an “original position,” (2) a “veil of ignorance,” and (3) unanimity of acceptance of the original position.

By original position, Rawls meant something akin to Hobbes’ understanding of the state of nature, a hypothetical situation in which rational people can arrive at a contractual agreement about how resources are to be distributed in accordance with the principles of justice as fairness. This agreement was intended to reflect not present reality but a desired state of affairs among people in the community. The veil of ignorance ((Figure)) is a condition in which people arrive at the original position imagining they have no identity regarding age, sex, ethnicity, education, income, physical attractiveness, or other characteristics. In this way, they reduce their bias and self-interest. Last, unanimity of acceptance is the requirement that all agree to the contract before it goes into effect. Rawls hoped this justice theory would provide a minimum guarantee of rights and liberties for everyone, because no one would know, until the veil was lifted, whether they were male, female, rich, poor, tall, short, intelligent, a minority, Roman Catholic, disabled, a veteran, and so on.

The five procedural steps, or “conjectures,” are (1) entering into the contract, (2) agreeing unanimously to the contract, (3) including basic conditions in the contract such as freedom of speech, (4) maximizing the welfare of the most disadvantaged persons, and (5) ensuring the stability of the contract.

These steps create a system of justice that Rawls believed gave fairness its proper place above utility and the bottom line. The steps also supported his belief in people’s instinctual drive for fairness and equitable treatment. Perhaps this is best seen in an educational setting, for example, the university. By matriculating, students enter into a contract that includes basic freedoms such as assembly and speech. Students at a disadvantage (e.g., those burdened with loans, jobs, or other financial constraints) are accommodated as well as possible. The contract between the university and students has proven to be stable over time, from generation to generation. This same procedure applies on a micro level to the experience in the classroom between an individual teacher and students. Over the past several decades—for better or worse—the course syllabus has assumed the role of a written contract expressing this relationship.

Rawls gave an example of what he called “pure procedural justice” in which a cake is shared among several people.

By what agreement shall the cake be divided? Rawls determined that the best way to divide the cake is to have the person slicing the cake take the last piece. This will ensure that everyone gets an equal amount. What is important is an independent standard to determine what is just and a procedure for implementing it.

The Problem of Redistribution

Part of Rawls’s critique of utilitarianism is that its utility calculus can lead to tyranny. If we define pleasure as that which is popular, the minority can suffer in terrible ways and the majority become mere numbers. This became clear in Mills’s attempt to humanize Bentham’s calculus. But Mills’s harm principle had just as bad an effect, for the opposite reason. It did not require anyone to give up anything if it had to be done through coercion or force. To extend Rawls’s cake example, if one person owned a bakery and another were starving, like Jean Valjean’s sister in Les Misérables, utilitarianism would force the baker to give up what he had to satisfy the starving person without taking into account whether the baker had greater debts, a sick spouse requiring medical treatment, or a child with educational loans; in other words, the context of the situation matters, as opposed to just the consequences. However, Mill’s utilitarianism, adhering to the harm principle, would leave the starving person to his or her own devices. At least he or she would have one slice of cake. This was the problem of distribution and redistribution that Rawls hoped to solve, not by calculating pleasure and pain, profit and loss, but by applying fairness as a normative value that would benefit individuals and society.

The problem with this approach is that justice theory is a radical, egalitarian form of liberalism in which redistribution of material goods and services occurs without regard for historical context or the presumption many share that it inherently is wrong to take the property legally acquired by one and distribute it to another. Rawls has been criticized for promoting the same kind of coercion that can exist in utilitarianism but on the basis of justice rather than pleasure. Justice on a societal level would guarantee housing, education, medical treatment, food, and the basic necessities of life for everyone. Yet, as recent political campaigns have shown, the question of who will pay for these guaranteed goods and services through taxes is a contentious one. These are not merely fiscal and political issues; they are philosophical ones requiring us to answer questions of logic and, especially in the case of justice theory, fairness. And, naturally, we must ask, what is fair?

Rawls’s principles and steps assume that the way in which the redistribution of goods and services occurs would be agreed upon by people in the community to avoid any fairness issues. But questions remain. For one, Rawls’s justice, like the iconic depiction, is blind and cannot see the circumstances in which goods and services are distributed. Second, we may question whether a notion of fairness is really innate. Third, despite the claim that justice theory is not consequentialist (meaning outcomes are not the only thing that matters), there is a coercive aspect to Rawls’s justice once the contract is in force, replacing utility with mandated fairness. Fourth, is this the kind of system in which people thrive and prosper, or, by focusing on the worst off, are initiative, innovation, and creativity dampened on the part of everyone else? Perhaps the most compelling critic of Rawls in this regard was his colleague at Harvard University, Robert Nozick (1938–2002), who wrote A Theory of Entitlement (1974) as a direct rebuttal of Rawlsian justice theory.

Nozick argued that the power of the state may never ethically be used to deprive someone of property he or she has legally obtained or inherited in order to distribute it to others who are in need of it.

Still, one of the advantages of justice theory over the other ethical systems presented in this chapter is its emphasis on method as opposed to content. The system runs on a methodology or process for arriving at truth through the underlying value of fairness. Again, in this sense it is similar to utilitarianism, but, by requiring unanimity, it avoids the extremes of Bentham’s and Mill’s versions. As a method in ethics, it can be applied in a variety of ways and in multiple disciplines, because it can be adapted to just about any value-laden content. Of course, this raises the question of content versus method in ethics, especially because ethics has been defined as a set of cultural norms based on agreed-upon values. Method may be most effective in determining what those underlying values are, rather than how they are implemented.

The “veil of ignorance” in Rawls’s “original position.” Those in the original position have no idea who they will be once the veil (wall) has been lifted. Rawls thought such ignorance would motivate people in the community to choose fairly. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


An illustration depicts a basic figure of a person, all in gray. The figure is labeled original position. To the right of the figure is a wall labeled veil of ignorance. On the other side of the wall, to the right, are eight figures with more details than the first. One figure has medium to light skin tone and a dress. One has medium to dark skin tone and a cane. One has light skin tone. One has light skin tone and a service dog. One has medium to dark skin tone. One has medium to light skin tone and a dress with a dollar sign on it. One has dark skin tone and a dress. One has dark skin tone and is in a wheelchair.

Justice in Business

Although no ethical framework is perfect or fits a particular era completely, Rawls’s justice theory has distinct advantages when applied to business in the twenty-first century. First, as businesses become interdependent and globalized, they must pay more attention to quality control, human resources, and leadership in diverse settings. What will give greater legitimacy to an organization in these areas than fairness? Fairness is a value that is cross-cultural, embraced by different social groups, and understood by nearly everyone. However, what is considered fair depends on a variety of factors, including underlying values and individual characteristics like personality. For instance, not everyone agrees on whether or how diversity ought to be achieved. Neither is there consensus about affirmative action or the redistribution of resources or income. What is fair to some may be supremely unfair to others. This presents an opportunity for engaged debate and participation among the members of Rawls’s community.

Second, as we saw earlier, justice theory provides a method for attaining fairness, which could make it a practical and valuable part of training at all levels of a company. The fact that its content—justice and fairness—is more accessible to contemporary people than Confucian virtue ethics and more flexible than Kant’s categorical imperative makes it an effective way of dealing with stakeholders and organizational culture.

Justice theory may also provide a seamless way of engaging in corporate social responsibility outwardly and employee development inwardly. Fairness as a corporate doctrine can be applied to all stakeholders and define a culture of trust and openness, with all the corresponding benefits, in marketing, advertising, board development, client relations, and so on. It is also an effective way of integrating business ethics into the organization so ethics is no longer seen as the responsibility solely of the compliance department or legal team. Site leaders and middle managers understand fairness; employees probably even more so, because they are more directly affected by the lack of it. Fairness, then, is as much part of the job as it is an ongoing process of an ethics system. It no doubt makes for a happier and more productive workforce. An organization dedicated to it can also play a greater role in civic life and the political process, which, in turn, helps everyone.

John Rawls’s Thought Experiment

John Rawls’s original position represents a community in which you have no idea what kind of person you will end up being. In this sense, it is like life itself. After all, you have no idea what your future will be like. You could end up rich, poor, married, single, living in Manhattan or Peru. You might be a surgeon or fishing for sturgeon. Yet, there is one community you will most likely be a part of at some point: the aged. Given that you know this but are not sure of the details, which conditions would you agree to now so that senior citizens are provided for? Remember that you most likely will join them and experience the effects of what you decide now. You are living behind not a spatial veil of ignorance but a temporal one.

Critical Thinking

  • What are you willing to give up so that seniors—whoever they might be—are afforded care and security in their later years?
  • Should you have to pay into a system that provides medical coverage to other people less health conscious than you? Why or why not?

Summary

Rawls developed a theory of justice based on social contract theory, holding that the natural state of human beings is freedom, not subjugation to a monarch, no matter how benign or well intentioned. Rawls’s theory views human beings as inherently good and, echoing Kant, inclined toward moral rectitude and action. In his theory, Rawls included the “veil of ignorance,” which ensures objectivity in our choices and the avoidance of bias. Criticism of Rawls’s theory focuses primarily on the issue of distribution, because decisions made in ignorance can neither reward innovation and enterprise nor encourage risk.

Assessment Questions

John Rawls’s theory of justice is based on which of the following?

  1. cognitive structures
  2. moral duty
  3. social contract theory
  4. survival of the fittest

C

The “veil of ignorance” ensures which of the following?

  1. mass delusion
  2. objectivity
  3. self-reliance
  4. Enlightenment reason

B

True or false? John Rawls’s theory of justice is mainly non-Utilitarian.

True

A distinguishing characteristic of justice theory is that it emphasizes method over content.

True

What challenges does Rawlsian justice theory present when it comes to the redistribution of goods and services in society?

Rawls’s theory has been called radical because it redistributes goods and services without regard for extenuating circumstances or historical context. It also has been accused of stifling enterprise, innovation, and investment.

Endnotes

1John Rawls, A Theory of Justice. (Cambridge, MA: Harvard University Press, 2009), 120, 136.
2John Rawls, A Theory of Justice. (Cambridge, MA: Harvard University Press, 2009), 121, 464.
3John Rawls, A Theory of Justice. (Cambridge, MA: Harvard University Press, 2009), 85.
4John Rawls, A Theory of Justice. (Cambridge, MA: Harvard University Press, 2009), 85.
5Stanford Encyclopedia of Philosophy, s.v. “John Rawls. 3.3 Reasonable Pluralism and the Public Political Culture” (by Leif Wenar). https://plato.stanford.edu/entries/rawls/ (accessed November 20, 2017).
6Stanford Encyclopedia of Philosophy, s.v. “Robert Nozick’s Political Philosophy” (by Eric Mack). https://plato.stanford.edu/entries/nozick-political/ (accessed March 9, 2018).

Glossary

justice as fairness
Rawls’s summary of the essence of his theory of justice
justice theory
the idea of fairness applied beyond the individual to include the community as well as analysis of social injustice with remedies to correct it
original position
in Rawls’s justice theory, a hypothetical situation in which rational people can arrive at a contractual agreement about how resources are to be distributed in accordance with the principles of justice as fairness
social contract theory
a theory that holds the natural state of human beings is freedom, but that human beings will rationally submit to some restrictions on their freedom to secure their mutual safety and benefit
unanimity of acceptance
in Rawls’s theory, the requirement that all agree to the contract before it goes into effect
veil of ignorance
in Rawls’s theory, a condition in which people arrive at the original position imagining they have no identity regarding age, sex, ethnicity, education, income, physical attractiveness, or other characteristics; in this way, they reduce their bias and self-interest

Defining and Prioritizing Stakeholders

III

Introduction

12

Starbucks, based in Seattle, Washington, is a company with more than 250,000 employees and locations across the globe. It directly affects countless stakeholders beyond its institutional investors and millions of customers, from coffee growers and milk producers, to urban and suburban communities and developers, to local, state, and national governments. (credit: modification of “StarbucksVaughanMills” by “Raysonho”/Wikimedia Commons, CC0)


This image shows the inside of a Starbucks Coffee store.

In May 2018, in the wake of a global uproar after two black men in a Philadelphia Starbucks were arrested while awaiting a friend, Starbucks closed its approximately eight thousand U.S. stores to conduct racial bias training ((Figure)).

The company also officially changed its policy to allow people to visit its stores and restrooms without making a purchase, hoping to avoid more incidents like this one (sparked by a white employee calling 9-1-1 when the men did not buy anything). The two men who were arrested eventually settled with Starbucks for an undisclosed sum.

As one of the largest beverage retailers in the world, Starbucks directly affects countless stakeholders: food and drink distributors; coffee and tea growers; milk producers; urban and suburban communities; local, state, and national governments; more than 300,000 employees and 1,600 institutional investors; and millions of customers.

The company’s decision to close its U.S. stores for half a day was financially costly, and the training session could never fully solve the problem of conscious or unconscious bias. But the firm believed it was the right thing to do. Why does it matter to its stakeholders what Starbucks does? What role do stakeholders play in a company’s decisions about its ethical behavior, and why?

Endnotes

1“The Latest: Police Release Call from Starbucks Employee,” Associated Press, April 17, 2018. https://apnews.com/7c0b3793ca244e128effc1019bde194c.
2“Starbucks,” Fortune. http://fortune.com/fortune500/starbucks/; “Starbucks Corporation Institutional Ownership,” Nasdaq. https://www.nasdaq.com/symbol/sbux/institutional-holdings; “Starbucks Company Profile,” Starbucks. https://www.starbucks.com/about-us/company-information/starbucks-company-profile (accessed June 18, 2018).

Adopting a Stakeholder Orientation

13

Learning Objectives

By the end of this section, you will be able to:

  • Identify key types of business-stakeholder relationships
  • Explain why laws do not dictate every ethical responsibility a company may owe key stakeholders
  • Discuss why stakeholders’ welfare must be at the heart of ethical business decisions

Have you ever had a stake in a decision someone else was making? Depending on your relationship with that person and your level of interest in the decision, you may have tried to ensure that the choice made was in your best interests. Understanding your somewhat analogous role as a stakeholder in businesses large and small, local and global, will help you realize the value of prioritizing stakeholders in your own professional life and business decisions.

Stakeholder Relationships

Many individuals and groups inside and outside a business have an interest in the way it brings products or services to market to turn a profit. These stakeholders include customers, clients, employees, shareholders, communities, the environment, the government, and the media (traditional and social), among others. All stakeholders should be considered essential to a business, but not all have equal priority. Different groups of stakeholders carry different weights with decision makers in companies and assert varying levels of interest and influence. As we examine their roles, consider how an organization benefits by working with its stakeholders and how it may benefit from encouraging stakeholders to work together to promote their mutual interests.

What are the roles of an organization’s many stakeholders? We begin with the internal stakeholders. The board of directors—in a company large enough to have one—is responsible for defining and evaluating the ongoing mission of a business after its founding. It broadly oversees decisions about the mission and direction of the business, the products or services offered, the markets in which the business will operate, and salary and benefits for the senior officers of the organization. The board also sets goals for income and profitability. Its most important function is to select and hire the chief executive officer (CEO) or president. The CEO is usually the only employee who reports directly to the board of directors, and he or she is charged with implementing the policies the board sets and consulting with them on significant issues pertaining to the company, such as a dramatic shift in products or services offered or discussions to acquire—or be acquired by—another firm.

In turn, the CEO hires executives to lead initiatives and carry out procedures in the various functional areas of the business, such as finance, sales and marketing, public relations, manufacturing, quality control, human resources (sometimes called human capital), accounting, and legal compliance. Employees in these areas are internal stakeholders in the success of both their division and the larger corporation. Some interact with the outside environment in which the business operates and serve as contact points for external stakeholders, such as media and government, as well.

In terms of external stakeholders for a business, customers certainly are an essential group. They need to be able to trust that products and services are backed by the integrity of the company. They also provide reviews, positive or negative, and referrals. Customers’ perceptions of the business matter, too. Those who learn that a business is not treating employees fairly, for instance, may reconsider their loyalty or even boycott the business to try to influence change in the organization. Stakeholder relationships, good and bad, can have compound effects, particularly when social media can spread word of unethical behavior quickly and widely.

Key external stakeholders are usually those outside of the organization who most directly influence a business’s bottom line and hold power over the business. Besides customers and clients, suppliers have a great deal of influence and command a great deal of attention from businesses of all sizes. Governments hold power through regulatory bodies, from federal agencies such as the Environmental Protection Agency to the local planning and zoning boards of the communities in which businesses exist. These latter groups often exercise influence over the physical spaces where businesses work and try to grow ((Figure)).

Maryland’s former Lieutenant Governor, Anthony Brown, hosts a 2014 small-business stakeholder roundtable discussion. Governments consider local businesses to be stakeholders in economic decision-making. Small businesses have their own local and regional stakeholders, who are influenced by the products and services they offer and the decisions they make in building their businesses. (credit: modification of “Lt. Governor Host MBE_Small Business Stakeholders Roundtable Discussion” by “Maryland GovPics”/Flickr, CC BY 2.0)


This image shows a group of men and women sitting around a table in discussion.

Businesses are responsible to their stakeholders. Every purchase of a product or a service carries with it a sort of promise. Buyers promise that their money or credit is good, and businesses promise a level of quality that will deliver what is advertised. The relationship can quickly get more complex, though. Stakeholders also may demand that the businesses they patronize give back to the local community or protect the global environment while developing their products or providing services. Employees may demand a certain level of remuneration for their work. Governments demand that companies comply with laws, and buyers in business-to-business exchanges (B2B, in business jargon) demand not only high-quality products and services but on-time delivery and responsive maintenance and service should something go wrong. Meeting core obligations to stakeholders is primarily about delivering good products and services, but it is also about communicating and preparing for potential problems, whether from within the company or from external circumstances like a natural disaster.

Ethical Responsibilities Often Extend Beyond Legal Requirements

We have seen that stakeholders include the people and entities invested in and influential in the success of an organization. It is also true that stakeholders can have multiple, and simultaneous, roles. For example, an employee can also be a customer and a stockholder.

Any transaction between a stakeholder and a business organization may appear finite. For instance, after you purchase something from a store you leave and go home. But your relationship with the store probably continues. You might want to repurchase the item or ask a question about a warranty. The store may have collected future marketing data about you and your purchases through its customer loyalty program or your use of a credit card.

Samsung, based in South Korea, is a large, multinational corporation that makes a variety of products, including household appliances such as washers and dryers. When Samsung’s washers developed a problem with the spin cycle in 2017, the company warned customers that the machines could become unbalanced and tip over, and that children should be kept away. The problem persisted, however, and Samsung’s responsibility and legal exposure increased. The eventual fix was to offer all owners of the particular washer model a full refund even if the customer did not have a complaint, and to offer free pick up of the machine as well. The recall covered almost three million washers, which ranged in price from $450 to $1500. By choosing to spend billions to rectify the problem, Samsung limited its legal exposure to potential lawsuits, settlement of which would likely have far exceeded the refunds it paid. This example demonstrates the weight of the implicit social contract between a company and its stakeholders and the potential impact on the bottom line if that contract is broken.

When a product does not live up to its maker’s claims for whatever reason, the manufacturer needs to correct the problem to retain or regain customers’ trust. Without this trust, the interdependence between the company and its stakeholders can fail. By choosing to recognize and repay its customer stakeholders, Samsung acted at an ethical maximum, taking the strongest possible action to behave ethically in a given situation. An ethical minimum, or the least a company might do that complies with the law, would have been to offer the warning and nothing more. This may have been a defensible position in court, but the warning might not have reached all purchasers of the defective machine and many children could have been hurt.

Each case of a faulty product or poorly delivered service is different. If laws reach above a minimum standard, they can grow cumbersome and impede business growth. If businesses adhere only to laws and ethical minimums, however, they can develop poor reputations and people can be harmed. The ethically minimal course of action is not illegal or necessarily unethical, but the company choosing it will have failed to recognize the value of its customers.

Amazon Sets a Demanding Pace on the Job

In a visit to an Amazon distribution center, a group of business students and their professors met with the general manager.

After taking them on an extensive tour of the five-acre facility, the general manager commented on the slowness of the visitors’ walking pace. He described the Amazon Pace, a fast, aggressive walk, and confirmed that the average employee walks eight or nine miles during a shift. These employees are called “pickers,” and their task is to fill an order and deliver it to the processing and packing center as quickly as possible. The design of the center is a trade secret that results in a random distribution of products. Therefore, the picker has to cover a number of directions and distances while filling an order. Those who cannot keep up the pace are usually let go, just as would be those who steal.

Critical Thinking

  • Does the requirement to walk an average of eight or nine miles at a fast pace every day strike you as a reasonable expectation for employees at Amazon, or any other workplace? Why or why not? Should a company that wants to impose this requirement tell job applicants beforehand?
  • Is it ethical for customers to patronize a company that imposes this kind of requirement on its employees? And if not, what other choices do customers have and what can they do about it?
  • The center’s general manager may have been exaggerating about the Amazon Pace to impress upon his visitors how quickly and nimbly pickers fill customer orders for the company. If not, however, is such a pace sustainable without the risk of physiological and psychological stress?

The law only partly captures the ethical obligations firms owe their stakeholders. One way many companies go beyond the legally required minimum as employers is to offer lavish amenities—that is, resources made available to employees in addition to wages, salary, and other standard benefits. They include such offerings as on-site exercise rooms and other services, company discounts, complimentary or subsidized snacks or meals, and the opportunity to buy stock in the company at a discounted price. Astute business leaders see the increased costs of amenities as an investment in retaining employees as long-term stakeholders. Stakeholder loyalty within and outside the firm is essential in sustaining any business venture, no matter how small or large.

The Social Responsibility of Business

There are two opposing views about how businesses, and large publicly held corporations in particular, should approach ethics and social responsibility. One view holds that businesses should behave ethically within the marketplace but concern themselves only with serving shareholders and other investors. This view places economic considerations above all others. The other view is that stakeholders are not the means to the end (profit) but are ends in and of themselves as human beings (see our earlier discussion of deontological ethics in Ethics from Antiquity to the Present). Thus, the social responsibility of business view is that being responsible to customers, employees, and a host of other stakeholders should be not only a corporate concern but central to a business’s mission. In essence, this view places a premium on the careful consideration of stakeholders. Consider what approach you might take if you were the CEO of a multinational corporation.

Critical Thinking

  • Would your business be driven primarily by a particular social mission or simply by economics?
  • How do you think stakeholder relationships would influence your approach to business? Why?

One challenge for any organization’s managers is that not all stakeholders agree on where the company should strive to land when it chooses between ethical minimums and maximums. Take stockholders, for example. Logically, most stockholders are interested in maximizing the return on their investment in the firm, which earns profit for them in the form of dividends. Lynn Stout, late Professor of Law at Cornell Law School, described the role of shareholder in this way:

“Shareholders as a class want companies to be able to treat their stakeholders well, because this encourages employee and customer loyalty . . . Yet individual shareholders can profit from pushing boards to exploit committed stakeholders—say, by threatening to outsource jobs unless employees agree to lower wages, or refusing to support products customers have come to rely on unless they buy expensive new products as well. In the long run, such corporate opportunism makes it difficult for companies to attract employee and customer loyalty in the first place.”

Essential to Stout’s point is that shareholders do not necessarily behave as a class. Some will want to maximize their investment even at a cost to other stakeholders. Some may want to extend beyond the legal minimum and seek a long-term perspective on profit maximization, demanding better treatment of stakeholders to maximize future potential value and to do more good than harm.

In the long run, stakeholder welfare must be kept at the heart of each company’s business operations for these significant, twin reasons: It is the right thing to do and it is good for business. Still, if managers need additional incentive to act on the basis of policies that benefit stakeholders, it is useful to recall that stakeholders who believe their interests have been ignored will readily make their displeasure known, both to company management and to the much wider community of social media.

Summary

An organization has duties and responsibilities with regard to each stakeholder; however, the implicit social contract between business and society means that meeting legal requirements might support only minimal ethical standards. Society on the whole and in the long run requires that business consider a broader range of duties in its relationships with key stakeholders.

Assessment Questions

Maintaining trust between stakeholders and organizations is ________.

  1. the stakeholder’s responsibility
  2. an ethical minimum
  3. an ethical maximum
  4. a social contract

D

True or false? Companies are required to provide amenities to their employees to fulfill the social contract between management and employees as stakeholders.

False. Amenities are additional resources made available to employees above and beyond wages, salary, or other standard benefits or obligations.

Choose your favorite brand. List at least five of its key stakeholder groups.

Regardless of the company or brand selected, responses should include some of the following: customers, clients, employees, shareholders, communities, government, media, and possibly the environment and other abstract concepts that represent resources or concerns of many people.

Endnotes

1Michael Nunez, “New Horror Story Proves Working for Amazon Is More Soul-Crushing Than We Thought,” Gizmodo, March 7, 2016. https://gizmodo.com/new-horror-story-proves-working-for-amazon-is-more-soul-1763323814.
2Lynn A. Stout, “The Shareholder Value Myth,” Paper 771 (Ithaca, NY: Cornell Law Faculty Publications 2013), 6. http://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2311&context=facpub.

Glossary

amenities
resources made available to employees in addition to wages, salary, and other standard benefits
ethical maximum
the strongest action a company can choose to behave ethically in a given situation
ethical minimum
the least a company might do to claim it holds an ethically positive position
social responsibility of business
the view that stakeholders are not the means to the end (profit) but are ends in and of themselves as human beings

Weighing Stakeholder Claims

14

Learning Objectives

By the end of this section, you will be able to:

  • Explain why stakeholders’ claims vary in importance
  • Categorize stakeholders to better understand their claims

As we saw earlier in this chapter and in Why Ethics Matter, the law only partially captures the ethical obligations firms owe their stakeholders. A particular stakeholder claim, that is, any given stakeholder’s interest in a business decision, may therefore challenge the ethical stance even of an organization that complies with the law. For example, some community members may oppose the opening of a “big box” chain store that threatens the livelihoods of small-business owners in the area, while shareholders, creditors, employees, and consumers within the nearby neighborhoods support it as an additional opportunity for profit and quality goods at competitive prices. Conflicts like this illustrate how complicated prioritizing stakeholder claims can be, particularly when there are ethical pros and cons on both sides. A big box store may offer a wider selection of goods at lower prices, for example, and create jobs for teens and part-time workers.

A related theme to recall is that even though all stakeholder claims are important for a company to acknowledge, not all claims are of equal importance. Most business leaders appreciate that a company’s key stakeholders are essential to its efficient operation and growth, and that its overall mission, goals, and limited resources will force its managers to make choices by prioritizing stakeholders’ needs. In this section, we look at ethical ways in which business managers can begin to make those decisions.

The Ethical Basis of Stakeholders’ Claims

Stakeholder claims vary in their significance for a firm. According to Donaldson and Preston,

there are three theoretical approaches to considering stakeholder claims: a descriptive approach, an instrumental approach, and a normative approach. The descriptive approach sees the company as composed of various stakeholder groups, each with its own interests. These interests impinge on the company to a greater or lesser degree; thus, the main point of the descriptive approach is to develop the most accurate model and act on it in ways that weigh and balance these interests as fairly as possible. The instrumental approach connects stakeholder management and financial outcomes, proposing that appropriate management of stakeholder interests is important and useful because it contributes to a positive bottom line.

The normative approach considers stakeholders as ends in themselves rather than simply as means to achieve better financial results. According to Donaldson and Preston, in the normative approach “the interests of all stakeholders are of intrinsic value. That is, each group of stakeholders merits consideration for its own sake and not merely because of its ability to further the interests of some other group, such as the shareowners.”

This approach is the one that most appropriately represents ethical stakeholder theory, according to Donaldson and Preston, and it places an objective consideration of all stakeholders’ interests ahead of fiscal considerations alone.

We can also view these three approaches to stakeholders as occupying levels of increasing comprehensiveness. At the lowest level is the descriptive approach, which merely sets the stage for consideration of stakeholder claims and concerns. The instrumental aspect combines a consideration for profit along with other stakeholder concerns and attempts to balance these interests with particular attention to the way the company and its shareholders might be affected. The normative approach takes the most comprehensive view of the organization and its stakeholders, putting the focus squarely on stakeholders. Although Donaldson and Preston stress that the descriptive and instrumental approaches are integral to stakeholder theory, they contend that the fundamental basis of stakeholder theory is normative.

Of course, these are theoretical approaches, and the extent to which any of them is implemented in a given company will vary. But unfortunately, the decision to disconnect from stakeholders is both real and expensive for a corporation. A 2005 survey of customers of 362 companies is demonstrative: “Only 8% of customers described their experience as ‘superior.’ However, 80% of the companies surveyed believe that the experience they have been providing is indeed superior.”

Another study found significant links between levels of customer satisfaction and a firm’s performance, including rates of retention, overall revenue, and stock price.

Enlightened companies spend time and resources testing their stakeholders’ concerns and eliciting their feedback while there is time to incorporate it into management decisions.

A classic example of negative consumer reaction is the response that met Ford Motor Company’s 1958 introduction of the Edsel ((Figure)). Ford had done extensive research to create a luxury family sedan aimed at an upper-income segment of the market then dominated by Buick, Oldsmobile, and Chrysler. However, the market did not identify Ford products with high status, and the Edsel did not last three years in the marketplace. Ford failed to serve the investors, suppliers, and employees who depended on the company for their livelihoods. Of course, the corporation survived that failure, perhaps because it learned the lessons of stakeholder management the hard way.

This Edsel Pacer was manufactured in 1958, the first year of production of the ill-fated Ford model, which ceased production in November 1959. (credit: modification of “Edsel Pacer 2-door Hardtop 1958 front” by “Redsimon”/Wikimedia Commons, CC BY 2.5)


This image shows a Ford Edsel car from 1958.

Entertainers too (as well as their clubs, venues, and studios) are sensitive to the views of their stakeholders—that is, fans and the consuming public as a whole. Scarlett Johansson recently signed on to play the role of Dante “Tex” Gill in a biographical film (or “biopic”). Gill had been identified as female at birth but spent much of his professional career self-identifying as male. When the casting was announced in July 2018, it provoked a controversy among transgender rights groups, and within a few days, Johansson announced she had withdrawn from the role.

“In light of recent ethical questions raised surrounding my casting as Dante Tex Gill, I have decided to respectfully withdraw my participation in the project. . . . While I would have loved the opportunity to bring Dante’s story and transition to life, I understand why many feel he should be portrayed by a transgender person, and I am thankful that this casting debate, albeit controversial, has sparked a larger conversation about diversity and representation in film,” she said.

Defining Stakeholder Categories

To better understand stakeholder theory and, ultimately, manage stakeholder claims and expectations, it may be helpful to take a closer look at categories of stakeholders. One way to categorize stakeholders is by defining their impact. For example, regulatory stakeholders including stockholders, legislatures, government regulators, and boards of directors are enabling stakeholders because they permit the firm to function. Normative stakeholders such as competitors and peers influence the norms or informal rules of the industry; functional stakeholders are those who influence inputs, such as suppliers, employees, and unions, and those influencing outputs such as customers, distributors, and retailers. Finally, diffused stakeholders include other organizations such as nongovernmental organizations (NGOs), voters, and mass media organizations with less direct relationships but potential for meaningful impacts on firms ((Figure)).

Grouping stakeholders into meaningful categories according to relationship types allows an organization to prioritize stakeholders’ claims. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This graphic shows a circle in the center with four boxes branching out from it. The circle in the center is titled “Organization.” Starting with the box at the top, it is titled “Enabling Stakeholders,” with four bullets that say “stockholders,” “legislators,” “government regulators,” and “boards of directors.” Going clockwise, the next box is “Diffused Stakeholders,” with three bullets that say “nongovernmental organizations,” “voters,” and “mass media.” Next is “Functional Stakeholders,” with six bullets that say “suppliers,” “employees,” “unions,” “customers,” “distributors,” and “retailers.” Last is “Normative Stakeholders,” with three bullets that say “competitors,” “peers,” and “professional associations.”

As the (Figure) shows, enabling and functional stakeholders are those active in design, production, and marketing. They provide input for the products or services the organization distributes in the form of output. Companies should identify all the stakeholders shown in the figure and consider how they are linked to the firm. Although the diffused linkage stakeholders will vary according to place and time, the enabling, functional, and normative linkage stakeholders are constant, because they are integral to the operation of the firm. Stakeholders, in turn, can exert some control and authority by serving on the board of directors, by exercising their power as purchasers, by being elected to public office, or by joining employees’ unions.

In many cases, if one stakeholder effects a change in the firm, other stakeholders will be affected. For example, if an NGO raises concerns about unequal pay of laborers on a rubber plantation that provides raw materials for gasket makers, the supplier may be forced to equalize pay, incurring additional expense. The supplier has taken the ethical action, but ultimately the cost is likely passed through the supply chain to the end user, the retail purchaser at the local car dealer. The supplier could also have absorbed the additional cost, diminishing the bottom line and reducing returns for stockholders, who may withdraw their investment from the company. Although this model of stakeholder relationships is complex, it is useful in understanding the impact of each individual group on the organization as a whole.

James E. Grunig, now professor emeritus at University of Maryland, and Todd Hunt, who together developed the organizational linkage model in (Figure), looked at these relationships through the lens of four “publics” or cohorts: the nonpublic, the latent, the aware, and the active. These publics are distinguished by their degree of awareness of a problem and ability to do something about it. In the nonpublic cohort, no problem is recognized or exists. For the latent public, a problem is there but the public does not recognize it. The aware public recognizes that a problem exists. The active public is aware of the problem and organizes to respond to it. These categories help the organization design its message about a problem and decide how to communicate. Herein lies the ethical significance. If an organization is aware of a problem and the public is not, the organization has an opportunity to communicate and guide the public in recognizing and dealing with it, as the example of Johnson & Johnson’s Tylenol product in the following box illustrates.

The Chicago Tylenol Murders

In the fall of 1982, Johnson & Johnson faced a public relations nightmare when customers in Cook County, Illinois, began dying—eventually, a total of seven people died—after taking over-the-counter, Tylenol-branded acetaminophen capsules. Analysis showed the presence of potassium cyanide, a fatal poison in no way connected with the production of the pill. Johnson & Johnson voluntarily removed all Tylenol products from the U.S. marketplace and offered to pay full retail price for any pills returned to the company. This represented about thirty million bottles of capsules worth more than $100 million. (Significantly, too, Johnson & Johnson decided on this wide-ranging action despite the fact that it and law enforcement realized the cyanide poisoning was limited to Cook County, Illinois.)

Because Tylenol was a flagship product bringing in significant revenue, this was an extreme action but one based on the company’s ethics, rooted in its corporate credo. Investigation showed that someone had tinkered with the bottles and injected cyanide into the product in stores. Although no one was ever apprehended, the entire drug industry responded, following Johnson & Johnson’s lead, by introducing tamper-proof containers that warned consumers not to use the product if the packaging appeared in any way compromised.

The strong ethical stance taken by Johnson & Johnson executives resulted in immediate action that reassured the public. When the company eventually returned Tylenol to the market, it introduced it first to clinics, hospitals, and physicians’ offices, promoting medicine’s professional trust in the product. The strategy was successful. Before the poisonings, Tylenol had 37 percent of the market of over-the-counter analgesics. That plunged to 7 percent in fall 1982 but was resurrected to 30 percent by fall 1983.

Critical Thinking

  • In its corporate credo, Johnson & Johnson identifies multiple stakeholders: users of its products (output), employees (input), employees’ families (diffused linkage), and the government (enabling linkage). Applying Grunig and Hunt’s theory, do you believe Johnson & Johnson acted as an enlightened company that includes and communicates with a variety of publics?
  • U.S. business leaders are often accused of acting on a short-term obsession with profitability at the expense of the long-term interests of their corporation. Which aspects of the Tylenol crisis demonstrate a short-term perspective? Which show the value of a longer-term perspective?

On the other hand, a company might try to manage a problem by covering it up or denying it. For example, Volkswagen had data that showed its diesel engine’s emissions exceeded U.S. pollution standards. Rather than redesign the engine, Volkswagen engineers installed a unit in each car to interpret the emissions as if they met Environmental Protection Agency standards. When the fraud was discovered, Volkswagen was required to buy back millions of cars. As of September 2017, the company had incurred fines and expenses in excess of $30 billion, and some employees had gone to jail. Such damage is bad enough, but loss of reputation and the trust of consumers and stockholders has hurt the company’s value and share price.

Volkswagen’s management of stakeholder relationships was poor and extremely expensive. Once-loyal stakeholders became part of an aware and active public—a group of people united by a common problem and organized for satisfaction, sometimes demanding compensation.

A challenge for business leaders is to assign appropriate weights to stakeholder claims on their companies in an ethical manner. This task is even more difficult because a claim is not necessarily a formal process. “Essentially, stakeholders ‘want something’ from an organization. Some want . . . to influence what the organization does . . . and others are, or potentially could be, concerned with the way they are affected by the organization.”

If a stakeholder has its own identity or voice, or if members of a stakeholder group are many, the claim can be clear and direct, such as in the case of a union negotiating for better pay and benefits, or a community trying to lure a corporation to open operations there. Think of the enormous effort communities around the world make to try to get the Olympics or World Cup organizers to bring the competition to their locale. In spite of significant investment and debt, these communities see a real advantage to their local economy.

Many stakeholder claims are indirect, or “voiceless,” due perhaps to their representing relatively few individuals relative to the size and power of the organization and the time required to evoke a response from a large, bureaucratic company. If you have ever had a problem with a cable television or satellite company, you can immediately understand this stakeholder relationship, because it is so difficult to find someone with enough authority to make a decision on behalf of the company. Some companies count on individuals’ growing frustrated and giving up on the claim. An indirect stakeholder claim might also be one that affects future generations, such as concerns about air and water pollution. For example, University of Southern California law professor Christopher D. Stone introduced in 1972 what was then a radical concept for the law in the United States, that the environment itself is entitled to legal standing in the courts. If this were so, then the environment might also be eligible for certain protections under the law. Appearing at the dawn of increasing social awareness of ecologic concerns, Stone’s influential law review article “Should Trees Have Standing?” gave many environmentalists a new legal philosophy to harness in defense of the natural world.

Summary

There are three approaches to stakeholder theory: the descriptive approach, the instrumental approach, and the normative approach. The normative approach takes the most comprehensive view of the organization and its stakeholders and is the fundamental basis of stakeholder theory. Organizations can analyze stakeholder claims by classifying them on the basis of their intensity and impact on the firm, as well as on the basis of their relationship to the firm. Such classifications may include enabling stakeholders, normative stakeholders, functional stakeholders, and diffused stakeholders. Using the lens of the four “publics” (the nonpublic, the latent, the aware, and the active), we can also understand a stakeholder claim on the basis of the public’s degree of awareness of a problem and ability to do something about it.

Assessment Questions

A shareholder is a stakeholder who ________.

  1. holds stock for investment
  2. has a general interest in the fate of all publicly traded companies
  3. focuses on the means by which firms get their products to market
  4. always purchases the product or service of a particular company

A

A stakeholder claim ________.

  1. is usually a complaint
  2. is always financial
  3. is any matter of concern for the corporation or company
  4. is the same as a lawsuit

C

Explain how the normative approach to stakeholder theory informs the instrumental aspect and the descriptive approach.

The normative approach is the fundamental basis of stakeholder theory and argues that stakeholders are ends unto themselves rather than means to an end. Thus, they have inherent value and cannot be looked at merely as instruments or as functional parts in an economic engine intended solely to generate profit for stockowners. That said, the instrumental and descriptive approaches also have their role in helping us to understand stakeholders and are mutually supportive of the normative approach.

Endnotes

1Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications,” The Academy of Management Review 20, no. 1 (1995): 65–91.
2Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications,” The Academy of Management Review 20, no. 1 (1995): 65–91.
3Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications,” The Academy of Management Review 20, no. 1 (1995): 65–91.
4Christopher Meyer and Andre Schwager, “Understanding Customer Experience,” Harvard Business Review, February 2007. https://hbr.org/2007/02/understanding-customer-experience.
5Paul Williams and Earl Naumann, “Customer Satisfaction and Business Performance: A Firm-Level Analysis,” Journal of Services Marketing 25, no. 1 (2011): 20–32.
6Mia Galuppo, “Scarlett Johansson Drops Out of ‘Rub & Tug’ Trans Film Following Backlash,” Hollywood Reporter, July 13, 2018. https://www.hollywoodreporter.com/news/scarlett-johansson-drops-trans-film-rub-tug-backlash-1127003.
7Aaron Hicklin, “Exclusive: Scarlett Johansson Withdraws from Rub & Tug,” Out, July 13, 2018. https://www.out.com/out-exclusives/2018/7/13/exclusive-scarlett-johansson-withdraws-rub-tug.
8Brad L. Rawlins, “Prioritizing Stakeholders for Public Relations,” Institute for Public Relations, March 2006. https://www.instituteforpr.org/wp-content/uploads/2006_Stakeholders_1.pdf.
9Charles Riley, “Volkswagen’s Diesel Scandal Costs Hit $30 Billion,” CNN Money, September 29, 2017. http://money.cnn.com/2017/09/29/investing/volkswagen-diesel-cost-30-billion/index.html.
10Miles Brignall, “Volkswagen’s US Compensation Deal Leaves British Drivers Fuming,” The Guardian, October 29, 2016. https://www.theguardian.com/money/2016/oct/29/volkswagen-us-compensation-deal-british-drivers-fuming; Soraya Sarhaddi Nelson, “German Consumers Fight Automakers for Compensation in Emissions Scandal,” All Things Considered, November 10, 2017. https://www.npr.org/2017/11/10/563378729/german-consumers-fight-automakers-for-compensation-in-emissions-scandal.
11P1 Examining Team, “All About Stakeholders – Part 1,” ACCA. http://www.accaglobal.com/us/en/student/exam-support-resources/professional-exams-study-resources/p1/technical-articles/stakeholders-part1.html (accessed August 5, 2018).
12Christopher D. Stone, “Should Trees Have Standing? Toward Legal Rights for Natural Objects,” Southern California Law Review 45, (1972): 450–501.

Glossary

descriptive approach
a theory that views the company as composed of various stakeholders, each with its own interests
diffused stakeholder
a stakeholder with an interest in a company’s decisions and whose impacts on a firm can be large even if the relationship is generally weaker than other types
enabling stakeholder
a stakeholder who permits an organization to function within the economic and legal system
functional stakeholder
a stakeholder whose relationships influence or govern an organization’s inputs and outputs
instrumental approach
a theory proposing that good management of stakeholders is important because it can help the bottom line
normative approach
a theory that considers stakeholders as ends unto themselves rather than means to achieve a better bottom line
normative stakeholder
a stakeholder in the organization’s industry who influences its norms or informal rules
stakeholder claim
a particular stakeholder’s interest in a business decision

Ethical Decision-Making and Prioritizing Stakeholders

15

Learning Objectives

By the end of this section, you will be able to:

  • Identify the factors that affect stakeholder prioritization
  • Explain why priorities will vary based upon the interest and power of the stakeholder
  • Describe how to prioritize stakeholder claims, particularly when they conflict

If we carry the idea of stakeholder to the extreme, every person is a stakeholder of every company. The first step in stakeholder management, the process of accurately assessing stakeholder claims so an organization can manage them effectively, is therefore to define and prioritize stakeholders significant to the firm. Then, it must consider their claims.

Given that there are numerous types of stakeholders, how do managers balance these claims? Ethically, no group should be treated better than another, and managers should respond to as many stakeholders as possible. However, time and resource limitations require organizations to prioritize claims as stakeholder needs rise and fall.

Stakeholder Prioritization

First, it may help to speak to the expectations that any stakeholders may have of a particular business or institution. It depends on particular stakeholders, of course, but we can safely say that all stakeholders expect a form of satisfaction from an organization. If these stakeholders are shareholders (stockowners), then they generally wish to see a high return on their purchase of company shares. If, on the other hand, they are employees, they typically hope for interesting tasks, a safe work environment, job security, and rewarding pay and benefits. If, yet again, the stakeholders are members of the community surrounding a business, they usually wish that the company not harm the physical environment or degrade the quality of life within it.

So the task confronting an organization’s management begins with understanding these multiple and sometimes conflicting expectations and ethically deciding which stakeholders to focus on and in what sequence, if not all stakeholders cannot be addressed simultaneously, that is, stakeholder prioritization. It helps to actively gather information about all key stakeholders and their claims. First, managers must establish that an individual with a concern is a member of a stakeholder group. For example, a brand may attract hundreds or thousands of mentions on Twitter each day. Which ones should be taken seriously as representative of key stakeholders? Brand managers look for patterns of communication and for context when deciding whether to engage with customers in the open expanses of social media platforms.

After establishing that a key stakeholder group is being represented, the manager should identify what the company needs from the stakeholder. This simply helps clarify the relationship. If nothing is needed immediately or for the foreseeable future, this does not mean the stakeholder group does not matter, but it can be a good indication that the stakeholder need not be prioritized at the moment.

Note that managers are often considering these questions in real time, usually with limited resources and power, and that circumstances can change in a matter of moments. In one sense, all representatives of a company are constantly practicing stakeholder prioritization. It need not be a formal process. At times, it is a question of which supplier should be praised or prodded or which customer has a larger order to fill or a special request that might be met. What matters is establishing that someone is a stakeholder, that the concern is currently important, and that the relationship matters for the growth of the business.

If the firm cannot survive without this particular stakeholder or replace him or her relatively easily, then such a person should have priority over other stakeholders who do not meet this criterion. Key suppliers, lucrative or steady customers, and influential regulators must all be attended to but not necessarily capitulated to. For example, a local state legislator representing the district where a business is located may be urging the legislature to raise business taxes to generate more revenue for the state. By him- or herself, the legislator may not have sufficient political clout to persuade the legislature to raise taxes. Yet wise business leaders will not ignore such a representative and will engage in dialogue with him or her. The legislator may eventually be able to win others over to the cause, so it behooves perceptive management to establish a working relationship with him or her.

Not every stakeholder can command constant attention, and no firm has unlimited time or resources, so in one sense, this prioritizing is simply the business of management. Combine the inherent priority of the stakeholder relationship with the level of exigency, that is, the level of urgency of a stakeholder claim, to arrive at a decision about where to begin focusing resources and efforts.

Stakeholder prioritization will also vary based on time and circumstance. For example, a large retailer facing aggressive new competitors must prioritize customer service and value. With Amazon acquiring Whole Foods and drastically cutting prices, the grocery chain’s customer base may very well grow because prices could become more attractive while the perception of high quality may persist. Potential customers may no longer need to economize by shopping elsewhere.

Whole Foods’ competitors, on the other hand, must now prioritize customer service, whereas before they could compete on price alone. Whole Foods can become a serious competitor to discount grocery stores like ALDI and Walmart.

Another way to prioritize stakeholder relationships is with a matrix of their power and interest. As (Figure) shows, a stakeholder group can be weighted on the basis of its influence (or power) over and interest in its relationship to the firm. A stakeholder with a high level of both power and interest is a key stakeholder. If this type of stakeholder group encounters a problem, its priority rises.

Stakeholder priority can be expressed as a relationship between the stakeholder group’s influence or power and the interest the stakeholder takes in the relationship. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This is a matrix chart showing the relationship between stakeholder power and stakeholder interest. The y-axis is labeled “Stakeholder power” and the x-axis is labeled “Stakeholder interest.” The graph area is divided into four even boxes, showing two columns and two rows. On top of two columns from left to right are the labels “Low interest” and “High interest” and to the right of the two rows from top to bottom are the labels “High power” and “Low power.” The box where low interest and high power intersect says “Keep satisfied, meet needs.” The box where high interest and high power intersect says “Keep engaged, manage closely.” The box where low interest and low power intersect says “Monitor lightly.” The box where high interest and low power interest says “Keep informed, respect interests.”

On the supplier side, a small farmer or seasonal supplier could fall in the low-power, low-interest category, particularly if that farmer were selling various retailers produce from his or her fields. However, if that same farmer could connect to a huge purveyor like Kroger, he or she could sell this giant customer its entire crop. This relationship places the farmer in the low-power, high-interest category, meaning he or she will most likely have to make price adjustments to make the sale.

The model’s focus on power reveals a need for any company to carefully cultivate relationships with stakeholders. Not all stakeholders have equal influence with a firm. Still, no organization can blithely ignore any stakeholder without potentially debilitating economic consequences. For example, now that Amazon has acquired Whole Foods and increased the size of the customer stakeholder group, it must also find ways to personalize its communications with this group, because personal service has traditionally been more a hallmark of Whole Foods than of Amazon.

Successful business practice today hinges on the ethical acknowledgement of stakeholder claims. It is the right thing to do. Not only that, it also engenders satisfied stakeholders, whether they be customers, stockowners, employees, or the community in which a firm is located. Naturally, satisfied stakeholders lead to the financial well-being of a company.

Managing Stakeholder Expectations

Stakeholder management does not work if the firm’s prioritizing decisions are based on flawed, inaccurate, or incomplete information. Some tools are available to help. MITRE is a nonprofit research and development consulting firm that helps governments and other large organizations with many stakeholders conduct stakeholder assessment. The MITRE Guide to Stakeholder Assessment and Management lays out a five-step system for stakeholder management.

Overall, MITRE stresses that an organization must sustain trust with its stakeholders through communication efforts. To accomplish this, however, stakeholders must first be clearly identified and then periodically reidentified, because stakeholder cohorts change in size and significance over time. The concerns or claims of stakeholders are identified through data gathering and analysis. Sometimes a firm will conduct surveys or focus groups with customers, suppliers, or other stakeholders. Other times, product usage data will be available as a function of sales figures and marketing data. For software in web and mobile applications, for example, user data may be readily available to show how stakeholders are using the company’s digital services or why they appear to be purchasing its products. Another source of stakeholder data is social media, where firms can monitor topics stakeholders of all types are talking about. What matters is gathering relevant and accurate data and ensuring that key stakeholders are providing it. In the next step, managers present the results of their research to the company’s decision makers or make decisions themselves.

Finally, stakeholders should be informed that their concerns were taken into consideration and that the company will continue to heed them. In other words, the firm should convey to them that they are important.

Malaysia Airlines

Malaysia Airlines is owned by individual investors and the Malaysian government, which took over the company in 2014 after two mysterious jet crashes. The airline has lost money and struggled since that time, going through three CEOs. The current CEO, Peter Bellew, is experienced in tourism and travel and has been asked to cut costs and increase revenues. His strategy is to maximize the number of Malaysian Muslims (who make up more than 60 percent of the population) flying to Mecca for hajj, the annual holy pilgrimage and an obligation for all Muslims who are well enough to travel and can afford the trip. Bellew plans to provide charter flights to make the pilgrimage easier on travelers.

Critical Thinking

  • Describe the passenger stakeholder claims on Malaysia Airlines.
  • Describe the government stakeholder claims on Malaysia Airlines.
  • What would you advise Bellew to identify as a priority—the demand from pilgrims for easy travel at a reduced price or the demand from the government for profitable operations? Explain your answer.

Because every firm, no matter its mission, ultimately depends on the marketplace, its clients or customers are often high-priority stakeholders. Ethically, the company owes allegiance to customer stakeholders, but it also has an opportunity and perhaps a responsibility to shape their expectations in ways that encourage its growth and allow it to continue to provide for employees, suppliers, distributors, and shareholders.

We should note, too, that nonprofit organizations are beholden, for the most part, to the same rules that apply to for-profits for their sustainability. Nonprofits typically provide a service that is just as dependent on cash flow as is the service or product of a for-profit. A significant difference, of course, is that the client or customer for a nonprofit’s service often is unable to pay for it. Therefore, the necessary cash must come from other sources, often in the form of donations or endowments. Hence, those who give to philanthropies constitute essential stakeholders for these nonprofits and must be acknowledged as such.

Wesley E. Lindahl, who studies and advises nonprofits, notes that philanthropies have an ethical obligation to safeguard the donations that come their way. He likens this to a stewardship, because the monies given to charities are gifts intended for others very much in need of them. So those who manage nonprofits have a special obligation to ensure that these donations are well spent and distributed appropriately.

There are three major components to bringing about change in customer or donor expectations: (1) customer receptivity to a product or service offered by the company, (2) acknowledgement of the gap between customer receptivity and corporate action to reduce it, and (3) a system to bring about and maintain change in customer desires to bring it in line with precisely what the corporation can deliver. One example of firms altering customers’ habits is the evolution of beverage containers. Most soft drinks and other beverages such as beer were once delivered in reusable glass bottles. Customers were motivated to return the bottles by the refund of a minimal cash deposit originally paid at the time of purchase. The bottles had to be thick and sturdy for reuse, which resulted in substantial transportation costs, due to their weight.

To reduce these costs of manufacturing and transportation, manufacturers first redesigned production to be local, and then, when technology allowed, introduced aluminum cans and pull tabs. Eventually, the cardboard carton that held bottles together was replaced by a plastic set of rings to hold aluminum cans together. Now, however, customers and other stakeholders object to the hazard these rings present to wildlife. Some firms have responded by redesigning their packaging yet again. This ongoing process of developing new packaging, listening to feedback, and redesigning the product over time ultimately changed stakeholder behavior and modernized the beverage industry. Stakeholders are essential parts of a cycle of mutual interest and involvement.

Going King Sized in the United States and Crashing on the Couch in China

IKEA is a multinational corporation with a proven track record of listening to stakeholders in ways that improve relationships and the bottom line. The Swedish company has had success in the United States and, more recently, in China by adapting to local cultural norms. For example, in the United States, IKEA solicited the concerns of many of its approximately fifty thousand in-store customers and even visited some at home. The company learned, among other things, that U.S. customers assumed IKEA featured only European-size beds. In fact, IKEA has offered king-size beds for years; they simply were not on display. IKEA then began to focus on displaying furniture U.S. consumers were more familiar with and so grew its bedroom furniture sales in 2012 and 2013.

As IKEA expands into China, it has welcomed a different trend—people taking naps on the furniture on display. “While snoozing is prohibited at IKEA stores elsewhere, the Swedish retailer has long permitted Chinese customers to doze off, rather than alienate shoppers accustomed to sleeping in public.”

Adapting to local culture, as these examples demonstrate, is one way a company can respond to stakeholder wishes. The firm abandons some of its usual protocols in exchange for increasing consumer identification with its products.

IKEA appears to have learned what many companies with a global presence have concluded: Stakeholders, and particularly consumer-stakeholders, have different expectations in different geographic settings. Because a firm’s ethical obligations include listening and responding to the needs of stakeholders, it behooves all international companies to appreciate the varying perspectives that geography and culture may produce among them.

Critical Thinking

  • Does IKEA have a system to influence stakeholder behavior? If so, describe the system and explain who changes more under the system, IKEA or its consumers.
  • Does IKEA’s strategy reflect a normative approach to managing stakeholder claims? If so, how?

The ethical responsibility of a stakeholder is to make known his or her preferences to the companies he or she purchases from or relies on. Such communication can lead to an increased commitment on the part of corporations to improve. To the extent they do so, companies act more ethically in responding to the wishes and needs of their stakeholders.

Summary

Business leaders prioritize those stakeholders who have immediate needs or high urgency or great significance to the organization, and the identity of these groups may shift over time. Stakeholders can also be prioritized on the basis of their relationship to the organization using a matrix of their power and interest. Steps in the MITRE stakeholder management process are to establish trust, identify stakeholders, gather and analyze appropriate data, present information to management, and let stakeholders know they matter. Because customers are often considered high-priority stakeholders, it can be essential for corporations and nonprofit organizations to manage any expectations that customers (or donors) may have.

Assessment Questions

What is the most important quadrant in the influence/interest matrix, and why?

The high-power, high-interest quadrant is most important because it represents stakeholders who both are highly interested in their relationship with the firm and have a high level of power or influence in the relationship.

In correct order, the stakeholder management steps adapted from the approach of the MITRE consulting firm are to ________.

  1. build trust, identify stakeholders, prioritize claims, visualize changes, and perform triage
  2. build trust, identify stakeholders, gather and analyze data, present results, make changes, and prepare a communication strategy
  3. build trust, identify stakeholders, gather and analyze data, present findings to management, and communicate key messages to stakeholders conveying the company’s appreciation of them
  4. identify stakeholders, gather and analyze data, make changes, and present results

C

True or false? Stakeholder management practice ultimately is about valuing stakeholder contributions to a firm, no matter how significant, inspired, or influential that contribution might not be.

True

Endnotes

1Nathaniel Meyersohn, “Why Kroger Is Making Its Own Clothes,” CNN Money, November 3, 2017. http://money.cnn.com/2017/11/03/news/companies/kroger-clothes/index.html.
2“Systems Engineering Guide. Stakeholder Assessment and Management,” MITRE. https://www.mitre.org/publications/systems-engineering-guide/enterprise-engineering/transformation-planning-and-organizational-change/stakeholder–assessment-and-management (accessed May 1, 2018).
3“Systems Engineering Guide. Stakeholder Assessment and Management,” MITRE. https://www.mitre.org/publications/systems-engineering-guide/enterprise-engineering/transformation-planning-and-organizational-change/stakeholder–assessment-and-management (accessed May 1, 2018).
4John Anthony, “Malaysia Airlines Prepares for Rebranding, CEO Mueller Says,” Stuff, October 2, 2015. https:www.stuff.co.nz/business/industries/72625417/Malaysia-Auirlines-prepares-for-rebranding-CEO-Christoph-Mueller-says.
5Wesley E. Lindahl, “The Fundraising Process,” in Understanding Nonprofit Organizations, 2nd ed, eds. J. Steven Ott and Lisa A. Dicke (Philadelphia: Westview Press, 2012), 123.
6Jenna Goudreau, “How IKEA Leveraged the Art of Listening to Global Dominance,” Forbes, January 30, 2013. https://www.forbes.com/sites/jennagoudreau/2013/01/30/how-ikea-leveraged-the-art-of-listening-to-global-dominance/#6ab8eefc2b09.
7Dan Levin, “Shh. It’s Naptime at Ikea in China,” New York Times, August 26, 2016. https://www.nytimes.com/2016/08/27/world/what-in-the-world/shh-its-naptime-at-ikea-in-china.html.

Glossary

exigency
the level of urgency of a stakeholder claim
stakeholder management
the process of accurately assessing stakeholder claims so an organization can manage them effectively
stakeholder prioritization
the process of deciding which stakeholders to focus on and in what sequence

Corporate Social Responsibility (CSR)

16

Learning Objectives

By the end of this section, you will be able to:

  • Define corporate social responsibility and the triple bottom line approach
  • Compare the sincere application of CSR and its use as merely a public relations tool
  • Explain why CSR ultimately benefits both companies and their stakeholders

Thus far, we have discussed stakeholders mostly as individuals and groups outside the organization. This section focuses on the business firm as a stakeholder in its environment and examines the concept of a corporation as a socially responsible entity conscious of the influences it has on society. That is, we look at the role companies, and large corporations in particular, play as active stakeholders in communities. Corporations, by their sheer size, affect their local, regional, national, and global communities. Creating a positive impact in these communities may mean providing jobs, strengthening economies, or driving innovation. Negative impacts may include doing damage to the environment, forcing the exit of smaller competitors, and offering poor customer service, to name a few. This section examines the concept of a corporation as a socially responsible entity conscious of the influences it has on society.

Corporate Social Responsibility Defined

In recent years, many organizations have embraced corporate social responsibility (CSR), a philosophy (introduced in Why Ethics Matter,) in which the company’s expected actions include not only producing a reliable product, charging a fair price with fair profit margins, and paying a fair wage to employees, but also caring for the environment and acting on other social concerns. Many corporations work on prosocial endeavors and share that information with their customers and the communities where they do business. CSR, when conducted in good faith, is beneficial to corporations and their stakeholders. This is especially true for stakeholders that have typically been given low priority and little voice, such as the natural environment and community members who live near corporate sites and manufacturing facilities.

CSR in its ideal form focuses managers on demonstrating the social good of their new products and endeavors. It can be framed as a response to the backlash corporations face for a long track record of harming environments and communities in their efforts to be more efficient and profitable. Pushback is not new. Charles Dickens wrote about the effects of the coal economy on nineteenth-century England and shaped the way we think about the early industrial revolution. The twentieth-century writer Chinua Achebe, among many others, wrote about colonization and its transformative and often painful effect on African cultures. Rachel Carson first brought public attention to corporation’s chemical poisoning of U.S. waterways in her 1962 book Silent Spring.

Betty Friedan’s The Feminine Mystique (1963) critiqued the way twentieth-century industrialization boxed women into traditional roles and limited their agency. Kate Chopin’s novel The Awakening (1899) and the nineteenth-century novels of Jane Austen had already outlined how limited options were for women despite massive social and economic shifts in the industrializing West. Stakeholder communities left out of or directly harmed by the economic revolution have demanded that they be able to influence corporate and governmental economic practices to benefit more directly from corporate growth as well as entrepreneurship opportunities. The trend to adopt CSR may represent an opportunity for greater engagement and involvement by groups mostly ignored until now by the wave of corporate economic growth reshaping the industrialized world.

CSR and the Environment

Corporations have responded to stakeholder concerns about the environment and sustainability. In 1999, Dow Jones began publishing an annual list of companies for which sustainability was important. Sustainability is the practice of preserving resources and operating in a way that is ecologically responsible in the long term.

The Dow Jones Sustainability Indices “serve as benchmarks for investors who integrate sustainability considerations into their portfolios.”

There is a growing awareness that human actions can, and do, harm the environment. Destruction of the environment can ultimately lead to reduction of resources, declining business opportunities, and lowered quality of life. Enlightened business stakeholders realize that profit is only one positive effect of business operations. In addition to safeguarding the environment, other ethical contributions that stakeholders could lobby corporate management to make include establishing schools and health clinics in impoverished neighborhoods and endowing worthwhile philanthropies in the communities where companies have a presence.

Other stakeholders, such as state governments, NGOs, citizen groups, and political action committees in the United States apply social and legal pressure on businesses to improve their environmental practices. For example, the state of California in 2015 enacted a set of laws, referred to as the California Transparency in Supply Chains Act, which requires firms to report on the working conditions of the employees of their suppliers. The law requires only disclosures, but the added transparency is a step toward holding U.S. and other multinational corporations responsible for what goes on before their products appear in shiny packages in stores. The legislators who wrote California’s Supply Chains Act recognize that consumer stakeholders are likely to bring pressure to bear on companies found to use slave labor in their supply chains, so forcing disclosure can bring about change because corporations would rather adjust their relationships with supply-chain stakeholders than risk alienating massive numbers of customers.

As instances of this type of pressure on corporations increase around the world, stakeholder groups become simultaneously less isolated and more powerful. Firms need customers. Customers need employment, and the state needs taxes just as firms need resources. All stakeholders exist in an interdependent network of relationships, and what is most needed is a sustainable system that enables all types of key stakeholders to establish and apply influence.

People, Planet, Profit: The Triple Bottom Line

How can corporations and their stakeholders measure some of the effects of CSR programs? The triple bottom line (TBL) offers a way. TBL is a measure described in 1994 by John Elkington, a British business consultant ((Figure)), and it forces us to reconsider the very concept of the “bottom line.” Most businesses, and most consumers for that matter, think of the bottom line as a shorthand expression of their financial well-being. Are they making a profit, staying solvent, or falling into debt? That is the customary bottom line, but Elkington suggests that businesses need to consider not just one but rather three measures of their true bottom line: the economic and also the social and environmental results of their actions. The social and environmental impacts of doing business, called people and planet in the TBL, are the externalities of their operations that companies must take into account.

The three components of the triple bottom line are interrelated. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This graphic shows a three dimensional line pyramid in the center. At the top of the pyramid is a box labeled “Company.” At each of the three bottom corners of the pyramid are boxes. Starting on the left and going counter-clockwise around the pyramid, the box is labeled “Social” and has three bullets that say “employee well-being,” “fair trade,” and “community stakeholder.” The next box is labeled “Economic” and has three bullets that say “revenue,” “growth,” and “cost.” The last box is labeled “Environmental” and has three bullets that say “land use,” “carbon footprint,” and “waste.”

The TBL concept recognizes that external stakeholders consider it a corporation’s responsibility to go beyond making money. If increasing wealth damages the environment or makes people sick, society demands that the corporation revise its methods or leave the community. Society, businesses, and governments have realized that all stakeholders have to work for the common good. When they are successful at acting in a socially responsible way, corporations will and should claim credit. In acting according to the TBL model and promoting such acts, many corporations have reinvested their efforts and their profits in ways that can ultimately lead to the development of a sustainable economic system.

CSR as Public Relations Tool

On the other hand, for some, CSR is nothing more than an opportunity for publicity as a firm tries to look good through various environmentally or socially friendly initiatives without making systemic changes that will have long-term positive effects. Carrying out superficial CSR efforts that merely cover up systemic ethics problems in this inauthentic way (especially as it applies to the environment), and acting simply for the sake of public relations is called greenwashing. To truly understand a company’s approach toward the environment, we need to do more than blindly accept the words on its website or its advertising.

When an Image of Social Responsibility May Be Greenwashing

Ben and Jerry’s Ice Cream started as a small ice cream stand in Vermont and based its products on pure, locally supplied dairy and agricultural products. The company grew quickly and is now a global brand owned by Unilever, an international consumer goods company co-headquartered in Rotterdam, The Netherlands, and London, United Kingdom.

According to its statement of values, Ben and Jerry’s mission is threefold: “Our Product Mission drives us to make fantastic ice cream—for its own sake. Our Economic Mission asks us to manage our Company for sustainable financial growth. Our Social Mission compels us to use our Company in innovative ways to make the world a better place.”

With its expansion, however, Ben and Jerry’s had to get its milk—the main raw ingredient of ice cream—from larger suppliers, most of which use confined-animal feeding operations (CAFOs). CAFOs have been condemned by animal-rights activists as harmful to the well-being of the animals. Consumer activists also claim that CAFOs contribute significantly to pollution because they release heavy concentrations of animal waste into the ground, water sources, and air.

Critical Thinking

  • Does the use of CAFOs compromise Ben and Jerry’s mission? Why or why not?
  • Has the growth of Ben and Jerry’s contributed to any form of greenwashing by the parent company, Unilever? If so, how?

Coca-Cola provides another example of practices some would identify as greenwashing. The company states the following on its website:

“Engaging our diverse stakeholders in long-term dialogue provides important input that informs our decision making, and helps us continuously improve and make progress toward our 2020 sustainability goals . . . We are committed to ongoing stakeholder engagement as a core component of our business and sustainability strategies, our annual reporting process, and our activities around the world. As active members of the communities where we live and work, we want to strengthen the fabric of our communities so that we can prosper together.”

Let us take a close look at this statement. “Engaging stakeholders in long-term dialogue” appears to describe an ongoing and reciprocal relationship that helps improvement be continuous. Commitment to “stakeholder engagement as a core component of business and sustainability strategies” appears to focus the company on the requirement to conduct clear, honest, transparent reporting.

Currently 20 percent of the people on Earth consume a Coca-Cola product each day, meaning a very large portion of the global population belongs to the company’s consumer stakeholder group. Depending on the process and location, it is estimated that it takes more than three liters of water to produce a liter of Coke. Each day, therefore, millions of liters of water are removed from the Earth to make Coke products, so the company’s water footprint can endanger the water supplies of both employee and neighbor stakeholders. For example, in Chiapas, Mexico, the Coca-Cola bottling plant consumes more than one billion liters of water daily, but only about half the population has running water.

Mexico leads the world in per capita consumption of Coke products.

If consumers are aware only of Coca-Cola’s advertising campaigns and corporate public relations writings online, they will miss the very real concerns about water security associated with it and other corporations producing beverages in similar fashion. Thus it requires interest on the part of stakeholders to continue to drive real CSR practices and to differentiate true CSR efforts from greenwashing.

The Ultimate Stakeholder Benefit

CSR used in good faith has the potential to reshape the orientation of multinational corporations to their stakeholders. By positioning themselves as stakeholders in a broader global community, conscientious corporations can be exemplary organizations. They can demonstrate interest and influence on a global scale and improve the way the manufacture of goods and delivery of services serve the local and global environment. They can return to communities as much as they extract and foster automatic financial reinvestment so that people willing and able to work for them can afford not only the necessities but a chance to pursue happiness.

In return, global corporations will have sustainable business models that look beyond short-term growth forecasts. They will have a method of operating and a framework for thinking about sustained growth with stakeholders and as stakeholders. Ethical stakeholder relationships systematically grow wealth and opportunity in dynamic fashion. Without them, the global consumer economy may fail. On an alternate and ethical path of prosperity, today’s supplier is a consumer in the next generation and Earth is still inhabitable after many generations of dynamic change and continued global growth.

Summary

Most organizations must practice genuine corporate social responsibility to be successful in the modern marketplace. The triple bottom line places people and the planet on equal standing with profit in the mission of an organization. The genuine practice of CSR, unlike greenwashing, requires a commitment to an additional stakeholder, the planet, whose continued healthy existence is essential for any organization to operate.

Assessment Questions

Name the three components of the triple bottom line.

The three components are people, profit, and planet.

What does the California Transparency in Supply Chains Act require of businesses that operate in California?

The California Act requires businesses that operate in California to describe for consumers all components and activities of their supply chains.

True or false? Corporate social responsibility is a voluntary action for companies.

True

The Dow Jones Sustainability Indices provides information for ________.

  1. investors who seek quick profit
  2. investors who seek long-term returns
  3. investors who value CSR in companies
  4. marketing promotions of each of its members

C

Endnotes

1Victoria Knowles, “What’s the Difference Between CSR and Sustainability?” 2degrees, March 25, 2014. https://www.2degreesnetwork.com/groups/2degrees-community/resources/whats-difference-between-csr-and-sustainability/.
2“Dow Jones Sustainability Indices,” RobecoSAM. http://www.sustainability-indices.com/index-family-overview/djsi-family-overview/#tab-1 (accessed August 5, 2018); “Results Announced for 2017 Dow Jones Sustainability Indices Review,” RobecoSAM, September 7, 2017. http://www.sustainability-indices.com/images/170907-djsi-review-2017-en-vdef.pdf.
3Kamala Harris, “The California Transparency in Supply Chains Act. A Resource Guide,” California Department of Justice, 2015. https://oag.ca.gov/sites/all/files/agweb/pdfs/sb657/resource-guide.pdf.
4Coca-Cola Company, “2016 Sustainability Report: Stakeholder Engagement,” August 18, 2017. http://www.coca-colacompany.com/stories/stakeholder-engagement#2.
5Martha Pskowski, “Coca-Cola Sucks Wells Dry in Chiapas, Forcing Residents to Buy Water,” Salon, September 16, 2017. https://www.salon.com/2017/09/16/coca-cola-sucks-wells-dry-in-chiapas-forcing-residents-to-buy-water_partner/.

Glossary

greenwashing
carrying out superficial CSR efforts that merely cover up systemic ethics problems for the sake of public relations
triple bottom line (TBL)
a measure that accounts for an organization’s results in terms of its effects on people, planet, and profits

Three Special Stakeholders: Society, the Environment, and Government

IV

Introduction

17

The Japanese concept of nemawashi broadly means “laying the groundwork” or “building strong roots.” In a business ethics context, nemawashi means building a strong foundation for an action or project by reaching out to all stakeholders and seeking their input, demonstrating how much the organization values their opinion as it builds support from the ground up. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


A tree grows centered in front of a row of houses. The tree’s roots spread out underground, extending the width of the row of houses in both directions.

Good business leaders know that a commitment to sustainability and corporate social responsibility (CSR) requires a strong foundation, one upon which a company can build and expand its commitment to every aspect of the organization.

Companies that truly intend to incorporate CSR into their long-term strategy start by soliciting input from a large and diverse group of stakeholders, followed by a transparent process of implementation, commitment, and enforcement. Corporate social responsibility is more than just another policy; it’s a philosophy, capturing the essence of nemawashi, or “building strong roots” ((Figure)). CSR also demonstrates that a company is willing to commit the financial and human resources necessary to make it a reality, rather than just a talking point.

This chapter looks at sustainability and CSR from the perspective of a diverse constituency, including managers, employees, investors, government regulators, competitors, customers and clients, the community, and the environment. If you were a CEO, would you be willing to commit the time and money to incorporate CSR the right way in your company? Why might some businesses hesitate to use a nemawashi-style approach?

Endnotes

1Patrick Moorhead, “Cisco’s CSR Program under CEO Chuck Robbins Is Flourishing,” Forbes, March 9, 2016. https://www.forbes.com/sites/patrickmoorhead/2016/03/09/ciscos-csr-program-under-ceo-chuck-robbins-is-flourishing/#46e003c2574e.

Corporate Law and Corporate Responsibility

18

Learning Objectives

By the end of this section, you will be able to:

  • Explain how investors and owners benefit from doing business as a corporate entity
  • Define the concept of shareholder primacy
  • Discuss the conflict between shareholder primacy and corporate social responsibility

Corporate law, which enables businesses to take advantage of a legal structure that separates liability from ownership and control, was introduced in most states in the nineteenth century. The separation of ownership and liability means that, unlike sole proprietors and members of partnerships, owners of modern business corporations enjoy the advantage of limited liability for the corporation’s debts and other financial obligations, a concept at the heart of a U.S. economic system built on capitalism.

The Advantages of Corporate Status

The concept of limited liability means that the owners (shareholders or stockholders) of corporations, as well as directors and managers, are protected by laws stating that in most circumstances, their losses in case of business failure cannot exceed the amount they paid for their shares of ownership ((Figure)). The same protection applies to owners of some other business entities such as limited liability companies (LLCs). An LLC is similar to a corporation in that owners have limited liability; however, it is organized and managed more like a partnership. For purposes of granting owners the protection of limited liability, several types of entities are possible within each state, including a corporation, an LLC, a limited liability partnership, and a limited partnership.

Corporate shareholders elect directors who appoint the company’s officers—all of whom benefit from limited liability. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


A diagram showing the relationship of corporate directors to limited liability. A large centered circle is labeled “Corporation”. Just overlapping the “Corporation” circle on the left edge is a circle labeled “Directors”. Just overlapping the “Corporation” circle on the top edge is a circle labeled “Shareholders”. Just overlapping the “Corporation” circle on the right edge is a circle labeled “Officers”. An arrow extends from the “Shareholders” circle to the “Directors” circle. An arrow extends from the “Directors” circle to the “Officers” circle. Inside the bottom edge of the “Corporation” circle is a circle labeled “Liability is limited to corporate assets”.

Without state incorporation laws, business owners would be subject to personal liability for business losses, which could create several disadvantages. Ownership would be riskier, so owners could have more difficulty selling their ownership interests. They could also be subject to a pro rata share of income taxes. These types of personal financial liability could limit the ability of businesses to raise capital by selling stock. Limited liability, by reducing the amount a shareholder can lose from investing in a corporation by buying its stock, increases the investment’s attractiveness to potential new shareholders. Ultimately, corporate status increases both the potential number of willing investors and the amount of capital they are likely to invest. After all, would you be willing to invest your money in a business if you knew not only that you could lose the capital you invested, but also that you could be sued personally for any and all debts of the business?

Corporate status is conferred upon a business by state law (statute) when a state issues the business a charter of incorporation. The protective shield of corporate status enables businesses to socialize their losses in a way that traditional proprietorships and partnerships are not able to do. Socializing a loss is a means to amortize it or spread it out over society in general, so the owners do not absorb it individually. Amortization is similar to the idea behind insurance, in which many people bear a small share in a loss, rather than one or a few people bearing all of it. Therefore, it is accurate to say that society enables corporations to exist, both by passing laws that create them and by limiting the financial risk exposure of their owners. Since our society grants for-profit businesses the right to incorporate and make unlimited profits with limited liability, a reasonable person could conclude that corporations owe a debt to society in return. Corporations’ quid pro quo—a Latin term meaning this for that—is acceptance of corporate social responsibility, to benefit the many stakeholders to whom corporations may owe a duty, including customers, the community, the environment, employees, media, and the government ((Figure)).

A corporation’s typical stakeholders include (but are not limited to) its customers or clients, the community in which it operates, the natural environment, its employees, the media, and the government. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


A diagram showing typical stakeholders. In the center is a circle labeled “Business Corporations”. Around the “Business Corporations” circle are six circles labeled “Government”, “Environment”, “Community”, “Media”, “Customers”, and “Employees”.

Balancing the Many Responsibilities of a Corporation

A longstanding ethical debate about corporate social responsibility asks whether, in fact, a corporation owes a duty to society or only to its shareholders. The line of important court cases shaping this issue spans almost a century and includes a series of landmark cases involving the Ford Motor Company, the Wrigley Company, and Hobby Lobby.

In Dodge v. Ford Motor Company (1919), the Michigan Supreme Court ruled in favor of shareholder primacy, saying that founder Henry Ford must operate the Ford Motor Company primarily in the profit-maximizing interests of its shareholders.

In the traditional corporate model, a corporation earns revenue and, after deducting expenses, distributes the profits to shareholders in the form of dividends. Ford had announced that his company would stop paying big dividends to shareholders and instead would use its profits to achieve several other goals, including improving product quality, expanding company facilities, and perhaps most surprisingly, lowering prices. Shareholders then sued Ford, asking the court to order Ford Motor Company to continue allocating the lion’s share of profits to high dividend payments. (It is ironic that the named shareholders who sued Ford were the Dodge brothers, former Ford suppliers who had recently started their own car company.)

At the trial, Ford ((Figure)) testified that he believed his company was sufficiently profitable to consider its broader obligation and engage in activities to benefit the public, including its workers and customers. This was a unique position for the founder and primary owner of a large corporation to take in the early twentieth century. During the rise of capitalism in the United States, most owners sought only to maximize profits, because that was the primary basis of their ability to attract capital and to reinvest in the company. Most investors were interested in a healthy return on their investment, rather than any type of social good. Shareholders contended that the concern Ford expressed for his workers and customers was both improper and illegal. The court agreed, and Ford was forced to abandon his managerial goal of balancing profits and realizing broader social goals.

In 1913, workers are shown laboring on a Ford assembly line (a) in Highland Park, Michigan. In Dodge v. Ford Motor Company (1919), the Michigan Supreme Court ruled that Henry Ford (b) must operate the Ford Motor Company primarily in the profit-maximizing interests of its shareholders rather than in the broader interests of his workers and customers. (credit a: modification of “Ford assembly line – 1913” by unknown/Wikimedia Commons, Public Domain; credit b: modification of “Portrait of Henry Ford” by Hartsook/Wikimedia Commons, Public Domain)


Part A shows a line of people assembling products. Part B shows Henry Ford.

Ironically, in the same case, the court upheld the validity of a doctrine known as the business judgment rule, a common-law principle stating that officers, directors, and managers of a corporation are not liable for losses incurred when the evidence demonstrates that decisions were reasonable and made in good faith, which gives corporate management latitude in deciding how to run the company.

Essentially, the business judgment rule holds that a court will not second-guess the decisions of a company’s managers or directors.

The legality and appropriateness of social responsibility as a business policy have followed a long and winding road since 1919. In the 1950s and 1960s, for example, some state courts rejected the shareholder primacy doctrine, instead ruling that a broad interpretation of the business judgment rule allowed managers discretion when it came to allocating company assets, including using them for programs demonstrating social awareness.

In 1968, in a highly publicized case, the court ruled that the board of directors of the Wrigley Company, of baseball and chewing gum fame, had a significant amount of discretion in determining how to balance the interests of stakeholders.

The case of Shlensky v. Wrigley (1968) revolved around William Wrigley Jr.’s ownership of the Chicago Cubs. The baseball team had steadfastly refused to install the lights necessary for playing night games at Wrigley Field, even though every other stadium in major league baseball had lights. Instead, the Cubs had respected the local community’s belief that night baseball games and their associated lights would negatively affect the surrounding neighborhood, creating more opportunities for crime. In the view of some investors, however, the Cubs’ decision was depressing profits for shareholders. The shareholders brought a challenge against the Wrigley Company, but the Cubs’ owners won the case.

The Wrigley case represented a shift from the idea that corporations should pursue only the maximization of shareholder value, as had been held in the Ford Motor Company case.

As a follow-up to this case, lights were finally installed at Wrigley Field in 1988, but only after the owner, William Wrigley III, had sold the team (in 1981) to the Tribune Company, a large media conglomerate that fought for six years to install lights. However, the case stands as precedent for the ability of management to balance various interests and profits when making decisions.

Dodge v. Ford (1919) and Shlensky v. Wrigley (1968) established the dynamic nature of the debate over the shareholder primacy doctrine and indicated a shift in both legal thought and precedent toward allowing management greater latitude in deciding how to best manage a corporation. A more recent decision, Burwell v. Hobby Lobby (2014), demonstrated what some may consider the double-edged sword of this latitude.

In a 5–4 decision in favor of Hobby Lobby, the Supreme Court ruled that some corporations (those that are closely held by a few shareholders) can object on ethical, moral, or religious grounds to the Affordable Care Act’s rule that health insurance policies must cover various forms of contraception; such companies can elect not to offer such coverage.

The majority opinion in the case was written by Justice Samuel Alito, joined by Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas, and Anthony Kennedy. In essence, the Court ruled that business owners could place their personal values first and follow their own agenda. The case received a great deal of publicity, some of it quite negative. Essentially, the Court held in this case that “corporate law does not require for-profit corporations to pursue profit at the expense of everything else,”

similar to the ruling in the Chicago Cubs/Wrigley Field case.

The decision was a victory for the family that owns Hobby Lobby and has been praised by some and criticized by others for expanding the rights of corporate owners. Some analysts believe it represents more than just an expansion of management prerogative and enlarges the right of corporations to be treated as a “person.” The Hobby Lobby case can be interpreted to mean the people who control corporations (owners and/or management) may act on their own values in a way that might well be inconsistent with the interests of employees and other minority shareholders. In the majority decision, Alito wrote, “A corporation is simply a form of organization used by human beings to achieve desired ends. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people.”

Hobby Lobby is primarily owned by one family, and Alito’s comments seem to suggest that another interpretation would limit the applicability of the case to only closely held corporations, in which the majority of the stock is owned by a small number of shareholders.

Some might think Henry Ford’s attempt to forego profits in order to pay workers higher wages was a good choice but not find Hobby Lobby’s preference for limiting female employees’ health insurance benefits on religious grounds to be so. However, the law must be interpreted logically: If you give management the prerogative to put one social issue ahead of profits, should management not also be able to pursue any social issue of its choosing? An extension of the logic used in the Hobby Lobby case could lead to an expansion of the corporate rights of the personhood doctrine, for example, by allowing the individual right to privacy to become a shield against regulatory scrutiny by government agencies (although a corporation is not a natural person).

Another potential problem with giving management greater rights to pursue social agendas is protecting the interests of minority shareholders who disagree with the majority. Since corporation law is state law, the protections for minority shareholders vary widely, but owners of a small number of shares have little or no power to influence the choices the corporation makes. Some states allow cumulative voting for seats on the board of directors, which increases minority shareholder power. Others permit buyouts or dissolution statutes that apply to closely held corporations. However, in a traditional large corporation, none of these protections for minority interests are likely to apply. Of course, another option is for disgruntled shareholders to sell their shares.

The Two Sides of the Corporate Responsibility Debate

The issue of corporate social responsibility is the subject of high-level global discussion and debate among leaders in the public and private sectors, such as the World Economic Forum Annual Meeting in Davos, Switzerland. Numerous respected academic centers also hold forums on CSR, such as the Center on Democracy, Development, and the Rule of Law at Stanford University and the Harvard Law School Forum on Corporate Governance and Financial Regulation.

As we have seen, slow but steady acceptance of CSR as a legitimate business concept has led to the legal and ethical position that corporate directors and managers may exercise business judgment and discretion in running a corporation. This development has come about for multiple reasons: a) the fact that society allows LLCs to exist, b) the sheer magnitude of the economic power corporations possess, and c) the desire of corporations to act responsibly in order to avoid more extensive government regulation. Managers are usually accorded significant latitude as long as they can point to a rational interpretation of their actions as benefiting the corporation as a whole in the long term. The combination of economic and political power in the world’s largest corporations necessitates that executives consider the interests of a broader set of stakeholders, rather than only stockholders. Indeed, social, environmental, and charitable programs often create shareholder value rather than take away from it. And honoring obligations to all stakeholders in a corporation—including those who own no stock shares—is the moral minimum a firm must undertake to satisfy the base threshold for acting ethically.

A recent study by researchers at Princeton and the University of Texas indicates that corporations benefit from following CSR policies in multiple ways.

These benefits are collectively called a “halo effect” and can add value to the business. As an example, consumers frequently take CSR spending as an indirect indicator that a company’s products are of high quality, and often they are also more willing to buy these products as an indirect way of donating to a good cause.

However, some economists, such as Milton Friedman, Henry Hazlitt, Adam Smith, and others, have argued that CSR initiatives based on environmental or social justice instead limit shareholder wealth.

The Nobel Prize-winning economist Milton Friedman (1912–2006) believed shareholders should be able decide for themselves what social initiatives to donate to or to take part in, rather than having a business executive decide for them. He argued that both government regulation and corporate social initiatives allow an outside third party to make these choices for shareholders.

In Friedman’s opinion, too much power assumed by corporate management in pursuing a social agenda might ultimately lead to a form of corporate autocracy. Supporters of the profit maximization principle believe it is a waste of corporate resources to reduce air pollution below the level required by law, to require vendors to participate in a sustainable supply chain initiative, or to pay lower-level employees a salary above the legally mandated minimum wage. Friedman asserted that “doing good deeds” is not the job of corporations; it is the right of those people who want to do them but should not be imposed on those who do not. His philosophy asserts that socially oriented initiatives are analogous to a form of outside regulation, resulting in higher costs to those corporations that follow socially responsible policies.

When Friedman was laying out this position in the 1970s, it reflected the prevailing opinion of a majority of U.S. shareholders and commentators on corporate law at that time. In the years since then, however, Friedman’s perspective has fallen into disfavor. This does not invalidate his point of view, but it does demonstrate that public opinion about corporations is subject to change over time. The subjectivity or relativity with which we view companies along with their perceived rights and responsibilities is a major theme this text addresses.

Do corporate directors owe a specific fiduciary duty to shareholders? A fiduciary duty is a very high level of legal responsibility owed by those who manage someone else’s money, which includes the duties of care and loyalty. Some examples of relationships that include a fiduciary duty are those between a trustee of an estate and its beneficiary, and between a fund manager and a client. According to the American Bar Association, the business judgment rule states “that as fiduciaries, corporate directors owe the corporation and its shareholders fiduciary duties of diligence and fidelity in performing their corporate duties. These fiduciary obligations include the duty of care and the duty of loyalty . . . the duty of care consists of an obligation to act on an informed basis; the duty of loyalty requires the board and its directors to maintain, in good faith, the corporation’s and its shareholders’ best interests over anyone else’s interests.”

So it would seem that the answer is yes, corporate directors do have a specific fiduciary duty to promote the best interests of the corporation. But what exactly does that duty entail? Does that specifically mean returning profits to shareholders in the form of dividends? As we have seen, these questions have frequently spilled over into the courts, in the form of shareholder lawsuits challenging the actions of directors and/or management.

UCLA law professor Steven Bainbridge wrote in the New York Times: “If directors were allowed to deviate from shareholder wealth maximization, they would inevitably turn to indeterminate balancing standards, which provide no accountability.”

As support for his position, Bainbridge pointed to a 2010 case, eBay Domestic Holdings Inc. v. Newmark, in which a Delaware court ruled that corporate directors are bound by fiduciary duties and standards that include “acting to promote the value of the corporation for the benefit of its stockholders.”

However, Lynn Stout, a professor at Cornell University Law School, wrote a contrasting piece in the New York Times in which she said, “There is a common belief that corporate directors have a legal duty to maximize corporate profits and shareholder value—even if this means skirting ethical rules, damaging the environment or harming employees. But this belief is utterly false. Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not.”

Her opinion is based in part on the Hobby Lobby decision referenced above.

Thus, while ethicists may agree that corporations do indeed owe social responsibilities to society, legal experts still differ over this point. The fact that we have seen inconsistent decisions from the courts over the last century confirms the lack of legal consensus. Of course, both legal and ethical opinion are always in flux, so where the debate stands today in no way indicates where it will be in ten years. On this issue, public opinion, as well as that of politicians and even the courts, is like a pendulum swinging back and forth, usually between points of view that are center-right or center-left, rather than at the extremes. However, the pendulum is reset every so often, and the arc within which it swings may differ from era to era.

Unilever “Enhancing Livelihoods” through Project Shakti

According to management guru Peter Drucker, whose ideas significantly contributed to the foundations of thought about the workings of the modern business corporation, workers “need to know the organization’s mission and to believe in it.” How do organizations ensure this commitment? By satisfying workers’ values.

A program undertaken by Unilever, the Dutch-British multinational company co-headquartered in Rotterdam and London, illustrates the kind of values-oriented corporate endeavor Drucker describes. Project Shakti is a Unilever CSR initiative in India that links corporate social responsibility and financial opportunities for local women.

It is considered a leading example of micro-entrepreneurship, and it expands the concept of sustainability to include not only environmental issues but also economic opportunity and financial networking in underdeveloped areas.

The goal, according to Unilever, is to give rural Shakti women the ability to earn money for themselves and their families as micro-entrepreneurs. Unilever’s subsidiary in India, Hindustan Lever, has started training programs for thousands of women in small towns and villages across India to help them understand how to run their own small sole proprietorships as distributors of the company’s products. With support from a team of rural sales managers, women who had been unable to support themselves are now becoming empowered by learning how a supply chain works, what products Hindustan Lever produces, and how to distribute them. The sales managers also act in a consulting capacity to help with business basics, money management, negotiations, and related skills that help the women run their businesses effectively.

The program was so successful that Unilever expanded it to include Shakti men, typically the sons, brothers, or husbands of the women already running businesses. The men, who are essentially like delivery drivers, sell Unilever products using bicycles for transportation, enabling them to cover a larger area than women cover on foot. The women spend most of their time running the business.

Project Shakti has enlisted more than 100,000 rural participants, which includes about 75,000 women. The project has changed their lives in ways that are profound, and not only because of the income earned. The women now have increased self-esteem based on a sense of empowerment, and they finally feel they have a place in Indian society. According to the Unilever Sustainable Living Plan, Project Shakti is one of the best and most sustainable ways the company can address women’s social concerns. It allows Unilever to conduct business in a socially responsible manner, helping women to help themselves while extending the reach of its products.

Critical Thinking

  • Do you believe Unilever sponsors the Shakti program to help women, to boost its own profits, or both? Explain your answer.
  • If Unilever has mixed motives, does this discredit the company in your eyes? Should it?
  • How is this program an example of both corporate and personal sustainability?
  • Could this model program be duplicated elsewhere, in another area and with different products? Why or why not?

It is clear that many different stakeholders value corporate social responsibility, including some investors, shareholders, employees, customers, and suppliers. Indeed, some businesses look at CSR as providing a perfect long-term strategic opportunity to strengthen company fundamentals while contributing to society at the same time. Effective corporate leaders will get try to get investors on board with the idea of CSR, avoiding or minimizing the potential for any litigation related to maximization of profits. And innovative companies are finding ways to create value for both the business and society simultaneously.

Data analysis indicates that following a policy of corporate social responsibility does not have to mean losing money; on the contrary, many corporations that use an ethical approach to doing business are actually quite profitable. Mutual funds, recognizing that investors care about sustainable investing, now offer socially responsible funds, and third-party ratings companies, such as Morningstar, rate the funds so potential investors can evaluate how well the companies in them are meeting environment, social, and governance challenges. An example of such a fund is the Calvert Fund, which describes itself as a “leader in responsible investing with a mission to deliver superior long-term performance to our clients and to enable them to achieve positive impact.”

The chart below analyzes mutual funds and their rate of return over several different time periods; included are examples of both general index funds and “socially responsible” or social index funds ((Figure)). If we compare the two general index funds at the top to the three funds at the bottom that invest in socially responsible companies, we see a competitive return on investment in the social funds. Social responsibility does not mean lower profitability.

This chart demonstrates that social responsibility can be profitable. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


A chart titled “Relative Profitability of Socially Responsible and Other Index Mutual Funds”. Five header columns are labeled from left to right: “Index or Fund”, “Holdings (Number of Different Stocks Held in Fund)”, “Year-to-Date Return”, “2-Year Return”, and “5-Year Return”. Five rows follow, from left to right. Row 1: “S&P 500 Index”, “500”, “8.2%”, “7.4%”, and “81.4%”. Row 2: “NASDAQ Index”, “3,176 6.5%”, “12.5%”, and “108%”. Rows 1 and 2 are also labeled “General index fund”. Row 3: “Vanguard FTSE Social Index”, “407”, “7.7%”, “5.7%”, and “96.7%”. Row 4: “TIAA-CREF Social”, “793”, “12.1%”, “0.1%”, and “66.8%”. Row 5: “iShares Social”, “403”, “8.1%”, “6.5%”, and “78.8%”. Rows 3, 4, and 5 are also labeled “Social index fund”.

Summary

While some argue that corporations have a primary duty to maximize profits for the benefit of shareholders, others assert that businesses have a duty to the society in which they operate, a duty that serves as the basis of the CSR philosophy. Many court cases have addressed the issue, but it has not been conclusively resolved.

Despite the ongoing ethical debate, being a good corporate citizen is a goal toward which most contemporary corporations strive. An effective CSR policy usually means that companies have to commit to both an internal and external approach to ethics. Corporate social responsibility and good corporate governance are in reality just two sides of the very same coin. Social responsibility does not mean lower profitability.

Assessment Questions

True or false? Corporations that embrace CSR policies consistently produce a lower rate of return on investment for shareholders.

False. Social responsibility does not mean lower profitability, as the returns on social index funds have shown.

True or false? Milton Friedman’s economic philosophy advocates increased government regulation to ensure that corporations are socially responsible.

False. Milton Friedman argued that shareholders should be able decide for themselves what social initiatives to donate to or to take part in, rather than having a business executive or government decide for them.

Which of the following is not true?

  1. Shareholder primacy is the clear legal precedent in the United States.
  2. Maximizing shareholder profits is a legitimate goal of management.
  3. Dividends are paid out of corporate profits.
  4. Companies that pursue CSR policies can also be profitable.

A

Industries like to be in control of their own destiny and as a result prefer self-regulation to laws imposed by governments. Self-regulation is often ________.

  1. based on external codes of conduct
  2. enforced by the courts
  3. in conflict with common law
  4. less costly for firms than government regulation

D

Identify two benefits for a company following a policy of corporate social responsibility (CSR).

One benefit is that consumers may prefer to purchase products from a socially responsible company. A second benefit is that CSR may attract more investors, or shareholders, who are interested in investing in the company.

Endnotes

2Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668 (Mich. 1919).
3Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668 (Mich. 1919).
4Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668 (Mich. 1919).
5Shlensky v. Wrigley, 237 N.E. 2d 776 (Ill. App. 1968).
6Shlensky v. Wrigley, 237 N.E. 2d 776 (Ill. App. 1968).
7Burwell v. Hobby Lobby, 573 U.S. ________ (2014).
8Burwell v. Hobby Lobby, 573 U.S. ________ (2014).
9Burwell v. Hobby Lobby, 573 U.S. ________ (2014).
10“Corporate Social Responsibility: The Halo Effect,” The Economist, June 25, 2015. https://www.economist.com/news/business/21656218-do-gooding-policies-help-firms-when-they-get-prosecuted-halo-effect.
11Milton Friedman, Capitalism and Freedom. (Chicago: University of Chicago Press. 1963).
12Lindsay Llewellyn, “Breaking Down the Business-Judgment Rule,” American Bar Association, May 30, 2013.

http://apps.americanbar.org/litigation/committees/commercial/articles/spring2013-0513-breaking-down-the-business-judgement-rule.html.

13Stephen Bainbridge, “A Duty to Shareholder Value,” Opinion Pages, New York Times, April 16, 2015.

https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/a-duty-to-shareholder-value.

14Stephen Bainbridge, “A Duty to Shareholder Value,” Opinion Pages, New York Times, April 16, 2015. https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/a-duty-to-shareholder-value.
15Lynn Stout, “Corporations Don’t Have to Maximize Profits,” Opinion Pages, New York Times, April 16, 2015. https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/corporations-dont-have-to-maximize-profits.
16Rick Wartzman, “What Peter Drucker Knew About 2020,” Harvard Business Review, October 16, 2014. https://hbr.org/2014/10/what-peter-drucker-knew-about-2020.
17Unilever. https://www.unilever.com/sustainable-living/values-and-values/.
18Tracey Keys, et al., “Making the Most of Corporate Social Responsibility,” McKenzie Quarterly, December 2009. https://www.mckinsey.com/global-themes/leadership/making-the-most-of-corporate-social-responsibility.
19Calvert. https://www.calvert.com/.

Glossary

business judgment rule
the principle that officers, directors, and managers of a corporation are not liable for losses incurred when the evidence demonstrates that decisions were reasonable and made in good faith
fiduciary duty
a very high level of legal responsibility owed by those who manage someone else’s money, which includes the duties of care and loyalty
limited liability
a business owner’s protection against loss of personal assets, granted with corporate status
moral minimum
the minimal actions or practices a business must undertake to satisfy the base threshold for acting ethically
quid pro quo
the tradeoff someone makes in return for getting something of value; from the Latin meaning this for that
shareholder primacy
a company’s duty to maximize profits for stockholders

Sustainability: Business and the Environment

19

Learning Objectives

By the end of this section, you will be able to:

  • Explain the concept of earth jurisprudence
  • Evaluate the claim that sustainability benefits both business and the environment
  • Identify and describe initiatives that attempt to regulate pollution or encourage businesses to adopt clean energy sources

Public concern for the natural environment is a relatively new phenomenon, dating from the 1960s and Rachel Carson’s seminal book Silent Spring, published in 1962. In 1992, Cormac Cullinan’s Wild Law proposed “earth justice” or “earth jurisprudence,” a concept underlying the law’s ability to protect the environment and effectively regulate businesses that pollute. The preoccupation with business success through investment in corporations, in contrast, is a much older concept, dating back at least to the creation of the British East India Company in 1600, and the widespread emergence of the corporation in Europe in the 1700s. If you were a business owner, would you be willing to spend company resources on environmental issues, even if not required to do so by law? If so, would you be able to justify your actions to shareholders and investment analysts as smart business decisions?

Environmental Justice

If a business activity harms the environment, what rights does the environment have to fight back? Corporations, although a form of business entity, are actually considered persons in the eyes of the law. Formally, corporate personhood, a concept we touched on in the preceding section, is the legal doctrine holding that a corporation, separate and apart from the people who are its owners and managers, has some of the same legal rights and responsibilities enjoyed by natural persons (physical humans), based on an interpretation of the word “person” in the Fourteenth Amendment.

The generally accepted constitutional basis for allowing corporations to assert that they have rights similar to those of a natural person is that they are organizations of people who should not be deprived of their rights simply because they act collectively. Thus, treating corporations as persons who have legal rights allows them to enter into contracts with other parties and to sue and be sued in a court of law, along with numerous other legal rights. Before and after the Supreme Court’s ruling in Citizens United v. Federal Election Commission (2010), which upheld the First Amendment free-speech rights of corporations, there have been numerous challenges to the concept of corporate personhood; however, none have been successful. Thus, U.S. law considers corporations to be persons with rights protected under key constitutional amendments, regulations, and case law, as well as responsibilities under the law, just as human persons have.

A question that logically springs from judicial interpretations of corporate personhood is whether the environment should enjoy similar legal status. Should the environment be considered the legal equivalent of a person, able to sue a business that pollutes it? Should environmental advocates have been able to file a lawsuit against BP (formerly British Petroleum) on behalf of the entire Gulf of Mexico for harm created by the 2010 Deepwater Horizon oil spill (discussed in more detail in the government regulation section of this chapter), which, at five million barrels, was ten times larger than the famous Exxon Valdez spill and remains the largest and most widespread ocean oil spill in the history of the global petroleum industry? Furthermore, the Deepwater Horizon spill affected not only thousands of businesses and people, but also the entirety of the Gulf of Mexico, which will suffer harm for years to come. Should the Gulf of Mexico have legal standing to sue, just like a person?

While U.S. jurisprudence has not yet officially recognized the concept that Earth has legal rights, there are examples of progress. Ecuador is now the first country to officially recognize the concept.

The country rewrote its Constitution in 2008, and it includes a section entitled “Rights for Nature.” It recognizes nature’s right to exist, and people have the legal authority to enforce these rights on behalf of the ecosystem, which can itself be named as a litigant in a lawsuit.

Earth jurisprudence is an interpretation of law and governance based on the belief that society will be sustainable only if we recognize the legal rights of Earth as if it were a person. Advocates of earth jurisprudence assert that there is legal precedent for this position. As pointed out earlier in this chapter, it is not only natural persons who have legal rights, but also corporations, which are artificial entities. Our legal system also recognizes the rights of animals and has for several decades. According to earth jurisprudence advocates, officially recognizing the legal status of the environment is necessary to preserving a healthy planet for future generations, in particular because of the problem of “invisible pollution.”

Businesses that pollute the environment often hide what they are doing in order to avoid getting caught and facing economic, legal, or social consequences. The only witness may be Earth itself, which experiences the harmful impact of their invisible actions. For example, as revealed in a recent report,

companies all over the world have for years been secretly burning toxic materials, such as carbon dioxide, at night. A company that needs to dump a toxic substance usually has three choices: dispose of it properly at a safe facility, recycle and reuse it, or secretly dump it. There is no doubt that dumping is the easiest and cheapest option for most businesses.

As another example, approximately twenty-five million people board cruise ships every year, and as a result, cruise ships dump one billion gallons (3.8 billion liters) of sewage into the oceans annually, usually at night so no one sees or smells it. Friends of the Earth, a nongovernmental organization (NGO) concerned with environmental issues, used data from the U.S. Environmental Protection Agency (EPA) to calculate this figure.

The sewage dumped into the sea is full of toxins, including heavy metals, pathogens, bacteria, viruses, and pharmaceutical drugs ((Figure)). When invisibly released near coasts, this untreated sewage can kill marine animals, contaminate seafood, and sicken swimmers, and no one registers the damage except the ocean itself. Many believe the environment should have the right not to be secretly polluted in the dead of night, and Earth should have rights at least equal to those of corporations.

A warning in Honolulu regarding the damage done by ocean dumping. (credit: “No Dumping – Drains to Ocean” by Daniel Ramirez/Wikimedia Commons, CC BY 2.0)


A sign that reads “No Dumping, Drains to Ocean”.

Cormac Cullinan, an environmental attorney, author, and leading proponent of earth jurisprudence, often collaborates with other environmental advocates such as Thomas Berry, an eco-theologian, scholar, and author. Cullinan, Berry, and others have written extensively about the important legal tenets of earth jurisprudence; however, it is not a legal doctrine officially adopted by the United States or any of its states to date. The concept of earth justice is tied indirectly to the economic theory of the “tragedy of the commons,” a phrase derived from British economist William Forster Lloyd, who, in the mid-nineteenth century, used a hypothetical example of unregulated grazing on common land to explain the human tendency to act independently, putting self-interest first, without regard for the common good of all users. The theory was later popularized by ecologist and philosopher Garrett Hardin, who tied it directly to environmental issues. In other words, when it comes to natural resources, the tragedy of the commons holds that people generally use as much of a free resource as they want, without regard for the needs of others or for the long-term environmental effects. As a way of combating the tragedy of the commons, Cullinan and others have written about the concept of earth justice,

which includes the following tenets:

“The Earth and all living things that constitute it have fundamental rights, including the right to exist, to have a habitat or a place to be.
Humans must adapt their legal, political, economic, and social systems to be consistent with the fundamental laws or principles that govern how the universe functions.
Human acts, including acts by businesses that infringe on the fundamental rights of other living things violate fundamental principles and are therefore illegitimate and unlawful.”

Today, supporters of the environment assert that government has both a right and an obligation to ensure that businesses do not overuse any resource, and to mandate adequate environmental protection when doing so. In addition, some form of fee may be collected for using up a natural resource, such as severance taxes imposed on the removal of nonrenewable resources like oil and gas, or deposits required for possible cleanup costs after projects have been abandoned. As part of the growing acceptance of the concept of earth justice, several nonprofit educational organizations and NGOs have become active in both lobbying and environmental litigation. One such organization is the Center for Earth Jurisprudence (housed at the Barry School of Law in Orlando), a nonprofit group that conducts research in this area.

Why Sustainability Is Good for Business

The notion that the environment should be treated as a person is relatively new. But given the prominence of the environmental movement worldwide, no well-managed business today should be conducted without an awareness of the tenuous balance between the health of the environment and corporate profits. It is quite simply good business practice for executives to be aware that their enterprise’s long-term sustainability, and indeed its profitability, depend greatly on their safeguarding the natural environment. Ignoring this interrelationship between business and the environment not only elicits public condemnation and the attention of lawmakers who listen to their constituents, but it also risks destroying the viability of the companies themselves. Virtually all businesses depend on natural resources in one way or another.

Progressive corporate managers recognize the multifaceted nature of sustainability—a long-term approach to business activity, environmental responsibility, and societal impact. Sustainability affects not only the environment but also other stakeholders, including employees, the community, politics, law, science, and philosophy. A successful sustainability program thus requires the commitment of every part of the company. For example, engineers are designing manufacturing and production processes to meet the demands of companies dedicated to sustainability, and the idea of company-wide sustainability is now mainstream. Many of the largest companies in the world see sustainability as an important part of their future survivability.

The Global 100 and Sustainability’s Strategic Worth

Corporate Knights is a Canadian research and publishing company that compiles an annual list called the Global 100, identifying the world’s most sustainable companies.

The 2018 edition of the list, presented at the World Economic Forum in Davos, Switzerland, shows that an increasing number of major multinational companies take sustainability seriously, including many U.S. businesses. The highest-ranking U.S. company is technology giant Cisco, which ranks seventh on the Global 100 list.

Other U.S. companies in the top twenty-five include Autodesk, Merck, and McCormick & Co. The countries with the best representation on the list are primarily from North America and Western Europe: the United States (18), France (15), the United Kingdom (10), Germany (7), Brazil (5), Finland (5), and Sweden (5).

You may expect that companies dedicated to sustainability would be less profitable in the long run as they face additional costs. In fact, data from the Global 100’s return on investment shows this is not the case. Let’s examine the evidence. If an investor had put $250 in Global 100 companies in 2005, it would have been worth $580 in 2015, compared to $520 for the same amount invested in a typical index fund. The Global 100’s cumulative return on high-sustainability firms is about 25 percent higher than a traditional investment.

Cisco Systems, number seven on the global list, is a good example of how green procurement and sustainable sourcing have become a regular part of the supply chain. At Cisco, according to a top-level supply chain executive, “we take seriously the responsibility of delivering products in an ethical and environmentally responsible manner.”

Cisco relies on its Supplier Code of Conduct to set standards for suppliers so they follow fair labor practices, ensure safe working conditions, and reduce their carbon footprint, the amount of carbon dioxide and other carbon compounds released by the consumption of fossil fuels, which can be measured quantitatively (see the link below). Cisco is in the process of embedding sustainability into supply chain management at all levels.

Another company dedicated to sustainability is Siemens, which was ranked number nine on the 2018 list. Siemens is a multinational industrial conglomerate headquartered in Germany, whose businesses range from power plants to electrical systems and equipment in the medical field and high-tech electronics. Siemens was rated the most energy-efficient firm in its sector, because it produced more dollars in revenue per kilowatt used than any other industrial corporation. This is a standard technique to judge efficiency and demonstrates that Siemens has a low carbon footprint for a company in the industries in which it operates. The commitment of Siemens to sustainability is further demonstrated by its decision to manufacture and sell more environmentally friendly infrastructure products such as green heating and air conditioning systems.

Cisco and Siemens show that businesses across the globe are starting to understand that for a supply chain to be sustainable, companies and their vendors must be partners in a clean and safe environment. Do businesses simply pay lip service to environmental issues while using all available natural resources to make as much money as they can in the present, or are they really committed to sustainability? There is abundant evidence that sustainability has become a policy adopted by businesses for financial reasons, not simply public relations.

McKinsey & Company is one of the world’s largest management consulting firms and a leader in the use of data analytics, both qualitative and quantitative, to evaluate management decisions. McKinsey conducts periodic surveys of companies around the world on matters of importance to corporate leaders. In the 2010 survey, 76 percent of executives agreed that sustainability provides shareholders long-term value, and in the 2014 survey, entitled “Sustainability’s Strategic Worth,” the data indicated that many companies consider cost savings to be the number-one reason for adopting such policies. Cost cutting, improved operations, and efficiency were indicated as the primary reasons for adopting sustainability policies by over one-third of all companies (36%).

Other major studies have demonstrated similar results. Grant Thornton is a leading global accounting and consulting firm. Its 2014 report on CSR showed that the top reason companies cite for moving towards more environmentally responsible business practices is financial savings. Grant Thornton conducted more than 2,500 interviews with clients and business executives in approximately thirty-five countries to discover why companies are making a commitment to sustainable practices. The study found that cost management was the key reason for sustainability (67%).

A specific example is Dell Computers, headquartered outside Austin, Texas, and with operations all over the world. The “Dell Legacy of Good Plan” has set a goal to reduce greenhouse gas emissions from all facilities and operations by 50 percent by the year 2020, along with several other environmental goals. As part of this overall plan, Dell created the Connected Workplace, a flex-work program allowing alternative arrangements such as variable work hours to avoid rush hour, full- or part-time work at home flexibility, and job sharing. This sustainability initiative helps the company avoid about seven thousand metric tons of greenhouse gas emissions, and, directly related to the financial benefit of sustainability, it saves the company approximately $12 million per year.

However, adopting sustainability policies may require a long-term outlook. A recent article in the Harvard Business Review discussed the issue of sustainability and how it can create real cost savings ((Figure)). “It’s hard for companies to recognize that sustainable production can be less expensive. That’s in part because they have to fundamentally change the way they think about lowering costs, taking a leap of faith . . . that initial investments made in more-costly materials and methods will lead to greater savings down the road. It may also require a willingness to buck conventional financial wisdom by focusing not on reducing the cost of each part but on increasing the efficiency of the system as a whole.”

Sustainability can create long-term cost savings for companies. (credit: work by Nattanan Kanchanaprat/Pixabay, CC0)


Four stacks of coins and a jar full of coins. The stacks grow in size from left to right. On top of each stack and on top of the jar are plant sprouts increasing in size from left to right.

Sustainability Standards

The International Organization for Standardization, or ISO, is an independent NGO and the world’s largest developer of voluntary international business standards. More than twenty thousand ISO standards now cover matters such as sustainability, manufactured products, technology, food, agriculture, and even healthcare. The adoption and use of these standards by companies is voluntary, but they are widely accepted, and following ISO certification guidelines results in the creation of products and services that are clean, safe, reliable, and made by workers who enjoy some degree of protection from workplace hazards.

In the environmental area, the ISO 14000 series of standards promotes effective environmental management systems in business organizations by providing cost-effective tools that make use of best practices for environmental management. These standards were developed in the 1990s and updated in 2015; they cover everything from the eco-design (ISO 14006) of factories and buildings to environmental labels (ISO 14020) to limits on the release of greenhouse gasses (ISO 14064). While their adoption is still voluntary, a growing number of countries allow only ISO 14000-certified companies to bid on public government contracts, and the same is true of some private-sector companies ((Figure)).

According to recent reports, close to fifteen thousand companies worldwide have chosen to be ISO 14000 certified, including Nissan, Ford, and IBM. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


A chart titled “Countries with the Most ISO 14000-Certified Companies”. Countries are listed from top to bottom by the number of certified companies, as follows: “Japan 2,600”, “Germany 1,600”, “UK 1, 200”, “Sweden 650”, “Taiwan 500”, “USA 590”, “Netherlands 475”, “Korea 460”, “Switzerland 400”, and “France 360”.

Another type of sustainability standard with which businesses may elect to comply is LEED certification. LEED stands for Leadership in Energy and Environmental Design, and it is a rating system devised by the U.S. Green Building Council to evaluate a structure’s environmental performance. The most famous example is the Empire State Building in New York City, which was awarded LEED Gold status (for existing buildings). The LEED certification was the result of a multimillion-dollar rebuilding program to bring the building up to date, and the building is the tallest in the United States to receive it. There are dozens of other examples of large commercial buildings, such as the Wells Fargo Tower in Los Angeles, as well as thousands of smaller buildings and residential homes. LEED certification is the driver behind the ongoing market transformation towards sustainable design in all types of structures, including buildings, houses, and factories.

The High Cost of Inaction

According to estimates from the EPA, by the year 2050, Earth’s population will be about ten billion people. Dramatic population growth has had a very significant and often negative human impact on the planet. Not only are there more people to feed, house, and care for, but new technologies allow businesses to harness natural resources in unprecedented amounts. NGOs and government agencies alike have taken notice. For years, the Department of State and the Department of Defense have considered climate change to be a potential threat to the long-term security of the United States. If unmanaged, climate change could pose a risk to both U.S. security and Department of Defense facilities and operations.

Other respected organizations are also alerting the public to the risks of ignoring climate change.

The Union of Concerned Scientists (UCS) has released a detailed report identifying approximately twenty serious risks that will be faced if the problem is not addressed in a substantial way. These risks include rising seas and increased coastal flooding, more intense and frequent heat waves, more destructive hurricanes, wildfires that last longer and produce more damage, and heavier precipitation in some areas and more severe droughts in other areas. In addition to extreme weather events, there would likely be widespread forest death in the Rocky Mountains and other mountain ranges, the destruction of coral reefs, and shifts in the ranges of plants and animals. Both military bases and national landmarks would be at risk, as would the electrical grid and food supply. The UCS, with a membership consisting of the world’s most respected scientists, bases its projections on scientific research studies that have produced empirical evidence of climate change. Its official position is that “global warming is already having significant and very costly effects on communities, public health, and our environment.”

Environmental protection and climate change issues receive varying degrees of support at the national level, depending on the commitment different presidents make to them. During periods in which the administration in Washington demonstrates a lower priority for climate change issues, such as the Trump administration’s announced intention to withdraw from the Paris Climate Accord, private companies may take the lead on actions to reduce global warming emissions.

For example, Microsoft founder Bill Gates recently announced the creation of a private initiative to invest $20 billion on climate-related research and development over the next five years. This is an example of government-funded early experimental research that a business may be able to turn into a commercially viable solution. If government steps back, private-sector companies concerned about long-term sustainability may have to take a leadership role.

Ultimately, it requires the cooperation of public and private efforts to address climate change; otherwise, the impacts will continue to intensify, growing more costly and more damaging.”

Sustainability often requires the public and private sectors to cooperate. Inaction contributes to disasters like the 2017 devastation of Houston by Hurricane Harvey and of Puerto Rico by Hurricane Maria. There is often tension between developers who want to build and cities that try to legislate for more green space. Green space not only offers a place for recreation and enjoyment of nature, but also provides essential natural drainage for rain and flood waters, reducing the likelihood that developed areas will end up underwater in a storm.

Flooding in Houston: Is the Status Quo Sustainable?

A symbiotic relationship exists between development and flooding in urban areas such as Houston, Texas. Imagine you are a member of the urban planning commission for the city council of Houston, which recently suffered traumatic flood damage from several major storms, including Hurricanes Harvey and Ike, and Tropical Storm Allison, all of which occurred since 2001 and caused a total of approximately $75 billion in damages.

The floods also caused dozens of deaths and changed the lives of millions who lived through them. Future storms may increase in severity, because climate change is warming ocean waters.

The mayor and the city council have asked the planning commission to propose specific solutions to the flooding problem. This solution must not rely exclusively on taxpayer funds and government programs, but rather must include actions by the private sector as well.

One of the most direct solutions is a seemingly simple tradeoff: The greater Houston area must reduce the percentage of land covered by concrete while increasing the percentage of land dedicated to green space, which acts like a sponge to absorb flood waters before they can do severe damage. The planning commission thinks the best way to accomplish this is to issue a municipal ordinance requiring corporate developers and builders to set aside as green space an amount of land at least equal to what will be covered by concrete, (neighborhoods, office buildings, parking lots, shopping centers). However, this will increase the cost of development, because it means more land will be required for each type of project, and as a result, developers will have higher land costs.

Critical Thinking

  • As a member of the urban planning commission, you will have to convince the stakeholders that a proposal to require more green space is a workable solution. You must get everyone, including developers, investors, neighborhood homeowner associations, politicians, media, and local citizens, on board with the idea that the benefit of sustainable development is worth the price. What will you do?
  • Is this a matter that should be regulated by the local, state, or federal government? Why?
  • Who pays for flood damage after a hurricane? Are your answers to this question and the preceding one consistent?

U.S. government agencies, such as the National Aeronautics and Space Administration (NASA) and National Oceanic and Atmospheric Administration, have identified many challenges in which sustainability can make a positive contribution. These include climate change, decreasing supplies of clean water, loss of ecological systems, degradation of the oceans, air pollution, an increase in the use and disposal of toxic substances, and the plight of endangered species.

Progress toward solving these challenges depends in part on deciding who should help pay for the protection of global environmental resources; this is an issue of both environmental and distributive justice.

One way to address the issue of shared responsibility between corporations and society is the implementation of a “cap and trade” system. According to the Environmental Defense Fund, cap and trade is a viable approach to addressing climate change by curbing emissions that pollute the air: The “cap” is a limit on greenhouse gas emissions—if companies exceed their cap, they must pay penalties—whereas the “trade” allows companies to use the free market to buy and sell pollution allowances that permit them to emit a certain amount of pollution.

At present, there are more questions than answers, including how much of the responsibility lies with governments, how this responsibility can be allocated between developed and developing nations, how much of the cost should the private sector bear, and how should these divisions of cost and responsibility be enforced. Private companies must bear part of the cost, and the business sector recognizes they have some responsibility, but many disagree on whether that should be in the form of after-the-fact fines, or before-the-fact fees and deposits paid to the government. Regulations may very well have to be international in scope, or companies from one country may abuse the environment in another.

Is It Ethical to Dump Toxic Waste in Countries That Allow It?

Should a multinational company take advantage of another country’s lack of regulation or enforcement if it saves money to do so?

A New York Times news correspondent reporting from Nigeria found a collection of steel drums stacked behind a village’s family living compound. In this mid-1990s case, ten thousand barrels of toxic waste had been dumped where children live, eat, and drink.

As safety and environmental hazard regulations in the United States and Europe have driven toxic waste disposal costs up to $3,000 per ton, toxic waste brokers are looking for the poorest nations with the weakest laws, often in West Africa, where the costs might be closer to $3 per ton. The companies in this incident were looking for cheap waste-dumping sites, and Nigeria agreed to take the toxic chemical waste without notifying local residents. Local people wearing shorts, t-shirts, and sandals unloaded barrels of polychlorinated biphenyls, placing them next to a residential area. Nigeria has often been near the top of the United Nations’ list of most corrupt nations, with government leaders cutting deals to line their own pockets while exposing their citizens to environmental hazards.

A more recent example occurred in Côte d’Ivoire (Ivory Coast) in 2006, when residents discovered that hundreds of tons of “slops” (chemicals) from a foreign-owned ship had been dumped near Abidjan, the country’s commercial capital. The ship was owned by a multinational energy company named Trafigura. According to a report from Amnesty International, more than 100,000 residents were sickened, leading to fifteen deaths. Trafigura had illegally dumped the toxic waste in Côte d’Ivoire after searching for a disposal site in several other countries.

Critical Thinking

  • Should a U.S. or European company take advantage of a country’s weak approach to business and political ethics?
  • Would your answer change if your decision saved your company $1 million?

Inaction on issues of sustainability can lead to long-term environmental consequences that may not be reversible (the death of ocean coral, the melting of polar ice caps, deforestation). Another hurdle is that it is sometimes difficult to convince companies and their investors that quarterly or annual profits are short-term and transitory, whereas environmental sustainability is long-term and permanent.

Environmental Economics and Policy

Some politicians and business leaders in the United States believe that the U.S. system of capitalism and free enterprise is the main reason for the nation’s prosperity over the past two hundred years and the key to its future success. Free enterprise was very effective in facilitating the economic development of the United States, and many people benefited from it. But it is equally true that this could not have happened without the country’s wealth of natural resources like oil, gas, timber, water, and many others. When we consider the environment and the role of sustainability, the question is not whether our system works well with an abundance of natural resources. Rather, we should ask how well it would work in a nation, indeed in a world, in which such resources were severely limited.

Does business, as the prime user of these resources, owe a debt to society? The Harvard Business Review recently conducted a debate on this topic on its opinion/editorial pages. Business owes the world everything and nothing, according to Andrew Winston, author and consultant on environmental and social challenges. “It’s an important question,” he wrote, “but one that implies business should do the socially responsible thing out of a sense of duty. This idea is a distraction. Sustainability in business is not about philanthropy, but about profitability, innovation, and growth. It’s just plain good business.”

On the other hand, Bart Victor, professor at Vanderbilt University’s Owen Graduate School of Management, wrote, “Business is far more powerful and deeply influential than any competing ideological force, political force or environmental force . . . business now has to see itself and its responsibilities and obligations in a new way.”

Using deontological or duty-based reasoning, we might conclude that business does owe a debt to the environment. A basic moral imperative in a normative system of ethics is that someone who uses something must pay for it. In contrast, a more utilitarian philosophy might hold that corporations create jobs, make money for shareholders, pay taxes, and produce things that people want; thus, they have done their part and do not owe any other debt to the environment or society at large. However, utilitarianism is often regarded as a “here and now” philosophy, whereas deontology offers a longer-term approach, taking future generations into account and thus aligning more with sustainability.

Should businesses have to pay more in fees or taxes than ordinary citizens for public resources or infrastructure they use to make a profit? Consider the example of fracking: West Texas has seen a recent boom in oil and gas drilling due to this relatively new process. Fracking is short for hydraulic fracturing, which creates cracks in rocks beneath Earth’s surface to loosen oil and gas trapped there, thus allowing it to flow more easily to the surface. Fracking has led to a greatly expanded effort to drill horizontally for oil and gas in the United States, especially in formations previously thought to be unprofitable, because there was no feasible way to get the fossil fuels to the surface. However, it comes with a significant downside.

Fracking requires very heavy equipment and an enormous amount of sand, chemicals, and water, most of which must be trucked in. Traffic around Texas’s small towns has increased to ten times the normal amount, buckling the roads under the pressure of a never-ending stream of oil company trucks. The towns do not have the budget to repair them, and residents end up driving on dangerous roads full of potholes. The oil company trucks are using a public resource, the local road system, often built with a combination of state and local taxpayer funds. They are obviously responsible for more of the damage than local residents driving four-door sedans to work. Shouldn’t the businesses have to pay a special levy to repair the roads? Many think it is unfair for small towns to have to burden their taxpayers, most of whom are not receiving any of the profits from oil and gas development, with the cost of road repair. An alternative might be to impose a Pigovian tax, which is a fee assessed against private businesses for engaging in a specific activity (proposed by British economist A. C. Pigou). If set at the proper level, the tax is intended as a deterrent to activities that impose a net cost—what economists call “negative externalities”—on third parties such as local residents.

This issue highlights one of many environmental debates sparked by the fracking process. Fracking also causes the overuse and pollution of fresh water, spills toxic chemicals into the ground water, and increases the potential for earthquakes due to the injection wells drilled for chemical disposal. Ultimately, as is often the case with issues stemming from natural resource extraction, local residents may receive a few short-term benefits from business activity related to drilling, but they end up suffering a disproportionate share of the long-term harm.

One method of dealing with the long-term harm caused by pollution is a carbon tax, that is, a “pay-to-pollute” system that charges a fee or tax to those who discharge carbon into the air. A carbon tax serves to motivate users of fossil fuels, which release harmful carbon dioxide into the atmosphere at no cost, to switch to cleaner energy sources or, failing that, to at least pay for the climate damage they cause, based on the amount of greenhouse gas emissions generated from burning fossil fuels. A proposal to implement a carbon tax system in the United States has been recommended by many organizations, including the conservative Climate Leadership Council (CLC).

Exxon Mobil, Shell, British Petroleum, and Total, along with other oil companies and a number of large corporations in other industries, recently announced their support for the plan to tax carbon emissions put forth by the CLC.

Would this “pay-to-pollute” method actually work? Will companies agree to repay the debt they owe to the environment? Michael Gerrard, the director of the Sabin Center for Climate Change Law at Columbia University Law School, said, “If a sufficiently high carbon tax were imposed, it could accomplish a lot more for fighting climate change than liability lawsuits.”

Initial estimates are that if the program were implemented, companies would pay more than $200 billion a year, or $2 trillion in the first decade, an amount deemed sufficient to motivate the expanded use of renewable sources of energy and reduce the use of nonrenewable fossil fuels.

Some environmental organizations, including the Nature Conservancy and the World Resources Institute, are also endorsing the plan, as are some legislators in Washington, DC. “The basic idea is simple,” Senator Sheldon Whitehouse (D-RI) said. “You levy a price on a thing you don’t want—carbon pollution—and you use the revenue to help with things you do want.”

According to the senator, a U.S. carbon tax or a fee of $45 per metric ton would reduce U.S. carbon emissions by more than 40 percent in the first decade. This is an idea with global support, and it has already been tried. The World Bank has data indicating that forty countries, along with some major cities, have already enacted such programs, including all countries of the EU, as well as New Zealand and Japan.

Corporate and Personal Choices Regarding the Environment of the Future

The car manufacturer Tesla is developing new technologies to allow people to reduce their carbon footprint. In addition to a line of electric cars, the company makes other renewable energy products, such as roofing tiles that act as solar energy panels, and promotes longer-term projects such as the Hyperloop, a high-speed train project jointly designed by Tesla and SpaceX.

Of course, if businesses are to succeed in selling environmentally friendly products, they must have consumers willing to buy them. A homeowner has to be ready to spend 20 percent more than the cost of a traditional roof to install solar roofing tiles that reduce the consumption of electricity generated by fossil fuels ((Figure)).

Although solar panels can reduce your carbon footprint, the tiles are much more expensive than standard roofing tiles. (credit: “Typical Solar Installation” by Tim Fuller/Flickr, CC BY 2.0)


A house with a roof covered with solar panels.

Another personal decision is whether to buy a $35,000 Tesla Model 3 electric car. While it reduces the driver’s carbon footprint, it requires charging every 250 miles, making long-distance travel a challenge until a national system of charging stations is in place.

Tesla’s founder, Elon Musk, is also the founder of SpaceX, an aerospace manufacturer that produces and launches the only space-capable rockets currently in existence in the United States. Thus, when NASA wants to launch a rocket, it must do so in partnership with SpaceX, a private company. It is often the case that private companies develop important advances in technology, with incentives from government such as tax credits, low-interest loans, or subsidies. This is the reality of capital-intensive, high-tech projects in a free-market economy, in which government spending may be limited for budgetary and political reasons. Not only is SpaceX making the rockets, but it is making them reusable, with long-term sustainability in mind.

Critical Thinking

  • Should corporations and individual consumers bear joint responsibility for sustaining the environment? Why or why not?
  • What obligation does each of us have to be aware of our own carbon footprint?
  • If individual consumers have some obligation to support environmentally friendly technologies, should all consumers bear this responsibility equally? Or just those with the economic means to do so? How should society decide?

Summary

Adopting sustainability as a strategy means protecting the environment. Society has an interest in the long-term survival, indeed the flourishing, of ecological habitats and natural resources, and we ask and expect companies to respect this societal goal in their business activities.

When analyzing what a business owes society in return for the freedom to extract our natural resources, we must balance development and preservation. It may be easy to say from afar that a business should cut back on how much it pollutes the air, but what happens when that means cutting back on fossil fuel use and transitioning to electric vehicles, a choice that affects everyone on a personal level?

Assessment Questions

What is earth jurisprudence?

Earth jurisprudence is an interpretation of law and governance based on the belief that society will be sustainable only if we recognize the legal rights of Earth as if it were a person.

Which of the following best describes the tragedy of the commons?

  1. People are always willing to sacrifice for the good of society.
  2. People are likely to use all the natural resources they want without regard to others.
  3. The common good of the people is a popular corporate goal.
  4. Tragedies occur when there is too much government regulation.

B

ISOs are sustainability standards for businesses ________.

  1. promulgated by the state government
  2. promulgated by the federal government
  3. promulgated by the World Trade Organization
  4. none of the above

D

True or false? If environmental harm is discovered, the business entity causing it is frequently held liable by both the government and the victims of the harm in separate proceedings.

True

Which of the following is a potentially effective way to reduce global warming?

  1. build more coal-burning power plants
  2. build more diesel-burning cars
  3. implement a carbon tax
  4. implement tax-free gasoline

C

Endnotes

19H.J. Graham, Everyman’s Constitution. (Madison: State Historical Society of Wisconsin, 1968). See also H.J. Graham, “The ‘Conspiracy Theory’ of the Fourteenth Amendment,” Yale Law Journal 47, no. 3 (1938): 341–403. doi: 10.2307/791947.
20“Ecuador Adopts Rights of Nature in Constitution,” The Rights of Nature. https://therightsofnature.org/ecuador-rights/.
21 M. Triassi, et al., “Environmental Pollution from Illegal Waste Disposal and Health Effects,” Int J Environ Res Public Health 12, no. 2 (2015): 1216–1236. doi: 10.3390/ijerph120201216.
22Gwynn Guilford, Quartz, December 9, 2014. https://qz.com/308970/cruise-ships-dump-1-billion-tons-of-sewage-into-the-ocean-every-year/.
23State of the World 2010 Transforming Cultures from Consumerism to Sustainability. Washington, DC: The Worldwatch Institute, 2010.
24Rights of Nature, “Principles of Earth Jurisprudence.” https://therightsofnature.org/principles-of-earth-jurisprudence/.
25Garrett Hardin, “The Tragedy of the Commons,” Science 162, no. 3859 (1968): 1243–1248. doi: 10.1126/science.162.3859.1243.
26Jeff Kauflin, “The World’s Most Sustainable Companies 2017,” Forbes, January 17, 2017. https://www.forbes.com/sites/jeffkauflin/2017/01/17/the-worlds-most-sustainable-companies-2017/#2773f73a4e9d.
27Corporate Knights, “2018 Global 100.” http://www.corporateknights.com/reports/global-100/.
28Jeff Kauflin, “The World’s Most Sustainable Companies 2017,” Forbes, January 17, 2017. https://www.forbes.com/sites/jeffkauflin/2017/01/17/the-worlds-most-sustainable-companies-2017/#2773f73a4e9d.
293BLMedia, “2015 Cisco Corporate Social Responsibility Report: Supply Chain,” 2015. http://3blmedia.com/News/2015-Cisco-Corporate-Social-Responsibility-Report-Supply-Chain.
30McKinsey & Co., “Sustainability’s Strategic Worth,” 2016. http://csr-raadgivning.dk/wp-content/uploads/2016/02/Sustainabilitys-strategic-worth-McKinsey-Global-Survey-results-McKinsey-July-2014.pdf.
31Paul Raleigh, “Corporate Social Responsibility: Beyond Financials,” Grant Thornton, August 13, 2014. https://www.grantthornton.global/en/insights/articles/Corporate-social-responsibility/.
32Jessica Lyons Hardcastle, “Dell’s Flexible Work Programs Save $12M, Reduce GHGs,” Environmental Leader, July 10, 2014. https://www.environmentalleader.com/2014/07/dells-flexible-work-programs-save-12m-reduce-ghgs/.
33Knut Haanaes, “Making Sustainability Profitable,” Harvard Business Review, March 2013. https://hbr.org/2013/03/making-sustainability-profitable.
34Adam Wernick, “The U.S. Defense Department Takes Climate Change Seriously,” Public Radio International, October 8, 2017. https://www.pri.org/stories/2017-10-08/us-defense-department-takes-climate-change-seriously.
35Union of Concerned Scientists, “Global Warming Impacts.” https://www.ucsusa.org/our-work/global-warming/science-and-impacts/global-warming-impacts#.WjQa11WnF0w.
36Lucy P. Marcus, “Why Strong Ties between Business and Government Matter,” The Guardian, January 4, 2016. https://www.theguardian.com/business/2016/jan/04/why-strong-ties-between-business-and-government-matter-r-and-d.
37Union of Concerned Scientists, “Global Warming Impacts.” https://www.ucsusa.org/our-work/global-warming/science-and-impacts/global-warming-impacts#.WjQa11WnF0w.
38National Conference on State Legislatures, “State Plastic and Paper Bag Legislation,” July 5, 2017. http://www.ncsl.org/research/environment-and-natural-resources/plastic-bag-legislation.aspx.
39Elizabeth Chuck, “Hurricane Harvey: How Many Billions of Dollars in Damage Will Historic Storm Cost?” NBC News, August 30, 2017. https://www.nbcnews.com/storyline/hurricane-harvey/how-many-billions-damage-will-harvey-cost-s-anyone-s-n797521.
40NASA, “Report on Climate Change,” March 22, 2018. https://climate.nasa.gov/evidence/.
41James Brooke, “Waste Dumpers Turning to West Africa,” New York Times, July 17, 1998. http://www.nytimes.com/1988/07/17/world/waste-dumpers-turning-to-west-africa.html?pagewanted=all.
42Financial Transparency Coalition, “Cross-border Dumping of Hazardous Waste,” August 20, 2010. https://financialtransparency.org/hazardous-waste/.
43Andrew Winston, “Business Owes the World Everything . . . and Nothing,” Harvard Business Review, May 4, 2010. https://hbr.org/2010/05/business-owes-the-world-everyt.html.
44Lew Harris, “Business Owes Significant Obligations to Society,” Newswise, February 23, 2000. https://www.newswise.com/articles/business-owes-significant-obligations-to-society.
45Climate Leadership Council, “The Four Pillars of Our Carbon Dividends Plan.” https://www.clcouncil.org/our-plan/.
46John Schwartz, “Exxon Mobil Lends Its Support to a Carbon Tax Proposal,” New York Times, June 20, 2017. https://www.nytimes.com/2017/06/20/science/exxon-carbon-tax.html.
47John Schwartz, “Exxon Mobil Lends Its Support to a Carbon Tax Proposal,” New York Times, June 20, 2017. https://www.nytimes.com/2017/06/20/science/exxon-carbon-tax.html.
48Katy Lederer, “Why Can’t Republicans Support a Carbon Tax?” The New Yorker, November 9, 2015. https://www.newyorker.com/business/currency/why-cant-republicans-support-a-carbon-tax.

Glossary

cap and trade
a system that limits greenhouse gas emissions by companies while allowing them to buy and sell pollution allowances
carbon footprint
the amount of carbon dioxide and other carbon compounds released by the consumption of fossil fuels
carbon tax
a pay-to-pollute system in which those who discharge carbon into the air pay a fee or tax
corporate personhood
the legal doctrine holding that a corporation, separate and apart from the people who are its owners and managers, has some of the same legal rights and responsibilities enjoyed by natural persons
sustainability
a long-term approach to the interaction between business activity and societal impact on the environment and other stakeholders
tragedy of the commons
an economy theory highlighting the human tendency to use as much of a free natural resource as wanted without regard for others’ needs or for long-term environmental effects or issues

Government and the Private Sector

20

Learning Objectives

By the end of this section, you will be able to:

  • Identify three public health issues that might warrant government regulation
  • Explain what is meant by “revolving door” in a political context
  • Compare constitutional arguments for and against government regulation of industry

Ideally, all levels of government—local, state, and federal—should work with each other and with private-sector businesses to accomplish a fair and rational balance between their respective roles in maintaining a just society. Rarely does one actor alone solve a problem; more often, it takes either a state-federal or a government-business partnership to make a significant impact on a social or economic challenge. Such partnerships are often quite effective, according to Deloitte, a global consulting and accounting firm.

For example, the federal Clean Air Act of 1970 gives the EPA nationwide authority, but controlling air pollution, which does not recognize borders, also necessitates that state governments play a very significant role in enforcing environmental standards. In turn, about half the states also allow major cities to have their own air quality regulatory programs. “Think globally, act locally” seems to capture the essence of government regulation in air quality. For decades, California has had an air-quality program that not only attempts to comply with mandates in the federal program but also goes a step further to create state-specific rules, such as stricter auto emissions guidelines.

In another example, in May 2017, the Environment and Natural Resources Division of the U.S. Department of Justice, together with the EPA and the Texas Commission on Environmental Quality, announced a settlement with Vopak, a Houston energy company, related to air-quality violations by the company.

Both federal and state government agencies had filed actions against Vopak, stating that the company failed to comply with Clean Air Act requirements to properly manage equipment at its on-site wastewater treatment facility, resulting in excess emissions of a variety of hazardous air pollutants, as well as volatile organic compounds, in an area classified as not meeting ground-level ozone standards. Per the settlement terms, the company, at considerable cost, “will install state-of-the art pollution controls at the wastewater treatment system and use infrared cameras” to detect otherwise undetectable air pollution from its chemical storage tanks. Additionally, Vopak will pay a $2.5 million civil penalty.

Sustainability and the Public Interest

For two centuries, businesses have profited from using and selling the nation’s natural resources. The tradeoff in a free but regulated economic system such as that in the United States is to allow the continued extraction of natural resources but to require a commitment to protection of the environment in return. This bargain promotes long-term sustainability by balancing the interests of the environment, state and local governments, and users of natural resources. However, this public-private collaboration is not without controversy.

The Keystone XL Pipeline

The case of the Keystone XL pipeline is an example of the emotional aspect of many environmental disputes, as our nation tries to come to grips with sustainability issues. Local and national opponents of the Keystone XL pipeline, which would carry crude oil from Canada to the Texas Gulf Coast, have protested for years to stop its construction ((Figure)). These efforts accelerated after President Trump approved the pipeline in March 2017, reversing President Obama’s decision to reject it on environmental grounds. It appears that the pipeline is likely to be completed, pending legal action still unresolved in Nebraska.

Groups across the political spectrum have come together to protest the proposed Keystone pipeline route. (credit: modification of “Protest against the proposed KeystoneXL tar sands pipeline” by Fibonacci Blue/Flickr, CC BY 2.0)


A banner held by people that reads “Keystone XL pipeline not in our “national interest”.”

To fight the pipeline, some opponents have used legal strategies such as court challenges in Nebraska, where regulators have not yet approved its route through the state. Other methods include tactics learned in the fight against the Dakota Access pipeline, in which protestors blocked equipment, occupied construction sites, and fought company employees and law enforcement officers. Protestors have vowed to use the same tactics against the Keystone XL. As Tom Goldtooth, executive director of the Indigenous Environmental Network, told reporters, “Our dedication to stop this pipeline isn’t just for the future determination of our lives as human beings but also for the future of all generations of life, and that we stay true to the understandings of protecting mother earth to the fullest degree and do it in a prayerful way.”

Opponents of projects such as Keystone XL are not always divided along political party lines, geography, age, or other demographics. Bret Clanton is a rancher and a registered Republican who doesn’t fit the standard profile of an environmentalist. The TransCanada Oil Company told him it planned to dig up three miles of his land to lay a section of the Keystone XL pipeline and bulldoze another two and half miles for an access road. “I’ve lived here all my life and this ground is pretty much as God, or whoever, made it, and I just want it to stay that way,” Clanton said. He fought the pipeline from the beginning and lobbied the state government for several years, but he and the others may lose their legal challenges.

Environmentalists now face a conundrum. Should they accept the pipeline and its potential for harm? Or should they advance to more aggressive tactics such as destroying property to forestall it and hope that a candidate friendlier to environmentalists is elected in 2020? Is nonlethal violence justified in the pursuit of environmental justice?

Critical Thinking

  • How should society and governments react to aggressive environmental protest?
  • How would you balance a protestor’s First Amendment right of free speech, expression, and assembly with concern for public safety and protection of property?

When discussing the topic of sustainability as a function of responsible and sustainable business conduct, we consider not only environmental health but also public health. Polluting the environment is bad for public health, but so too are a wide variety of inherently dangerous products from alcohol to tobacco to guns to drugs. The World Health Organization estimates that alcohol is the cause of close to 7 percent of all deaths each year globally, or about 3.5 million people, and total global sales of alcohol are well over $1 trillion per year.

The question is whether society should allow businesses to market, sell, and profit from a product that causes so many deaths and creates a significant public health problem. The same question can be asked about tobacco, on which businesses make over half a trillion dollars annually and which the United States has struggled to regulate for years. Some businesses are acting on their own to rein in the sale or use of harmful products. In 2014, CVS, a drugstore and health care giant, chose to stop selling tobacco products, because such sales do not support its corporate mission.

Few issues are the source of as much public debate as guns, but it is clear that gun violence in the United States is a major public health challenge. There are about 35,000 deaths per year in the United States due to firearms, and another 75,000 nonfatal firearm injuries. However, thousands of businesses profit from gun sales. Annual revenue in the gun and ammunition manufacturing industry is close to $14 billion, producing a profit of $1.5 billion, whereas the annual revenue of gun and ammunition stores is an additional $3 billion, resulting in a profit of $500 million.

Based on these facts, should the sale of guns remain relatively unregulated, or, in the interest of public health, should the government increase regulatory efforts in this area? On the corporate front, after the most recent fatal mass shooting at a high school in Parkland, Florida, several companies took action without waiting for the law to change. Dick’s Sporting Goods announced it will no longer sell semi-automatic assault rifles, such as the AR-15, as has Kroger, which owns Fred Meyer stores. Walmart has announced it will no longer sell guns to anyone under twenty-one years of age.

Another pressing social issue is opioid abuse. In 2016, there were approximately sixty thousand deaths due to drug overdoses, almost double the number of gun deaths. Profits from the sale of these drugs are in the tens of billions of dollars, and the pharmaceutical industry spends $100 million lobbying Congress not to regulate it more stringently. Some local government entities are suing opioid drug manufacturers,

and, in the private sector, CVS recently announced it would now fill opioid prescriptions with supplies for only seven days. While opioids are legal and often legitimately prescribed for pain management, a large part of the problem is that they are also overprescribed.

Given these facts, should pharmaceutical corporations be allowed to profit from this product? What ethical or legal responsibilities do those in the medical community have for the problem?

Although sustainability discussions justifiably focus on the protection of human life and public health issues, a related ethical issue close to the hearts of many citizens is animal rights. Businesses have begun to take notice of public demands in this area, as evidenced by a 2017 Fortune article about the Yoox Net-a-Porter Group.

Net-a-Porter is a large, online retailer (with $2 billion/year in sales) that markets top-line brands such as Prada, Gucci, and Michael Kors. After a survey of its customers showed that a significant majority want the company to forgo fur products, it decided to forbid the use of fur in its entire line. Other big-name brands such as Armani, Hugo Boss, North Face, Nautica, and Timberland have followed Net-a-Porter’s lead and recently announced fur-free policies.

Related developments are taking place in the cosmetics and food industries. Many cosmetics companies have announced cruelty-free product testing policies for products ranging from makeup to hairspray. In the food industry, the U.S. Department of Agriculture recently reported that cage-free eggs account for approximately one-quarter of the wholesale shell egg market.

Why? Sales and profits are the answer, along with sustainability. According to research conducted by Walmart, over 75 percent of the retail giant’s customers said they would be more likely to shop at a store that improves its policies related to animal welfare. Thus, not only Walmart but also supermarket chains such as Kroger have announced the gradual implementation of cage-free egg-buying policies, as have fast food giants such as McDonald’s and Burger King.

Such changes are often prompted, if not driven, by the influence of informed consumer stakeholders who are demanding the products they want to buy.

The Revolving Door between Government Regulation and the Private Sector

While private companies may take the initiative in response to public demand, and intergovernmental cooperation can accomplish many good things, sometimes the solution is for a private-sector company or industry to work directly with the government, as we saw with the example of Space X. Given the pressure on federal, state, and local agencies to reduce their budgets, many have increasingly turned to public-private partnerships, or P3s, as a means to solve problems.

Sometimes, however, the relationship between business and government can become too close, as when executives from the private sector leave their jobs to work for government agencies, becoming the regulators rather than the regulated, and then return to industry in a kind of “revolving door” effect. For example, Goldman Sachs, one of the world’s largest financial services firms, has seen many of its executives take senior leadership positions in the presidential administrations of both Democrats and Republicans, including the present secretary of the treasury, Steven Mnuchin. The same trend is occurring on a global level; Mario Draghi, the president of the European Central Bank, was previously a vice chair and managing director of Goldman Sachs International, and Mark Carney, the governor of the Bank of England, worked for Goldman Sachs as well. The large number of executives from one of the biggest investment banks in the world moving in and out of government service causes some critics to warn of the “fox guarding the hen house” approach to regulation. Is the relationship between government and the private sector sometimes too cozy? Does this revolving door in fact result in bad policy?

Of course, it would be incorrect to assume, because multiple executives of a firm landed in government positions, that the firm is automatically guilty of wrongdoing. Goldman Sachs has created several programs with ethical goals. The company encourages clients to consider environmental and sustainability issues, and it backs green bonds, which are used to fund projects that have positive environmental and/or climate benefits. In truth, our government would find it difficult to function without the expertise from the private sector supplementing that of the public sector in public service positions.

Research by the Federal Reserve Bank of Kansas City demonstrates how regulation and legislation in this area must strike a balance between encouraging and discouraging executives from the private sector to serve in high-level government positions. Our system of government service does not want to run the risk of undermining “the ability of regulatory agencies to seek and retain top level talent, but at the same time we do not want to impair the independence of government policy-makers.”

A quick look at some figures indicates the scope of the problem. A 2008 General Accounting Office survey of fifty large defense contractors revealed that almost ninety thousand people who had left the Department of Defense in the preceding eight years were afterwards employed by private-sector companies doing business with the government as contractors.

While legal restrictions exist to limit the revolving door effect, most relate only to direct government contracting. Private-sector companies seeking to acquire talent by hiring former employees of the federal government must be aware of the statutory and regulatory restrictions and their associated penalties.

One rule says former senior government employees may not make any communication with or appearance before their former agency, with the intent to influence the agency, for one year after leaving service. The ban is extended to two years for certain “very senior” officials.

Penalties for violations can include fines of up to $50,000 per violation and/or twice the amount of compensation received. On a company level, the penalty can be up to $500,000 per violation and/or twice the amount of the contract. Moreover, individuals who intentionally violate the law may be subject to criminal penalties, which can include up to five years in jail.

In 2009, shortly after he took office, President Obama issued an executive order requiring all executive agency appointees to take an ethics pledge as a prerequisite for accepting appointment. The pledge included a lobbying ban and restrictions on appointees and lobbyists entering and leaving the government. For instance, appointees entering the government had to agree not to participate in any matter both “directly and substantially” related to their former employer or clients for two years.

However, because these ethical restrictions were implemented by way of executive order, not federal statute, they may vary from president to president. Ethical questions have been raised about traditional conflict of interest concepts in the present administration, because people currently serving in it have retained ownership of private companies rather than selling them or placing them in blind trusts.

Of course, the relationship between government and business is an important one, and expertise in a field can be extremely valuable to both sides in a business-government partnership. However, this collaboration should be transparent and subject to public scrutiny, as noted by the Brookings Institution, one of the oldest nonprofit public policy think tanks. In a report entitled “Amateur Government: When Political Appointees Manage the Federal Bureaucracy,” the Institution warns against the potential for conflicts of interest stemming from allowing too many industry executives to move into government service, set overtly pro-industry policies, and then go back to their higher-paying, private-sector jobs. The key is to seek a balance.

Government Regulation and the Constitution

Over the past decade, many politicians have run for office on a platform of reducing government regulation. There are at least two closely related positions on reducing federal government regulation. The first is essentially a states’ rights position that seeks to limit the powers of the federal government to those very specifically enumerated in the Constitution. It is based on principles embodied in the Tenth Amendment and on a narrow interpretation of the Commerce Clause. The Tenth Amendment reserves to the states any right not specifically delegated to the federal government. The Commerce Clause is the part of the Constitution that gives the federal government the right to regulate commerce between states.

The second, related view of government regulation holds that “less is better” at all levels, whether state or federal. Its followers simply seek to reduce the size of government and regulation at every level. Some might attribute this position to a libertarian or “small government” philosophy.

These two philosophies might be characterized as less government regulation vs. no government regulation, other than military defense. The preference for state regulation is often based on a belief in the business community that many states are softer on regulation that the federal government, or that states are closer to the problems businesses face and are more efficient at addressing them. However, there is little clear evidence that one branch of government is more efficient than another. The real challenge is weighing the benefits of regulation against the costs, and finding the right balance between over- and under-regulation. Weak regulation can allow a business to cut corners. For instance, auto emission regulations intended to go into effect by certain dates have been delayed multiple times during the 1980s and the early 2000s. The Obama administration announced plans to enforce tougher rules, but the current administration has said it plans to delay implementation. Auto emission regulations have become politically charged, constantly changing depending on the party in power, and some states have responded with their own legislation instead of waiting for the federal stalemate to end. Regulation that is consistently enforced in the effort to achieve the long-term goal, such as cleaner air, is preferable to a moving target.

A third position is that government is not necessarily a bad thing. Such a “federalist” philosophy might assert that centralized government provides an array of benefits for citizens. For example, in the Federalist Papers, Alexander Hamilton emphasized that a well-intentioned central government was not the enemy of liberty but rather the best means of securing the rights achieved through the passage of the Constitution. He and others also pointed out an advantage of federal over state government—a large republic such as the United States would actually benefit from a larger electorate and a larger pool of qualified leaders, and competing state and regional interests would be more balanced under federal regulation.

Acceptance of one or the other of these philosophies may lean an administration towards more or less regulation, as well as calibrating its response to aggressive lobbying by industries seeking to reduce regulation they view as burdensome. The results for the environment and/or public health can sometimes be disastrous.

BP Deepwater Horizon Oil Spill and Government Regulation

The company that owned and operated the Deepwater Horizon drilling rig, Transocean Ltd., contracted in 2010 with BP to drill a very deep water offshore oil well in the Gulf of Mexico, in a field called the Macondo. The drilling operation failed and ultimately led to an infamous environmental and human disaster called the Deepwater Horizon spill that has since been the subject of intense scrutiny and litigation.

Eleven workers were killed and seventeen were injured, and at least five million barrels of oil poured into the ocean in the largest such spill in history. The environmental harm was epic in scale ((Figure)). Five years later, tar balls still dotted the beach. Oil buried beneath the sand offshore still gets pushed toward the beach whenever the surf is rough. Offshore islands have disappeared because the mangrove roots were coated in oil, killing the trees. Once the mangrove root framework that holds the land together was destroyed, the islands were washed away within a few years. Louisiana was already losing land at a concerning pace, and more has been lost since the spill. Scientists confirm that the disaster has accelerated the pace of the loss.

The 2010 Deepwater Horizon oil rig fire and resulting river of oil in the Gulf of Mexico. (credit left: modification of “Deepwater Horizon offshore drilling unit on fire” by the US Coast Guard/Wikimedia Commons, Public Domain; credit right: modification of “Defense.gov photo essay 100506-N-6436W-023” by Michael B. Watkins/Wikimedia Commons, Public Domain)


Left: The Deepwater Horizon oil rig on fire, surrounded with multiple ships spraying suppression materials. Right: Oil floating on the surface of water in the Gulf of Mexico.

Many question whether more regulation and a better relationship between regulators and the oil industry might have prevented the Deepwater Horizon disaster. Transocean, the rig owner/operator, did not install a relatively inexpensive safety device, an acoustically triggered shutoff valve, which most experts agree could have stopped the flow of oil from the well into the Gulf. Congress had not mandated such a device, largely as a result of oil industry lobbying, and since it wasn’t required, BP and Transocean were free to act as they pleased.

Other nations with offshore drilling activities, such as Norway and Brazil, mandate that all oil rigs be equipped with backup acoustically triggered shutoff valves as a safety measure. Norway has a stellar reputation for safety related to its North Sea offshore drilling. Two-thirds of Statoil, its largest oil company, is owned by the government, and, as a result, the company does not lobby the government for weakened regulation. The same is true of Petrobras, the Brazilian oil company.

Partial government ownership makes public/private-sector cooperation more likely and is therefore likely to improve safety as well.

Critical Thinking

  • Should the U.S. government pass a law requiring the use of the automatic shutoff valves on oil rigs in its waters?
  • Should privately owned oil companies be allowed to lobby against safety regulations?
  • Research whether public attitudes in the United States support stronger offshore drilling safety regulations. What do you think accounts for your findings?

Questions of regulation and political influence have become even more sensitive in recent years, following the decision in Citizens United v. Federal Election Commission (2010).

In Citizens United, the U.S. Supreme Court ruled 5–4 that laws preventing corporations from using general treasury funds for political advertising violated the First Amendment’s guarantee of freedom of speech. In other words, the government may not prevent corporations from spending money to support or oppose candidates in elections. With this decision, the Court invalidated numerous campaign finance reform laws. Many commentators think the decision opened the floodgates for special-interest groups to spend without limit in U.S. elections.

What does Citizens United mean for businesses? Business entities may now seek to persuade the voting public by spending an unlimited amount of money on political ads, whether through social media or traditional print and broadcast media. Businesses opposed to government regulation can spend without limit to help elect candidates whose position on reduced regulation is the same as theirs, thereby increasing the pressure on Congress to deregulate. Many think the profusion of money in U.S. politics is one cause of the partisan divide that often paralyzes the legislative branch and unduly influences the executive branch.

One of the sponsors of the corporate governance law known as the Sarbanes-Oxley Act (SOX), Senator Paul Sarbanes (D-MD), is among those who would like to see financial limits on business lobbying groups and political action committees, several of which are attempting to repeal current regulations such as SOX, which is tough on business fraud. Sarbanes-Oxley, passed in 2002 in response to several highly publicized corporate fraud cases that took down companies such as Enron and WorldCom, mandates reporting transparency in areas ranging from finance to accounting to supply chain activities. Essentially, it ensures that we now consider it both unethical and illegal to deceive shareholders, creditors, and the public at large.

Sarbanes-Oxley applies to publicly traded companies and is enforced by the Securities and Exchange Commission. It covers multiple topics such as the independence of corporate boards and outside certified public accounting firms that audit corporations. The law also makes the CEO and CFO personally responsible for errors in annual audits—thus making it harder to “cook the books.” Finally, it prohibits company loans to executives and grants protection to whistleblowers.

Some critics thought compliance with SOX might be too costly. However, after more than a decade of enforcement, it is now clear to most that Sarbanes-Oxley was, and is, a necessary regulatory step. It has allowed for significant progress to be made in slowing down the kind of unethical conduct that led to the Enron fraud. Although SOX technically applies only to publicly traded companies, many private companies also adopt SOX-style internal controls and transparency, as do not-for-profits such as universities and hospitals.

Summary

One challenge in a free enterprise system is balancing the need for government regulation and private-sector corporate managers’ need for independence in running their businesses. The Sarbanes-Oxley Act tries to strike this balance by mandating transparency in corporate governance. This debate also includes the question whether businesses operating in the private sector ought to do public good on their own, regardless of whether the government mandates it. For example, many companies make a commitment to keep the environment clean, and to do so by going above and beyond what the law requires.

Assessment Questions

True or false? The law prohibits all executives from serving in senior government posts and then leaving to go back to work for the same company in the private sector.

False. Legal restrictions exist to limit the revolving door effect, but most relate only to direct government contracting and/or lobbying.

True or false? Air pollution is regulated by three levels of government: local, state, and federal.

True

Which of the following is true?

  1. Very few business executives have ever left private jobs to go into government service.
  2. Most government regulatory agencies are funded by donations.
  3. Numerous executives have left Goldman Sachs to go to work for the government.
  4. Few people leave government service to go into the private sector.

C

Which of the following constitutional provisions gives regulatory power to the federal government?

  1. First Amendment
  2. Tenth Amendment
  3. Commerce Clause
  4. Supremacy Clause

C

The Citizens United case ________.

  1. upheld existing law limiting spending on behalf of political candidates
  2. overturned existing law
  3. sent the case back to the lower court to be re-tried
  4. created more restrictive limits on political spending

B

What Amendment was at the center of the Citizens United case? Explain.

The First Amendment and free speech: The case was a challenge to the federal elections law limiting the amount of money a person or business can spend in support of a political candidate.

Endnotes

49Lauren Rosenbaum, “The growing complexity of social and economic challenges is driving new, innovative forms of collaboration between governments and businesses.” Deloitte, March, 19, 2013. https://www2.deloitte.com/insights/us/en/focus/business-trends/2013/partnerships-for-the-future.html.
50U.S. Department of Justice, “Under Agreement with United States and State of Texas, Vopak to Reduce Hazardous Air Pollution at Chemical Storage Facility,” May 17, 2017. https://www.justice.gov/opa/pr/under-agreement-united-states-and-state-texas-vopak-reduce-hazardous-air-pollution-chemical.
51U.S. Department of Justice, “State-Federal Cooperation in Environmental Enforcement,” May 24, 2017. https://www.justice.gov/archives/opa/blog/state-federal-cooperation-environmental-enforcement.
52Ben Wolfgang, “Environmentalists, Tribes Promise Dakota Access-style Camps, Protests to Stop Keystone XL Pipeline,” The Washington Times, March 24, 2017. http://www.washingtontimes.com/news/2017/mar/24/keystone-xl-pipeline-environmentalists-tribes-prom/.
53Oliver Laughland and Laurence Mathieu-Léger, “Keystone Pipeline Defiance Triggers Further Assault on Citizens’ Rights,” The Guardian, May 3, 2017. https://www.theguardian.com/us-news/2017/may/03/keystone-pipeline-protests-land-rights-south-dakota.
54World Health Organization, “Global Status Report on Alcohol and Health,” 2011. http://www.who.int/substance_abuse/publications/global_alcohol_report/msbgsruprofiles.pdf.
55Larry Merlo, “Message from Larry Merlo, President and CEO,” February 5, 2014. https://cvshealth.com/thought-leadership/message-from-larry-merlo-president-and-ceo.
56Louis Jacobson, “Counting Up How Much the NRA Spends on Campaigns and Lobbying,” Politifact, October 11, 2017. http://www.politifact.com/truth-o-meter/article/2017/oct/11/counting-up-how-much-nra-spends/.
57Mattie Quinn, “The Opioid Files: Hundreds of States and Cities Are Suing Drug Companies,” Governing, November 13, 2017. http://www.governing.com/topics/health-human-services/gov-opioid-lawsuits-companies-states-cities.html.
58Owen Amos, “Why Opioids Are Such an American Problem?” BBC News, October 25, 2017. http://www.bbc.com/news/world-us-canada-41701718.
59Matthew Prescott, “Why Animal Cruelty Is Bad Business,” Fortune, June 23, 2017. http://fortune.com/2017/06/23/animal-cruelty-stop-human-society-welfare-businesses-companies/.
60“Egg Markets Overview,” USDA AMS Agricultural Analytics Division, July 20, 2018. https://www.ams.usda.gov/sites/default/files/media/Egg%20Markets%20Overview.pdf.
61Matthew Prescott, “Why Animal Cruelty Is Bad Business,” Fortune, June 23, 2017. http://fortune.com/2017/06/23/animal-cruelty-stop-human-society-welfare-businesses-companies/.
62Janet Yellen, “Financial Stability a Decade after the Onset of the Crisis,” Symposium Federal Reserve Bank of Kansas City, August 25, 2017. https://www.federalreserve.gov/newsevents/speech/yellen20170825a.htm.
63Dave Nadler and Ryan P. McGovern, “Top Ten Things Every Government Contractor Should Know about Post-Government Employment and ‘Revolving Door’ Restrictions,” Association of Corporate Counsel, September 2015. http://www.acc.com/_cs_upload/vl/membersonly/InfoPAK/584525_11.pdf.
64Dave Nadler and Ryan P. McGovern, “Top Ten Things Every Government Contractor Should Know about Post-Government Employment and ‘Revolving Door’ Restrictions,” Association of Corporate Counsel, June 18, 2013. http://www.acc.com/legalresources/publications/topten/tttegcskapeardr.cfm?bcsi-ac-a70e1c0dc9ec8868=2719437500000002IZDw7%2FkDT%2FHOA2foH2ESHqJFX%2FQEYQAAAgAAAD+gbAGEAwAAUgAAAHsnLwA.
65Dave Nadler and Ryan P. McGovern, “Top Ten Things Every Government Contractor Should Know about Post-Government Employment and ‘Revolving Door’ Restrictions,” Association of Corporate Counsel, June 18, 2013.
66David M. Cohen, “Amateur Government: When Political Appointees Manage the Federal Bureaucracy,” The Brookings Institution, 1996. https://www.brookings.edu/wp-content/uploads/2016/06/amateur.pdf.
67EPA, “Deepwater Horizon – BP Gulf of Mexico Oil Spill.” https://www.epa.gov/enforcement/deepwater-horizon-bp-gulf-mexico-oil-spill.
68Debbie Elliott, “5 Years after BP Oil Spill, Effects Linger and Recovery Is Slow,” NPR, April 20, 2015. https://www.npr.org/2015/04/20/400374744/5-years-after-bp-oil-spill-effects-linger-and-recovery-is-slow
69Russell Gold, et al., “Leaking Oil Well Lacked Safeguard Device,” Wall Street Journal, April 28, 2010. https://www.wsj.com/articles/SB10001424052748704423504575212031417936798.
70Citizens United v. Federal Election Commission, 558 U.S. 310 (2010).

Glossary

Citizens United
a 2010 Supreme Court ruling in favor of unlimited spending by individuals and corporations on political campaigns
Commerce Clause
an enumerated power listed in the Constitution giving the federal government the right to regulate commerce between states
Sarbanes-Oxley
legislation passed in 2002 that mandates reporting transparency by businesses in areas ranging from finance to accounting to supply chain activities
states’ rights
a view that states should have more governing authority than the federal government, based on the Tenth Amendment, which reserves to the states any right not specifically delegated to the federal government

The Impact of Culture and Time on Business Ethics

V

Introduction

21

Business ethics do not exist in a vacuum. They are a reflection of the underlying values of a society and the way society lives out those values over time. This experience is captured in language, culture, religious traditions, and modes of thinking, all of which have varied throughout history and influence the conduct of business in a range of ways. (credit: modification of “atlas close up dark dirty” by Aaditya Arora/Pexels, CC0)


This image shows a map of the world on a dark background with the continents cutout to reveal a lighter color.

Ethics is a construct of considerable significance to human beings. Some suggest ethics emerged to allow families and clans to cooperate in harsh environments. Others point to its use in governing trade and commerce, even simple bartering. Still others say ethical behavior is wired into the cognitive structures of the brain, explaining why we find codes of ethics and morality in texts as diverse as the Code of Hammurabi (a Babylonian code of law nearly four thousand years old), the Bible, the Napoleonic Code, and The Analects of Confucius, all of which outline ways for people to live together in society.

Whatever its origin, ethics has almost certainly existed throughout human time and varied with language, culture, history, and geography ((Figure)). Are there underlying values that transcend time and place, however? If so, do the protocols of business ethics embody these values? For instance, we see respect for others in Dubai, where tea accompanies negotiations; in Tokyo, where formal words and bows come first; and in Lima, where polite inquiries about the family precede business. Is respect, therefore, a universal value?

In short, to what degree is any code of business ethics conditioned by culture, time, and geography? Given that individuals are responsible only for their own behavior, is it possible for business ethics to be universal?

The Relationship between Business Ethics and Culture

22

Learning Objectives

By the end of this section, you will be able to:

  • Describe the processes of acculturation and enculturation
  • Explain the interaction of business and culture from an ethical perspective
  • Analyze how consumerism and the global marketplace might challenge the belief system of an organization

It has been said that English is the language of money and, for that reason, has become the language of business, finance, trade, communication, and travel. As such, English carries with it the values and assumptions of its native speakers around the world. But not all cultures share these assumptions, at least not implicitly. The sick leave or vacation policies of a British investment bank, for instance, may vary greatly from those of a shoe manufacturer in Laos. Because business and capitalism as conducted today have evolved primarily from European origins and profits are measured against Western standards like the U.S. dollar, the ethics that emerges from them is also beholden primarily (but not exclusively) to Western conceptions of behavior. The challenge for business leaders everywhere is to draw out the values of local cultures and integrate the best of those into their management models. The opportunities for doing so are enormous given the growing impact of China, India, Russia, and Brazil in global commerce. The cultures of these countries will affect the dominant business model, possibly even defining new ethical standards.

Business Encounters Culture

To understand the influence of culture on business ethics, it is essential to understand the concepts of enculturation and acculturation. In its most basic anthropological sense, enculturation refers to the process by which humans learn the rules, customs, skills, and values to participate in a society. In other words, no one is born with culture; all humans, regardless of their origin, have to learn what is considered appropriate behavior in their surrounding cultures. Whereas enculturation is the acquisition of any society’s norms and values, acculturation refers specifically to the cultural transmission and socialization process that stems from cultural exchange. The effects of this blending of cultures appear in both the native (original) culture and the host (adopted) culture. Historically, acculturation has often been the result of military or political conquest. Today, it also comes about through economic development and the worldwide reach of the media.

One of the earliest real estate deals in the New World exemplifies the complexity that results when different cultures, experiences, and ethical codes come into contact. No deed of sale remains, so it is difficult to tell exactly what happened in May 1626 in what is now Manhattan, but historians agree that some kind of transaction took place between the Dutch West India Company, represented by Pieter Minuit, the newly appointed director-general of the New Netherland colony, and the Lenape, a Native American tribe ((Figure)). Which exact Lenape tribe is unknown; its members may have been simply passing through Manhattan and could have been the Canarsee, who lived in what is today southern Brooklyn.

Legend has it that the Dutch bought Manhattan island for $24 worth of beads and trinkets, but some historians believe the natives granted the Dutch only fishing and hunting rights and not outright ownership. Furthermore, the price, acknowledged as “sixty guilders” (about $1000 today), could actually represent the value of items such as farming tools, muskets, gun powder, kettles, axes, knives, and clothing offered by the Dutch. Clearly, the reality was more nuanced than the legend.

The 1626 purchase of Manhattan as depicted by Alfred Fredericks in The Popular Science Monthly of 1909. (credit: “The Purchase of Manhattan Island” by “Ineuw”/Wikimedia Commons, Public Domain)


This figure shows a depiction of a white man holding a paper and meeting with two Native Americans. There are other Native Americans gathered around, sitting on the ground behind them. There is also another white man next to the first pulling fabric out of a chest.

The “purchase” of Manhattan is an excellent case study of an encounter between two vastly different cultures, worldviews, histories, and experiences of reality, all within a single geographic area. Although it is a misconception that the native peoples of what would become the United States did not own property or value individual possession, it is nevertheless true that their approach to property was more fluid than that of the Dutch and of later settlers like the English, who regarded property as a fixed commodity that could be owned and transferred to others. These differences, as well as enforced taxation, eventually led to war between the Dutch and several Native American tribes.

European colonization only exacerbated hostilities and misunderstandings, not merely about how to conduct business but also about how to live together in harmony.

Two major conditions affect the relationship between business and culture. The first is that business is not culturally neutral. Today, it typically displays a mindset that is Western and primarily English-speaking and is reinforced by the enculturation process of Western nations, which tends to emphasize individualism and competition. In this tradition, business is defined as the exchange of goods and services in a dedicated market for the purpose of commerce and creating value for its owners and investors. Thus, business is not open ended but rather directed toward a specific goal and supported by beliefs about labor, ownership, property, and rights.

In the West, we typically think of these beliefs in Western terms. This worldview explains the misunderstanding between Minuit, who assumed he was buying Manhattan, and the tribal leaders, who may have had in mind nothing of the sort but instead believed they were granting some use rights. The point is that a particular understanding of and approach to business are already givens in any particular culture. Businesspeople who work across cultures in effect have entered the theater in the middle of the movie, and often they must perform the translation work of business to put their understanding and approach into local cultural idioms. One example of this is the fact that you might find sambal chili sauce in an Indonesian McDonald’s in place of Heinz ketchup, but the restaurant, nevertheless, is a McDonald’s.

The second condition that affects the relationship between business and culture is more complex because it reflects an evolving view of business in which the purpose is not solely generating wealth but also balancing profitability and responsibility to the public interest and the planet. In this view, which has developed as a result of political change and economic globalization, organizations comply with legal and economic regulations but then go beyond them to effect social change and sometimes even social justice.

The dominant manufacture-production-marketing-consumption model is changing to meet the demands of an increasing global population and finite resources. No longer can an organization maintain a purely bottom-line mentality; now it must consider ethics, and, therefore, social responsibility and sustainability, throughout its entire operation. As a result, local cultures are assuming a more aggressive role in defining their relationship with business prevalent in their regions.

Had this change taken place four centuries ago, that transaction in Manhattan might have gone a little differently. However, working across cultures can also create challenging ethical dilemmas, especially in regions where corruption is commonplace. A number of companies have experienced this problem, and globalization will likely only increase its incidence.

Petrobras

If you were to do a top-ten list of the world’s greatest corruption scandals, the problems of Petrobras (Petróleo Brasileiro) in Brazil surely would make the list. The majority state-owned petroleum conglomerate was a party to a multibillion-dollar scandal in which company executives received bribes and kickbacks from contractors in exchange for lucrative construction and drilling contracts. The contractors paid Petrobras executives upward of five percent of the contract amount, which was funneled back into slush funds. The slush funds, in turn, paid for the election campaigns of certain members of the ruling political party, Partido dos Trabalhadores, or Workers Party, as well as for luxury items like race cars, jewelry, Rolex watches, yachts, wine, and art.

The original investigation, known as Operation Car Wash (Lava Jato), began in 2014 at a gas station and car wash in Brasília, where money was being laundered. It has since expanded to include scrutiny of senators, government officials, and the former president of the republic, Luiz Inácio Lula da Silva. The probe also contributed to the impeachment and removal of Lula’s successor, Dilma Rousseff. Lula and Rousseff are members of the Workers Party. The case is complex, revealing Chinese suppliers, Swiss bank accounts where money was hidden from Brazilian authorities, and wire transfers that went through New York City and caught the eye of the U.S. Department of Justice. In early 2017, the Brazilian Supreme Court justice in charge of the investigation and prosecution was mysteriously killed in a plane crash.

It is hard to imagine a more tragic example of systemic breakdown and individual vice. The loss of trust in government and the economy still affects ordinary Brazilians. Meanwhile, the investigation continues.

Critical Thinking

  • Is there any aspect of the case where you think preventive measures could have been taken either by management or government? How would they have worked?
  • Do you think this case represents an example of a culture with different business ethics than those practiced in the United States? Why or why not? How might corporations with international locations adjust for this type of issue?

Balancing Beliefs

What about the ethical dimensions of a business in a developed country engaging in commerce in an environment where corruption might be more rampant than at home? How can an organization remain true to its mission and what it believes about itself while honoring local customs and ethical standards? The question is significant because it goes to the heart of the organization’s values, its operations, and its internal culture. What must a business do to engage with local culture while still fulfilling its purpose, whether managers see that purpose as profitability, social responsibility, or a balance between the two?

Most business organizations hold three kinds of beliefs about themselves. The first identifies the purpose of business itself. In recent years, this purpose has come to be the creation not just of shareholder wealth but also of economic or personal value for workers, communities, and investors.

The second belief defines the organization’s mission, which encapsulates its purpose. Most organizations maintain some form of mission statement. For instance, although IBM did away with its formal mission statement in 2003, its underlying beliefs about itself have remained intact since its founding in 1911. These are (1) dedication to client success, (2) innovation that matters (for IBM and the world), and (3) trust and personal responsibility in all relationships.

President and chief executive officer (CEO) Ginni Rometty stated the company “remain[s] dedicated to leading the world into a more prosperous and progressive future; to creating a world that is fairer, more diverse, more tolerant, more just.”

Finally, businesses also go through the process of enculturation; as a result, they have certain beliefs about themselves, drawn from the customs, language, history, religion, and ethics of the culture in which they are formed. One example of a company whose ethics and ethical practices are deeply embedded in its culture is Merck & Co., one of the world’s largest pharmaceutical companies and known for its strong ethical values and leadership. As its founder George W. Merck (1894–1957) once stated, “We try to remember that medicine is for the patient. We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.”

Culture is deeply rooted, but businesses may make their own interpretations of its accepted norms.

Our beliefs are also challenged when a clash occurs between a legal framework and cultural norms, such as when a company feels compelled to engage in dubious and even illegal activities to generate business. For example, the German technology company Siemens has paid billions of dollars in fines and judgments for bribing government officials in several countries. Although some local officials may have expected to receive bribes to grant government contracts, Siemens was still bound by national and international regulations forbidding the practice, as well as by its own code of ethics. How can a company remain true to its mission and code of ethics in a highly competitive international environment ((Figure))?

Ethical decision-making in a global context requires a broad perspective. Business leaders need to know themselves, their organization’s mission, and the impact of their decisions on local communities. They also must be open to varying degrees of risk. (credit: “accomplishment action adventure atmosphere” by unknown/Pixabay, CC0)


This image shows a person hiking up a snow-covered mountain. The moon is half-full and off to the right of the mountain and the hiker. It appears very large in the sky and very close to the hiker.

Business performance is a reflection of what an organization believes about itself, as in the IBM and Merck examples.

Those beliefs, in turn, spring from what the individuals in the organization believe about it and themselves, based on their communities, families, personal biographies, religious beliefs, and educational backgrounds. Unless key leaders have a vision for the organization and themselves, and a path to achieving it, there can be no balance of beliefs about profitability and responsibility, or integration of business with culture. The Manhattan purchase was successful to the degree that Minuit and the tribal leaders were willing to engage in an exchange of mutual benefit. Yet this revealed a transaction between two very different commercial cultures. Did each group truly understand the other’s perception of an exchange of goods and services? Furthermore, did the parties balance personal and collective beliefs for the greater good? Given the distinctions between these two cultures, would that even have been possible?

Consumerism and the Global Marketplace

To paraphrase the ancient Greek philosopher Heraclitus (c. 535–475 BCE), the one constant in life is change. Traditional norms and customs have changed as the world’s population has grown more diverse and urbanized, and as the Internet has made news and other resources readily available. The growing emphasis on consumerism—a lifestyle characterized by the acquisition of goods and services—has meant that people have become defined as “consumers” as opposed to citizens or human beings. Unfortunately, this emphasis eventually leads to the problem of diminishing marginal utility, with the consumer having to buy an ever-increasing amount to reach the same level of satisfaction.

At the same time, markets have become more diverse and interconnected. For example, South Korean companies like LG and Samsung employ 52,000 workers in the United States,

and many U.S. companies now manufacture their products abroad. Such globalization of their domestic markets has allowed U.S. consumers to enjoy products from around the world, but it also presents ethical challenges. The individual consumer, for instance, may benefit from lower prices and a greater selection of goods, but only by supporting a company that might be engaged in unethical practices in its overseas supply or distribution chains. Producers’ choices about wages, working conditions, environmental impact, child labor, taxation, and plant safety feature in the creation of each product brought to market. Becoming aware of these factors requires consumers to engage in an investigation of the business practices of those parties they will patronize and exercise a certain amount of cultural and ethical sensitivity.

Overseas Manufacturing

How can the purchase of a pair of sneakers be seen as an ethical act? Throughout the 1990s, the U.S. shoe and sportswear manufacturer Nike was widely criticized for subcontracting with factories in China and Southeast Asia that were little more than sweatshops with deplorable working conditions. After responding to the criticisms and demanding that its suppliers improve their workplaces, the company began to redeem itself in the eyes of many and has become a model of business ethics and sustainability. However, questions remain about the relationship between business and government.

For instance, should a company advocate for labor rights, a minimum wage, and unionization in developing countries where it has operations? What responsibility does it have for the welfare of a contractor’s workers in a culture with differing customs? What right does any Western company have to insist that its foreign contractors observe in their factories the protocols required in the West? What, for example, is sacred about an eight-hour workday? When Nike demands that foreign manufacturers observe Western laws and customs about the workplace, arguably this is capitalist imperialism. Not only that, but Western firms will be charged more for concessions regarding factory conditions. Perhaps this is as it should be, but Western consumers must then be prepared to pay more for material goods than in the past.

Some argue that demanding that companies accept these responsibilities imposes cultural standards on another culture through economic pressure. Others insist there should be universal standards of humane employee treatment, and that they must be met regardless of where they come from or who imposes them. But should the market dictate such standards, or should the government?

The rise of artificial intelligence and robotics will complicate this challenge because, in time, they may make offshoring the manufacture and distribution of goods unnecessary. It may be cheaper and more efficient to bring these operations back to developed countries and use robotic systems instead. What would that mean for local cultures and their economies? In Nike’s case, automation is already a concern, particularly as competition from its German rival, Adidas, heats up again.

Critical Thinking

  • What ethical responsibilities do individual consumers have when dealing with companies that rely on overseas labor?
  • Should businesses adopt universal workplace standards about working conditions and employee protections? Why or why not?
  • What would be required for consumers to have the necessary knowledge about a product and how it was made so that they could make an informed and ethical decision? The media? Commercial watchdog groups? Social-issues campaigns? Something else?

In considering the ethical challenges presented by the outsourcing of production to lower costs and increase profits, let us return to the example of IBM. IBM has a responsibility to provide technology products of high quality at affordable prices in line with its beliefs about client success, innovation, and trust. If it achieved these ends in a fraudulent or otherwise illegal way, it would be acting irresponsibly and in violation of both U.S. and host country laws and as well as the company’s own code of ethics. These constraints appear to leave little room for unethical behavior, yet in a globalized world of intense competition, the temptation to do anything possible to carve out an advantage can be overpowering. This choice between ends and means is reminiscent of the philosophers Aristotle and Kant, both of whom believed it impossible to achieve just ends through unjust means.

But what about consumer responsibility and the impact on the global community? Western consumers tend to perceive globalization as a phenomenon intended to benefit them specifically. In general, they have few compunctions about Western businesses offshoring their manufacturing operations as long as it ultimately benefits them as consumers. However, even in business, ethics is not about consumption but rather about human morality, a greater end. Considering an expansion of domestic markets, what feature of this process enables us to become more humane rather than simply pickier consumers or wasteful spenders? It is the opportunity to encounter other cultures and people, increasing our ethical awareness and sensitivity. Seen in this way, globalization affects the human condition. It raises no less a question than what kind of world we want to leave to our children and grandchildren.

Summary

Culture has a tremendous influence on ethics and its application in a business setting. In fact, we can argue that culture and ethics cannot be separated, because ethical norms have been established over time by and make sense to people who share the same background, language, and customs. For its part, business operates within at least two cultures: its organizational culture and the wider culture in which it was founded. When a business attempts to establish itself in a new environment, a third culture comes into play. With increasingly diverse domestic and global markets and the spread of consumerism, companies must consider the ethical implications of outsourcing production and resist the temptation to look the other way when their values are challenged by the reality of overseas supply or distribution chains.

Assessment Questions

The fact that a McDonald’s in Indonesia might provide sambal chili sauce to its customers rather than ketchup is as an example of ________.

  1. acculturation
  2. consumerism
  3. enculturation
  4. globalization

A

What is the major difference between enculturation and acculturation?

Enculturation is the process by which humans learn the characteristics, values, and rules to participate in a society more generally, whereas acculturation is the introduction of the values, worldview, philosophy, or practice of one culture into another.

How might consumerism be at odds with the growing concern for business ethics?

As an extreme preoccupation with buying and owning, consumerism runs counter to the new sensitivity to ethics and human flourishing in business, because it defines people not by their humanity but by their purchasing power.

True or False? Globalization is evidence that business is culturally neutral.

False. Cultures often adapt to business rather than the other way around. As an example, U.S.-style jeans and baseball caps can now be found globally.

Endnotes

1Janos Marton, “Today in NYC History: How the Dutch Actually Bought Manhattan (The Long Version),” Untapped Cities. https://untappedcities.com/2015/05/06/today-in-nyc-history-how-the-dutch-actually-bought-manhattan-the-long-version/ (accessed December 5, 2017).
2Nathanial Benchley, “The 24$ Swindle,” American Heritage. http://www.americanheritage.com/content/24-swindle (accessed December 5, 2017).
3Ojibwa, “The Governor Krieft War,” Native American Netroots. http://nativeamericannetroots.net/diary/968 (accessed December 7, 2017).
4David Gelles and Claire Cain Miller, “Business Schools Now Teaching #MeToo, N.F.L. Protests and Trump,” New York Times, December 25, 2017. https://www.nytimes.com/2017/12/25/business/mba-business-school-ethics.html.
5Jonathan Watts, “The Long Read Operation Car Wash: Is This the Biggest Corruption Scandal in History?” The Guardian, June 1, 2017. https://www.theguardian.com/world/2017/jun/01/brazil-operation-car-wash-is-this-the-biggest-corruption-scandal-in-history.
6David Gautschi, “The Liberal Arts: What Business Needs Now” (speech, Orono, Maine, May 4, 2016), Phi Beta Kappa induction, University of Maine.
7Ovidijus Jurevicius, “Mission Statement of IBM,” Strategic Management Insight. https://www.strategicmanagementinsight.com/mission-statements/ibm-mission-statement.html (accessed December 15, 2017).
8IBM homepage. https://www.ibm.com/ibm/us/en/ (accessed December 15, 2017).
9George W. Merck, “Medicine Is for the Patient, Not for the Profits” (speech, Richmond, Virginia, December 1, 1950), Medical College of Virginia at Richmond. https://www.merck.com/about/our-people/gw-merck-doc.pdf.
10Michael Avari and Robert Brancatelli, “Integrating Virtue into the Jesuit Business School Curriculum,” Journal of Jesuit Business Education 5, no. 1 (2014): 71–87.
11Nancy McLernon, “Protectionism Is a Negative-Sum Game,” Wall Street Journal, December 11, 2017.
12Jennifer Bissell-Linsk, “Nike’s Focus on Robotics Threatens Asia’s Low-Cost Workforce,” Financial Times, October 22, 2017. https://www.ft.com/content/585866fc-a841-11e7-ab55-27219df83c97 (accessed December 26, 2017).

Glossary

acculturation
the cultural transmission and socialization process that stems from cultural exchange
consumerism
a lifestyle characterized by the acquisition of goods and services
enculturation
the process by which humans learn the rules, customs, skills, and values to participate in a society

Business Ethics over Time

23

Learning Objectives

By the end of this section, you will be able to:

  • Describe the ways ethical standards change over time
  • Identify major shifts in technology and ethical thinking over the last five hundred years
  • Explain the impact of government and self-imposed regulation on ethical standards and practices in the United States

Besides culture, the other major influence in the development of business ethics is the passage of time. Ethical standards do not remain fixed; they transform in response to evolving situations. Over time, people change, technology advances, and cultural mores (i.e., acquired culture and manners) shift. What was considered an appropriate or accepted business practice one hundred or even fifty years ago may not carry the same moral weight it once did. However, this does not mean ethics and moral behavior are relative. It simply acknowledges that attitudes change in relationship to historical events and that cultural perspective and the process of acculturation are not stagnant.

Shifts in Cultural and Ethical Standards

We find an example of changing cultural mores in the fashion industry, where drastic evolution can occur even over ten years, let alone a century. The changes can be more than simply stylistic ones. Clothing reflects people’s view of themselves, their world, and their values. A woman in the first half of the twentieth century might be very proud to wear a fox stole with its head and feet intact ((Figure)). Today, many would consider that an ethical faux pas, even as the use of fur remains common in the industry despite active campaigns against it by organizations such as People for the Ethical Treatment of Animals. At the same time, cosmetics manufacturers increasingly pledge not to test their products on animals, reflecting changing awareness of animals’ rights.

Philanthropist Anne Morgan, wife of banker and industrialist J.P. Morgan, wearing a fur stole circa 1915. (credit: “Anne Morgan, wearing fur stole, ca. 1915” by “Elisa.rolle”/Wikimedia Commons, Public Domain)


This image shows Anne Morgan wearing a fox stole over her shoulders, gloves, a hat, and a jacket and skirt.

Bias is built into the human psyche and expressed through our social structures. For this reason, we should avoid making snap judgments about past eras based on today’s standards. The challenge, of course, is to know which values are situational—that is, although many values and ethics are relative and subjective, others are objectively true, at least to most people. We can hardly argue in favor of slavery, for example, no matter in which culture or historical era it was practiced. Of course, although some values strike us as universal, the ways in which they are interpreted and applied vary over time, so that what was once acceptable no longer is, or the reverse.

When Even Doctors Smoked

From the 1940s to the 1970s, cigarettes were as common as water bottles are today. Nearly everyone smoked, from judges in court to factory workers and pregnant women. Edward Bernays, the Austrian-American founder of the field of public relations, promoted smoking among women in a 1929 campaign in New York City in which he marketed Lucky Strike cigarettes as “torches of freedom” that would lead to equality between men and women. However, by the late 1960s, and in the wake of the release of the landmark Surgeon General’s report on “Smoking and Health” on January 11, 1964, it had become clear that there was a direct link between cigarette smoking and lung cancer. Subsequent research has added heart and lung diseases, stroke, and diabetes. Smoking has decreased in Western countries but remains well established in the global East and South, where cigarette manufacturers actively promote the products in markets like Brazil, China, Russia, and Singapore, especially among young people.

Critical Thinking

Are such practices ethical? Why or why not?

Thus, we acknowledge that different eras upheld different ethical standards, and that each of these standards has had an impact on our understanding of ethics today. But this realization raises some basic questions. First, what should we discard and what should we keep from the past? Second, on what basis should we make this decision? Third, is history cumulative, progressing onward and upward through time, or does it unfold in different and more complicated ways, sometimes circling back upon itself?

The major historical periods that have shaped business ethics are the age of mercantilism, the Industrial Revolution, the postindustrial era, the Information Age, and the age of economic globalization, to which the rise of the Internet contributed significantly. Each of these periods has had a different impact on ethics and what is considered acceptable business practice. Some economists believe there may even be a postglobalization phase arising from populist movements throughout the world that question the benefits of free trade and call for protective measures, like import barriers and export subsidies, to reassert national sovereignty.

In some ways, these protectionist reactions represent a return to the theories and policies that were popular in the age of mercantilism.

Unlike capitalism, which views wealth creation as the key to economic growth and prosperity, mercantilism relies on the theory that global wealth is static and, therefore, prosperity depends on extracting wealth or accumulating it from others. Under mercantilism, from the sixteenth to the eighteenth centuries, the exploration of newly opened markets and trade routes coincided with the impulse to colonize, producing an ethical code that valued acculturation by means of trade and often brute force. European powers extracted raw commodities like cotton, silk, diamonds, tea, and tobacco from their colonies in Africa, Asia, and South America and brought them home for production. Few questioned the practice, and the operation of business ethics consisted mainly of protecting owners’ interests.

During the Industrial Revolution and the postindustrial era, in the nineteenth and early twentieth centuries, business focused on the pursuit of wealth, the expansion of overseas markets, and the accumulation of capital. The goal was to earn as high a profit as possible for shareholders, with little concern for outside stakeholders. Charles Dickens (1812–1870) famously exposed the conditions of factory work and the poverty of the working class in many of his novels, as did the American writer Upton Sinclair (1878–1968). Although these periods witnessed extraordinary developments in science, medicine, engineering, and technology, the state of business ethics was perhaps best described by critics like Ida Tarbell (1857–1944), who said of industrialist John D. Rockefeller (1839–1937) ((Figure)), “Would you ask for scruples in an electric dynamo?”

Ida Tarbell (a) was a pioneer of investigative journalism and a leading “muckraker” of the Progressive Era. She is perhaps best known for her exposé of the business practices of John D. Rockefeller (b), founder of the Standard Oil Company. (credit a: modification of “TARBELL, IDA M.” by Harris & Ewing/Library of Congress, Public Domain; credit b: modification of “John D. Rockefeller 1885” by “DIREKTOR”/Wikimedia Commons, Public Domain)


Part A shows Ida Tarbell writing by hand at a desk. Part B shows John D. Rockefeller.

With the advent of the Information and Internet ages in the late twentieth and early twenty-first centuries, a code of professional conduct developed for the purpose of achieving goals through strategic planning.

In the past, ethical or normative rules were imposed from above to lead people toward right behavior, as the company defined it. Now, however, more emphasis is placed on each person at a firm embracing ethical standards and following those dictates to arrive at the appropriate behavior, whether at work or when off the clock.

The creation of human resources departments (increasingly now designated as human capital or human assets departments) is an outgrowth of this philosophy, because it reflects a view that humans have a unique value that ought not be reduced simply to the notion that they are instruments to be manipulated for the purposes of the organization. Millennia earlier, Aristotle referred to “living tools” in a similar but critical way.

Although one characteristic of the information age—access to information on an unprecedented scale—has transformed business and society (and some say made it more egalitarian), we must ask whether it also contributes to human flourishing, and to what extent business should concern itself with this goal.

A Matter of Time

What effect does time have on business ethics, and how is this effect achieved? If we accept that business today has two purposes—profitability and responsibility—we might assume that business ethics is in a much better position now than in the past to affect conduct across industries. However, much of the transformation of business over time has been the result of direct government intervention; one recent example is the Dodd–Frank Wall Street Reform and Consumer Protection Act that followed the financial crisis of 2008. Yet, despite such regulation and increased management vigilance in the form of ethics training, compliance reporting, whistleblower programs, and audits, it is tempting to conclude that business ethics is in worse shape than ever. The Information Age and the Internet may even have facilitated unethical behavior by making it easier to move large sums of money around undetected, by enabling the spread of misinformation on a global scale, and by exposing the public to the theft and misuse of vast stores of personal data gathered by companies as diverse as Equifax and Facebook.

However, since the mercantile era, there has been a gradual increase in awareness of the ethical dimension of business. As we saw in the preceding chapter, businesses and the U.S. government have debated and litigated the role of corporate social responsibility throughout the twentieth century, first validating the rule of shareholder primacy in Dodge v. Ford Motor Company (1919) and then moving away from a strict interpretation of it in Shlensky v. Wrigley (1968). In Dodge v. Ford Motor Company (1919), the Michigan Supreme Court famously ruled that Ford had to operate in the interests of its shareholders as opposed to its employees and managers, which meant prioritizing profit and return on investment. This court decision was made even though Henry Ford had said, “My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.”

By mid-century and the case of Shlensky v. Wrigley (1968), the courts had given boards of directors and management more latitude in determining how to balance the interests of stakeholders.

This position was confirmed in the more recent case of Burwell v. Hobby Lobby (2014), which held that corporate law does not require for-profit corporations to pursue profit at the expense of everything else.

Governmental regulation and legal interpretations have not been the only avenues of change over the past century. The growing influence of consumers has been another driving force in recent attempts by businesses to self-regulate and voluntarily comply with global ethical standards that ensure basic human rights and working conditions. The United Nations (UN) Global Compact is one of these standards. Its mission is to mobilize companies and stakeholders to create a world in which businesses align their strategies and operations with a set of core principles covering human rights, labor, the environment, and anticorruption practices. The Global Compact is a “voluntary initiative based on CEO commitments to implement universal sustainability principles and to undertake partnerships in support of UN goals.”

Of course, as a voluntary initiative, the initiative does not bind corporations and countries to the principles outlined in it.

Whenever we look at the ways in which our perception of ethical business practice changes over time, we should note that such change is not necessarily good or bad but rather a function of human nature and of the ways in which our views are influenced by our environment, our culture, and the passage of time. Many of the examples discussed thus far illustrate a gradual increase in social awareness due to the actions of individual leaders and the historical era in which they found themselves. This does not mean that culture is irrelevant, but that human nature exists and ethical inclination is part of that nature. Historical conditions may allow this nature to be expressed more or less fully. We might measure ethical standards according to the degree they allow human compassion to direct business practice or, at least, make it easier for compassion to hold sway. We might then consider ethics not just a nicety but a constitutive part of business, because it is an inherent human trait. This is a perspective Kant and Rawls might have agreed with. Ethical thinking over time should be measured, deliberate, and open to examination.

Summary

As a function of culture, ethics is not static but changes in each new era. Technology is a driving force in ethical shifts, as we can see in tracing changes from the age of mercantilism to the Industrial Revolution to the postindustrial era and the Information Age. Some of the most successful recent efforts to advance ethical practices have come from influences outside industry, including government regulation and consumer pressure.

Assessment Questions

Protecting owners’ interests was a common feature of ________.

  1. the Industrial Revolution
  2. the Information Age
  3. the Dodd-Frank Act
  4. muckraking

A

True or false? All ethical standards are relative and should be treated as such.

False. Certain core ethics exist throughout cultures and time, although they may manifest in different ways.

True or false? The United Nations Global Compact is a set of standards that is binding worldwide.

False. The UN Global Compact is a voluntary set of standards; it is not legally binding on countries or corporations.

What did the decision in Shlensky v. Wrigley (1968) establish in ethical terms? How does it compare to the decision in Dodge v. Ford Motor Company (1919)?

Shlensky v. Wrigley gave boards of directors and management more latitude in determining how to balance the interests of stakeholders. This was in contrast to Dodge v. Ford Motor Company, which validated the rule of shareholder primacy.

Endnotes

1“Concept and Stages of World’s Economy Development,” JBEM. http://www.jbem.lt/concept-stages-worlds-economy-development/ (accessed January 1, 2018).
2Ron Chernow, Titan: The Life of John D. Rockefeller, Sr. (New York: Random House, 1998), 534.
3Alasdair MacIntyre, After Virtue, 3rd ed. (South Bend: University of Notre Dame Press, 2007), 86.
4Alasdair MacIntyre, After Virtue, 3rd ed. (South Bend: University of Notre Dame Press, 2007), 74–75.
5Aristotle, Nicomachean Ethics, translated by J.A.K. Thomson. (New York: Penguin Books, 2004), 1161b: “the slave is a living tool in the same way that a tool is an inanimate slave.”
6Dodge v. Ford Motor Company, Illinois College of Law. https://law.illinois.edu/wp-content/uploads/2018/06/Aviram-July-27.pdf, pp. 10–14 (accessed January 9, 2018).
7Shlensky v. Wrigley, 237 NE 2d 776 (Ill. App. 1968).
8United Nations Global Compact, “Our Mission.” https://www.unglobalcompact.org/what-is-gc/mission (accessed February 9, 2018).

Glossary

mercantilism
the economic theory that global wealth is static and prosperity comes from the accumulation of wealth through extraction of resources or trade

The Influence of Geography and Religion

24

Learning Objectives

By the end of this section, you will be able to:

  • Describe the impact of geography on global relationships and business ethics
  • Explain how religion informs ethical business practice around the world

Business ethics guides people to practice commerce professionally and honestly and in a way that permits as many as possible to flourish. However, as we have seen, the ethical standards by which business is conducted can vary depending on culture and time. Geography and regional cultural practices also play a significant role. As global markets become increasingly connected and interdependent, we navigate more of our valued relationships across international boundaries.

Business as Global Relationships

Global relationships teach us to be sensitive not just to other languages and customs but also to other people’s worldviews. A company looking to move its production to another country may be interested in setting up supply, distribution, and value chains that support human rights, worker safety, and equity for women, while the local culture is excited about the economic benefits it will gain from the company’s investment in employment and the local tax base and infrastructure. These goals need not be in conflict, but they must be integrated if the company is to reach an ethically sound agreement with the host country. Dialogue and openness are crucial to this process, just as they are in every other kind of relationship.

Geography affects a business’s relationship with almost any type of stakeholder, from stockholders and employees to customers, the government, and the environment. Hence the growing importance of localization, the process of adapting a product for non-native environments and languages, especially other nations and cultures. Such adaption often starts with language translation but may include customizing content or products to the tastes and consumption habits of the local market; converting currencies, dates, and other measurements to regional standards; and addressing community regulations and legal requirements.

Research has shown that successful leaders and organizations with global responsibilities “need to understand and exceed the leadership expectations in the cultures they are interacting with.”

In its study of leadership effectiveness and organizational behavior across cultures, the GLOBE leadership project of the Beedie School of Business at Simon Fraser University in Vancouver, Canada, found leader effectiveness is contextual and strongly connected to cultural and organizational values. The study also concluded that, although leaders learn to adapt to cultural expectations, they often have to exceed those expectations to be truly successful.

In other words, business has a role beyond merely reflecting the culture in which it operates.

One element of business culture you may not realize is based on local custom and culture is the notion of time. Unlike the notion of historical time discussed in the previous module, the concept of time in business—people’s approach to punctuality, for example—varies widely in different cultures. To put it in economic terms, all cultures share the resource of time, but they measure and use that resource very differently. These differences might significantly affect the foundation of any business relationships you may want to establish around the world. For this and many other reasons, basic cultural literacy must be at the forefront of any ethical system that governs business behavior.

Consider, for example, that in the United States, we might speak of “a New York minute,” “the nick of time,” “the eleventh hour,” and so on. Such expressions make sense in a culture where the enculturation process emphasizes competition and speed. But even among Western business cultures, conceptions of time can differ. For example, the Italian subito and the German sofort both refer to something happening “at once” or “straightaway,” but with different expectations about when the action, in fact, will take place. And some cultures do not measure the passage of time at all.

Generally, the farther east and south we travel from the United States, the more time becomes relational rather than chronological. In Kenya, tutaonana baadaye means “see you later,” although “later” could be any time, open to context and interpretation. The nomadic inhabitants of North Africa known as the Tuareg sit down to tea before discussing any business, and as a rule, the longer the time spent in preliminary conversation, the better. A Tuareg proverb has it that the first cup of tea is bitter like life, the second sweet like love, and the third gentle like death.

Compare this with the Western attitude that “time flies” and “time is money.” Finally, Westerners doing business in some English-speaking African countries have learned that if they want something immediately, they have to say “now now” as “now” by itself does not convey the desired sense of immediacy.

Another aspect of international business relationships is the question of personal space. In Nigeria, for example, standing either too close or too far from someone to whom you are speaking might be seen as impolite. In some cultures, touch is important in establishing connection, whereas in others it may be frowned upon. As a general rule, “contact” cultures—where people stand closer together when interacting, touch more often, and have more frequent direct eye contact—are found in South America, the Middle East, and southern Europe, while “noncontact” cultures—where eye contact and touching are less frequent, and there is less physical proximity during interactions—are in northern Europe, the Far East, and the United States. So, the seemingly innocuous gesture of a handshake to cement a new business relationship might be viewed very differently depending on where it occurs and who is shaking hands.

All of this speaks to the awareness and cultural sensitivity that must be exhibited by an ethical manager doing business in a region different from his or her own. Certain mistakes, particularly accidental ones and those not motivated by malicious design, will likely be forgiven. Still, a global ethical demeanor requires that we be as conscious as possible as to what constitutes courtesy wherever we find ourselves conducting business.

Tucked In, Tucked Out

Time and space are just two examples of cultural characteristics that you may take for granted but that are not universal. Business attire is another, as is humor, which is notoriously hard to translate across languages and cultures. And, of course, miscommunications can occur not just across regional boundaries and business cultures but even within them. For example, unless you are a barista at a hipster coffee bar, it may not be a good idea to wear piercings, tattoos, or colorfully dyed hair to work. Employers have the right to establish a dress code and expect employees to abide by it.

In the movie The Intern, Robert De Niro’s senior character wears conservative blue and gray suits to his job at an e-commerce fashion startup, whereas the younger men dress very casually. At one point in the film, De Niro’s character asks, “Doesn’t anybody tuck in their shirt?” Leaving your shirt untucked has become more acceptable in recent years, and the black t-shirt and jeans favored in Silicon Valley are now quite fashionable in some business environments.

Many today would disagree with the old adage that “clothes make the man,” yet studies show that well-dressed employees are held in higher esteem and may earn more, on average, than those who dress down. The age of uncomfortable dresses and starched white shirts may be over, but cultural standards, along with underlying values that prioritize, say, innovation over uniformity, change over time and even within the same company.

Critical Thinking

  • How do you think clothing choices affect the relationships we form at work or in other business situations?
  • What is your opinion about workplace dress codes, and how far should employers go in setting dress and other behavior standards? Why are these standards important (or not) from an ethical perspective?
  • How do you think clothing might affect an international company’s approach to business ethics?

Religion and Ethics

A major factor in the difference that geography and culture make in our ethical standards is the influence of religious practice. For example, just as the current debate over the redistribution of goods and services has Christian roots, so the Industrial Revolution in England and northern Europe looked to Protestant Christianity in particular for the values of frugality, hard work, industriousness, and simplicity. Until the seventeenth century, religion and ethics were nearly inseparable. Many believed that people could not be persuaded to do the right thing without the threat of eternal damnation. The Enlightenment’s attempt to peel religion away from ethics was short-lived, with even Kant acknowledging the need to base morality on something beyond the rationalism of his time.

Religions are neither uniform nor monolithic, of course, nor are they unchanging over time. The core of Christianity, for instance, does not change, but its emphasis in any given period does. Moreover, the state or crown often worked side by side with the church in the past, choosing certain teachings over others to promote its own interests. This cooperation was evident during the era of mercantilism when the issue of personhood, or the privilege of having the freedom and capacity to make decisions and act morally, was hotly debated in the context of slavery, a practice that had been going on for centuries in the Christian West and the Islamic East. Although the church officially opposed slavery, the conquest of new lands was justified theologically as bringing salvation and civilization to populations considered savage and unsophisticated. Christianity was thought to save them from their pagan ways just as Islam and the message of the prophet saved unbelievers in the East. Behavioral norms for the clergy were founded and supported by the divine right of kings and the authority of religious tradition ((Figure)). Commerce and trade followed these norms.

Just as concepts of time and space vary from culture to culture, so do the influence of religious tradition and authority on ethics and what is considered appropriate behavior, whether individual or corporate. The Taj Mahal is not the Palace of Versailles. (credit left: modification of “Taj Mahal” by Suraj rajiv/Wikimedia Commons, CC BY 4.0; credit right: modification of “Cour de Marbre du Château de Versailles October 5, 2011” by Kimberly Vardeman/Wikimedia Commons, CC BY 2.0)


One photo shows the Taj Mahal, which is a large, grand, white marble mausoleum in India, with its rectangular reflecting pool. A second photo shows the Palace of Versailles, which is a very ornate, royal palace in France.

By the time of the Industrial Revolution and postindustrial eras, Protestantism and its values of frugality, hard work, and simplicity (the “Protestant ethic”) had helped create a culture of individualism and entrepreneurship in the West, particularly in Great Britain and the United States. In fact, the Protestant work ethic, religion, and a commitment to hard work all are intertwined in the business history of both these countries. One example of this singular association is John D. Rockefeller, who, in the late nineteenth and early twentieth centuries, commanded the attention given today to Bill Gates and Warren Buffet as emblems of free enterprise.

No one was more convinced of the link between religious faith and success in business than Rockefeller, who clung to his Baptist faith from his early years until his death in 1937. The richest person of his age, Rockefeller earned his fortune as the founder and major shareholder of Standard Oil but always regarded his billions as a public trust rather than his personal prize. “As his fortune grew big enough to beggar the imagination, [Rockefeller] retained his mystic faith that God had given him money for mankind’s benefit . . . or else why had He lavished such bounty on him?”

Despite criticism, even from family members, Rockefeller donated enormous sums to many causes, especially medical research (in the form of Rockefeller University) and higher education. He financed the founding of the University of Chicago as an institution that would train students to pursue their professional and business interests under the guidance of Christian faith.

Still, as Ida Tarbell pointed out in her work, Rockefeller’s business ethics were not above reproach. In making his fortune, he pursued markedly Darwinian practices revealing a conviction in survival of the fittest. Later in life, and as his philanthropic motivation increased, his endowment of several charitable causes more fully reflected his belief as to how God wished him to dispose of a sizable portion of his wealth.

Of course, Rockefeller’s concept of stewardship—an attitude toward money and capital that stresses care and responsibility rather than pure utility—can be found across cultures and religions in various forms, and there are many similarities among the Judaic, Islamic, and Christian views of money and its use toward a greater end. All three of these religions teach that no harm should be done to others, nor should people be treated as means toward a material end like wealth. Yet what role does a religious concept of stewardship play in the ethics of the twenty-first century? The Enlightenment attempted to separate religion and ethics but could not. Are the two concepts inextricably linked? Might the business leaders of today succeed where the Enlightenment failed?

Although religious practices and cultural assumptions remain strongly in place, fewer people in the West today profess a religion than in the past.

Does this development affect the way you approach business relationships and conduct negotiations? Might we see a universal, secular code of ethics developing in place of religion? If so, how would it accommodate the differences across time, regions, and cultures discussed in this chapter? The Universal Declaration of Human Rights, adopted by the United Nations General Assembly in December 1948, contains a list of basic human rights such as the right to life, liberty, due process, religion, education, marriage, and property. Business ethics will have to balance all these factors when adopting standards of conduct and local practices.

Ramadan

Jillian Armstrong leads an external audit team reviewing the financial statements of Islamabad Investment Bank in Islamabad, Pakistan. It is Ramadan, and the employees on her team are Muslims who fast each day for a month. Jillian has never fasted and believes the practice can be harmful over prolonged periods, especially in the heat of summer. She proposes several times that team members keep up their strength by drinking water or tea, but her suggestions are met with awkward silence. She has decided to leave well enough alone as long as everyone does their work, but now she faces a dilemma. What should she do for lunch? Should she eat in her office, out of sight of the team and bank employees? Have lunch in one of the local restaurants that cater to Westerners? Or perhaps fast with her team and eat at sundown?

Critical Thinking

  • What do you think would be the effect of Jillian’s accepting the local custom but continuing her own personal preference at mealtimes?
  • Can two ways of life exist side by side at work? Why or why not?

Summary

Business is primarily about relationships—with employees, business partners, and customers and clients. Ethical standards and practices governing these relationships depend on the environment they exist in, an environment that, in turn, depends on additional factors such as geography and religion. Religion’s role in business is less certain today; we are perhaps more likely to see a universal, secular code of ethics develop than to see religion serve as common ground for different cultures to come together.

Assessment Questions

Values of Protestant Christianity were often used to justify ________.

  1. mercantilism
  2. Standard Oil’s overseas investments
  3. business success during the Industrial Revolution
  4. secular humanism

C

True or false? Religion continues to be a forceful influence on ethical systems.

True

Define localization and name at least three items that might be included as part of a localization effort.

Localization is the process of adapting a product for use or sale in other nations and cultures. This might include language translation, adapting content to the tastes and consumption habits of the local market, and converting measurements.

How would you reconcile cultural differences between so-called contact and noncontact cultures in the context of business negotiations?

This can be a matter of managing expectations. Managers must do the work required for any business deal but deliver it in a way that is culturally sensitive, even if that means negotiating details like project deadlines and the conduct of meetings and agreeing to have different expectations of those in a different cultural context.

Endnotes

1Global Leadership & Organizational Behavior Effectiveness (GLOBE), “GLOBE CEO Study 2014,” GLOBE. http://globeproject.com/study_2014 (accessed May 1, 2018).
2Global Leadership & Organizational Behavior Effectiveness (GLOBE), “Overview,” GLOBE. http://globeproject.com/studies.
3Fabrizio Gatti, Bilal: Viaggiare, Lavorare, Morire da Clandestini. (Milano: Bibliotecca Universale Rizzoli), 51–53.
4Ron Chernow, Titan: The Life of John D. Rockefeller. (New York: Random House, 1998), 467.
5“Religious Landscape Study,” Pew Research Center. http://www.pewforum.org/religious-landscape-study/ (accessed January 15, 2018).

Glossary

localization
the process of adapting a product for non-native environments and languages, especially in other nations and cultures

Are the Values Central to Business Ethics Universal?

25

Learning Objectives

By the end of this section, you will be able to:

  • Explain the difference between relative and absolute ethical values
  • Discuss the degree to which compliance is linked with organizational responsibility and personal values
  • Identify the criteria for a system of normative business ethics
  • Evaluate the humanistic business model

One of the perennial themes in business ethics—indeed, in ethics in general—is the difference between relative and absolute values. Is it possible to identify a set of universal values that is consistent across cultures and time? We might begin with always honoring the terms of a contract, consistently treating customers and partners with honesty, and never cheating. Where could we go from there? No matter our culture, geography, or time, could we identify some basic normative behaviors to govern business conduct in general?

Absolute Values versus Relative Values

To put this question another way, is there a set of universal values that all can endorse? Are there “human values” that apply everywhere despite differences in time, place, and culture ((Figure))? If not, and if ethical standards are relative, are they worth having? Again, the UN Universal Declaration of Human Rights is a useful starting point for the way business can conduct itself. Let us look at how it is possible to align business with human rights in such a way that both profitability and responsibility are honored across the globe.

The pursuit of happiness is as near a universal human trait as we can find. It is not a coincidence that it appears in the American Declaration of Independence (1776), which was written by Thomas Jefferson and inspired by the British Enlightenment philosopher John Locke. However, the nature of human happiness is subjective. For example, everyone must eat to survive, but not everyone would agree that eating chocolate-raspberry cake brings happiness. (credit: “Happiness Is a Piece of Cake Close Up Photography” by Antonio Quagliata/Pexels, CC0)


This image shows a knife cutting into a piece of cake. The knife says happiness is a piece of cake.

According to the Union Internationale des Avocats, an international, nongovernmental association of legal professionals, corruption “corrodes the democratic principles of accountability, equality, and transparency. It poses an extremely high cost to the citizenry, it saps the credibility of government and it places companies under an unbearable economic burden.”

The UN Convention Against Corruption has called corruption “an insidious plague” that exists everywhere and “hurts the poor disproportionately by diverting funds intended for development, undermining a Government’s ability to provide basic services, feeding inequality and injustice and discouraging foreign aid and investment.”

Corruption appears to exist everywhere, so it would seem to require a persistent and consistent answer everywhere. Can business ethics provide one?

Business ethics exists on three levels: the individual, the organizational, and the societal. At the organizational and societal levels, laws, regulations, and oversight can go a long way toward curtailing illegal activity. Business ethics motivates managers to (1) meet legal and industry governing and reporting requirements and (2) shape corporate culture so that corrupt practices such as bribery, embezzlement, and fraud have no place in the organization. In the ideal case, the organization’s culture never allows the latter, because scandals not only damage reputations but they make companies and countries much less attractive to investors. Corruption is expensive: According to the World Economic Forum, no less than $2 trillion is lost each year worldwide as a result of corruption, a staggering waste not just of resources but of credibility for business in general.

At the individual level, when corruption takes place, it is a matter of conscience. Corruption can be defeated only by individuals acting in accordance with their conscience and being supported by systems and corporate culture that encourage such action. Transparency, whistleblower programs, ethics training, and modeling of appropriate behavior by upper management can create the conditions for employees to act ethically, but conscience is a personal phenomenon. So, although the work of national, regional, and international organizations can limit corruption through enforcement and the prosecution of cases (as was the case with the revelation of the so-called Panama Papers), corruption will not be reduced in any significant way unless efforts have been made to form individual conscience and teach practical ways to act on it.

Although ethical practice has been directly influenced by religion, as noted, ethics is not religion and religious belief is not a prerequisite for a commitment to business ethics. For example, although what constitutes ethical behavior in Islamic society is strongly linked to religious values, secular philosophers can endorse a highly developed commitment to commercial ethics, too. Furthermore, most religions have high ethical standards but do not address many of the problems faced in business. And although a good system of law incorporates ethical standards, the law can and sometimes does deviate from what is ethical. Finally, in the same vein, ethics is not science. The social and natural sciences provide data to make better ethical choices, but science cannot tell people what they ought to do (nor should it).

Absolute values do exist. Abstaining from cheating customers, defrauding clients, lying, and murder are fairly objective ethical values; the reason for making any exceptions must be carefully laid out. Ethical systems, whether utilitarian, rights based, or based on natural law and virtue ethics, are attempts to translate absolute values like these into workable solutions for people. From these systems has emerged a basic set of ethical norms for the business world.

Business Ethics and Compliance

A hallmark of any profession is the existence of ethical guidelines, often based on values like honesty, integrity, and objectivity. Organizational responsibility is fairly straightforward: Comply with applicable local, state, national, and international regulations. Compliance can be an immense task for industries like aerospace, pharmaceuticals, banking, and food production, due to the large number of employees involved, the certification of them that sometimes is necessary, and the requisite record keeping. Still, legal requirements are usually clear, as are the ways an organization can exceed them (as do, for example, companies such as Whole Foods, Zappos, and Starbucks). Personal responsibility is a different matter. It is either less clear what to do or harder to do it because of constant pressure to increase the organization’s profitability and the perception that “everybody else is doing it.”

In the United States, companies spend more than $70 billion annually on ethics training; worldwide, the figure is more than double that.

Unfortunately, in the United States, much of this money is spent on merely meeting the minimum requirements of compliance, so that if there is ever a problem with the Department of Justice or the Securities and Exchange Commission, the organization is insulated from criticism or liability because its employees have engaged in the recommended training. Federal Sentencing Guidelines for felonies and serious misdemeanors now carry mandatory prison time for individual executives who are convicted. These guidelines also are designed to help organizations with compliance and reporting, and they introduce seven steps toward that end: (1) create a Code of Ethics, (2) introduce high-level oversight, (3) place ethical people in positions of authority, (4) communicate ethics standards, (5) facilitate employee reporting of misconduct, (6) react and respond to instances of misconduct, and (7) take preventive steps.

Many organizations focus on the letter of the law so that they can claim “good faith” in their effort to create an ethical environment. However, middle managers and employees often complain their ethics training consists of passing a computerized sexual harassment or fraud program once a year but that nothing is done to address issues in a substantive way or to change the culture of the organization, even those that have experienced problems.

The focus still seems to be on organizational responsibility and compliance as opposed to individual responsibility and the formation of ethical conscience. We might argue that it is not the business of business to form people in their conscience, but the result of not doing so has become expensive for everyone concerned.

The damage done to an organization’s or government’s reputation due to scandal can be enormous and long lasting. The 2017 conviction for bribery and embezzlement of Lee Jae-yong, heir to the Samsung electronics empire, was part of a widespread corruption scandal that brought down the president of South Korea. Bribery was also at the heart of the FIFA (Fédération Internationale de Football Association) corruption scandal, in which soccer officials, marketing executives, and broadcasters were accused of racketeering, wire fraud, and money laundering by the U.S. Department of Justice in 2015. The Volkswagen emissions scandal also began in 2015, when the Environmental Protection Agency cited the German automaker for violating the Clean Air Act by cheating on emissions tests. To date, the fallout has cost the company nearly $30 billion in fines.

As the LIBOR (London Interbank Offered Rate) scandal, in which banks were manipulating rates to profit from trades, showed, ethical breakdowns often occur because systems fail or people make bad decisions, and sometimes both. In the case of LIBOR, the United Kingdom’s Serious Fraud Office determined there were inadequate systems of oversight in the setting of rates and that individual executives encouraged rate fixing, which led to the conviction of several traders, at least one of whom still maintains his innocence.

The result was a staggering $6 billion cumulative fine for the banks involved (i.e., Barclay’s, J.P. Morgan Chase, Citicorp, Royal Bank of Scotland, and Deutsche Bank).

If there is anything to be learned from these scandals, it is that organizations will succumb to ethics crises if they do not pay attention to their organizational culture and foster their employees’ growth as moral beings. This is even more important in industries like banking that are more susceptible to unethical behavior because of the great sums of money that change hands. Compliance is important, but business managers must attempt to go above and beyond to clearly model and enforce the highest standards of ethical behavior.

Normative Business Ethics

Normative business ethics should address systemic issues such as oversight and transparency as well as the character of individuals who make up the organization. Human flourishing may not be the immediate concern of business, but managers and employees have a significant impact on business performance. Giving employees common-sense advice and training in practical ways to counter unethical behavior, as well as ethical role models at the top of the organization, can be more effective than prevention. There are programs that do this, such as “Giving Voice to Values” at the Darden School of Business at the University of Virginia.

These programs are effective for their ability to help individuals act on their principles. As effective as they may be, however, they beg the larger question not of how someone can act on what their conscience tells them but how to determine what their conscience is telling them in the first place.

One model of ethical behavior, sometimes called the humanistic business model, may provide the answer for businesses that wish to achieve the dual goal of human flourishing and responsible profits. In this model, organizations focus on employees as a vital part of the operation and support them in their professional training, health care, education, family responsibilities, and even spiritual concerns. Leaders create positive relationships with stakeholders, including their employees, to cultivate investor goodwill and because they believe in the underlying values of trust and authenticity. The influence of positive psychology is evident, and there is much to commend in this kinder approach to the job of management that makes an effort to establish “sustainable human welfare.”

However, happy employees are one thing; the human flourishing identified by Aristotle and John Stuart Mill is quite another. What, then, is missing from humanistic business?

The problem is that if anything flourishes in this model, it is often the business rather than the employees. After all, free enterprise has the interests of the enterprise at heart. But employees are human beings first, which means any attempt to improve their welfare must begin by thinking of them as human beings rather than as employees. How can businesses do this?

One alternative is to put the humanities into business. Businesses currently rely heavily on data analytics, algorithms, and statistical analyses to drive decision-making. The use of these tools is often backed by social science research in consumer behavior, behavioral finance, and cognitive studies. But looking to the humanities to understand business is an opportunity to engage business in subjects and ideas that have a tremendous, if often overlooked, impact on people. After all, literature that has stood the test of time can provide tremendous insight into human behavior, and Homer or Shakespeare may be more relevant to contemporary executive leadership than a business seminar on how to motivate employees.

In fact, we could argue that anything that makes an impact on people should legitimately be within the scope of business. Richard DeGeorge (1933–) of the University of Kansas describes what adding the humanities to business education entails:

“Students do not need psychosociological jargon in their business interactions. They do need to understand people and their motives, to know how to read and judge character, and to have the ability to imagine themselves in another’s shoes, be they those of a competitor, a boss, or a subordinate. For those dedicated to the case method, novels, short stories, and plays offer an inexhaustible storehouse of riches, more detailed, subtle, and complete than most cases written up for courses.”

In DeGeorge’s humanities model, business ethics would not prepare students to do certain things, for which they likely will be trained by their employers, but to be certain persons. DeGeorge suggests that “a course in the philosophy of business would enable students to think about the foundations of business—its values, ends, purpose, and justification . . . philosophy could add a critical element to business education, an element that would keep business education always alive and prevent it from becoming an accepted, orthodox ideology.”

Finally, if normative business ethics is to recognize and, ultimately, be based on the individual, it must address another human trait: bias. Intellectual, emotional, and social biases affect all decision-making, including those of an ethical nature. Some bias is good, as in having a favorable disposition toward those who work hard in intellectually honest ways. Bias also rewards those who support and nurture the best elements of a culture, whether corporate, social, or political. But it becomes dangerous when people use it to blind themselves to the reality around them, reinforce hardened positions even in the face of contradictory evidence, and shirk their responsibility as moral beings.

An example of bias occurs when employees engage in unethical activity because it has been sanctioned by higher-ups. They abdicate personal responsibility by assigning blame elsewhere. However, no amount of rationalization of the fear of job loss, financial pressure, desire to please a supervisor, and the rest, can justify such behavior, because it diminishes moral agency, the self-awareness, freedom, and ability to make choices based on our perception of right and wrong. And such agency needs to be at the heart of business ethics. After all, we cannot make a commitment to serve customers, develop leaders, and improve life for all stakeholders unless there is freedom and moral agency, the necessary ingredients in establishing an attitude of concern, that is, respect for oneself and for others, including all appropriate stakeholders.

“What’s Love Got to Do with It?”

Philosopher and historian Martin Buber (1878–1965) taught that love is not a feeling but a responsibility of one person for another. Feelings may come and go, but the solidarity that people have with each other and the care they take with one another define them as human beings ((Figure)). Thus, love, as responsibility, depends on relationships based on good faith and concern. Business, too, is about relationships. Without a relationship of trust, there can be no exchange of goods or services upon which economies are built.

Many people question the place of love in a business setting. When seen from Buber’s perspective, however, love is not an idyllic feeling but a driving force for justice and care. This does not deny the need for profit and financial success. It simply emphasizes the other side of the twofold purpose of business (profit and responsibility). In fact, John Mackey, the founder of Whole Foods, has said that love has been the basis of his success in business, which translates into care and concern for customers beyond profit and for workers beyond productivity ((Figure)).

If there is anything that transcends time, place, and culture, it is love. The search for a universally applied set of ethics always comes back to it. But what does love look like in a business setting? (credit: “Love Is All You Need Signage” by Jacqueline Smith/Pexels, CC0)


This image shows a billboard on the side of a building that says love is all you need.

Recall the statement by IBM quoted earlier in the chapter: “[IBM] remain[s] dedicated to leading the world into a more prosperous and progressive future; to creating a world that is fairer, more diverse, more tolerant, more just.”

Critical Thinking

  • Can Martin Buber’s notion of love play a role in business? What would that look like?
  • What responsibilities do companies have regarding justice and care? Should business ethics be grounded only on more concrete tenets? Why or why not?

Summary

Any system of business ethics must consider the processes of enculturation and acculturation as well as the fact that ethical standards may shift depending on geography or time, even if certain underlying ethical values (e.g., prohibitions against lying, fraud, or murder) may remain constant. It is usually in a business’s best interest to promote human flourishing within the organization, providing comprehensive training along a humanistic business model, which applies the social sciences to ensure profitability and responsibility in an organization as well as happy, productive employees.

Assessment Questions

Businesses today are concerned with balancing profitability with responsibility. Therefore, they should ________.

  1. pay attention to culture
  2. go beyond compliance
  3. hire moral people
  4. hire outside consultants to monitor their supply chain.

A

What are the levels upon which business ethics exists?

  1. compliance and governance
  2. federal, state, and local
  3. normative and descriptive
  4. individual, organizational, and societal

D

Why is conscience the locus or center of ethical behavior in business?

Conscience is the locus of ethical behavior in business because individuals acting in free association make up the business or organization. They are motivated by their inner voice to act responsibly toward each other and their stakeholders—or not.

Describe the challenge of identifying a universal set of ethics.

Although many agree on the importance of goals like acting with honesty and fairness and treating people as ends rather than means, their implementation is extremely complex, because people have different understandings of what is honest, fair, or an end in itself. The result may be a series of diverse rules rather than one set.

How does humanities in ethics differ from a humanistic business model?

A humanistic business model focuses on leadership development and the data of social science about how to motivate people. Humanities in ethics looks to case methods, novels, short stories, and plays to gain insight into human behavior.

Endnotes

1João Miguel Barros, “15 Observations on the Phenomenon of Corruption: An Engaged Perspective from Macau,” Union Internationale des Avocats.
2United Nations Office on Drugs and Crime, “Foreword” in “United Nations Convention against Corruption,” unodc.org. http://www.unodc.org/documents/treaties/UNCAC/Publications/Convention/08-50026_E.pdf (accessed January 15, 2018).
3Stéphanie Thomson, “We Waste $2 Trillion a Year on Corruption. Here Are Four Better Ways to Spend That Money,” Weforum.org. https://www.weforum.org/agenda/2017/01/we-waste-2-trillion-a-year-on-corruption-here-are-four-better-ways-to-spend-that-money/ (accessed January 11, 2018).
4Tom Fox, “White Collar Criminals and Their Flagrant Rationalizations,” fcpablog.com. http://www.fcpablog.com/blog/2017/9/29/tom-fox-white-collar-criminals-and-their-flagrant-rationaliz.html (accessed January 16, 2018).
5Josh Bersin, “Spending on Corporate Training Soars: Employee Capabilities Now a Priority,” forbes.com. https://www.forbes.com/sites/joshbersin/2014/02/04/the-recovery-arrives-corporate-training-spend-skyrockets/#4b6b313c5a73 (accessed January 16, 2018).
6L.V. Anderson, “Ethics Trainings Are Even Dumber Than You Think,” slate.com. http://www.slate.com/articles/business/the_ladder/2016/05/ethics_compliance_training_is_a_waste_of_time_here_s_why_you_have_to_do.html (accessed January 17, 2018).
7Max H. Bazerman and Ann E. Tenbrunsel, “Ethical Breakdowns,” Harvard Business Review, April 2011. https://hbr.org/2011/04/ethical-breakdowns; Kristen Dooley, “The LIBOR Scandal,” Review of Banking and Financial Law, 32 no. 1 (2012): 2–12.
8James McBride, “Understanding the LIBOR Scandal,” Council on Foreign Relations. https://www.cfr.org/backgrounder/understanding-libor-scandal (accessed January 17, 2018).
9ABC News. “Barclays, UBS Among Six Top Banks Fined Nearly $US6bn for Rigging Foreign Exchange, Libor Rates.” http://www.abc.net.au/news/2015-05-21/us-britain-fine-top-banks-nearly-6-bn-for-forex-libor-abuses/6485510 (accessed March 17, 2018).
10Institute for Business in Society, “Giving Voice to Values,” University of Virginia Darden School of Business. http://www.darden.virginia.edu/ibis/initiatives/giving-voice-to-values/ (accessed January 13, 2018).
11Humanistic Management Center, “The Three Stepped Approach to Humanistic Management,” Humanistic Management Center. http://www.humanisticmanagement.org/cgi-bin/adframe/about_humanistic_management/the_three_stepped_approach_to_humanistic_management/index.html (accessed January 13, 2018).
12Richard T. De George, “Business as a Humanity: A Contradiction in Terms?” in Business As a Humanity, eds. Thomas J. Donaldson, R. Edward Freeman, The Ruffin Series in Business Ethics, ed. R. Edward Freeman. (New York: Oxford University Press, 1994), 16.
13Richard T. De George, “Business as a Humanity: A Contradiction in Terms?” in Business As a Humanity, eds. Thomas J. Donaldson, R. Edward Freeman, The Ruffin Series in Business Ethics, ed. R. Edward Freeman. (New York: Oxford University Press, 1994), 17.
14John Mackey, “Rethinking the Social Responsibility of Business,” wholefoodsmarket.com, September 28, 2005. http://www.wholefoodsmarket.com/blog/john-mackeys-blog/rethinking-social-responsibility-of%C2%A0business (accessed March 17, 2018).
15IBM homepage. https://www.ibm.com/ibm/us/en/ (accessed January 13, 2018).

Glossary

humanistic business model
a business model for balancing profitability and responsibility fairly, especially with regard to stakeholders
moral agency
the self-awareness, freedom, and ability to make choices based on one’s perception of right and wrong
universal values
ethical principles that apply everywhere despite differences in time, geography, and culture

What Employers Owe Employees

VI

Introduction

26

Fifty years ago, corporate and regulatory boardrooms were almost exclusively male and white, as this meeting of the Federal Open Market Committee, an executive committee of the Federal Reserve banking system, demonstrates. How much has this changed today? (credit: modification of “FOMC meeting, 1970s” by Harris & Ewing/Wikimedia Commons, Public Domain)


This image shows twenty-three white men and one black man in suits sitting around a large boardroom-style table.

The 2020 Gender Diversity Index shows that many Fortune 1000 boards of directors still lack diversity.

Women and minorities continue to be underrepresented at the chief executive officer (CEO) level too.

Does this sameness merely look bad, or are there ethical and business reasons why top U.S. management should be more diverse ((Figure))?

A demographic disconnect between leadership and workforce influences working conditions in many ways. For example, if more women held leadership roles, would workplace sexual harassment have come to light before the #MeToo movement? Would more companies offer paid family leave? If minorities were better represented at the executive level, would corporate lobbyists advocate differently for immigration and health care policies? When 70 percent of boardroom seats are occupied by white men,

who make up only 30 percent of the population, many people’s views, ideas, and opinions will go unheard in decisions that affect their lives and livelihoods. We have seen progress, but much remains to be accomplished. Does management have an ethical duty to try to diversify top leadership? Whatever individual responses we might offer to each of these questions, a significant theme in this chapter is that ethical behavior in the workplace is most effectively instituted when it is modeled by senior leadership.

Endnotes

12020 Women on Boards, “2020 Gender Diversity Index Key Findings,” 2016. https://www.2020wob.com/companies/2020-gender-diversity-index (accessed January 5, 2018).
2Valentina Zarya, “The Percentage of Female CEOs in the Fortune 500 Drops to 4%,” Fortune, June 6, 2016. http://fortune.com/2016/06/06/women-ceos-fortune-500-2016/.
3Elizabeth Olsen, “Study Finds Only Modest Gains by Women and Minorities on Fortune 500 Boards,” New York Times, February 5, 2017. https://www.nytimes.com/2017/02/05/business/dealbook/fortune-500-board-directors-diversity.html.

The Workplace Environment and Working Conditions

27

Learning Objectives

By the end of this section, you will be able to:

  • Identify specific ethical duties managers owe employees
  • Describe the provisions of the Occupational Safety and Health Act
  • Identify Equal Employment Opportunity Commission protections, including those against sexual harassment at work
  • Describe how employees’ expectations of work have changed

All employees want and deserve a workplace that is physically and emotionally safe, where they can focus on their job responsibilities and obtain some fulfillment, rather than worrying about dangerous conditions, harassment, or discrimination. Workers also expect fair pay and respect for their privacy. This section will explore the ethical and legal duties of employers to provide a workplace in which employees want to work.

Ethical Decision-Making and Leadership in the Workplace

A contemporary corporation always owes an ethical, and in some cases legal, duty to employees to be a responsible employer. In a business context, the definition of this responsibility includes providing a safe workplace, compensating workers fairly, and treating them with a sense of dignity and equality while respecting at least a minimum of their privacy. Managers should be ethical leaders who serve as role models and mentors for all employees. A manager’s job, perhaps the most important one, is to give people a reason to come back to work tomorrow.

Good managers model ethical behavior. If a corporation expects its employees to act ethically, that behavior must start at the top, where managers hold themselves to a high standard of conduct and can rightly say, “Follow my lead, do as I do.” At a minimum, leaders model ethical behavior by not violating the law or company policy. One who says, “Get this deal done, I don’t care what it takes,” may very well be sending a message that unethical tactics and violating the spirit, if not the letter, of the law are acceptable. A manager who abuses company property by taking home office supplies or using the company’s computers for personal business but then disciplines any employee who does the same is not modeling ethical behavior. Likewise, a manager who consistently leaves early but expects all other employees to stay until the last minute is not demonstrating fairness.

Another responsibility business owes the workforce is transparency. This duty begins during the hiring process, when the company communicates to potential employees exactly what is expected of them. Once hired, employees should receive training on the company rules and expectations. Management should explain how an employee’s work contributes to the achievement of company-wide goals. In other words, a company owes it to its employees to keep them in the loop about significant matters that affect them and their job, whether good or bad, formal or informal. A more complete understanding of all relevant information usually results in a better working relationship.

That said, some occasions do arise when full transparency may not be warranted. If a company is in the midst of confidential negotiations to acquire, or be acquired by, another firm, this information must be kept secret until a deal has been completed (or abandoned). Regulatory statutes and criminal law may require this. Similarly, any internal personnel performance issues or employee criminal investigations should normally be kept confidential within the ranks of management.

Transparency can be especially important to workers in circumstances that involve major changes, such as layoffs, reductions in the workforce, plant closings, and other consequential events. These kinds of events typically have a psychological and financial impact on the entire workforce. However, some businesses fail to show leadership at the most crucial times. A leader who is honest and open with the employees should be able to say, “This is a very difficult decision, but one that I made and will stand behind and accept responsibility for it.” To workers, euphemisms such as “right sizing” to describe layoffs and job loss only sounds like corporate doublespeak designed to help managers justify, and thereby feel better (and minimize guilt), about their (or the company’s) decisions. An ethical company will give workers advance notice, a severance package, and assistance with the employment search, without being forced to do so by law. Proactive rather than reactive behavior is the ethical and just thing to do.

Historically, however, a significant number of companies and managers failed to demonstrate ethical leadership in downsizing, eventually leading Congress to take action. The Worker Adjustment and Retraining Notification (WARN) Act of 1989 has now been in effect for almost three decades, protecting workers and their families (as well as their communities) by mandating that employers provide sixty days’ advance notice of mass layoffs and plant closings ((Figure)). This law was enacted precisely because companies were not behaving ethically.

The WARN law mandates advance notice of mass layoffs to workers so that they can adequately prepare for such an event. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This figure shows four boxes total, with two on the left and two on the right. The boxes on the left each have an arrow that points toward the corresponding box on the right. The first box on the left says “Notice required (60 days)” and its corresponding box on the right has two bullets that say “100 or more total employees” and “50 or more employees laid off.” The second box on the left says “Exceptions” and its corresponding box on the right has two bullets that say “Does not include part-time workers (less than 20 hours)” and “Does not include new workers (less than six months).”

A report by the Cornell University Institute of Labor Relations indicated that, prior to passage of WARN, only 20 percent of displaced workers received written advance notice, and those who did received very short notice, usually a few days. Only 7 percent had two months’ notice of their impending displacement.

Employers typically preferred to get as many days of work as possible from their workforces before a mass layoff or closing, figuring that workers might reduce productivity or look for other jobs sooner if the company were transparent and open about its situation. In other words, when companies put their own interests and needs ahead of the workforce, we can hardly call that ethical leadership.

Other management actions covered by WARN include outsourcing, automation, and artificial intelligence in the workplace. Arguably, a company has an ethical duty to notify workers who might be adversely affected even if the WARN law does not apply, demonstrating that the appropriate ethical standard for management often exceeds the minimum requirements of the law. Put another way, the law sometimes is often slow to keep up with ethical reflection on best management practices.

Workplace Safety under the Occupational Safety and Health Act

The primary federal law ensuring physical safety on the job is the Occupational Safety and Health Act (OSHA), which was passed in 1970.

The goal of the law is to ensure that employers provide a workplace environment free of risk to employees’ safety and health, such as mechanical or electrical dangers, toxic chemicals, severe heat or cold, unsanitary conditions, and dangerous equipment. OSHA also refers to the Occupational Safety and Health Administration, which operates as a division of the Department of Labor and oversees enforcement of the law. This act created the National Institute for Occupational Safety and Health (NIOSH), which serves as the research institute for OSHA and enunciates appropriate standards for safety and health on the job.

Employer obligations under OSHA include the duty to provide a safe workplace free of serious hazards, to identify and eliminate health and safety hazards ((Figure)), to inform employees of hazards present on the job and institute training protocols sufficient to address them, to extend to employees protective gear and appropriate safeguards at no cost to them, and to publicly post and maintain records of worker injuries and OSHA citations.

Harry McShane, who celebrated his sixteenth birthday a month or so before this photo was taken by social reformer and photographer Lewis Wickes Hine, lost his left arm as a result of a workplace injury in May 1908 in Cincinnati, Ohio. McShane had already been working in the factory for more than two years. Before federal safety regulations (such as OSHA and FLSA), catastrophic injuries on the job were common, as was the presence of children in the workforce. McShane received no compensation for his injuries. (credit: modification of “Lewis Wickes Hines – Harry McShane 1908” by “Fordmadoxfraud”/Wikimedia Commons, Public Domain)


This image shows a teenage boy who is missing an arm.

OSHA and related regulations give employees several important rights, including the right to make a confidential complaint with OSHA that might result in an inspection of the workplace, to obtain information about the hazards of the workplace and ways to avoid harm, to obtain and review documentation of work-related illnesses and injuries at the job site, to obtain copies of tests done to measure workplace hazards, and protection against any employer sanctions as a consequence of complaining to OSHA about workplace conditions or hazards.

A worker who believes his or her OSHA rights are being violated can make an anonymous report. OSHA will then establish whether there are reasonable grounds for believing a violation exists. If so, OSHA will conduct an inspection of the workplace and report any findings to the employer and employee, or their representatives, including any steps needed to correct safety and health issues.

OSHA has the authority to levy significant fines against companies that commit serious violations. The largest imposed to date were against BP, the oil company responsible for the largest oil spill in U.S. history, discussed in the feature box on BP Deepwater Horizon Oil Spill and Government Regulation. OSHA took into account that seventeen workers died on BP’s rig, Deepwater Horizon, as a result of the initial explosion and fire in April 2010. Consequently, rig-worker safety was upgraded by statute. Total OSHA penalties issued to BP from 2005 to 2009 exceed $102 million.

Other large fines issued over the last thirty years include $2.8 million against Union Carbide for violations related to an explosion and fire at its plant in Seadrift, Texas, in March 1991; $8.2 million levied against Samsung Guam in the wake of numerous worksite accidents at Guam’s International Airport in 1995; and $8.7 million against Imperial Sugar in connection with an explosion at the company’s plant in Port Wentworth, Georgia, in February 2008.

More recently, OSHA fined the producers of The Walking Dead $12,675 (the maximum allowable for a single citation) in the wake of the death of a stuntman working on an episode of the television show in Georgia in July 2017.

These fines demonstrate that the agency is serious about trying to protect the environment and workers. However, for some, the question remains whether it is more profitable for a business to gamble on cutting corners on safety and pay the fine if caught than to spend the money ahead of time to make workplaces completely safe. OSHA fines do not really tell the whole story of the penalties for workplace safety issues. There can also be significant civil liability exposure and public relations damage, as well as worker compensation payments and adverse media coverage, making an unsafe workplace a very expensive risk on multiple levels.

A Workplace Free of Harassment

Employers have an ethical and a legal duty to provide a workplace free of harassment of all types. This includes harassment based on sex, race, religion, national origin, and any other protected status, including disability. Employees should not be expected to work in an atmosphere where they feel harassed, prejudiced against, or disadvantaged. The two complaints most frequently filed with the Equal Employment Opportunity Commission (EEOC), which strives to eliminate racial, gender, and religious discrimination in the workplace, are sexual harassment and racial harassment. Together, these categories made up two-thirds of all cases filed during 2017. More than thirty thousand complaints of sexual, gender, racial, or creedal harassment are filed each year, illustrating the frequency of the problem.

The EEOC enforces Title VII of the Civil Rights Act (CRA) of 1964, which prohibits workplace discrimination including sexual harassment.

(As discussed elsewhere in the text, the CRA also protects employees from discrimination based on race, gender, religion, and national origin.) According to EEOC guidelines, it is unlawful to sexually harass a person because of that person’s sex, either through explicit offers in exchange for sexual favors (known as quid pro quo) or through actions at a broader more systemic level that create a “hostile working environment.” Sexual harassment includes unwelcome touching, requests for sexual favors, any other verbal or physical harassment of a sexual nature, offensive remarks based on a person’s sex, and off-color jokes. The harasser can be the victim’s supervisor (which creates company liability the first time it happens) or a peer coworker (which usually creates liability after the second time it happens, assuming the company had notice of the first occurrence). It can even be someone who is not an employee, such as a client or customer, and the law applies to men and women. Thus, the victim and the harasser both can be either a woman or a man, and offenses include both opposite-sex and same-sex harassment.

Although the law does not prohibit mild teasing, offhand comments, or isolated incidents that are not serious, harassment does become illegal when, according to the law, it is so frequent “that it creates a hostile or offensive work environment or when it is so severe that it results in an adverse employment decision (such as the victim being fired or demoted).”

It is management’s responsibility to prevent harassment through education, training, and enforcement of a policy against it, and failure to do so will result in legal liability for the company.

Two relatively recent examples of workplace environments that descended into the worst excesses of sexist and other inappropriate behavior occurred at American Apparel and Uber. In both cases, principal leaders were mostly men who engaged in ruthless, no-holds-barred management practices that benefitted only those subordinates who most resembled the leaders themselves. Such environments may thrive for a while, but the long-term consequences can include criminal violations that produce hefty fines and imprisonment, bankruptcy, and radical upheaval in corporate management. At American Apparel and at Uber, these events resulted in the dismissal of each company’s CEO, Dov Charney (who also was the founder of the company) and Travis Kalanick (who was one of the corporation’s founders), respectively.

In 2017 and 2018, a renewed focus on sexual harassment in the workplace and other inappropriate sexual behaviors brought a stream of accusations against high-profile men in politics, entertainment, sports, and business. They included entertainment industry mogul Harvey Weinstein; Pixar’s John Lasseter; on-air personalities Matt Lauer and Charlie Rose; politicians such as Roy Moore, John Conyers, and Al Franken; and Uber’s Kalanick, to name just a few ((Figure)).

Major figures in the news and entertainment industries, as well as Silicon Valley, have been accused of sexual harassment and often terminated or forced into retirement. Examples include Matt Lauer of NBC (a) and Travis Kalanick at Uber (b). (credit a: modification of “Hires 090402-N-0696M-018b” by Chad J. McNeeley/Wikimedia Commons, Public Domain; credit b: modification of “GES Opening Plenary on June 23, 2016” by GES Photo/Flickr, Public Domain)


Part A shows Matt Lauer. Part B shows Travis Kalanick.

The workplace harassment problem has continued for many decades despite the EEOC’s enforcement efforts; it remains to be seen whether new public scrutiny will prompt a permanent change in the workplace. The Ford Motor Company serves as a relevant example. Decades after Ford tried to address sexual harassment at two Chicago-area assembly plants, the abuse at the plants evidently continues. According to legal action filed with the EEOC in the early 1990s, conditions for women working at some Ford auto assembly plants were hostile. Female employees alleged they were groped, that men pressed against them and simulated sex acts, and that men even masturbated in front of them. They further asserted that men would routinely make crude comments about the figures of female coworkers, and graffiti depictions of penises were everywhere—carved into tables, spray painted onto floors, and scribbled on walls. Managers and floor supervisors were accused of giving women better assignments in return for sex and punishing those who refused.

In the 1990s, lawsuits and an EEOC action led to a $22 million settlement in which Ford admitted to widespread misconduct and committed to crack down on the offenders. However, it seems Ford still did not learn its lesson, or, after almost three decades, the memory dimmed and they slipped right back into old habits. In August 2017, the EEOC reached a new $10 million settlement with Ford for sexual and racial harassment at the two Chicago plants. Though Ford did not admit any wrongdoing in the recent settlement, it appears that neither millions of dollars in earlier damages nor promises by management led to any serious change. The New York Times interviewed some of the women at Ford,

and Sharon Dunn, who was a party of the first case and is now again a party of the second, said, “For all the good that was supposed to come out of what happened to us, it seems like Ford did nothing. If I had that choice today, I wouldn’t say a damn word.”

A Satisfied Workforce

Although the workplace should be free of harassment and intimidation of every sort, and management should provide a setting where all employees are treated with dignity and respect, ideally, employers should go much further.

Most people spend at least one-third and possibly as much as one-half of their waking hours at work. Management, therefore, should make work a place where people can thrive, that fosters an atmosphere in which they can be engaged and productive. Workers are happier when they like where they work and when they do not have to worry about childcare, health insurance, or being able to leave early on occasion to attend a child’s school play, for example. For our grandparents’ generation, a good job was dependably steady, and employees tended to stay with the same employer for years. There were not many extras other than a secure job, health insurance, and a pension plan. However, today’s workers expect these traditional benefits and more. They may even be willing to set aside some salary demands in exchange for an environment featuring perquisites (or “perks”; nonmonetary benefits) such as a park-like campus, an on-the-premises gym or recreational center, flextime schedules, on-site day care and dry cleaning, a gourmet coffee house or café, and more time off. This section will explore how savvy managers establish a harmonious, compassionate workplace while still setting expectations of top performance.

Happy employees are more productive and more focused, which enhances their performance and leads to better customer treatment, fewer sick days, fewer on-the-job accidents, and less stress and burnout. They are more focused on their work, more creative, and better team players, and they are more likely to help others and demonstrate more leadership qualities. How, then, does an employer go about the process of making workers happy? Research has identified several pitfalls that managers should avoid if they want to have a good working relationship with their direct reports and, indeed, all their employees.

One is making employees feel like they are just employees. To be happy at work, employees, instead, need to feel like they know each other, have friends at work, are valued, and belong. Another pitfall is remaining aloof or above your employees. Taking an authentic interest in who they are as people really does matter. When surveys ask employees, “Do you feel like your boss cares about you?,” too frequently the answer is no. One way to show caring and interest is to recognize when employees are making progress; another might be to take a personal interest in their lives and families. Asking employees to share their ideas and implementing these ideas whenever possible is another form of acknowledgement and recognition. Pause and highlight important milestones people achieve, and ensure that they feel their contributions are noticed by saying thank you.

Good advice to new managers includes making work fun. Allow people to joke around as appropriate so that when mistakes occur they can find humor in the situation and move forward without fixating simply on the downside. Celebrate accomplishments. Camaraderie and the right touch of humor can build a stronger workplace culture. Encourage exercise and sleep rather than long work hours, because those two factors improve employees’ health, focus, attention, creativity, energy, and mood. In the long run, expecting or encouraging people to regularly work long hours because leaving on time looks bad is counterproductive to the goals of a firm. Accept that employees need to disengage sometimes. People who feel they are always working because their management team expects they must remain in touch via e-mail or mobile phone can become tremendously stressed. To combat this, companies should not expect their workers to be available around the clock, and workers should not feel compelled to be so available. Rather, employers should allow employees to completely disengage regularly so they can focus on their friends and families and tend to their own personal priorities. By way of international comparison, according to a recent article in Fortune, Germany and France have actually gone as far as banning work-related e-mails from employers on the weekends, which is a step in the right direction, even if only because disconnecting from work is now mandated by law.

Employers must decide exactly how to spend the resources they have allocated to labor, and it can be challenging to make the right decision about what to provide workers ((Figure)). Should managers ask employees what they want? Benchmark the competition? Follow the founder’s or the board’s recommendations? How does a company make lifestyle benefits fair and act ethically when there is backlash against family-friendly policies from people who do not have their own families? Unlike the purchase of raw materials, utilities, and other budgetary items, which is driven primarily by cost and may present only a few choices, management’s offering of employee benefits can present dozens of options, with costs ranging from minimal to very high. Work-at-home programs may actually cost the company very little, for example, whereas health insurance benefits may cost significantly more. In many other industrialized countries, the government provides (i.e., subsidizes) benefits such as health insurance and retirement plans, so a company does not have to weigh the pros and cons (i.e., do a cost-benefit analysis) of what to offer in this area. In the United States, employee benefits become part of a cost-benefit analysis, especially for small and mid-sized companies. Even larger companies today are debating what benefits to offer.

Workplace or clubhouse? Some companies offer playful perks in an effort to attract the best employees and increase worker satisfaction. (credit: work by Jason Putsche Photography/Spark Baltimore, CC BY 4.0)


This image shows a room with a shuffleboard table and a foosball table.

Management has to decide not only how much money to spend on benefits and perks but precisely what to spend the money on. Another decision is what benefit choices management should allow each employee to make, and which choices to make for the workforce as a whole. The best managers communicate regularly with their workforce; as a result, they are more likely to know (and be able inform top management about) the types of perks most desired and most likely to attract and keep good workers. (Figure) shows that men and women do not always want the same benefits, which presents a challenge for management. For instance, many women place about twice as much value as many men do on day care (23%–11%) and on paid family leave (24%–14%). Also valued more highly generally by women than by men are better health insurance, work-from-home options, and flexible hours, whereas more men value an on-site gym and free coffee more than women typically do.

As this chart shows, men and women view the importance of various benefits differently, even if their top-ranked benefits are the same (i.e., better insurance, work-from-home options, and more flexible hours). (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This chart is a bar chart that shows the percentage of men and women who ranked the importance of different benefits as a tradeoff to earnings. The benefits are listed on the left side and the bars of the chart extend to the right. There is a bar for men and a bar for women for each benefit. The first benefit listed is “better health, dental, and vision insurance,” and 61 percent of women and 47 percent of men ranked it. Then “work-from-home options” was ranked by 55 percent of women and 40 percent of men. Then “more flexible hours” was ranked by 47 percent of women and 38 percent of men. Then “unlimited vacation” was ranked by 47 percent of women and 33 percent of men. Then “paid maternity/paternity leave” was ranked by 24 percent of women and 14 percent of men. Then “student loan assistance” was ranked by 24 percent of women and 20 percent of men. Then “free day-care services” was ranked by 23 percent of women and 11 percent of men. Then “tuition assistance” was ranked by 16 percent of women and 14 percent of men. Then “free fitness/yoga classes” was ranked by 11 percent of women and 9 percent of men. Then “free gym membership” was ranked by 11 percent of women and 12 percent of men. Then “free coffee” was ranked by 10 percent of women and 12 percent of men. Then “free snacks” was ranked 9 percent of women and 10 percent of men. Then “company-wide retreats” was ranked by 6 percent of women and 7 percent of men. Then “team bonding events” was ranked by 5 percent of women and 7 percent of men. Then “free weekly employee outings” was ranked by 5 percent of women and 6 percent of men. Then “on-site gym” was ranked by 4 percent of women and 6 percent of men.

Age and generation also play a role in the types of perks that employees value. Workers aged eighteen to thirty-five rank career advancement opportunities (32%) and work-life balance (33%) as most important to them at work. However, 42 percent of workers older than thirty-five say work-life balance is the most important feature. This is likely because Generation X (born in the years 1965–1980) place a high value on opportunities for work-life balance, although, like Baby Boomers (born in the years 1946–1964), they also value salary and a solid retirement plan. On the other hand, Millennials (born in the years 1981–1997) appreciate flexibility: having a choice of benefits, paid time off, the ability to telecommute, flexible hours, and opportunities for professional development.

The menu of benefits and perks thus depends on several variables, such as what the company can afford, whether employees value perks over the more direct benefit of higher pay, what the competition offers, what the industry norm is, and the company’s geographic location. For example, Google is constantly searching for ways to improve the health, well-being, and morale of its “Googlers.” The company is famous for offering unusual perks, like bicycles and electric cars to get staff around its sprawling California campus. Additional benefits are generous paid parental leave for new parents, on-site childcare centers at one location, paid leaves of absence to pursue further education with tuition covered, and on-site physicians, nurses, and health care. Other perks are gaming centers, organic gardens, eco-friendly furnishings, a pets-at-work policy, meditation and mindfulness training, and travel insurance and emergency assistance on personal and work-related travel. On the death of a Google employee, his or her spouse or domestic partner is compensated with a check for 50 percent of the employee’s salary each year for a decade. In addition, all a deceased employee’s stock options vest immediately for the surviving spouse or domestic partner. Furthermore, a deceased employee’s children receive $1000 per month until they reach the age of nineteen, or until the age of twenty-three if they are full-time students.

In addition to offering benefits and perks, managers can foster a healthy workplace by applying good “people skills” as well. Managers who are respectful, open, transparent, and approachable can achieve two goals simultaneously: a workforce that is happier and also one that is more productive. Good management requires constant awareness that each team member is also an individual working to meet both personal and company goals. Effective managers act on this by regularly meeting with employees to recognize strengths, identify constructive ways to improve on weaknesses, and help workers realize collective and individual goals. Ethical businesses and good managers also invest in efforts like performance management and employee training and development. These commitments call for giving employees frequent and honest feedback about what they do well and where they need improvement, thereby enabling them to develop the skills they need, not only to succeed in the current job but to move on to the next level. Fostering teamwork by treating people fairly and acknowledging their strengths is also an important responsibility of management. Ethical managers, therefore, demonstrate most, if not all, of the following qualities: cultural awareness, positive attitude, warmth and empathy, authenticity, emotional intelligence, patience, competence, accountability, respectful, and honesty.

Summary

A company and its managers need to provide a workplace at which employees want to work, free of safety hazards and all types of harassment. Perks and benefits also make the company an attractive place to work. Yet another factor is managers who make employees feel valued and respected. A company can use all these tools to attract and retain top talent, helping to reach the goals of having a well-run company with a satisfied workforce. Philosophers Aristotle and Immanuel Kant said taking ethical action is the right thing to do. The decision to create an environment in which employees want to come to work each day is, in large part, an ethical choice, because it creates a healthy environment for all to encounter. However, the bonus comes when a satisfied workforce fosters increased quality and productivity, which leads to appreciative customers or clients and increased profitability. There is a financial payoff in that a well-treated workforce is also a productive one.

Assessment Questions

How often should managers in a workplace anticipate an inspection from the Occupational Safety and Health Administration?

  1. every day
  2. once a month
  3. upon request or complaint
  4. never

C

True or false? Sexual harassment is unethical but not illegal.

False. Sexual harassment is both unethical and illegal.

What are examples of benefits or perks that women usually value more than men?

Surveys show that women value benefits related to childcare and health care more highly than do men, although the benefit mix any employee values most is an individual one.

What can a company do to try to reduce sexual harassment?

Managers can model ethical behavior by example, and the company can offer training and communicate and strictly enforce a written policy.

Endnotes

1R.G. Ehrenberg and G.H. Jacubson, “Why WARN? The Impact of Recent Plant-Closing and Layoff Prenotification Legislation in the United States [electronic version]” in Employment Security and Labor Market Behavior, ed. C. Buechtemann. (Ithaca, NY: Cornell University Press, 1993: 200–214).
2Occupational Safety and Health Act, 29 U.S.C. §651 et seq. (1970)
3Occupational Safety and Health Act, 29 U.S.C. §651 et seq. (1970)
4Occupational Safety & Health Administration, “Top Enforcement Cases Based on Total Issued Penalty,” U.S. Department of Labor. https://www.osha.gov/dep/enforcement/top_cases.html (accessed January 5, 2018).
5Occupational Safety & Health Administration, “Top Enforcement Cases Based on Total Issued Penalty,” U.S. Department of Labor. https://www.osha.gov/dep/enforcement/top_cases.html (accessed January 5, 2018).
6Occupational Safety & Health Administration, “Top Enforcement Cases Based on Total Issued Penalty,” U.S. Department of Labor. https://www.osha.gov/dep/enforcement/top_cases.html (accessed January 5, 2018).
7U.S. Equal Employment Opportunity Commission, “Statistics.” https://www.eeoc.gov/eeoc/statistics/ (accessed April 22, 2018).
8Civil Rights Act, § 7, 42 U.S.C. § 2000e et seq. (1964).
9U.S. Equal Employment Opportunity Commission, “Sexual harassment.” https://www1.eeoc.gov//laws/types/sexual_harassment.cfm?renderforprint=1 (accessed July 11, 2018).
10Jeffrey Dastin, “American Apparel Names New CEO, Officially Ousts Founder,” Reuters, December 16, 2014. https://www.reuters.com/article/us-american-apparel-managementchanges-idUSKBN0JU2J220141216; Julie Carrie Wong, “Uber CEO Travis Kalanick Resigns Following Months of Chaos,” The Guardian, June 21, 2017. https://www.theguardian.com/technology/2017/jun/20/uber-ceo-travis-kalanick-resigns.
11Susan Chira and Catrin Einhorn, “How Tough Is It to Change a Culture of Harassment? Ask Women at Ford,” New York Times, December 19, 2017. https://www.nytimes.com/interactive/2017/12/19/us/ford-chicago-sexual-harassment.html.
12Susan Chira and Catrin Einhorn, How Tough Is It to Change a Culture of Harassment? Ask Women at Ford,” New York Times, December 19, 2017. https://www.nytimes.com/interactive/2017/12/19/us/ford-chicago-sexual-harassment.html.
13Barry Moltz, “Seven Secrets to Keeping Your Employees Happy,” American Express Small Business, August 24, 2017. https://www.americanexpress.com/us/small-business/openforum/articles/7-secrets-to-keeping-your-employees-happy/.
14David Z. Morris, “New French Law Bars Work Email After Hours,” Fortune, January 1, 2017. http://fortune.com/2017/01/01/french-right-to-disconnect-law/.
15Stephen Miller, “Millennials in the Dark About Their Benefits,” SHRM.org, October 25, 2016. https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/millennials-benefits.
16Investopedia, “Top Ten Reasons to Work at Google,” Investopedia. https://www.investopedia.com/articles/investing/060315/top-10-reasons-work-google.asp.

Glossary

EEOC
the Equal Employment Opportunity Commission, created by the U.S. Civil Rights Act of 1964 and which attempts to eliminate discrimination in the workplace based on race, gender, or creed
OSHA
the Occupational Safety and Health Act, which governs workplace safety, and the Occupational Safety and Health Administration, which administers the act at the federal level
sexual harassment
unwelcome touching, requests for sexual favors, and other verbal or physical harassment of a sexual nature from a supervisor, coworker, client, or customer

What Constitutes a Fair Wage?

28

Learning Objectives

By the end of this section, you will be able to:

  • Explain why compensation is a controversial issue in the United States
  • Discuss statistics about the gender pay gap
  • Identify possible ways to achieve equal pay for equal work
  • Discuss the ethics of some innovative compensation methods

The Center for Financial Services Innovation (CFSI) is a nonprofit, nonpartisan organization funded by many of the largest American companies to research issues affecting workers and their employers. Findings of CFSI studies indicate that employee financial stress permeates the workplaces of virtually all industries and professions. This stress eats away at morale and affects business profits. A recent CFSI report details data showing that “85% of Americans are anxious about their personal financial situation, and admit that their anxiety interferes with work. Furthermore, this financial stress leads to productivity losses and increased absenteeism, healthcare claims, turnover and costs affecting workers who cannot afford to retire.”

The report also indicates that employees with high financial anxiety are twice as likely to take unnecessary sick time, which is can be expensive for an employer.

The CFSI report makes clear that ensuring workers are paid a fair wage is not only an ethical practice; it is also an effective way to achieve employees’ highest and most productive level of performance, which is what every manager wants. In the process, it also makes workers more loyal to the company and less likely to jump ship at the first sign of a slightly better wage somewhere else.

The concept of a fair wage has a greater significance than simply one worker’s pay or one company’s policy. It is an economic concept critical to the nation as a whole in an economic system like capitalism, in which individuals pay for most of what they need in life rather than receiving government benefits funded by taxes. The ethical issues for the business community and for society at large are to identify democratic systems that can effectively eradicate the financial suffering of the poorest citizens and to generate sufficient wages to support the economic sustainability of all workers in the United States. Put another way, has the real income of average American workers declined so much over the past few decades that it now threatens the productivity of the largest economy in the world?

Economic Data as an Indicator of Fair Wages

The Pew Research Center indicates that over the thirty-five years between 1980 and 2014, the inflation-adjusted hourly wages of most middle-income American workers were nearly stagnant, rising just 6 percent, or an average of less than 0.2 percent, per year.

(The Pew Research Center defines middle-class adults as those living in households with disposable incomes ranging from 65 percent to 200 percent of the national median, which is approximately $60,000.) The data collected by the Economic Policy Institute, a nonprofit, nonpartisan think tank, show the same stagnant trend.

Contrast this picture with the wages of high-income workers, which rose 41 percent over the same years. Many economists, political leaders, and even business leaders admit that increasing wage and wealth disparities are not a sustainable pattern if the U.S. economy is to succeed in the long term.

Wage growth for all workers must be fair, which, in most cases, means higher wages for low- and middle-income workers. (Figure) presents evidence of the growth of the income gap in the United Sates since the start of the great recession in 2007.

Stagnant income has been the reality for lower- and middle-income American adults, with income in 2016 actually lower than it was 10 years before. This has not been the case for upper-income adults. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This chart is a bar chart titled “Median Household Worth prior to and after the Great Recession.” The label for the y-axis is “Median household net worth (in dollars) and the values start at 0 and increase by 100,000 up to 900,000. The labels for the x-axis are “Lower income,” “Middle income,” and “Upper income.” There are bar graphs for the years 2007, 2013, and 2016 for each income group listed on the x-axis. All of the lower income graphs are below 100,000. The one for 2007 reaches about 20,000 and the ones for 2013 and 2016 decrease slightly from that. The middle income graphs range from about 160,000 to 100,000. The one for 2007 is at about 160,000, then 2013 is at about 100,000, and then 2016 is at about 110,000. The upper income graphs range from about 660,000 to 810,000. The one for 2007 is at about 740,00, then 2013 is at about 660,000, and then 2016 is at about 810,000.

No reasonable person, regardless of profession or political party, would dispute that employees are entitled to a fair or just wage. Rather, it is in the calculation of a fair wage that the debate begins. Economists, sociologists, psychologists, and politicians all have opinions about this, as have most workers. Some of the factors that feature in calculations are federal and state minimum-wage standards, the cost of living, and the rate of inflation. Should a fair wage include enough money to raise a family, too, if the wage earner is the sole or principal support of a family?

(Figure) shows the growth, or lack of growth, in the buying power of a minimum-wage earner since 1940. Compare the twenty-year period of 1949 through 1968 with the fifty-year period from 1968 through 2017. The difference has created a sobering reality for many workers. In the nearly six decades since 1960, the inflation-adjusted real minimum wage actually declined by 23 percent. That means minimum-wage workers did not even break even; the value of their wages declined over fifty years, meaning they have effectively worked half a century with no raise. In the following chart, nominal wage represents the actual amount of money a worker earns per hour; real wage represents the nominal wage adjusted for inflation. We consider real wages because nominal wages do not take into account changes in prices and, therefore, do not measure workers’ actual purchasing power.

The graph contrasts the U.S. nominal wage (dollar amount) and the real wage (dollar amount’s purchasing power) over the last seventy-five years, indicating a steady decline in purchasing power experienced by most workers. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This graph is titled “Nominal versus Real Minimum Wage.” The y-axis shows dollars, starting at 0 and increasing by two dollar increments. The x-axis shows years from 1940 to 2010, increasing by 10 year increments. The trend line for nominal minimum wage starts at about $5.70 in 1940 and fluctuates between this and about $4.00 until it spikes in 1950 to $8.00. There is a slight decrease, then it jumps again around 1955 to about $9.00. It goes back toward $8.00 in 1960, then steadily increases until another jump around 1968 to about $11.50. It decreases over the next few years back to about $9.00, then goes back up to around $10.00 until about 1980. Then a steady decrease to about $7.00 occurs from about 1980 to 1988. Around 1990, it goes back up to about $8.00, then fluctuates between about $8.00 and $7.50 until about 2000. There is a decline to about $6.00 until 2005, and then it increase back to just above $8.00 around 2010 before declining around. The trend line for real minimum wage is an increasing trend line. It starts at close to $0.00 in 1940 and steadily increases, with one period of no change around 1950 to 1965, to close to $2.00 around 1968. From about 1968 to 1973 there is no change. Then it steadily increases again until there is a large jump from about 1976 to 1980 when it reaches close to $4.00. Most of the time from 1980 to 1990 shows no change. Then it increases again from about 1989 to 1996, reaching about $5.50. There is no change until about 2006 when it increases to $7.25 around 2008. Then it shows no change from there.

One positive development for minimum-wage workers is that state governments have taken the lead in what was once viewed primarily as a federal issue. Today, most states have a higher minimum hourly wage than the federal minimum of $7.25. States with the highest minimum hourly wages are Washington ($11.50), California and Massachusetts ($11.00), Arizona and Vermont ($10.50), New York and Colorado ($10.40), and Connecticut ($10.00). Some cities have even higher minimum hourly wages than under state law; for example, San Francisco and Seattle are at $15.00. As of the end of 2017, twenty-nine states had higher minimum hourly wages than the federal rate, according to Bankrate.com ((Figure)).

As of 2017, there is a patchwork quilt of state-level minimum wage laws. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


A map of the United States is titled “Minimum Wage by State, 2017.” The states are colored in to show minimum wage. States with a minimum wage between $7.25 and $7.99 are Idaho, Utah, Wyoming, New Mexico, Texas, Oklahoma, Kansas, North Dakota, Iowa, Wisconsin Missouri, Louisiana, Mississippi, Alabama, Tennessee, Kentucky, Indiana, New Hampshire, Pennsylvania, Virginia, North Carolina, South Carolina, and Georgia. States with a minimum wage between $8.00 and $8.74 are Nevada, Montana, South Dakota, Illinois, Arkansas, Ohio, New Jersey, Delaware, and Florida. States with a minimum wage between $8.75 and $9.49 are Hawaii, Colorado, Nebraska, Michigan, West Virginia, Maine, and Maryland. States with a minimum wage between $9.50 and $10.24 are Oregon, Alaska, Arizona, Minnesota, New York, Vermont, Connecticut, and Rhode Island. States with a minimum wage between $10.25 and $11.50 are Washington, California, Massachusetts, and Washington, DC.

Unfair Wages: The Gender Pay Gap

Even after all possible qualifiers have been added, it remains true that women earn less than men. Managers sometimes offer multiple excuses to justify pay inequities between women and men, such as, “Women take time off for having babies” or “Women have less experience,” but these usually do not explain away the differences. The data show that a woman with the same education, experience, and skills, doing the same job as a man, is still likely to earn less, at all levels from bottom to top. According to a study by the Institute for Women’s Policy Research, even women in top positions such as CEO, vice president, and general counsel often earn only about 80 percent of what men with the same job titles earn.

Data from the EEOC over the five years from 2011 through 2015 for salaries of senior-level officials and managers (defined by the EEOC as those who set broad policy and are responsible for overseeing execution of those policies) show women in these roles earned an average of about $600,000 per year, compared with their male counterparts, who earned more than $800,000 per year.

That $200,000 difference amounts to a wage gap of about 35 percent each year.

The same is true in mid-level jobs as well. In a long-term study of compensation in the energy industry, researchers looked at the job of a land professional—who negotiates with property owners to lease land on which the oil companies then drill wells—and found evidence of women consistently getting paid less than men for doing the same job. Median salaries were compared for male and female land professionals with similar experience (one to five years) and educational background (bachelor’s degree), and men earned $7000 more per year than their female counterparts.

Doesn’t the law require men and women to be paid the same? The answer is yes and no. Compensation discrimination has been illegal for more than fifty years under a U.S. law called the Equal Pay Act, passed in 1963. But the problem persists. Women earned about 60 percent of what men earned in 1960, and that value had risen to only 80 percent by 2016. Given these historic rates, women are not projected to reach pay equity until at least 2059, with projections based on recent trends predicting dates as late as 2119.

These are aggregate data; thus, they include women and men with the same job, or similar jobs, or jobs considered to fall in the same general category, but the data do not compare the salary of a secretary to that of a CEO, which would be an unrealistic comparison.

Equal pay under the law means equal pay for the “same” job, but not for the “equivalent” job. Those companies wishing to avoid strict compliance with the law may use several devices to justify unequal pay, including using slightly different job titles, slightly different lists of job duties, and other techniques that lead to different pay for different employees doing essentially the same job. Women have taken employers to court for decades, only to find their lawsuits unsuccessful because proving individual compensation discrimination is very difficult, especially given that multiple factors can come into play in compensation decisions. Sometimes class-action lawsuits have been more successful, but even then plaintiffs often lose.

Can anything be done to achieve equal pay? One step would be to pass a new law strengthening the rules on equal pay, but two recent attempts to pass the Paycheck Fairness Act (S.84, H.R.377) and the Fair Pay Act (S.168, H.R.438) narrowly failed.

These or similar bills, if ever enacted into law, would significantly reduce wage discrimination against those who work in similar job categories by establishing equal pay for “equivalent” work, rather than the current law which uses the term “same” job. The idea of pay equivalency is closely related to comparable worth, a concept that has been put into action on a limited basis over the years, but never on a large scale. Comparable worth holds that workers should be paid on the basis of the worth of their job to the organization. Equivalent work and comparable worth can be important next steps in the path to equal pay, but they are challenging to implement because they require rethinking the entire basis for pay decisions.

If a woman’s starting salary for the first job of her career is less than that of a man, the initial difference, even if small, tends to cause a systemic, career-long problem in terms of pay equity. Researchers at Temple University and George Mason University found that if a new hire gets $5000 more than another worker hired at the same time, the difference is significantly magnified over time. Assuming an average annual pay increase of 5 percent, an employee starting with a $55,000 salary will earn at least $600,000 more over a forty-year career than an employee who starts an equivalent job with a $50,000 salary. This significantly affects many personal decisions, including retirement, because, all other things equal, a lower-paid woman will have to work three years longer than a man to earn the same amount of money over the course of her career.

European Approaches to the Gender Pay Gap

The policies of other nations can offer some insight into how to address pay inequality. Iceland, for example, has consistently been at the top of the world rankings for workplace gender equality in the World Economic Forum survey.

A new Icelandic law went into effect on January 1, 2018, that makes it illegal to pay men more than women, gauged not by specific job category, but rather in all jobs collectively at any employer with twenty-five or more employees, a concept known as an aggregate salary data approach.

The burden of proof is on employers to show that men and women are paid equally or they face a fine. The ultimate goal is to eliminate all pay inequities in Iceland by the year 2022. The United Kingdom has taken a first step toward addressing this issue by mandating pay transparency, which requires employers with 250 workers or more to publish details on the gaps in average pay between their male and female employees.

Policies not directly linked to salary can help as well. German children have a legal right to a place in kindergarten from the age of three years, which has allowed one-third of mothers who could not otherwise afford nursery school or kindergarten to join the workforce.

In the United Kingdom, the government offers up to thirty hours weekly of free care for three- and four-year-old children to help mothers get back in the workforce. Laws such as these allow women, who are often the primary caregivers in a household, to experience fewer interruptions in their careers, a factor often blamed for the wage gap in the United States.

The World Economic Forum reports that about 65 percent of all Organization for Economic Cooperation and Development (OECD) countries have introduced new policies on pay equality, including requiring many employers to publish calculations every year showing the gender pay gap.

Steps such as the collection and reporting of aggregate salary data, or some form of early education or subsidized childcare, are positive steps toward eventually achieving the goal of wage equality.

Critical Thinking

  • Which of these policies do you think would be the most likely to be implemented in the United States and why?
  • How would each of the normative theories of ethical behavior (virtue ethics, utilitarianism, deontology, and justice theory) view this issue and these proposed solutions?

Part of the reason that initial pay disparity is heightened over a career is that when a worker changes jobs, the new employer usually asks what the employee was making in his or her last job and uses that as a baseline for pay in the new job. To combat the problem of history-based pay, which often hurts women, eight states (and numerous municipalities) in the United States now ban employers from asking job applicants to name their last salary.

Although this restriction will not solve the entire problem, it could have a positive effect if it spreads nationally. In a survey by the executive search firm Korn Ferry, forty-six of one hundred companies said they usually comply with the legal requirements in force in the strictest of the locations in which they operate, meaning workers in states without this law might not be asked about their salary history during new-job negotiations either.

Experiments in Compensation

Whether we are discussing fair wages, minimum wages, or equal wages, the essence of the debate often boils down to ethics. What should people get paid, who should determine that, and should managers and upper management do only what is required by law or go above and beyond if that means doing what they think is right? Organizational pay structures are set by a variety of methods, including internal policies, the advice of outside compensation consultants, and external data, such as market salaries.

An innovative compensation decision in Seattle may provide some insight. In 2011, a young man earning $35,000 a year told his boss at Gravity, a credit-card payments business, that his earnings were not sufficient for a decent life in expensive Seattle. The boss, Dan Price, who cofounded the company in 2004, was somewhat surprised as he had always taken pride in treating employees well. Nevertheless, he decided his employee was right. For the next three years, Gravity gave every employee a 20 percent annual raise. Still, profit continued to outgrow wages. So Price announced that over the next three years, Gravity would phase in a minimum salary of $70,000 for all employees. He reduced his own salary from $1 million to $70,000, to demonstrate the point and help fund it. The following week, five thousand people applied for jobs at Gravity, including a Yahoo executive who took a pay cut to transfer to a company she considered fun and meaningful to work for.

Price’s decision started a national debate: How much should people be paid? Since 2000, U.S. productivity has increased 22 percent, yet inflation-adjusted median wages have increased only 2 percent. That means a larger share of capitalism’s rewards are going to shareholders and top executives (who already earn an average of three hundred times more than typical workers, up from seventy times more just a decade ago), and a smaller share is going to workers. If Gravity profits while sharing the benefits of capitalism more broadly, Price’s actions will be seen as demonstrating that underpaying the workforce hurts employers. If it fails, it may look like proof that companies should not overpay.

Price recognized that low starting salaries were antithetical to his values and felt that struggling employees would not be motivated to maintain the high quality that made his company successful with that compensation. He calls the $70,000 minimum wage an ethical and moral imperative rather than a business strategy, and, though it will cost Gravity about $2 million per year, he has ruled out price increases and layoffs. More than half the initial cost was offset by his own pay cut, the rest by profit. Revenue continues to grow at Gravity, along with the customer base and the workforce. Currently, the firm has a retention rate of 91 percent.

Yet Price says managers’ scorecards should measure purpose, impact, and service, as much as profit.

Michael Wheeler, a professor at Harvard Business School who teaches a course called “Negotiation and The Moral Leader,” recently discussed the aftermath of Dan Price’s decision at Gravity. He interviewed other entrepreneurs about their plans for creative compensation to help develop a happy and motivated workforce, and it appears that some other companies are taking notice of how successful Gravity has been since Price made the decision to pay his workers more.

One of these entrepreneurs was Megan Driscoll, the CEO of Pharmalogics Recruiting, who, after hearing Dan Price speak to a group of executives, was inspired to raise the starting base pay of her employees by 33 percent. When Driscoll put her plan to work, her business had forty-six employees and $6.7 million in revenue. A year later, staff and revenues had jumped to seventy-two and $15 million, respectively. Driscoll points to data showing her people are working harder and smarter after the pay raise than before. There has been a 32 percent increase in clients, and the client retention rate doubled to 80 percent.

Stephan Aarstol, CEO of Tower Paddleboards, wanted to give his workers a raise, but his company did not have the cash. Instead, Aarstol boldly cut the work day to five hours from the ten hours most employees had been working. Essentially that doubled their pay, and as a result, he says, employee focus and engagement have skyrocketed, as have company profits.

Managers must carefully balance the short term, such as quarterly profits, versus long-term sustainability as a successful company. This requires recognizing the value of work that each person contributes and devising a fair, and sometimes creative, compensation plan.

Summary

The concept of paying people fairly can become complicated. It includes trying to allocate and compensate workers in the most effective manner for the company, but it takes judgement, wisdom, and a moral imperative to do it fairly. Managers must balance issues of compensation equity, employee morale, motivation, and profits—all of which may have legal, ethical, and business elements. The issue of a fair wage is particularly salient for those earning the minimum wage, which, in real terms, has declined by 23 percent since 1960, and for women, who continue to experience a significant pay gap as compared with their male counterparts.

Assessment Questions

According to data presented in the chapter, about how much do women earn in comparison with men doing the same job?

  1. a lot less (about 40%–50%)
  2. somewhat less (about 70%–80%)
  3. almost the same (95%)
  4. about the same (100%)

B

True or false? Minimum wages are established by federal law only.

False. Minimum wage can be set by city (municipal), state, or federal governments.

True or false? Minimum wages have at least kept pace with the cost of living, because of the automatic cost-of-living adjustment clause in the law.

False. Minimum wages have not kept up with inflation; in fact, they have fallen far behind.

Why have some states raised minimum wages above the federal minimum?

Cost of living variations and concern about a shrinking middle class are possible motives for a state to enact its own above-federal minimum wage.

What are some of the reasons that have contributed to women making less than men in similar jobs?

Among the factors are discrimination, historical wage rates, and artificially manipulated job titles.

Endnotes

1Sohrab Kohli and Rob Levy, “Employee Financial Health: How Companies Can Invest in Workplace Wellness,” Center for Financial Service Information, May 30, 2017. http://cfsinnovation.org/research/employee-financial-health/.
2Drew Desilver, “For Most Workers, Real Wages Have Barely Budged for Decades,” Pew Research Center, October 9, 2014. http://www.pewresearch.org/fact-tank/2014/10/09/for-most-workers-real-wages-have-barely-budged-for-decades/.
3Lawrence Mishel, Elise Gould, and Josh Bivens, “Wage Stagnation in Nine Charts,” Economic Policy Institute, January 6, 2015. http://www.epi.org/publication/charting-wage-stagnation/.
4Lawrence Mishel, Elise Gould, and Josh Bivens, “Wage Stagnation in Nine Charts,” Economic Policy Institute, January 6, 2015. http://www.epi.org/publication/charting-wage-stagnation/.
5Ariane Hegewisch and Angela Edwards, “The Gender Wage Gap: 2011,” Institute for Women’s Policy Research, September 2012. https://iwpr.org/publications/the-gender-wage-gap-2011/ (accessed July 12, 2018).
6The Republic, “The Gender Wage Gap in 6 Charts,” azcentral.com, April 6, 2017. https://www.azcentral.com/story/money/business/economy/2017/04/06/gender-wage-gap-6-charts/100122100/.
7Kurt Stanberry and Forrest Aven, “Unequal pay for equal work. Why women still lag behind after the 50th anniversary of the U.S. Equal Pay Act,” Compensation and Benefits Review Journal, 45, no. 4, (2013): 193–199.
8Kevin Miller, “The Simple Truth about the Gender Pay Gap,” American Association of University Women. https://www.aauw.org/research/the-simple-truth-about-the-gender-pay-gap/ (accessed April 23, 2018).
9Kurt Stanberry and Forrest Aven, “Unequal pay for equal work. Why women still lag behind after the 50th anniversary of the U.S. Equal Pay Act,” Compensation and Benefits Review Journal, 45, no. 4 (2013): 193–199.
10George Mason University, “Study Reveals the Secrets to Negotiating a Higher Salary,” October 20, 2010. https://eagle.gmu.edu/newsroom/843/.
11Laura Lyons Cole, “Iceland’s New Law Aimed at Eliminating the gender pay gap places the Country in Stark Contrast to the United States,” Business Insider, January 4, 2018. http://www.businessinsider.com/iceland-gender-pay-gap-law-2018-1.
12Laura Lyons Cole, “Iceland’s New Law Aimed at Eliminating the Gender Pay Gap Places the Country in Stark Contrast to the United States,” Business Insider, January 4, 2018. http://www.businessinsider.com/iceland-gender-pay-gap-law-2018-1.
13Liz Alderman, “Britain Aims to Close Gender Pay Gap with Transparency and Shame,” New York Times, April 4, 2018. https://www.nytimes.com/2018/04/04/business/britain-gender-pay-gap.html.
14“The Gender Pay Gap,” The Economist, October 7, 2017. https://www.economist.com/news/international/21729993-women-still-earn-lot-less-men-despite-decades-equal-pay-laws-why-gender.
15Lauren Lyons Cole, “Iceland’s New Law Aimed at Eliminating the Gender Pay Gap Places the Country in Stark Contrast to the US,” Business Insider, January 4, 2018. http://uk.businessinsider.com/iceland-gender-pay-gap-law-2018-1?IR=T&r=US
16Jena McGregor, “Will Bans on Asking about Salary History Work?” Houston Chronicle, November 19, 2017. http://digital.olivesoftware.com/Olive/ODN/HoustonChronicle/shared/ShowArticle.aspx?doc=HHC%2F2017%2F11%2F19&entity=Ar04514&sk=921F5F6D&mode=text.
17“Korn Ferry Executive Survey: New Laws Forbidding Questions on Salary History Likely Changes the Game for Most Employers,” Korn Ferry, November 14, 2017. https://www.kornferry.com/press/korn-ferry-executive-survey-new-laws-forbidding-questions-on-salary-history-likely-changes-the-game-for-most-employers/ (accessed January 25, 2018).
18Peter Georgescu, “What Are We Waiting For?” Forbes, January 24, 2018. https://www.forbes.com/sites/petergeorgescu/2018/01/24/what-are-we-waiting-for/#6d32c7c556e3.
19Michael Wheeler,“3 years Ago, This Boss Set a $70,000 Minimum Wage for his Employees—and the Move Is Still Paying Off,” CNBC, August 29, 2017. https://www.cnbc.com/2017/08/29/this-boss-set-a-70000-minimum-wage-for-his-employees-3-years-ago.html.
20Michael Wheeler, “3 years Ago, This Boss Set a $70,000 Minimum Wage for his Employees—and the Move Is Still Paying Off,” CNBC, August 29, 2017. https://www.cnbc.com/2017/08/29/this-boss-set-a-70000-minimum-wage-for-his-employees-3-years-ago.html.
21Deep Patel, “Can This Shark Tank Company Take on an Industry Working a Five-Hour Day?” Huffington Post, June 3, 2016. https://www.huffingtonpost.com/deep-patel/can-this-shark-tank-compa_b_10243974.html.

Glossary

comparable worth
the idea that pay should be based upon a job holder’s worth to the organization rather than on salary history

An Organized Workforce

29

Learning Objectives

By the end of this section, you will be able to:

  • Discuss trends in U.S. labor union membership
  • Define codetermination
  • Compare labor union membership in the United States with that in other nations
  • Explain the relationship between labor productivity gains and the pay ratio in the United States

The issue of worker representation in the United States is a century-old debate, with economic, ethical, and political aspects. Are unions good for workers, good for companies, good for the nation? There is no single correct response. Your answer depends upon your perspective—whether you are a worker, a manager, an executive, a shareholder, or an economist. How might an ethical leader address the issue of the gap between labor’s productivity gains and their relatively stagnant wages as compared with that of management?

Organized Labor

Americans’ longstanding belief in individualism makes some managers wonder why employees would want or need to be represented by a labor union. The answer is, for the same reasons a CEO wants to be represented by an attorney when negotiating an employment contract, or that an entertainer wants to be represented by an agent. Unions act as the agent/lawyer/negotiator for employees during collective bargaining, a negotiation process aimed at getting management’s agreement to a fair employment contract for members of the union. Everyone wants to be successful in any important negotiation, and people often turn to professionals to help them in such a situation.

However, in the United States, as elsewhere around the globe, the concept of worker organization has been about more than simply good representation. Unionization and worker rights have often been at the core of debates related to class economics, political power, and ethical values. There are legitimate points on each side of the union debate ((Figure)).

Pros and Cons of Unions
Pros of Unions Cons of Unions
Unions negotiate increased pay and benefits for workers. Unions can make it harder to fast-track promotions for high-performing workers and/or get rid of low-performing ones.
Unions create a formal dispute resolution process for workers. Workers are required to pay union dues/fees that some might rather not pay.
Unions act as an organized lobbying group for worker rights. Unions sometimes lead to a closed culture that makes it harder to diversify the workforce.
Collective bargaining agreements often set norms for employment for an entire industry—benefiting all workers, including those who are not at a union company. Collective bargaining contracts can drive up costs for employers and lead to an adversarial relationship between management and workers.

The value of unions is a topic that produces significant disagreement. Historically, unions have attained many improvements for workers in terms of wages and benefits, standardized employment practices, labor protections (e.g., child labor laws), workplace environment, and on-the-job safety. Nevertheless, sometimes unions have acted in their own interests to sustain their own existence, without primary concern for the workers they represent.

The history of the worker movement (summarized in the video in the following Link to Learning) reveals that in the first half of the twentieth century, wages were abysmally low, few workplace safety laws existed, and exploitive working conditions allowed businesses to use child labor. Unions stepped in and played an important role in leveling the playing field by representing the interests of the workers. Union membership grew to a relatively high level (33% of wage and salary workers) in the 1950s, and unions became a force in politics. However, their dominance was relatively short-lived, not least because in the 1960s, the federal government started to enact employment laws that codified many of the worker protections unions had championed. In the 1980s and 1990s, the U.S. economy gradually evolved from manufacturing, where unions were strong, to services, where unions were not as prevalent. The service sector is more difficult to organize, due to a variety of factors such as the historical absence of unions in the sector, workers’ widely differing work functions and schedules, challenging organizational status, and white-collar bias against unions.

These developments, along with the appearance of state right-to-work laws, have led to a decline in unions and their membership. Right-to-work laws give workers the option of not joining the union, even at companies where the majority has voted to be represented by a union, resulting in lower membership. Right-to-work laws attempt to counter the concept of a union shop or closed shop, which requires that all new hires automatically be enrolled in the labor union appropriate to their job function and that union dues automatically be deducted from their pay.

Some question the fairness of right-to-work laws, because they allow those who do not join the union to get the same pay and benefits as those who do join and who pay unions dues for their representation. On the other hand, right-to-work laws provide workers the right of choice; those who do not want to join a union are not forced to do so. Those who do not choose to join may end up having a strained relationship with union workers, however, when a union-mandated strike occurs. Some non-union members, and even union members, elect to cross the picket line and continue to work. Traditionally, these “scabs,” as they are derisively labeled by unions, have faced both overt and subtle retaliation at the hands of their coworkers, who prioritize loyalty to the union.

Twenty-eight states have right-to-work laws ((Figure)). Notice that many right-to-work states, such as Michigan, Missouri, Indiana, Wisconsin, Kentucky, Tennessee, Alabama, and Mississippi, are among the top ten states where automobiles are manufactured and unions once were strong.

Right-to-work states have typically been clustered in the South and Southeast, where unions have been traditionally less prevalent. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


A map of the United States is titled “States with Right-to-Work Laws.” The states with right-to-work laws are Nevada, Idaho, Utah, Arizona, Wyoming, North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Texas, Iowa, Missouri, Arkansas, Louisiana, Mississippi, Alabama, Tennessee, Kentucky, Indianapolis, Michigan, Wisconsin, West Virginia, Virginia, North Carolina, South Carolina, Georgia, and Florida. The states without right-to-work laws are Alaska, Hawaii, Washington, Oregon, California, Montana, Colorado, New Mexico, Minnesota, Illinois, Ohio, Main, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, Maryland, Delaware, and Washington, DC.

According to the U.S. Bureau of Labor Statistics, total union membership in the United States dropped to 20 percent of the workforce in 1980; by 2016, it was down to about half that ((Figure)).

Public sector (government) workers have a relatively high union membership rate of 35 percent, more than five times that of private-sector workers, which is at an all-time low of 6.5 percent. White-collar workers in education and training, as well as first responders such as police and firefighters now have some of the highest unionization rates, also 35 percent. Among states, New York continues to have the highest union membership rate at 23 percent, whereas South Carolina has the lowest, at slightly more than 1 percent.

Union membership in the United States has steadily declined since 1980. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


The graph is titled “Percentage of U.S. Workers Who Are Union Members, 1983 to 2017.” The y-axis shows percentages from 10 to 25 percent, increasing by 5 percent increments. The x-axis shows years from 1980 to 2020, increasing by 10 year increments. The trend line starts at 20 percent and declines to just above 10 percent from 1983 to 2017. The decline from 1983 to about 1990 is more rapid and goes down to about 16 percent. The changes after that are more gradual, other than a decrease from about 16 percent to 14 percent from around 1994 to 1999. There is also a slight increase around 2006 to 2008 from about 12 percent to 12.5 percent.

Codetermination is a workplace concept that goes beyond unionization to embrace shared governance, in which management and workers cooperate in decision-making and workers have the right to participate on the board of directors of their company. Board-level representation by employees is widespread in European Union countries. Most codetermination laws apply to companies over a certain size. For example, in Germany, they apply to companies with more than five hundred employees.

The labor union movement never has been quite as strong in the United States as in Europe—the trade-union movement began in Europe and remains more vibrant there even today—and codetermination is thus not common in U.S. companies ((Figure)).

Labor union membership remains much higher in Europe and other Group of Seven (G7) countries than in the United States. Only France has a lower percentage of union membership.

Unionization as Percentage of Workforce in Eight Industrialized Nations
Country Workforce in Unions, %
Australia 25
Canada 30
France 9
Germany 26
Italy 35
Japan 22
Sweden 82
United Kingdom 29
United States 12

Codetermination has worked relatively well in some countries. For example, in Germany, workers, managers, and the public at large support the system, and it has often resulted in workers who are more engaged and have a real voice in their workplaces. Management and labor have cooperated, which, in turn, has led to higher productivity, fewer strikes, better pay, and safer working conditions for employees, which is a classic win-win for both sides.

Pay and Productivity in the United States

Some managers, politicians, and even members of the general public believe unions are a big part of the reason that U.S. companies have difficulty competing in the global economy. The conservative think tank Heritage Foundation conducted a study that concluded unions may be responsible, in part, for a slower work process and reduced productivity.

However, multiple other studies indicate that U.S. productivity is up.

Productivity in the United States increased 74 percent in the period 1973 to 2016, according to the OECD. In global productivity rankings, most studies indicate the United States ranks quite high, among the top five or six countries in the world and number two on the list compiled by the OECD ((Figure)).

This table compares 2015 productivity among several industrialized nations. U.S. productivity ranks high on the list.

Productivity in 2015 by Country (Sample of Eight Industrialized Nations)
Country Productivity (output/hours worked)
Australia 102.20
Canada 109.45
Germany 105.90
Japan 103.90
Mexico 105.10
South Korea 97.60
United Kingdom 100.80
United States 108.87

During the same period as the productivity gains discussed in the preceding paragraph, 1973 to 2016, wages for U.S. workers increased only 12 percent. In other words, productivity has grown six times more than pay. Taken together, these facts mean that American workers, union members or not, should not shoulder the blame for competitive challenges faced by U.S. companies. Instead, they are a relative bargain for most companies. (Figure) compares productivity and pay and demonstrates the growing disparity between the two, based on data collected by the Economic Policy Institute.

In the last four decades, wages in the United States have not kept up with productivity. According to the Economic Policy Institute, from 1948 to 1973, hourly compensation rose 91 percent, which closely follows productivity gains of 97 percent. However, from 1973 to 2013, hourly compensation rose only 9 percent, whereas productivity rose 74 percent in the same period. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


The graph is titled “Employee Productivity and Compensation, 1950 to 2010. The y-axis shows percentages from 0 to 250 percent, increasing by 25 percent increments. The x-axis shows years from 1950 to 2010, increasing by 10 year increments. The trend line for productivity starts at 0 percent and increases steadily overall to almost 250 percent. There are slight decreases around 1974 and 1982, and larger increases around 1983 and 2005. The trend line for hourly compensation starts at 0 percent and steadily increases in line with productivity until about 1974 at about 100%. It then fluctuates and decreases to about 80 percent around 1990 to 1995. Then it begins to increase again until reaching about 120 percent.

Is Management Compensation Fair?

We gain yet another perspective on labor by looking at management compensation relative to that of employees. Between 1978 and 2014, inflation-adjusted CEO pay increased by almost 1,000 percent in the United States, while worker pay rose 11 percent.

A popular way to compare the fairness of a company’s compensation system with that in other countries is the widely reported pay ratio, which measures how many times greater CEO pay is than the wages for the average employee.

The average multiplier effect in the United States is in the range of three hundred. This means that CEO pay is, on average, three hundred times as high as the pay of the average worker in the same company. In the United Kingdom, the multiplier is twenty-two; in France, it is fifteen; and in Germany, it is twelve.

The 1965 U.S. ratio was only twenty to one, which raises the question, why and how did CEO pay rise so dramatically high in the United States compared with the rest of the world? Are CEOs in the United States that much better than CEOs in Germany or Japan? Do American companies perform that much better? Is this ratio fair to investors and employees? A large part of executive compensation is in the form of stock options, which frequently are included in the calculation of an executive’s salary and benefits, rather than direct salary. However, this, in turn, raises the question of whether all or a portion of the general workforce should also share in some form of stock options.

Everyone wants to be paid fairly for their work. Whether CEO or administrative assistant, engineer or assembly-line worker, we naturally look out for our own best interest. Thus, management compensation is a topic that often causes resentment among the rank and file, especially when organized workers go on strike. From the employee viewpoint, the question is why management often wants to hold the line when it comes to everyone’s wages but their own.

Verizon Strike

More than forty thousand Verizon workers went on strike in 2016 ((Figure)). The strike was eventually settled, with workers getting a raise, but bitter feelings and distrust remained on both sides. Workers thought management salaries were too high; management thought workers were seeking excessive raises. To continue basic phone services for its customers during the strike, Verizon called on thousands of non-union employees to perform the strikers’ work. Non-union staff had to cross picket lines formed by fellow employees to go to work each day during the strike. Enmity toward these picket-line crossers was exceptionally high among some union members.

Union workers from the Communications Workers of America and the International Brotherhood of Electrical Workers are shown walking a Verizon picket line. They are protesting Verizon’s decision to not provide pay raises. (credit: modification of “Verizon on Strike” by Marco Verch/Flickr, CC BY 2.0)


This image shows a group of people dressed in matching red shirts in an area enclosed with signs that say “CWA on strike for good jobs at Verizon Wireless” and “CWA and IBEW on strike. Fighting corporate greed at Verizon.”

Critical Thinking

  • How does management reintroduce civility to the workplace to keep peace between different factions?
  • How could Verizon please union workers after the strike without firing the picket-line crossers, some of whom were Verizon union employees who consciously chose to cross the picket line?

Summary

Employees seek fair treatment in the workplace and sometimes gain a negotiating advantage with management by choosing to be represented by a labor union. Union membership in the United States has fallen in recent years as federal and state law have expanded to include worker protections unions fought for, and as the nation has shifted from a manufacturing to a service economy. Public-sector employee groups such as teachers, professors, first responders, and nurses are unionized in some cities and states. U.S. workers have contributed to a long rise in productivity over the last forty years but have not generally shared in wage gains.

Assessment Questions

In the United States, CEO pay is on average ________ times as high as the pay of the average worker in the same company.

  1. 30
  2. 50
  3. 100
  4. 300

D

True or false: U.S. union membership today is at the lowest level since the 1950s.

True

True or false: The right to work without joining a union is controlled by federal law.

False. Right-to-work laws are state laws.

Why is union membership at an all-time low?

Union membership is low due to two primary reasons: the United States has switched from a manufacturing economy to a service economy, and the law now affords workers many of the protections they once got only through a collective bargaining agreement.

How does executive pay in the United States compare to that in other countries?

Most studies indicate that U.S. executives are paid much more highly than executives in other countries, including those that are very competitive with the United States. The pay ratio is approximately three hundred in the United States as compared with twenty-two in the United Kingdom and twelve in Germany.

Endnotes

1U.S. Bureau of Labor Statistics, “Union Members Summary.” https://www.bls.gov/news.release/union2.nr0.htm (accessed January 5, 2018).
2Ewan McGaughey, “The Codetermination Bargains: The History of German Corporate and Labor Law,” Columbia Journal of European Law, 23, no. 1 (2016); LSE Legal Studies Working Paper No. 10/2015. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2579932.
3“Trade Union Membership Compared,” Nationmaster. http://www.nationmaster.com/country-info/stats/Labor/Trade-union-membership#country (accessed July 12, 2018).
4Michael Haberman, Why Unions Are Bad For Companies, Employees and Customers,” Omega, June 25, 2009. http://omegahrsolutions.com/2009/06/why-unions-are-bad-for-companies-employees-and-customers.html.
5“The Productivity–Pay Gap,” Economic Policy Institute. https://www.epi.org/productivity-pay-gap/ (accessed April 22, 2018).
6David Johnson, “These are the Most Productive Countries in the World,” Time, January 4, 2017.
7Paul Hodgson, “Top CEOs Make More Than 300 Times the Average Worker,” Fortune, June 22, 2015. http://fortune.com/2015/06/22/ceo-vs-worker-pay/.
8Steve McDonnell, “CEO Compensation in the US vs. the World,” Houston Chronicle. http://work.chron.com/ceo-compensation-vs-world-15509.html (accessed January 15, 2018).

Glossary

closed shop
a union environment that requires new hires to be automatically enrolled in the labor union and union dues to be automatically deducted from their pay
codetermination
a concept popular in Europe that gives workers the right to participate on the board of directors of their company
collective bargaining
union negotiations with an employer on behalf of employees
pay ratio
the number of times greater the average executive’s salary is than the average worker’s
right-to-work law
a state law that says a worker cannot be forced to join a union

Privacy in the Workplace

30

Learning Objectives

By the end of this section, you will be able to:

  • Explain what constitutes a reasonable right to privacy on the job
  • Identify management’s responsibilities when monitoring employee behavior at work

Employers are justifiably concerned about threats to and in the workplace, such as theft of property, breaches of data security, identity theft, viewing of pornography, inappropriate and/or offensive behavior, violence, drug use, and others. They seek to minimize these risks, and that often requires monitoring employees at work. Employers might also be concerned about the productivity loss resulting from employees using office technology for personal matters while on the job. At the same time, however, organizations must balance the valid business interests of the company with employees’ reasonable expectations of privacy.

Magnifying ethical and legal questions in the area of privacy is the availability of new technology that lets employers track all employee Internet, e-mail, social media, and telephone use. What kind and extent of monitoring do you believe should be allowed? What basic rights to privacy ought a person have at work? Does your view align more closely with the employer’s or the employee’s?

Legal and Ethical Aspects of Electronic Monitoring

Monitored workstations, cameras, microphones, and other electronic monitoring devices permit employers to oversee virtually every aspect of employees’ at-work behavior ((Figure)). Technology also allows employers to monitor every aspect of computer use by employees, such as downloads of software and documents, Internet use, images displayed, time a computer has been idle, number of keystrokes per hour, words typed, and the content of e-mails. According to a survey by the American Management Association, 48 percent of employers used a form of video monitoring in the workplace, and 67 percent monitored employee Internet use. In 30 percent of the organizations responding to the survey, this electronic monitoring had ultimately led to an employee’s termination.

Electronic monitoring often captures data from cameras, computers, and listening devices. This information can then be used against employees accused of violating company policy, raising privacy concerns. (credit left: modification of “Surveillance video cameras, Gdynia” by Paweł Zdziarski/Wikimedia Commons, CC 2.5; credit right: credit: modification of “Keylogger-screen-capture-example” by “FlippyFlink”/Wikimedia Commons, Public Domain)


Left shows a surveillance camera. Right shows an e-mail sharing insider information about a stock purchase.

The laws and regulations governing electronic monitoring are somewhat indirect and inconsistent. Very few specific federal statutes directly regulate private employers when it comes to broad workplace privacy issues. However, monitoring is subject to various state rules under both statutory and common law, and sometimes federal and state constitutional provisions as well. The two primary areas of the law related to workplace monitoring are a federal statute called the Electronic Communications Privacy Act of 1986 (ECPA) and various state common law protections against invasion of privacy.

Although the ECPA may appear to prohibit an employer from monitoring its employees’ oral, wire, and electronic communications, it contains two big exceptions that weaken its protection of employees’ rights. One is the business purpose exception. This allows employers—on the basis of legitimate business purposes—to monitor electronic and oral communications, and employers generally assert a legitimate business purpose to be present. The other widely used exception is the consent exception, which allows employers to monitor employee communications provided employees have given their consent. According to the Society for Human Resource Management, the ECPA definition of electronic communication applies to the electronic transmission of communications but not to their electronic storage. Therefore, courts have distinguished between monitoring electronic communications such as e-mail during transmission and viewing e-mails in storage. Viewing emails during transmission is broadly allowed, whereas viewing stored e-mail is considered similar to searching an employee’s private papers and thus is not routinely allowed under the ECPA unless certain circumstances apply (e.g., the e-mails are stored in the employer’s computer systems).

In general, it is legal for a company to monitor the use of its own property, including but not limited to computers, laptops, and cell phones. According to the ECPA, an employer-provided computer system is the property of the employer, and when the employer provides employees with a laptop they can take home, it likely violates no laws when it monitors everything employees do with that computer, whether business-related or personal. The same is true of an employer-provided cell phone or tablet, and always true when an employer gives employees notice of a written policy regarding electronic monitoring of equipment supplied by the company. Generally, the same is not true of equipment owned by the employee, such as a personal cell phone.

However, an important distinction is based on the issue of consent. The consent provision in the ECPA is not limited to business communications only; therefore, a company might be able to assert the right to monitor personal electronic communications if it can show employee consent (although this is very likely to worry employees, as discussed in the next section). Another consideration is whose e-mail server is being used. The ECPA and some state laws generally make it illegal for employers to intercept private e-mail by using an employee’s personal log-on/user ID/password information.

Although the ECPA and National Labor Relations Act are both federal laws, individual states are free to pass laws that impose greater limitations, and several states have done so. Some require employers to provide employees advance written notice that specifies the types or methods of monitoring to which they will be subjected. Examples of state laws creating some degree of protection for workers include laws in California and Pennsylvania that require consent of both parties before any conversation can be monitored or recorded.

Employees can bring common law privacy claims to challenge employer monitoring. (Common laws are those based on prior court decisions rather than on legislatively enacted statutes.) To prevail on a common law claim of invasion of privacy, which is a tort, the employee must demonstrate a right to privacy with respect to the information being monitored. Several state constitutions, such as those in Louisiana, Florida, South Carolina, and California, expressly provide citizens a right to privacy, which may protect employees with respect to monitoring of their personal electronic information and personal communication in the workplace.

One additional regulatory consideration applicable to electronic monitoring is whether the company’s workforce is unionized. The National Labor Relations Board, the federal labor law agency, has ruled that the video surveillance of any portion of the workplace is a condition of employment subject to collective bargaining and must be agreed to by the union before implementation, so employees have notice. If a workplace is not unionized (the majority are not), then this federal regulation requiring notice does not apply, and as stated previously in this chapter, if there is any protection at all, it would have to be given by state regulation (which is rare in the private [nongovernmental] sector).

What Constitutes a Reasonable Monitoring Policy?

Many employees generally are not be familiar with the specific details of the law. They may feel offended by monitoring, especially of their own equipment. Companies must also consider the effect on workplace morale if everyone feels spied upon, and the risk that some high-performing employees may decide to look elsewhere for career opportunities. Employers should develop a clear, specific, and reasonable monitoring policy. The policy should limit monitoring to that which is directly work related. For example, if a company is concerned about productivity and the goal of monitoring is to keep tabs on employee performance, then neither keystroke logging nor screenshot recording is necessary; software designed to show idle time or personal Internet use would be more helpful in identifying wasted time, which is the ultimate goal.

Employers should always remember their business goals when monitoring employees. It is not only a matter of treating employees ethically; it also makes good business sense to ensure that monitoring pertains only to business matters and does not unnecessarily intrude into the privacy of employees. Perhaps most importantly, in the interest of fairness, the monitoring policy must be communicated to the employees. When, if ever, is it acceptable to monitor without notice to the employee and without his or her knowledge?

The Connecticut policy in the preceding Link to Learning applies to all employers (i.e., in state and in private sector workplaces). However, many states have policies that apply only to employees who work for the government. State employees hold a special status that conveys certain state constitutional rights with regard to due process, reasonable searches, and related legal doctrines. The same is true for federal government employees and the U.S. Constitution, which means the government has a duty of fairness in employee surveillance. It does not mean, however, that the government cannot monitor its employees at all, as demonstrated by an incident involving a California police officer. In a unanimous decision in Ontario v. Quon,

the U.S. Supreme Court in 2010 ruled in favor of a police chief in Ontario, California, who read nearly five hundred text messages sent by one of his sergeants on a police-issued pager. Many of the text messages were personal and some were sexually explicit. Only a few dozen were work related. The justices agreed that constitutional limits on unreasonable searches by public employers (under the Fourth Amendment) were minimal given a work-related purpose.

This decision creates precedent for more than 25 million employees of federal, state, and local governments and limits their expectation of privacy when using employer-issued tools. “Because the search [by the police chief] was motivated by a legitimate work-related purpose and because it was not excessive in scope, the search was reasonable,” said Justice Anthony M. Kennedy.

In the private sector, where employees are not working for the government and the constitutional prohibition on unreasonable searches and seizures has very little applicability, if any, employers have even more latitude in terms of employee monitoring than in a government setting. The Ontario v. Quon case in all likelihood would never even make it to court if the employer were a private-sector company, because the issue of whether getting the text message was a reasonable search and seizure under the Fourth Amendment does not apply in a nongovernment employment setting. The Constitution acts to limit government intrusions but does not generally restrict private companies in this type of situation. However, ethical considerations may encourage private-sector employers to treat their workers respectfully, even if not required by law.

Security versus Privacy

You manage a large, high-end jewelry store with an international clientele. Your workforce of 150 is demographically diverse, and your employees are trustworthy as a rule. However, you have experienced some unexplained loss of inventory and suspect a couple of employees are stealing valuable pieces, removing them from backroom storage safes and handing them off to another person somewhere in the store who leaves with them or to a third person pretending to be a customer. To prevent this, your assistant managers are urging you to place discreet cameras in the restrooms and break rooms, where these exchanges are likely occurring. Some managers might be concerned about using cameras at all due to privacy issues; others might want to use them without notifying employees or putting up signs because they do not want to tip off the suspects or deal with the negative reaction of the workforce (although that brings up invasion of privacy issues). You are weighing the pros of catching the thieves against the possible loss of other employees’ trust.

Critical Thinking

  • What issues must you confront as you decide whether you will take the recommendation of your assistant managers?
  • What, ultimately, will you do? Explain your decision.

Drug Testing in the Workplace

Key issues that arise about a drug testing or monitoring program begin with whether an employer wants or needs to do it. Is it required by law for a particular job, under state or local regulations? Is it for pre-employment clearance? Does the employer need employees’ permission? Does a failed test require mandatory termination? With the exception of employers in industries regulated by the federal government, such as airlines, trucking companies, rail lines, and national security-related firms, federal law is not controlling on the issue of drug testing in the workplace; it is largely a state issue. At the federal level, the Department of Transportation does mandate drug testing for workers such as airline crews and railway conductors and has a specific procedure that must be followed. However, for the most part, drug testing is not mandatory and depends on whether the employer wants to do it. Multiple states do regulate drug testing, but to varying degrees, and there is no common standard to be followed.

Testing of job applicants is the most common form of drug testing. State laws typically allow it, but the employer must follow state rules, if they exist, about providing notice and following standard procedures intended to prevent inaccurate samples. Testing current employees is much less common, primarily due to cost; however, companies that do use drug testing include some in the pharmaceutical and financial services industries. Some states put legal constraints on drug testing of private-sector employees. For example, in a few states. the job must include the possibility of property damage or injury to others, or the employer must believe the employee is using drugs.

Challenging a drug test is difficult because tests are considered highly accurate. An applicant or employee can refuse to take the test, but that often means not being hired or losing the job, assuming the worker is an employee at will. The concept of employment at will affirms that either the employee or the employer may dissolve an employment arrangement at will (i.e., without cause and at any time unless an employment contract is in effect that stipulates differently). Most workers are considered employees at will because neither the employer nor employee is obligated to the other; the worker can quit or be fired at any time for any reason because there is no contractual obligation. In some states, the employee risks not only job loss but also the denial of unemployment benefits if fired for refusing to take a drug test. Thus, the key concept that makes drug testing possible is employment at will, which covers approximately 85 percent of the employees in the private sector (unionized workers and top executives have contracts and thus are not at will, nor are government employees who have due process rights). The only legal limitation is that, in some states, the drug testing procedure must be fair, accurate, and designed to minimize errors and false-positive results.

The drug testing process, however, raises some difficult privacy issues. Employers want and are allowed to protect against specimen tampering by taking such steps as requiring subjects to wear a hospital gown. Some employers use test monitors who check the temperature of the urine and/or listen as a urine sample is collected. According to the Cornell University Law School Legal Information Institute, some state courts (e.g., Georgia, Louisiana, Hawaii) have found it an unreasonable invasion of privacy for the monitor to watch an employee in the restroom; however, in other states (e.g., Texas, Nevada), this is allowed.

Case examples abound of challenges based on privacy concerns. In an article in the Harvard Journal of Law and Technology, University of Houston Law School professor Mark Rothstein, who is director of the Health Law and Policy Institute, summarized examples of legal challenges.

In one case, the court ruled that an employer engaged in unlawful retaliation as defined by the Mine Safety and Health Act. The employer dismissed two employees who were required to urinate in the presence of others but found themselves unable to do so. In a different case, $125,000 in tort damages was awarded to a worker for invasion of privacy and negligent infliction of emotional distress as a consequence of his being forced to submit a urine sample as he was being directly observed.

Summary

Monitoring of employees, whether electronically or through drug testing, is a complex area of workforce management. Numerous state and federal legal restrictions apply, and employers must decide not only what they are legally allowed to do but also what they should do ethically, keeping in mind the individual privacy concerns of their employees.

Assessment Questions

True or false? Advance permission from employees is required before they can be electronically monitored under federal law.

False. If an employer is monitoring any device owned by the company, such as a telephone or computer, no advance notice is required.

True or false? Workplace drug testing is completely prohibited in some states.

False. No state completely bans drug testing. Some regulate it to make sure it is fair and accurate.

Why would a company want to monitor Internet use at work?

There are at least two reasons a company might want to monitor Internet use at work: productivity and electronic security. Managers do not want employees wasting time or exposing the company to breaches of data security, identity theft, or the legal ramifications of inappropriate or offensive behavior.

What are the two major exceptions to the Electronic Communications Privacy Act that weaken its protections of employee privacy rights?

The two exceptions to the ECPA that weaken its protection are the business purpose exception, which allows monitoring if an employer can demonstrate a legitimate business purpose for doing so, and the consent exception, which allows employers to monitor employee communications provided employees have given their consent.

Should drug testing of employees be allowed?

The answer is yes, as long as a company is responsible for what its employees do. Then businesses need to check for drugs due to reasons such as workplace safety and protection of property.

Endnotes

1“Managing Workplace Monitoring and Surveillance,” SHRM.org, February 18, 2016. https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/workplaceprivacy.aspx (accessed January 15, 2018).
2Electronic Communications Privacy Act, 18 U.S.C. §2511 et seq. (1986).
3Another Evil HR Director, “Privacy in the Workplace,” HRInConfidence, June 13, 2013. http://www.hrinconfidence.com/2013_06_01_archive.html
4Ontario v. Quon, 560 U.S. 746 (2010).
5Legal Information Institute, “Expectation of Privacy,” Cornell Law School. https://www.law.cornell.edu/wex/expectation_of_privacy (accessed April 22, 2018).
6Mark Rothstein, “Workplace Drug Testing: A Case Study in the Misapplication of Technology,” Harvard Journal of Law and Technology 5, Fall (1991): 65–93.

Glossary

business purpose exception
an exception to the Electronic Communications Privacy Act of 1986 that permits employers to monitor all oral and electronic communications, assuming they can show a legitimate business purpose for doing so
consent exception
an exception to the Electronic Communications Privacy Act of 1986 that allows employers to monitor employee communications provided employees have given their consent
employment at will
a legal philosophy that holds that either the employee or the employer may dissolve the employment arrangement at will (i.e., without cause and at any time unless an employment contract is in effect that stipulates differently)

What Employees Owe Employers

VII

Introduction

31

What responsibilities do employees have to coworkers and to the company, as well as to themselves, when they are on the job? (credit, clockwise from top left): modification of “Call Centre 2006” by “AaronY”/Wikimedia Commons, CC BY 2.0; credit: modification of “los bolleros” by Agustín Ruiz/Flickr, CC BY 2.0; credit: modification of “Training” by Cory Zanker/Flickr, CC BY 4.0; credit: modification of “Afghan women at a textile factory in Kabul” by Andrea Salazar/Wikimedia Commons, Public Domain; credit: modification of “GenoPheno” by Cory Zanker/Flickr, CC BY 4.0; credit: modification of “Group” by Cory Zanker/Flickr, CC BY 4.0; credit: modification of “doin’ work” by Nick Allen/Flickr, CC BY 2.0)


This is a collage of different photos showing employees doing their jobs, in a variety of workplaces. Clockwise from the top left: A room is filled with people at rows of desks with computers. People wearing chef outfits are around a table with cooking tools. People at a table are listening to someone writing on a board during a meeting. A room is filled with sewing machines in a row with people working at each machine. A person is working on a laptop outside. People are gathered in a circle and talking. A person wearing a construction hat and vest is using a jackhammer.

What Employers Owe Employees discussed the duties, obligations, and responsibilities managers and companies owe their employees. This chapter looks at the other side of that relationship to weigh the ethical dimensions of being a worthy employee and responsible coworker ((Figure)).

Coworkers may express their opinions differently, for instance, agreeing or disagreeing, perhaps in very animated ways. Although we and our peers at work may not see eye to eye on every issue, we work best when we understand the need to get along and to show a degree of loyalty to our employer and each other, as well as to ourselves, our values, and our own best interests. Balancing these factors requires a concerted effort.

What would you do, for example, if one of your coworkers were being bullied or harassed by another employee or a manager? Suppose a former colleague tried to recruit you to her new firm. What is the ethical action for you to take? How would you react if you learned your company’s managers were behaving unethically or breaking the law? Who could you tell, and what could you expect as a result? What is the right response if a client or customer behaves badly toward you as an employee representing your firm? How do you provide good customer service and support the company brand in the face of difficult working conditions?

Loyalty to the Company

32

Learning Objectives

By the end of this section, you will be able to:

  • Define employees’ responsibilities to the company for which they work
  • Describe a non-compete agreement
  • Explain how confidentiality applies to trade secrets, intellectual property, and customer data

The relationship between employee and employer is changing, especially our understanding of commitment and loyalty. An ethical employee owes the company a good day’s work and his or her best effort, whether the work is stimulating or dull. A duty of loyalty and our best effort are our primary obligations as employees, but what they mean can change. A manager who expects a twentieth-century concept of loyalty in the twenty-first century may be surprised when workers express a sense of entitlement, ask for a raise after six months, or leave for a new job after twelve months. This chapter will explore a wide range of issues from the perspective of what and how employees contribute to the overall success of a business enterprise.

A Duty of Loyalty

Hard work and our best effort likely make sense as obligations we owe an employer. However, loyalty is more abstract and less easily defined. Most workers do not have employment contracts, so there may not be a specific agreement between the two parties detailing their mutual responsibilities. Instead, the common law (case law) of agency in each state is often the source of the rules governing an employment relationship. The usual depiction of duty in common law is the duty of loyalty, which, in all fifty states, requires that an employee refrain from acting in a manner contrary to the employer’s interest. This duty creates some basic rules employees must follow on the job and provides employers with enforceable rights against employees who violate them.

In general terms, the duty of loyalty means an employee is obligated to render “loyal and faithful” service to the employer, to act with “good faith,” and not to compete with but rather to advance the employer’s interests.

The employee must not act in a way that benefits him- or herself (or any other third party), especially when doing so would create a conflict of interest with the employer.

The common law of most states holds as a general rule that, without asking for and receiving the employer’s consent, an employee cannot hold a second job if it would compete or conflict with the first job. Thus, although the precise boundaries of this aspect of the duty of loyalty are unclear, an employee who works in the graphic design department of a large advertising agency in all likelihood cannot moonlight on the weekend for a friend’s small web design business. However, employers often grant permission for employees to work in positions that do not compete or interfere with their principal jobs. The graphic designer might work for a friend’s catering business, for example, or perhaps as a wedding photographer or editor of a blog for a public interest community group.

What is clear is that it is wrong for employees to make work decisions primarily for their own personal gain, rather than doing what is in the employer’s best interest. An employee might have the authority to decide which other companies the employer will do business with, for example, such as service vendors that maintain the copiers or clean the offices. What if the employee owned stock in one of those companies or had a relative who worked there? That gives him or her an incentive to encourage doing business with that particular company, whether it would be best for the employer or not.

The degree to which the duty of loyalty exists is usually related to the degree of responsibility or trust an employer places in an employee. More trust equals a stronger duty. For example, when an employee has very extensive authority or access to confidential information, the duty can rise to its highest level, called a fiduciary duty, which is discussed in an earlier chapter.

Differing Concepts of Loyalty

There is no generally agreed-upon definition of an employee’s duty of loyalty to his or her employer. One indicator that our understanding of the term is changing is that millennials are three times more likely than older generations to change jobs, according to a Forbes Human Resources Council survey ((Figure)).

About nine in ten millennials (91 percent) say they do not expect to stay with their current job longer than three years, compared with older workers who often anticipated spending ten years or even an entire career with one employer, relying on an implicit social contract between employer and employee that rewarded lifetime employment.

The data on millennials and job mobility indicate that millennials are more likely to “job hop” than their predecessors. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This graphic has a circle on the left with three lines branching off from it to the right. In the circle is the word “Millennials.” The first line to the right says “3 times more likely to change jobs.” The second line says “90 percent change jobs within first 3 years.” The last line says “4 different jobs in the first 10 years (by age 32).”

The Loyalty Research Center, a consulting firm, defines loyal employees as “being committed to the success of the organization. They believe that working for this organization is their best option . . . and loyal employees do not actively search for alternative employment and are not responsive to offers.”

Likewise, Wharton School, University of Pennsylvania, professor Matthew Bidwell says there are two halves to the term: “One piece is having the employer’s best interests at heart. The other piece is remaining with the same employer rather than moving on.” Bidwell goes on to acknowledge, “There is less a sense that your organization is going to look after you in the way that it used to, which would lead [us] to expect a reduction in loyalty.”

Why are employees less likely to feel a duty of loyalty to their companies? One reason is that loyalty is a two-way street, a feeling developed through the enactment of mutual obligations and responsibilities. However, most employers do not want to be obligated to their workers in a legal sense; they usually require that almost all workers are employees “at will,” that is, without any long-term employment contract. Neither state nor federal law mandates an employment contract, so when a company says an employee is employed at will, it is sending a message that management is not making a long-term commitment to the employee. Employees may naturally feel less loyalty to an organization from which they believe they can be let go at any time and for any legal reason (which is essentially what at-will employment means). Of course, at-will employment also means the employee can also quit at any time. However, freedom to move is a benefit only if the employee has mobility and a skill set he or she can sell to the highest bidder. Otherwise, for most workers, at-will employment usually works to the employer’s advantage, not the employee’s.

Another reason the concept of loyalty to an organization seems to be changing at all levels is the important role money plays in career decisions. When they see chief executive officers (CEOs) and other managers leaving to work for the highest bidder, subordinates quickly conclude that they, too, ought to look out for themselves, just as their bosses do, rather than trying to build up seniority with the company. Switching jobs can often be a way for employees to improve their salaries. Consider professional sports. For decades professional athletes were tied to one team and could not sell their services to the highest bidder, meaning that their salaries were effectively capped. Finally, after several court decisions (including the Curt Flood reserve clause case involving the St. Louis Cardinals and Major League Baseball),

players achieved some degree of freedom and can now switch employers frequently in an effort to maximize their earning potential.

The same evolution occurred in the entertainment industry. In the early years of the movie business, actors were tied to studios by contracts that prevented them from making movies for any other studio, effectively limiting their earning power. Then the entertainment industry changed as actors gained the freedom to sell their services to the highest bidder, becoming much more highly compensated in the process. Employees in any industry, not just sports and entertainment, benefit from being able to change jobs if their salary at their current job stagnates or falls below the market rate.

Another economic phenomenon affecting loyalty in the private sector was the switch from defined-benefit to defined-contribution retirement plans. In the former, often called a pension, employee benefits are usually sponsored (paid) fully by the employer and calculated using a formula based on length of employment, salary history, and other factors. The employer administers the plan and manages the investment risk, promising the employee a set payout upon retirement. In the defined-contribution plan, however, the employee invests a certain percentage of his or her salary in a retirement fund, often a 401(k) or 403(b) plan, where it is sometimes matched (partially or wholly) by the employer. (These savings plans with their seemingly strange designations are part of the U.S. Internal Revenue Code, and the letter/number combinations indicate subsections of the Code. 401(k) Plans typically are featured in for-profit employment settings and 403(b) plans in nonprofit environments.) Defined-benefit plans reward longevity in the firm, whereas defined-contribution plans reward high earnings over seniority. Thus, with the growth of defined-contribution plans, some reasons for staying with the same employer over time are no longer applicable.

According to PayScale’s Compensation Best Practices Report, the two leading motivators people give for leaving their job are first, higher pay, and second, personal reasons (e.g., family, health, marriage, spousal relocation).

Of course, beyond money, workers seek meaning in their work, and it is largely true that money alone does not motivate employees to higher performance. However, it is a mistake for managers to think money is not a central factor influencing employees’ job satisfaction. Money matters because if employees are not making enough money to meet their financial obligations or goals, they will likely be looking to for a higher-paying job. And, of course, increasing salary or other benefits can be a way of demonstrating both the company’s loyalty to its employees and the role it believes employees’ best interests play in its mission—navigating the aforementioned two-way street. For some employees, simply being acknowledged and thanked for their service and good work can go a long way toward sparking their loyalty; for others, more concrete rewards may be necessary.

Finally, many people work for themselves as freelance or contract workers in the new “gig” economy. They may take assignments from one or more companies at a time and are not employees in the traditional sense of the word. Therefore, it seems more reasonable that they would approach work in the same way a certified public accountant or attorney would—as completing a professional job for a client, after which they move on the next client, always keeping their independent status. We would not expect gig workers to demonstrate employer loyalty when they are not employees.

The Ties That Bind

If building employee loyalty is a challenge for managers and they see their workers leaving for better opportunities, what can they do to change the situation? Some companies focus on team-building activities, company picnics, rock-climbing walls, or zip lines, but do these actually make workers decide to stay with their company for less salary? The answer is usually no. The reality is that salary plays an important role in an employee’s decision to move to a new job. Therefore, retention bonuses are a popular and perhaps more successful technique for instilling loyalty. The company provides a payment to an employee contingent on his or her committing to remain at the company for a specific period.

According to a Glassdoor study,

when changing jobs, employees earn an average increase of more than 5 percent in salary alone, not including benefits. Thus, the offer of a salary increase and/or a retention or performance bonus can help turn many would-be former employees into newly loyal ones. The same study found that a 10 percent increase in pay upped the odds that an employee would stay at the company. According to Dr. Andrew Chamberlain, chief economist of Glassdoor, “While it is important to provide upward career paths for workers, a simple job title promotion may not be enough. Maintaining competitive pay is an important part of reducing turnover.”

Of course, a retention bonus may not be enough to keep someone at a job he or she hates, but it might help someone who likes the job to decide to stay. The Society for Human Resource Management believes retention plans should be part of an overall pay strategy, not merely giveaways for tenure.

Imagine that your colleague is considering leaving your firm for another company: Your manager has offered him a retention bonus to stay and your colleague is seeking your advice about what to do. What would you advise?

Critical Thinking

  • What questions would you ask your colleague to better determine the advice you should give him or her?
  • Consider your summer jobs, part-time employment, work-study hours on campus, and internships. What meant more to you—the salary you made or the extent to which you were treated as a real contributor and not just a line on a payroll ledger? Or a combination of both?
  • What lessons do you now draw about reciprocal loyalty between companies and their workers?

Confidentiality

In the competitive world of business, many employees encounter information in their day-to-day work that their employers reasonably expect they will keep confidential. Proprietary (private) information, the details of patents and copyrights, employee records and salary histories, and customer-related data are valued company assets that must remain in-house, not in the hands of competitors, trade publications, or the news media. Employers are well within their rights to expect employees to honor their duty of confidentiality and maintain the secrecy of such proprietary material. Sometimes the duty of confidentiality originates specifically from an employment contract, if there is one, and if not, the duty still exists in most situations under the common law of agency.

Most companies do not consider U.S. common law on confidentiality sufficient protection, so they often adopt employment agreements or contracts with employees that set forth the conditions of confidentiality. (Note that such contracts define a one-way obligation, from the employee to the employer, so they do not protect the at-will employee from being terminated without cause.) Typically, an employment agreement will list a variety of requirements. For example, although in most situations the law would already hold that the employer owns copyrightable works created by employees within the scope of their employment (known as works for hire), a contract usually also contains a specific clause stating that the company owns any and all such works and assigning ownership of them to the company. The agreement will also contain a patent assignment provision, stating that all inventions created within the scope of employment are owned by or assigned to the company.

Employers also want to protect their trade secrets, that is, information that has economic value because it is not generally known to the public and is kept secret by reasonable means. Trade secrets might include technical or design information, advertising and marketing plans, and research and development data that would be useful to competitors. Often nondisclosure agreements are used to protect against the theft of all such information, most of which is normally protected only by the company’s requirement of secrecy, not by federal intellectual property law. Federal law generally protects registered trademarks (commercial identifications such as words, designs, logos, slogans, symbols, and trade dress, which is product appearance or packaging) and grants creators copyrights (to protect original literary and artistic expressions such as books, paintings, music, records, plays, movies, and software) and patents (to protect new and useful inventions and configurations of useful articles) ((Figure)).

Registered trademarks and content covered by patents and copyrights are protected by law, but trade secrets have no official status and so do not enjoy the same level of federal protection. Thus, companies generally protect trade secrets internally, usually with employment agreements or contracts. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This graphic shows words related to copyright. The words “copyright,” “registered trademark,” and “patent” are larger than the rest. The words “common law protections,” “patent pending,” “statutory protections,” “proprietary information,” “trade secret,” and “intellectual property” are also in the graphic.

U.S. companies have long used non-compete agreements as a way to provide another layer of confidentiality, ensuring that employees with access to sensitive information will not compete with the company during or for some period after their employment there. The stated purpose of such agreements is to protect the company’s intellectual property, which is the manifestation of original ideas protected by legal means such as patent, copyright, or trademark. To be enforceable, non-compete agreements are usually limited by time and distance (i.e., they are in effect for a certain number of months or years and within a certain radius of the employer’s operations). However, some companies have begun requiring these agreements even from mid- and lower-level workers in an attempt to prevent them from changing jobs, including those who have no access to any confidential intellectual property. About 20 percent of the U.S. private-sector workforce, and about one in six people in jobs earning less than $40,000 a year, are now covered by non-compete agreements.

The increased use of such agreements has left many employees feeling trapped by their limited mobility.

An ethical question arises regarding whether this practice is in the best interests of society and its workers, and some states are responding. California enacted a law in 2017 saying that most non-compete agreements are void, holding that although an employee may owe the employer a responsibility not to compete while employed, that duty ceases upon termination of employment.

In other words, an employee does not “belong” to a company forever. In California, therefore, a non-compete arrangement that limits employment after leaving the employer is now unenforceable. Does this law reflect the approach that most states will now take? A California company may still legally prohibit its employees from moonlighting during the term of their employment, particularly for a competitor.

Non-Compete Agreements

After an investigation by then–New York attorney general Eric Schneiderman, fast-food franchisor Jimmy John’s announced in 2016 that it would not enforce non-compete agreements signed by low-wage employees that prohibited them from working at other sandwich shops, and it agreed to stop using the agreements in the future. Jimmy John’s non-compete agreement had prohibited all workers, regardless of position, from working during their employment and for two years after at any other business that sold “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches” in a geographic area within two miles of any Jimmy John’s shop anywhere in the United States.

Schneiderman said of the agreements, “They limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued.” Illinois Attorney General Lisa Madigan had also initiated action, filing a lawsuit that asked the court to strike down such clauses. “Preventing employees from seeking employment with a competitor is unfair to Illinois workers and bad for Illinois businesses,” Madigan said. “By locking low-wage workers into their jobs and prohibiting them from seeking better paying jobs elsewhere, the companies have no reason to increase their wages or benefits.”

Jimmy John’s has more than 2,500 franchises in forty-six states, so its agreement meant it would be difficult for a former worker to get a job in a sandwich shop in almost any big city in the United States.

Critical Thinking

  • Other than being punitive, what purpose do non-compete agreements serve when low-level employees are required to sign them?
  • Suppose an executive chef or vice president of marketing or operations at Jimmy John’s or any large sandwich franchise leaves the firm with knowledge of trade secrets and competitive strategies. Should he or she be compelled to wait a negotiated period of time before working for a competitor? Why or why not?
  • What is fair to all parties when high-level managers possess unique, sensitive information about their former employer?

Employers may also insert a nonsolicitation clause, which protects a business from an employee who leaves for another job and then attempts to lure customers or former colleagues into following. Though these clauses have limitations, they can be effective tools to protect an employer’s interest in retaining its employees and customers. However, they are particularly difficult for employees to comply with in relatively closed markets. Sample language for all the clauses we have discussed is found in (Figure).

Common clauses found in employment contracts include those restricting competition and solicitation upon termination of the contract, as well as requiring confidentiality during and after employment. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This graphic shows three boxes. The first one is titled “Non-Compete Clause.” It says “The Employee agrees that for a period of one year after the Employee no longer works for the Company, the Employee will not engage in the same or similar activities as were performed for the Company in any business within a 100-mile radius of the Company.” The second one is titled “Nonsolicitation of Customers/Employees Clause.” It says “The Employee agrees that for a period of two years after the Employee no longer works for the Company, the Employee will not solicit customer, clients, and/or employees of the Company. The third one is titled “Confidentiality/Non-Disclosure Clause.” It says “Employee agrees that during employment with the Company and following the termination of such employment for an unlimited term, the Employee shall not misappropriate, divulge, disclose, or make use of any confidential information, intellectual property, or trade secrets.”

A final clause an employee might be required to sign is a nondisparagement clause, which prohibits defaming or deliberately running down the reputation of the former employer.

Summary

Although employees’ and employers’ concepts of loyalty have changed, it is reasonable to expect workers to have a basic sense of responsibility to their company and willingness to protect a variety of important assets such as intellectual property and trade secrets. Current employees should not compete with their employer in a way that would violate conflict-of-interest rules, and former employees should not solicit previous customers or employees upon leaving employment.

Assessment Questions

The common law concept that requires an employee to render loyal and faithful service to the employer is ________.

  1. the duty of confidentiality
  2. a non-compete agreement
  3. the duty of loyalty
  4. trade secret protection

C

An employee who works in the graphic design department of a large advertising agency most likely cannot moonlight after business hours for a friend’s ________.

  1. bakery business
  2. web design business
  3. construction business
  4. landscaping design business

B

True or false? All fifty states require that an employee refrain from acting in a manner contrary to the employer’s interest.

True

Based on a non-compete agreement, what should the employee avoid creating with the employer?

Conflict of interest: The employee must not act in a way that would result in a conflict of interest with the employer.

What duty requires an employee to maintain the secrecy of proprietary material, such as trade secrets, intellectual property, and customer data?

Duty of confidentiality: Employers are well within their rights to expect employees to honor their duty of confidentiality and maintain the secrecy of such proprietary material as trade secrets, intellectual property, and customer data.

Endnotes

1Schmidt v. Blue Lily Farms LLC, No. A08-1398. (Minn. Ct. App. July 21, 2009).
2Restatement (Second) of Agency, § 394 (1958).
3Peter Murdock, “The New Reality of Employee Loyalty,” Forbes, December 12, 2017. https://www.forbes.com/sites/forbeshumanresourcescouncil/2017/12/28/the-new-reality-of-employee-loyalty/#f652ce34cf35.
4“Declining Employee Loyalty: A Casualty of the New Workplace,” Wharton School of Business, University of Pennsylvania, May 9, 2012. http://knowledge.wharton.upenn.edu/article/declining-employee-loyalty-a-casualty-of-the-new-workplace/.
5“Declining Employee Loyalty: A Casualty of the New Workplace,” Wharton School of Business, University of Pennsylvania, May 9, 2012. http://knowledge.wharton.upenn.edu/article/declining-employee-loyalty-a-casualty-of-the-new-workplace/.
6Flood v. Kuhn, 407 U.S. 258 (1972).
7Crystal Spraggins, “Yes, People Really Do Quit Jobs for More Money,” PayScale, May 2015. https://www.payscale.com/compensation-today/2015/05/yes-people-really-do-quit-jobs-for-more-money.
8“Why Employees Quit, According to New Glassdoor Economic Research,” Glassdoor, February 2, 2017. https://www.glassdoor.com/press/employees-quit-glassdoor-economic-research/.
9“Why Employees Quit, According to New Glassdoor Economic Research,” Glassdoor, February 2, 2017. https://www.glassdoor.com/press/employees-quit-glassdoor-economic-research/.
10Rob Rogers, “Retention Compensation Plans—Please Stay! A Successful Retention Pay Strategy Isn’t Merely a Giveaway for Tenure,” Society for Human Resource Management, February 26, 2015. https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/retention-compensation-plans.aspx.
11Office of Economic Policy, U.S. Dept. of the Treasury, “Non-Compete Contracts: Economic Effects and Policy Implications,” March 2016. https://www.treasury.gov/resource-center/economic-policy/Documents/UST%20Non-competes%20Report.pdf.
12“New California Noncompete Law,” The NonCompete Center. http://californianoncompete.com/ (accessed February 19, 2018).
13Reuters, “Jimmy John’s Will Stop Making Low-Wage Employees Sign Non-Compete Agreements,” Fortune, June 22, 2016. http://fortune.com/2016/06/22/jimmy-johns-non-compete-agreements/.
14Office of the Attorney General, State of Illinois, “Madigan Sues Jimmy John’s for Imposing Unlawful Non-Compete Agreements on Sandwich Makers and Delivery Drivers,” June 8, 2016. http://www.illinoisattorneygeneral.gov/pressroom/2016_06/20160608.html.

Glossary

duty of confidentiality
a common-law rule giving an employee responsibility to protect the secrecy of the employer’s proprietary information, such as trade secrets, material covered by patents and copyrights, employee records and salary information, and customer data
duty of loyalty
a common-law rule that requires an employee to refrain from acting in a manner contrary to the employer’s interest
intellectual property
the manifestation of original ideas, protected by legal means such as patent, copyright, or trademark
non-compete agreement
a contract clause ensuring that employees will not compete with the company during or after employment there
nondisclosure agreement
an agreement to prevent the theft of trade secrets, most of which are protected only by a duty of secrecy and not by federal intellectual property law
nonsolicitation clause
an agreement that protects a business from an employee who leaves for another job and then attempts to lure customers or former colleagues away
trade secret
a company’s technical or design information, advertising and marketing plans, and research and development data that would be useful to competitors

Loyalty to the Brand and to Customers

33

Learning Objectives

By the end of this section, you will be able to:

  • Describe how employees help build and sustain a brand
  • Discuss how employees’ customer service can help or hurt a business

A good employment relationship is beneficial to both management and employees. When a company’s products or services are legitimate and safe and its employment policies are fair and compassionate, managers should be able to rely on their employees’ dedication to those products or services and to their customers. Although no employee should be called upon to lie or cover up a misstep on the part of the firm, every employee should be willing to make a sincere commitment to an ethical employer.

Respecting the Brand

Every company puts time, effort, and money into developing a brand, that is, a product or service marketed by a particular company under a particular name. As Apple, Coca-Cola, Amazon, BMW, McDonald’s, and creators of other coveted brands know, branding—creating, differentiating, and maintaining a brand’s image or reputation—is an important way to build company value, sell products and services, and expand corporate goodwill. In the sense discussed here, the term “brand” encompasses an image, reputation, logo, tagline, or specific color scheme that is trademarked, meaning the company owns it and must give permission to others who would legally use it (such as Tiffany’s unique shade of blue).

Companies want and expect employees to help in their branding endeavors. For example, according to the head of training at American Express, the company’s brand is its product, and its mantra has always been, “Happy employees make happy customers.”

American Express places significant emphasis on employee satisfaction because it is convinced this strategy helps protect and advance its brand. One company that uses positive employee involvement in branding is the technology conglomerate Cisco, which started a branding program on social media that reaches out to employees ((Figure)). Employees are encouraged to be creative in their brand-boosting posts in the program. The benefit is that prospective job candidates get a peek into Cisco life, and current employees feel the company trusts and values their ideas.

These Cisco employees, part of a newly formed Virtual Customer Success team in India, help promote the brand and perhaps promote change as well. Women have been underrepresented in STEM careers (science, technology, engineering, math), and this group takes pride in the fact that they are part of a gender-balanced team. This photo was submitted as part of the annual #WeAreCisco #LoveWhereYouWork contest, with the hashtag #womenintech and the photo caption “Sorry, we’re busy making a difference.” (credit: modification of work by Shojana Ravi/Cisco, CC BY 4.0, used with the permission of https://thenetwork.cisco.com)


The image shows seven women smiling. The one in the center is wearing a shirt that says “Customer Success.”

However, protecting the brand can be a special challenge today, thanks to the ease with which customers and even employees can post negative information about the brand on the Internet and social media. Consider these examples in the fast-food industry. A photo posted on Taco Bell’s Facebook page showed an employee licking a row of tacos. A Domino’s Pizza employee can be seen in a YouTube video spitting on food, putting cheese into his nose and then putting that cheese into a sandwich, and rubbing a sponge used for dishwashing on his groin area.

On Twitter, a Burger King employee in Japan posted a photo of himself lying on hamburger buns while on duty.

The companies all responded swiftly. A Taco Bell spokesperson said the food was not served to customers and the employee in the photo was fired. The two Domino’s employees behind the videos were fired and faced felony charges and a civil lawsuit; Domino’s said the tainted food was never delivered. According to a Burger King news release, the buns in the photo were waste material because of an ordering mistake and were promptly discarded after the photo was taken; the employee in the photo was fired.

These examples demonstrate how much damage disloyal or disgruntled employees can create, especially on social media. All three companies experienced financial and goodwill losses after the incidents and struggled to restore public trust in their products. The immediate and long-term costs of such incidents are the reason companies invest in developing brand loyalty among their employees.

According to a Harvard Business Review interview with Colin Mitchell, global vice president, McDonald’s Brand, McDonald’s, good branding requires that a business think of marketing not just to its customers but also to its employees, because they are the “very people who can make the brand come alive for your customers”.

The process of getting employees to believe in the product, to commit to the idea that the company is selling something worth buying, and even to think about buying it, is called internal marketing. Of course, some employees may not want to be the equivalent of a company spokesperson. Is it reasonable to expect an employee to be a kind of roving ambassador for the company, even when off the clock and interacting with friends and neighbors? Suppose employers offer employees substantial discounts on their products or services. Is this an equitable way to sustain reciprocal loyalty between managers and workers? Why or why not?

Internal marketing is an important part of the solution to the problem of employees who act as if they do not care about the company. It helps employees make a personal connection to the products and services the business sells, without which they might be more likely to undermine the company’s expectations, as in the three fast-food examples cited in this section. In those cases, it is clear the employees did not believe in the brand and felt hostile toward the company. The most common problem is usually not as extreme. More often it is a lack of effort or “slacking” on the job. Employees are more likely to develop some degree of brand loyalty when they share a common sense of purpose and identity with the company.

Obligations to Customers

As the public’s first point of contact with a company, employees are obliged to assist the firm in forming a positive relationship with customers. How well or poorly they do so contributes a great deal to customers’ impression of the company. And customers’ perceptions affect not only the company but all the employees who depend on its success for their livelihood. Thus, the ethical obligations of an employee also extend to interactions with customers, whom they should treat with respect. Employers can encourage positive behavior toward customers by empowering employees to use their best judgment when working with them.

It may take only one bad customer interaction with a less-than-engaged or committed employee to sour brand loyalty, no matter how hard a company has worked to build it. In the same way, just one good experience can build up good will.

Redefining Customers

Sometimes engaged employees go above and beyond in the interest of customer service, even if they have no “customers” to speak of. Kathy Fryman is one such employee. Fryman was a custodian for three decades at a one hundred-year-old school in the Augusta (KY) Independent School District. She was not just taking care of the school building, she was also taking care of the people inside.

Fryman fixed doors that would not close, phones that would not ring, and alarms that did not sound when they should. She kept track of keys and swept up dirty floors before Parents’ Night. That was all part of the job of custodian, but she did much more.

Fryman would often ask the nurse how an ill student was doing. She would check with a teacher about a kid who was going through tough times at home. If a teacher mentioned needing something, the next day it would show up on his or her desk. A student who needed something for class would suddenly find it in his or her backpack. Speaking of Fryman, district superintendent Lisa McCrane said, “She just has a unique way of making others feel nurtured, comforted, and cared for.” According to Fryman, “I need to be doing something for somebody.”

Fryman’s customers were not there to buy a product on which she would make a commission. Her customers were students and teachers, parents and taxpayers. Yet she provided the kind of service that all employers would be proud of, the kind that makes a difference to people every day.

Critical Thinking

  • Is there a way for a manager to find, develop, and encourage the next Fryman, or is the desire to “do something good for somebody” an inherent trait in some employees that is missing in others?
  • What is the appropriate means to reward a worker with Fryman’s level of commitment? Her salary was fixed by school district pay schedules. Should she have been given an extra stipend for service above and beyond the expected? Additional time off with pay? Some other reward?
  • Employees who display Fryman’s zeal often do so for their own internal rewards. Others may simply want to be recognized and appreciated for their effort. If you were the superintendent in her district, how would you recognize Fryman? Could she, for example, be invited to speak to new hires about opportunities to render exceptional service?

Employees who treat customers well are assets to the company and deserve to be treated as such. Sometimes, however, customers are rude or disrespectful, creating a challenge for an employee who wants to do a good job. This problem is best addressed by management and the employee working together. In the Pizza Hut case that follows, an employee was placed in a bad situation by customers.

Is the Customer Always Right?

At an independently owned Pizza Hut franchise in Oklahoma,

two regular customers made sexually offensive remarks to a female employee named Lockard, who then told her boss she did not like waiting on them. One evening, these customers again entered the restaurant, and her boss instructed Lockard to wait on them. She did, but this time the customers became physically abusive. Although it is the employee’s duty to provide good customer service, that does not mean accepting harassment.

Lockard sued her employer, the owner of the franchise, for failing to take her complaints seriously and for making her continue to suffer sexual harassment and assault by customers. The jury ruled in her favor, awarding her $360,000, and an appeals court upheld the judgment.

Critical Thinking

  • Clearly, no employee should expect to be physically assaulted, but how far should an employee be expected to go in the name of customer service? Is taking verbal taunts expected? Why or why not?
  • Just as every employee should treat customers and clients with respect, so every employer is ethically—and often legally—obligated to safeguard employees on the job. This includes establishing a workplace atmosphere that is safe and secure for workers. If you were the owner of this Pizza Hut franchise, what protections might you put in place for your employees?

Summary

Employees have a duty to be loyal to the brand and treat customers well. Internal marketing is one process by which a company instills employee commitment to the brand and builds loyalty in its workforce. This loyalty should be a two-way street, however. If the company wants its employees to treat customers with respect, it must treat them with respect as well.

Assessment Questions

Which of the following is especially important for developing and maintaining employee loyalty to the brand?

  1. empowerment
  2. engagement
  3. commitment
  4. dedication

A. Employers can encourage positive behavior toward customers by empowering employees to use their best judgment when working with them.

Efforts to get employees to believe in the product, to commit to the idea that the company is selling something worth buying, and even to think about buying it are part of ________.

  1. brand loyalty
  2. internal marketing
  3. employee engagement
  4. company identity

B

True or false? Employees are more likely to develop some degree of brand loyalty when they have a common sense of purpose and identity with the company.

True

Why should employees care about the way they treat customers?

Customers’ perceptions are formed by the employees with whom they have contact, and these perceptions affect not only the company but all the employees who depend on its success for their livelihood.

Endnotes

1Marilyn Nagel, “How Are Your Employees Affecting Your Brand?” Huffington Post, September 23, 2013. https://www.huffingtonpost.com/marilyn-nagel/employee-engagement_b_3956204.html.
2Jill Larsen, “Cisco’s Employer Brand Puts Employees First,” Cisco, December 12, 2016. https://newsroom.cisco.com/feature-content?type=webcontent&articleId=1809254.
3“Taco Bell Worker Appears to Be Licking a Bunch of Taco Shells in This Facebook Picture,” Huffington Post, June 3, 2013. https://www.huffingtonpost.com/2013/06/03/taco-bell-worker-licking_n_3377709.html; “Domino’s Workers Disgusting YouTube Video: Spitting, Nose-Picking and Worse,” Huffington Post, April 14, 2009. https://www.huffingtonpost.com/2009/04/14/dominos-workers-disgustin_n_186908.html.
4Colin Mitchell, “Selling the Brand Inside,” Harvard Business Review, January 2002. https://hbr.org/2002/01/selling-the-brand-inside.
5Brenna Kelly, “Augusta Schools Custodian Kathy Fryman Takes Care of Building and the People Inside; Gets Fred Award,” Northern Kentucky Tribune, September 23, 2017. http://www.nkytribune.com/2017/09/augusta-schools-custodian-kathy-fryman-takes-care-of-building-and-the-people-inside-gets-fred-award/.
6LOCKARD, Plaintiff-Appellee, v. PIZZA HUT, INC., a corporation, doing business as Pizza Hut; A & M Food Services, Inc., a corporation, doing business as Pizza Hut, Defendants-Appellants. US Ct. App. Tenth Circuit (1998).

Glossary

brand
a type of product or service marketed by a particular company under a particular name
branding
the process of creating, differentiating, and maintaining a particular image and/or reputation for a company, product, or service
internal marketing
the process of getting employees to believe in the company’s product and even to buy it

Contributing to a Positive Work Atmosphere

34

Learning Objectives

By the end of this section, you will be able to:

  • Explain employees’ responsibility to treat their peers with respect
  • Describe employees’ duty to follow company policy and the code of conduct
  • Discuss types of workplace violence

You may spend more time with your coworkers than you spend with anyone else, including your family and friends. Thus, your ability to get along with work colleagues can have a significant impact on your life, as well as your attitude toward your job and your employer. All sorts of personalities populate our workplaces, but regardless of their working style, preferences, or quirks, employees owe one another courtesy and respect. That does not mean always agreeing with them, because evaluating a diversity of perspectives on business problems and opportunities is often essential for finding solutions. At the same time, however, we are responsible for limiting our arguments to principles, not personalities. This is what we owe to one another as human beings, as well as to the firm, so worksite arguments do not inflict lasting harm on the people who work there or on the company itself.

Getting Along with Coworkers

An employee who gets along with coworkers can help the company perform better. What can employees do to help create a more harmonious workplace with a positive atmosphere?

One thing you can do is to keep an open mind. You may be wondering as you start a new job whether you will get along with your colleagues as well as you did at your old job. Or, if you did not get along with the people there and were looking for a change, you might fear things will be the same at the new job. Do not make any prejudgments. Get to know a bit about your new coworkers. Accept, or extend, lunch invitations, join weekend activities and office social events, and perhaps join those office traditions that bind long-serving employees and newcomers together in a collaborative spirit.

Another thing you can do it to remember to be kind. Everyone has a bad day every now and then, and if you spot a coworker having one, performing a random act of kindness may make that person’s day better. You do not need to be extravagant. Offer to stay late to help the person meet a tight deadline, or bring coffee or a healthy snack to someone working on particularly difficult tasks. Remember the adage, “It’s nice to be important, but it’s more important to be nice.”

For any relationship to succeed, including the relationship between coworkers, the parties must respect each other—and show it. Avoid doing things that might offend others. For example, do not take credit for someone else’s work. Do not be narrow minded; when someone brings up a topic such as politics or religion, be willing to listen and tolerate differing points of view.

A related directive is to avoid sexual jokes, stories, anecdotes, and innuendos. You might think it is okay to talk about anything and everything at work, but it is not. Others may not find the topic funny and feel offended, and you may make yourself vulnerable to action by management if such behavior is reported. Your coworkers might be a captive audience, but you should never place them in an awkward position.

Make an effort to get along with everyone, even difficult people. You did not choose your coworkers, and some may be hard to get along with. But professionalism requires that we attempt to establish the best working relationships we can on the job, no matter the opinions we might have about our colleagues. Normally, we might like some of them very much, be neutral about some others, and genuinely dislike still others. Yet our responsibility in the workplace is to respect and act at least civilly toward all of them. We likely will feel better about ourselves as professionals and also live up to our commitments to our companies.

Finally, do no use social media to gossip. Gossiping at work can cause problems anywhere, perhaps especially on social media, so resist the urge to vent online about your coworkers. It makes you appear petty, small, and untrustworthy, and colleagues may stop communicating with you. You may also run afoul of your employer’s social media policy and risk disciplinary action or dismissal.

Understanding Personalities

Understanding the various personalities at work can be a complex task, but it is a vital one for developing a sense of collegiality. One technique that may be helpful is to develop your own emotional intelligence, which is the capacity to recognize other people’s emotions and also to know and manage your own. One aspect of using emotional intelligence is showing empathy, the willingness to step into someone else’s shoes.

All of us have different workplace personalities, which express the way we think and act on the job. There are many such personalities, and none is superior or inferior to another, but they are a way in which we exhibit our uniqueness on the job ((Figure)). Some of us lead with our brains and emphasize logic and reason. Others lead with our hearts, always emphasizing mercy over justice in our relationships with others.

Which type of personality are you? (credit: Jackson Ceszyk/Flickr, CC BY 4.0)


The image shows lego figure heads stacked in five columns, with four heads in each column. The heads show a variety of expressions.

Employees can also have very different work styles, the way in which we are most comfortable accomplishing our tasks at work. Some of us gravitate toward independence and jobs or tasks we can accomplish alone. Others prefer team or project work, bringing us into touch with different personalities. Still others seek a mix of these environments. Some prioritize getting the job done as efficiently as possible, whereas others value the journey of working on the project with others and the shared experiences it brings. There is no right or wrong style, but it benefits any worker to know his or her preferences and something about the work personalities of colleagues. When in the office, the point for any of us individually is to appreciate what motivates our greatest success and happiness on the job.

Personality Test

Imagine you are a department director with twenty-five employees reporting directly to you. Two of them are experts in their fields: You like and respect them individually, as do the others in your department, but they simply cannot get along with each other and so never work together.

How do you resolve this personality clash? You cannot simply insist that the two colleagues cooperate, because personalities do not change. Still, you have to do your best to establish an atmosphere in which they can least collaborate civilly. Even though managers have no power to change human nature or the personality conflicts that inevitably occur, part of their responsibility is to establish a harmonious working environment, and others will judge you on the harmony you cultivate in your department.

Critical Thinking

Working relationships are extremely important to an employee’s job satisfaction. What options would you use to foster a cooperative working relationship in your department?

Reducing Workplace Violence

As recent incidents have shown—for example, the April 2018 shooting at YouTube headquarters in San Bruno, California

workplace violence is a reality, and all employees play a role in helping make work a safe, as well as harmonious place. Employees, in fact, have a legal and ethical duty not to be violent at work, and managers have a duty to prevent or stop violence. The National Institute for Occupational Safety and Health reports that violence at work usually fits into one of four categories: traditional criminal intent, violence by one worker against another, violence stemming from a personal relationship, and violence by a customer.

In violence based on traditional criminal intent, the perpetrator has no legitimate relationship to the business or its employees, and often the violence is part of a crime such as robbery or shoplifting. Violence between coworkers occurs when a current or former employee attacks another employee in the workplace. Worker-on-worker deaths account for approximately 15 percent of all workplace homicides. All companies are at risk for this type of violence, and contributing factors include failure to conduct a criminal background check as part of the hiring process.

When the violence arises from problems in a personal relationship, the perpetrator often has a direct relationship not with the business but with the victim, who is an employee. This category of violence accounts for slightly less than 10 percent of all workplace homicides. Women are at higher risk of being victims of this type of violence than men. In the fourth scenario, the violent person has a legitimate relationship with the business, perhaps as a customer or patient, and becomes violent while on the premises. A large portion of customer incidents occur in the nightclub, restaurant, and health care industries. In 2014, about one-fifth of all workplace homicides resulted from this type of violence.

Codes of Conduct

Companies have a right to insist that their employees, including managers, engage in ethical decision-making. To help achieve this goal, most businesses provide a written code of ethics or code of conduct for all employees to follow. These cover a wide variety of topics, from workplace romance and sexual harassment to hiring and termination policies, client and customer entertainment, bribery and gifts, personal trading of company shares in any way that hints of acting on insider knowledge of the company’s fortunes, outside employment, and dozens of others. A typical code of conduct, regardless of the company or the industry, will also contain a variety of standard clauses, often blending legal compliance and ethical considerations ((Figure)).

Sample Code of Conduct
Compliance with all laws Employees must comply with all laws, including bribery, fraud, securities, environmental, safety, and employment laws.
Corruption and fraud Employees must not accept certain types of gifts and hospitality from clients, vendors, or partners. Bribery is prohibited in all circumstances.
Conflict of interest Employees must disclose and/or avoid any personal, financial, or other interests that might influence their ability to perform their job duties.
Company property Employees must treat the company’s property with respect and care, not misuse it, and protect company facilities and other material property.
Cybersecurity and digital devices policy Employees must not use company computer equipment to transfer illegal, offensive, or pirated material, or to visit potentially dangerous websites that might compromise the safety of the company network or servers; employees must respect their duty of confidentiality in all Internet interactions.
Social media policy Employees may [or may not] access personal social media accounts at work but are expected to act responsibly, follow company policies, and maintain productivity.
Sexual harassment Employees must not engage in unwelcome or unwanted sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature. Behaviors such as conditioning promotions, awards, training, or other job benefits upon acceptance of unwelcome actions of a sexual nature are always wrong.

Workplace respect Employees must show respect for their colleagues at every level. Neither inappropriate nor illegal behavior will be tolerated.

Two areas that deserve special mention are cybersecurity and harassment. Recent news stories have highlighted the hacking of electronic tools such as computers and databases, and employees and managers can indirectly contribute to such data breaches through unauthorized web surfing, sloppy e-mail usage, and other careless actions. Large companies such as Equifax, LinkedIn, Sony, Facebook, and JP Morgan Chase have suffered the theft of customer information, leading to loss of consumer confidence; sometimes large fines have been levied on companies. Employees play a part in preventing such breaches by strictly following company guidelines about data privacy and confidentiality, the use and storage of passwords, and other safeguards that limit access to only authorized users.

We are also witnessing an increased level of public awareness about harassment in the workplace, particularly because of the #MeToo movement that followed revelations in 2017 and 2018 of years of sexual predation by powerful men in Hollywood and Washington, DC, as well as across workplaces of all kinds, including in sports and the arts. A victim of sexual harassment can be a man or a woman, and/or the same sex as the harasser. The harasser can be a supervisor, coworker, other employee, officer/director, intern, consultant, or nonemployee. Whatever the situation, harassing and threatening behavior is wrong (and sometimes criminal) and should always be reported.

Summary

Ethical employees accept their role in creating a workplace that is respectful, safe, and welcoming by getting along with coworkers and doing what is best for the company. They also comply with corporate codes of conduct, which cover a wide range of behaviors, from financial dealings and bribery to sexual harassment. In addition, they are alert to any situation in the workplace that could escalate into violence. In short, the employee has a duty to be a responsible person in the job.

Assessment Questions

A patient becomes violent on hospital premises after being turned down for the clinical trial of a new drug therapy. This scenario fits which of the following workplace violence categories?

  1. traditional criminal intent
  2. violence by one worker against another
  3. violence stemming from a personal relationship
  4. violence by a customer

D. Violence by a customer occurs when the violent person has a legitimate relationship with the business, perhaps as a customer or patient.

Understanding the various personalities at work can be a complex task, but it is an important one for developing which of the following?

  1. collegiality
  2. emotional intelligence
  3. empathy
  4. personality harmony

A

True or false? Emotional intelligence is a willingness to step into someone else’s shoes.

True

Regardless of their working style, preferences, or quirks, what do employees owe one another?

Employees owe each other courtesy and respect.

What are the four categories of violence at work, according to the National Institute for Occupational Safety and Health (NIOSH)?

NIOSH indicates that violence at work usually fits into one of four categories: traditional criminal intent, violence by one worker against another, violence stemming from a personal relationship, and violence by a customer.

Endnotes

1Robin Lindsay and Barbara Marcolini, “YouTube Shooting: Woman Wounds 3 Before Killing Herself, Police Say,” New York Times, April 3, 2018. https://www.nytimes.com/2018/04/03/us/youtube-shooting.html.
2“4 Types of Workplace Violence: What’s Your Greatest Risk?” Safety.BLR.com, December 23, 2015. https://safety.blr.com/workplace-safety-news/emergency-planning-and-response/violence-in-workplace/4-Types-of-Workplace-Violence-Whats-Your-Greatest-/.
3Bureau of Labor Statistics, “Table A-6. Fatal Occupational Injuries Resulting from Transportation Incidents and Homicides, United States, 2014.” https://www.bls.gov/iif/oshwc/cfoi/cftb0291.pdf (accessed July 14, 2018).
4Some phrasing borrowed from U.S. government standards: U.S. Department of State, “Sexual Harassment Policy.” https://www.state.gov/s/ocr/c14800.htm (accessed March 1, 2018).

Glossary

work style
the way and order in which we are most comfortable accomplishing our tasks at work
workplace personality
the manner in which we think and act on the job

Financial Integrity

35

Learning Objectives

By the end of this section, you will be able to:

  • Describe an employee’s responsibilities to the employer in financial matters
  • Define insider trading
  • Discuss bribery and its legal and ethical consequences

Employees may face ethical dilemmas in the area of finance, especially in situations such as bribery and insider trading in securities. Such dubious “profit opportunities” can offer the chance of realizing thousands or millions of dollars, creating serious temptation for an employee. However, insider trading and bribery are serious violations of the law that can result in incarceration and large fines.

Insider Trading

The buying or selling of stocks, bonds, or other investments based on nonpublic information that is likely to affect the price of the security being traded is called insider trading. For example, someone who is privy to information that a company is about to be taken over, which will cause its stock price to rise when the information becomes public, may buy the stock before it goes up in order to sell it later for an enhanced profit. Likewise, someone with inside information about a coming drop in share price may sell all his or her holdings at the current price before the information is announced, avoiding the loss other shareholders will suffer when the price falls. Although insider trading can be difficult to prove, it is essentially cheating. It is illegal, unethical, and unfair, and it often injures other investors, as well as undermining public confidence in the stock market.

Insider trading laws are somewhat complex. They have developed through federal court interpretations of Section 10(b)5 of the Securities Exchange Act of 1934, as well as through actions by the U.S. Securities and Exchange Commission (SEC). The laws identify several kinds of violations. These include trading by an insider (generally someone who performs work for the company) who possesses significant confidential information relevant to the valuation of the company’s stock, and trading by someone outside of the company who is given this sort of information by an insider or who obtains it inappropriately. Even being the messenger (the one communicating material nonpublic information to others on behalf of someone else) can be a legal violation.

The concept of an “insider” is broad and includes officers, directors, and employees of a company issuing securities. A person can even constitute what is called a “temporary insider” if he or she temporarily assumes a unique confidential relationship with a firm and, in doing so, acquires confidential information centered on the firm’s financial and operational affairs. Temporary insiders can be investment bankers, brokers, attorneys, accountants, or other professionals typically thought of as outsiders, such as newspaper and television reporters.

A famous case of insider trading, Securities and Exchange Commission v. Texas Gulf Sulphur Co. (1968), began with the discovery of the Kidd Mine and implicated the employees of Texas mining company.

When first notified of the discovery of a large and very valuable copper deposit, mine employees bought stock in the company while keeping the information secret. When the information was released to the public, the price of the stock went up and the employees sold their stock, making a significant amount of money. The SEC and the Department of Justice prosecuted the employees for insider trading and won a conviction; the employees had to give back all the money they had made on their trades. Insider trading cases are often highly publicized, especially when charges are brought against high-profile figures.

Insider Trading and Fiduciary Duty

One of the most famous cases of insider trading implicated Michael Milken, Dennis Levine, and Martin Siegel, all executives of Drexel Burnham Lambert (DBL), and the company itself.

Ivan Boesky, also accused, was an arbitrageur, an outside investor who bet on corporate takeovers and appeared to be able to uncannily anticipate takeover targets, buy their stock ahead of time, and earn huge profits. Everyone wondered how; the answer was that he cheated. Boesky went to the source—the major investment banks—to get insider information. He paid Levine and Siegel to give him pretakeover details, an illegal action, and he profited enormously from nearly every major deal in the merger-crazy 1980s, including huge deals involving oil companies such as Texaco, Getty, Gulf, and Chevron.

The SEC started to become suspicious after receiving a tip that someone was leaking information. Investigators discovered Levine’s secret Swiss bank account, with all the money Boesky had paid him. Levine then gave up Boesky in a plea deal; the SEC started watching Boesky and subsequently caught Siegel and Milken.

The penalties were the most severe ever given at the time. Milken, the biggest catch of all, agreed to pay $200 million in government fines, $400 million to investors who had been hurt by his actions, and $500 million to DBL clients—for a grand total of $1.1 billion. He was sentenced to ten years in prison and banned for life from any involvement in the securities industry. Boesky received a prison sentence of 3.5 years, was fined $100 million, and was permanently barred from working with securities. Levine agreed to pay $11.5 million and $2 million more in back taxes; he too was given a lifetime ban and was sentenced to two years in prison.

Milken and Levine violated their financial duties to their employer and the company’s clients. Not only does insider trading create a public relations nightmare, it also subjects the company to legal liability. DBL ended up being held liable in civil lawsuits due to the actions of its employees, and it was also charged with violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act) and ultimately failed, going bankrupt in 1990.

(As a note of interest regarding the aftermath of all of this for Milken, he has tried to redeem his image since his incarceration. He resolutely advises others to avoid his criminal acts and has endowed some worthy causes in Los Angeles.)

Critical Thinking

  • Employers in financial services must have stringent codes of professional behavior for their employees to observe. Even given such a code, how should employees honor their fiduciary duty to safeguard the firm’s assets and treat clients equitably? What mechanisms would you suggest for keeping employees in banking, equities trading, and financial advising within the limits of the law and ethical behavior?
  • This case dominated the headlines in the 1980s and the accused in this case were all severely fined and received prison sentences. How do you think this case might be treated today?
  • Should employees in these industries be encouraged or even required to receive ethical certification from the state or from professional associations? Why or why not?

Bribery and the Foreign Corrupt Practices Act

Another temptation that may present itself to employees is the offer of a bribe. A bribe is a payment in some material form (cash or noncash) for an act that runs counter to the legal or ethical culture of the work environment. Bribery constitutes a violation of the law in all fifty U.S. states, as well as of a federal law that prohibits bribery in international transactions, the Foreign Corrupt Practices Act. Bribery generally injures not only individuals but also competitors, the government, and the free-market system as a whole. Of course, often the bribe is somewhat less obvious than an envelope full of money. It is important, therefore, to understand what constitutes a bribe.

Numerous factors help establish the ethics (and legality) of gift giving and receiving: the value of the gift, its purpose, the circumstances under which it is given, the position of the person receiving it, company policy, and the law. Assuming an employee has decision-making authority, the company wants and has the right to expect him or her to make choices in its best interest, not the employee’s own self-interest. For example, assume an employee has the authority to buy a copy machine for the company. The employer wants to get the best copy machine for the best price, taking into account quality, service, warranties, and other factors. But what if the employee accepts a valuable gift card from a vendor who sells a copy machine with higher operating and maintenance charges, and then places the order with that vendor. This is clearly not in the best interests of the employer. It constitutes a failure on the part of the employee to follow ethical and legal rules, and, in all likelihood, company policy as well. If a company wants its employees always to do the right thing, it must have policies and procedures that ensure the employees know what the rules are and the consequences for breaking them.

A gift may be only a well-intentioned token of appreciation, but the potential for violating company rules (and the law) is still present. A well-written and effectively communicated gift policy provides guidance to company employees about what is and is not appropriate to accept from a customer or vendor and when. This policy should clearly state whether employees are allowed to accept gifts on or outside the work premises and who may give or accept them. If gifts are allowed, the gift policy should define the acceptable value and type, and the circumstances under which an employee may accept a gift.

When in doubt about whether the size or value of a gift renders it impossible for an employee to accept it, workers should be advised to check with the appropriate officer or department within their company. Be it an “ethics hotline” or simply the human resources department, wise firms provide an easy protocol for employees to follow in determining what falls within and without the protocols for accepting gifts.

As an example of a gift policy, consider the federal government’s strict rules.

A federal employee may not give or solicit a contribution for a gift to an official superior and may not accept a gift from an employee receiving less pay if that employee is a subordinate. On annual occasions when gifts are traditionally given, such as birthdays and holidays, an employee may give a superior a gift valued at less than $10. An employee may not solicit or accept a gift given because of his or her official position, or from a prohibited source, including anyone who has or seeks official action or business with the agency. In special circumstances such as holidays, and unless the frequency of the gifts would appear to be improper, an employee generally may accept gifts of less than $20. Gifts of entertainment, such as expensive restaurant meals, are also restricted. Finally, gifts must be reported when their total value from one source exceeds $390 in a calendar year. Some companies in the private sector follow similar rules.

Bribery presents a particular ethical challenge for employees in the international business arenas. Although every company wants to land lucrative contracts around the world, most expect their employees to follow both the law and company policy when attempting to consummate such deals. The U.S. law prohibiting bribery in international business dealings is the Foreign Corrupt Practices Act (FCPA), which is an amendment to the Securities and Exchange Act of 1934, one of the most important laws promoting transparency in corporate governance. The FCPA dates to 1977 and was amended in 1988 and 1998. Its main purpose is to make it illegal for companies and their managers to influence or bribe foreign officials with monetary payments or rewards of any kind in an attempt to get or keep business opportunities outside the United States. The FCPA is enforced through the joint efforts of the SEC and the Department of Justice.

It applies to any act by U.S. businesses, their representatives, foreign corporations whose stock is traded in U.S. markets, and all U.S. citizens, nationals, or residents acting in furtherance of a foreign corrupt practice, whether they are physically present in the United States or not (this is called the nationality principle). Antibribery law is a serious issue for companies with overseas business and cross-border sales. Any companies or individuals convicted of these activities may pay significant fines, and individuals can face prison time.

The FCPA prohibits an agent of any company incorporated in the United States from extending a bribe to a foreign government official to achieve a business advantage in that country, but it does not specifically prohibit the extension of a bribe to a private officer of a nongovernmental company in a foreign country. The definition of a foreign government official can be expansive; it includes not only those working directly for the government but also company officials if the company is owned or operated by the government. An exception is made for “facilitating or grease payments,” small amounts of money paid to low-level government workers in an effort to speed routine tasks like processing paperwork or turning on electricity, but not to influence the granting of a contract.

Illegal payments need not be cash; they can include anything of value such as gifts and trips. For example, BHP Billiton, a U.S. energy company, and GlaxoSmithKline, a U.K. pharmaceutical company, were each fined $25 million for buying foreign officials tickets to the 2008 Olympic Games in Beijing, China.

Fines for violations like these can be large and can include civil penalties as well as forfeited profits. For example, Telia, a Swedish telecommunications provider whose shares are traded on Nasdaq, recently agreed to pay nearly a billion dollars ($965 million) in a settlement to resolve FCPA violations that consisted of using bribery to win business in Uzbekistan.

The potential effect of laws such as the FCPA that impose ethical duties on employees and the companies they work for is often debated. Although some believe the FCPA disadvantages U.S. firms competing in foreign markets, others say it is the backbone of an ethical free enterprise system. The argument against strong enforcement of the FCPA has some merit according to managers in the field, and there is a general sense that illegal or unethical conduct is sometimes necessary for success. An attorney for energy-related company Cinergy summed up the feelings of many executives: “Shame on the Justice Department’s myopic view and inability to understand the realities of the world.”

Some nations consider business bribery to be culturally acceptable and turn a blind eye to such activities.

The argument in favor of FCPA enforcement has its supporters as well, who assert that the law not only covers the activities of U.S. companies but also levels the playing field because of its broad jurisdiction over foreign enterprises and their officials. The fact is that since the United States passed the FCPA, other nations have followed suit. The 1997 Organization for Economic Cooperation and Development (OECD) Anti-Bribery Convention has been instrumental in getting its signatories (the United Kingdom and most European Union nations) to enact stricter antibribery laws. The United Kingdom adopted the Bribery Act in 2010, Canada adopted the Corruption of Foreign Officials Act of 1999, and European Union nations have done the same. There is also the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which has forty-three signatories, including all thirty-five OECD countries and eight other countries.

Companies and employees engaging in transactions in foreign markets face an increased level of regulatory scrutiny and are well served if they put ethics policies in place and enforce them. Companies must train employees at all levels to follow compliance guidelines and rules, rather than engaging in illegal conduct such as “under the table” and “off the books” payments ((Figure)).

“Under the table” and “off the books” are terms applied to payments that are really bribes. (credit: modification of “Graft for Everyone!” by Chris Potter/Flickr, CC BY 2.0)


This image shows a stack of 100 dollar bills half in a clasp envelope.

Ethical Leadership

Of course, bribery is just one of many ethical dilemmas an employee might face in the workplace. Not all such dilemmas are governed by the clear-cut rules generally laid out for illegal acts such as bribery. Employees may find themselves being asked to do something that is legal but not considered ethical. For example, an employee might receive confidential proprietary knowledge about another firm that would give his or her firm an unfair competitive advantage. Should the employee act on this information?

Should You Act on Information If You Have Doubts?

Assume you are a partner in a successful computer consulting firm bidding for a contract with a large insurance company. Your chief rival is a firm that has usually offered services and prices similar to yours. However, from a new employee who used to work for that firm, you learn that it is unveiling a new competitive price structure and accelerated delivery dates, which will undercut the terms you had been prepared to offer the insurance company. Assume you have verified that the new employee is not in violation of any non-compete or nondisclosure agreement and therefore the information was not given to you illegally.

Critical Thinking

Would you change prices and delivery dates to beat your rival? Or would you inform both your rival and potential customer of what you have learned? Why?

Most companies say they want all employees to obey the law and make ethical decisions. But employees typically should not be expected to make ethical decisions based just on gut instinct; they need guidance, training, and leadership to help them navigate the maze of grey areas that present themselves daily in business. This guidance can be provided by the company through standard setting and the development of ethical codes of conduct and policies. Senior managers modeling ethical behavior and so leading by direct example also provide significant direction.

Summary

Legal and cultural differences may allow bribes in other countries, but bribery and insider trading (which allows someone with private information about securities to profit from that knowledge at the public’s expense) are illegal in the United States, as well as unethical. A clear gift policy should be in place to help employees understand when it is acceptable to accept a gift from another employee or an outsider (such as a vendor), and to distinguish gifts from bribes.

Assessment Questions

The buying or selling of stocks, bonds, or other investments based on nonpublic information that is likely to favorably affect the price of the security being traded is which of the following?

  1. insider trading
  2. bribery
  3. illegal transaction
  4. manipulation

A

A payment in some form (cash or noncash) for an act that runs counter to the legal or ethical culture of the work environment is called ________.

  1. insider trading
  2. bribery
  3. illegal transaction
  4. manipulation

B

True or false? Because legal and cultural differences allow bribes in some other countries, U.S. firms and their employees are permitted to pay them.

False. Despite legal and cultural differences that may allow bribes in other countries, U.S. firms and their employees are prohibited from paying them.

Bribery generally injures individuals and which other entities?

In addition to individuals, bribery injures competitors, the government, and the free-market system as a whole.

List the factors that help establish the ethics (and legality) of gift giving and receiving.

Factors that help establish the ethics and legality of gift giving include the value of the gift, its purpose, the circumstances under which it is given, the position of the person receiving it, company policy, and the law.

Endnotes

1SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833 (2d Cir. 1968).
2Andrew Beattie, “Top 4 Most Scandalous Insider Trading Debacles,” Investopedia, August 22, 2017. https://www.investopedia.com/articles/stocks/09/insider-trading.asp#ixzz56LjMgfhQ.
3For information on rules on gifts in the federal government, see: Code of Federal Regulations, 5 CFR 2635 201–205 and 301–304, 81 FR 48687 (August 2016).
4Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1, et seq. (1977).
5“SEC Enforcement Actions: FCPA Cases,” U.S. Securities and Exchange Commission. https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml (accessed April 23, 2018).
6“SEC Enforcement Actions: FCPA Cases,” U.S. Securities and Exchange Commission. https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml (accessed April 23, 2018).
7Stan Abrams, “The ‘FCPA Is Bad for Business’ Argument and the Reality of China FDI,” Business Insider, August 3, 2012. http://www.businessinsider.com/the-fcpa-is-bad-for-business-argument-and-the-reality-of-china-fdi-2012-8.

Glossary

bribe
a payment in some form (cash or noncash) for an act that runs counter to the legal and ethical culture of the work environment
Foreign Corrupt Practices Act
an amendment to the Securities and Exchange Act of 1934; its main purpose is to make it illegal for companies and their managers to influence or bribe foreign officials with monetary payments or rewards of any kind in an attempt to get or keep business opportunities outside the United States
insider trading
the buying or selling of stocks, bonds, or other investments based on nonpublic information that is likely to favorably affect the price of the security being traded

Criticism of the Company and Whistleblowing

36

Learning Objectives

By the end of this section, you will be able to:

  • Outline the rules and laws that govern employees’ criticism of the employer
  • Identify situations in which an employee becomes a whistleblower

This chapter has explained the many responsibilities employees owe their employers. But workers are not robots. They have minds of their own and the freedom to criticize their bosses and firms, even if managers and companies do not always welcome such criticism. What kind of criticism is fair and ethical, what is legal, and how should a whistleblowing employee be treated?

Limiting Pay Secrecy

For decades, most U.S. companies enforced pay secrecy, a policy that prohibits employees from disclosing or discussing salaries among themselves. The reason was obvious: Companies did not want to be scrutinized for their salary decisions. They knew that if workers were aware of what each was paid, they would question the inequities that pay secrecy kept hidden from them.

Recently, the situation has begun to change. Ten states have enacted new laws banning employers from imposing pay secrecy rules: California, Colorado, Illinois, Louisiana, Maine, Michigan, Minnesota, New Hampshire, New Jersey, and Vermont.

The real game changer came in 2012, when multiple decisions by the National Labor Relations Board (NLRB) and various federal courts made it clear that most pay secrecy policies are unenforceable and violate federal labor law (National Labor Relations Act, 29 U.S.C. § 157-158).

Generally speaking, labor law lends employees the right to engage in collective activities, including that of discussing with each other the specifics of their individual employment arrangements, which includes how much they are paid. Moreover, the applicable sections of the 1935 National Labor Relations Act (NLRA) apply to union and non-union employees, so there is no exception made for companies whose employees are non-unionized, meaning the law protects all workers. In 2014, President Barack Obama issued an executive order banning companies that engaged in federal contracting from prohibiting such salary discussions.

Opening up the discussion of pay acknowledges the growing desire of employees to be well informed and to have the freedom to question or criticize their company. If employees cannot talk about something at work because they think it will make their boss angry, where do they go instead? Social media can be a likely answer. Protections generally extend to salary discussions on Facebook or Twitter or Instagram; Section 7 of the NRLA protects two or more employees who act together or discuss improving their terms and conditions of employment in person or online, just as it does in other settings.

Speaking Out on Social Media

Does the First Amendment protect employees at work who criticize their boss or their company? Generally, no. That answer may surprise those who believe that the First Amendment protects all speech. It does not. The Bill of Rights was created to protect citizens from an overreaching government, not from their employer. The First Amendment reads as follows:

“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

The key words are “Congress shall make no law,” meaning the content of speech is something the government and politicians cannot control with laws or policies. However, this right of free speech is generally not applicable to the private sector workplace and does not cover criticism of your employer.

Does that mean an employee can be fired for criticizing the company or boss? Yes, under most circumstances. Therefore, if someone posts a message on social media that says, “My boss is a jerk” or “My company is a terrible place to work,” the likelihood is that the person can be fired without any recourse, assuming he or she is an employee at will (see the discussion of at-will employment earlier in this chapter). Unless the act of firing constitutes a violation under federal law, such as Title VII of the Civil Rights Act of 1964, the speech is not protected speech, and thus the speaker (the employee) is not protected.

At some point, all of us may get angry with our companies or supervisors, but we still have a duty to keep our disputes in-house and not make public any situations we are attempting to resolve internally. Employers typically are prohibited from discussing human resource matters relating to any specific employees. Employees, too, should keep complaints confidential unless and until crimes are charged or civil suits are filed.

Adrian Duane and IXL Learning

Adrian Duane had worked for IXL, a Silicon Valley educational technology company,

for about a year when he got into a dispute with his supervisor over Duane’s ability to work flexible hours after he returned from medical leave following transgender surgery.

Duane posted a critical comment on Glassdoor.com after he said his supervisor refused to accommodate a scheduling request. Duane’s critique said, in part: “If you’re not a family-oriented white or Asian straight or mainstream gay person with 1.7 kids who really likes softball—then you’re likely to find yourself on the outside. . . . Most management do not know what the word ‘discrimination’ means, nor do they seem to think it matters.”

According to court documents, Paul Mishkin, IXL’s CEO, confronted Duane with a printout of the Glassdoor review during a meeting about his complaints, at which time IXL terminated Duane. IXL claimed the derogatory post showed “poor judgment and ethical values.” Security had already cleared out Duane’s desk and boxed his personal effects, and he was escorted from the premises. According to IXL, the company had granted Duane’s requests for time off or modified work schedules and welcomes all individuals equally regardless of gender identity.

The NLRB heard Duane’s case. Judge Gerald M. Etchingham said he did not believe the post was part of a concerted or group action among Duane’s fellow employees at the company, and therefore it was not protected under the NLRA, because it was not an attempt to improve collective terms and conditions of employment. Furthermore, Etchingham said Duane’s post was more like “a tantrum” and “childish ridicule” of his employer rather than speech protected under Section 7 of the NLRA. In other words, this was not an attempt to stimulate discussion but rather an anonymous one-way (and one-time) post. “Here, Duane’s posting on Glassdoor.com was not a social media posting like Facebook or Twitter. Instead, Glassdoor.com is a website used by respondent and prospective employees as a recruiting tool to recruit prospective employees.”

The NLRB decision is an interesting step in the development of the law as the NLRB tries to apply the NLRA’s protections to employee use of social media. Duane has a pending Equal Employment Opportunity Commission lawsuit alleging employment discrimination under Title VII of the Civil Rights Act of 1964.

Critical Thinking

  • What ethical and legal obligations do employees have to refrain from badmouthing their employers in a fit of pique, especially on the firm’s own website?
  • Should management allow employees to criticize the company without fear of retaliation? Could management benefit from allowing such criticism? Why or why not?

The rules related to social media are evolving, but applicable laws do not generally distinguish between sites or locations in which someone might criticize an employer, so criticism of the boss remains largely unprotected speech. As discussed earlier, employees can go online and post information about wages, hours, and working conditions, and that speech is protected by federal statute. So, although some general complaints against employers are not protected under the First Amendment, they may be protected under the NLRA (because arguably they may be related to terms and conditions of employment). However, most courts agree that statements personally critical of the boss or the company on a basis other than wages and working conditions are not protected. Obviously, there is no protection when employees post false or misleading information on social media in an attempt to harm the company’s reputation or that of management.

Whistleblowing: Risks and Rewards

The act of whistleblowing—going to an official government agency and disclosing an employer’s violation of the law—is different from everyday criticism. In fact, whistleblowing is largely viewed as a public service because it helps society reduce bad workplace behavior. Being a whistleblower is not easy, however, and someone inclined to act as one should expect many hurdles. If a whistleblower’s identity becomes known, his or her revelations may amount to career suicide. Even if they keep their job, whistleblowers often are not promoted, and they may face resentment not only from management but also from rank-and-file workers who fear the loss of their own jobs. Whistleblowers may also be blacklisted, making it difficult for them to get a job at a different firm, and all as a result of doing what is ethical.

Blowing the whistle on your employer is thus a big decision with significant ramifications. However, most employees do not want to cover up unethical or illegal conduct, nor should they. When should employees decide to blow the whistle on their boss or company? Ethicists say it should be done with an appropriate motive—to get the company to comply with the law or to protect potential victims—and not to get revenge on a boss at whom you are angry. Of course, even if an employee has a personal revenge motive, if the company actively is breaking the law, it is still important that the wrongdoing be reported. In any case, knowing when and how to blow the whistle is a challenge for an employee wanting to do the right thing.

The employee should usually try internal reporting channels first, to disclose the problem to management before going public. Sometimes workers mistakenly identify something as wrongdoing that was not wrongdoing after all. Internal reporting gives management a chance to start an investigation and attempt to rectify the situation. The employee who goes to the government should also have some kind of hard evidence that wrongful actions have occurred; the violation should be serious, and blowing the whistle should have some likelihood of stopping the wrongful act.

Under many federal laws, an employer cannot retaliate by firing, demoting, or taking any other adverse action against workers who report injuries, concerns, or other protected activity. One of the first laws with a specific whistleblower protection provision was the Occupational Safety and Health Act of 1970. Since passage of that law, Congress has expanded whistleblower authority to protect workers who report violations of more than twenty different federal laws across various topics. (There is no all-purpose whistleblower protection; it must be granted by individual statutes.)

A sample of the specific laws under which whistleblowing employees are protected can be found in the environmental area, where it is in the public interest for employees to report violations of the law to the authorities, which, in turn, helps the average citizen concerned about clean air and water. The Clean Air Act protects any employee reporting air emission violations from area, stationary, and mobile sources from any retaliation for such reporting. The Water Pollution Control Act similarly protects from retaliation any employee who reports alleged violations relating to discharge of pollutants into water.

Without the help of employees who are “on the ground” and see the violations occur, it could be difficult for government regulators to always find the source of pollution. Even when whistleblowers are not acting completely altruistically, their revelations may still be true and worthy of being brought to the public’s attention. Thus, in such situations, the responsible employee becomes a steward of the public interest, and we all should want whistleblowers to come forward. Yet not all whistleblowers are white knights, and not all their firms are evil dragons worthy of being slain.

Blowing the whistle may bring the employee more than just intrinsic ethical rewards; it may also result in cash. The most lucrative law under which employees can blow the whistle is the False Claims Act (FCA), 31 U.S.C. §§ 3729–3733. This legislation was enacted in 1863, during the American Civil War, because Congress was worried that suppliers of goods to the Union Army might cheat the government. The FCA has been amended many times since then, and today it serves as a leading example of a statutory law that remains important after more than 150 years. The FCA provides that any person who knowingly submits false claims to the government must pay a civil penalty for each false claim, plus triple the amount of the government’s damages. The amount of this basic civil penalty is regularly adjusted by the cost of living, and the current penalty range is from $5500 to $11,000.

More importantly for our discussion, the qui tam provision of the law allows private persons (called relators) to file lawsuits for violations of the FCA on behalf of the government and to receive part of any penalty imposed. The person bringing the action is a type of a whistleblower, but one who initiates legal action on his or her own rather than simply reporting it to a government agency. If the government believes it is a worthwhile case and intervenes in the lawsuit, then the relator (whistleblower) is entitled to receive between 15 and 25 percent of the amount the government recovers. If the government thinks winning is a long shot and declines to intervene in the lawsuit, the relator’s share increases to 25 to 30 percent.

A few whistleblowers have become rich (and famous, thanks to an ABC News story), with awards ranging in the neighborhood of $100 million.

In 2012, a single whistleblower, Bradley Birkenfeld, a former UBS employee, was awarded $104 million by the Internal Revenue Service (IRS), making him the most highly rewarded whistleblower in history. Birkenfeld also spent time in prison for participating in the tax fraud he reported. In 2009, ten former Pfizer employees were awarded $102 million for exposing an illegal promotion of prescription medications. John Kopchinski, the original whistleblower and one of the ten, received $50 million. In another case involving the health care company HCA, two employees who blew the whistle on Medicare fraud ended up receiving a combined total of $100 million.

It is not just the size of the reward that should get your attention but also the amount of money these employees saved taxpayers and/or shareholders. They turned in companies that were cheating the Centers for Medicare and Medicaid Services (affecting taxpayers), the IRS (affecting government revenues), and private health insurance (affecting premiums). The public saved far more than the reward paid to the whistleblowers.

Incredibly high rewards such as the aforementioned are somewhat unusual, but according to National Whistleblower Center director Stephen Kohn, “Birkenfeld’s and Eckard’s rewards act like advertisements for the U.S. government’s whistleblower programs, which make hundreds of rewards every year.”

The FCA is one of four laws under which whistleblowers can receive a reward; the others are administered by the IRS, the SEC, and the Commodity Futures Trading Commission. Most whistleblowers do not get paid until the lawsuit and all appeals have concluded and the full amount of any monetary penalty has been paid to the government. Many complex cases of business fraud can go on for several years before a verdict is rendered and appealed (or a settlement is reached). An employee whose identity has been disclosed and who has been unofficially blacklisted may not see any reward money for several years.

Sherron Watkins and Enron

Enron is one of the most infamous examples of corporate fraud in U.S. history. The scandal that destroyed the company resulted in approximately $60 billion in lost shareholder value. Sherron Watkins, an officer of the company, discovered the fraud and first went to her boss and mentor, founder and chairperson Ken Lay, to report the suspected accounting and financial irregularities. She was ignored more than once and eventually went to the press with her story. Because she did not go directly to the SEC, Watkins received no whistleblower protection. (The Sarbanes-Oxley Act was not passed until after the Enron scandal. In fact, it was Watkins’s circumstance and Enron’s misdeeds that helped convince Congress to pass the law.

)

Now a respected national speaker on the topic of ethics and employees’ responsibility, Watkins talks about how an employee should handle such situations. “When you’re faced with something that really matters, if you’re silent, you’re starting on the wrong path . . . go against the crowd if need be,” she said in a speech to the National Character and Leadership Symposium, (a seminar to instill leadership and moral qualities in young men and women).

Watkins talks openly about the risk of being an honest employee, something employees should consider when evaluating what they owe their company, the public, and themselves. “I will never have a job in corporate America again. The minute you speak truth to power and you’re not heard, your career is never the same again.”

Enron’s corporate leaders dealt with the looming crisis by a combination of blaming others and leaving their employees to fend for themselves. According to Watkins, “Within two weeks of me finding this fraud, [Enron president] Jeff Skilling quit. We did feel like we were on a battleship, and things were not going well, and the captain had just taken a helicopter home. The fall of 2001 was just the bleakest time in my life, because everything I thought was secure was no longer secure.”

Critical Thinking

  • Did Watkins owe an ethical duty to Enron, to its shareholders, or to the investing public to go public with her suspicions? Explain your answer.
  • How big a price is it fair to ask a whistleblowing employee to pay?

Sometimes employees, including managers, face an ethical dilemma that they seek to address from within rather than becoming a whistleblower. The risk is that they may be ignored or that their speaking up will be held against them. However, companies should want and expect employees to step forward and report wrongdoing to their superiors, and they should support that decision, not punish it. Sallie Krawcheck, a financial industry executive, was not a whistleblower in either the classical or the legal sense. She went to her boss with her discovery of wrongdoing at work, which means she had no legal protection under whistleblower statutes. Read her story in the following box.

Sallie Krawcheck and Merrill Lynch

Shortly after Sallie Krawcheck took over as chief of Merrill Lynch’s wealth management division at Bank of America, she discovered that a mutual fund called the Stable Value Fund, a financial product Merrill had sold to customers as an investment for their 401k plans, was not as stable as its name implied. The team at Merrill had made a mistake by managing the fund in a way that assumed a higher risk than was acceptable to its investors, and the fund ended up losing much of its value. Unfortunately, because it was supposed to be a low-risk fund, the people who had invested in it, and who would suffer most from Merrill’s mistakes, were earners of relatively modest incomes, including Walmart employees, who made up the largest group.

According to Krawcheck, she had two options. Option one was to say tough luck to the Stable Value Fund’s investors, including the Walmart employees, explaining that all investments carry some degree of risk. Option two was to bail out the investors by pouring money into the fund to increase its value. Krawcheck had already been burned once by trying to be ethical. She had been head of CitiGroup’s wealth management division (Smith Barney); in that capacity, she had made a decision to reimburse clients for some of their losses she felt were due to company mistakes. Rather than supporting her decision, however, CitiGroup terminated her, in large part for making the ethical decision rather than the profitable one. Now she was in the same predicament with a new company. Should Krawcheck risk her job again by choosing the ethical act, or should she make a purely financial decision and tell the 401k investors they would have to take the loss?

Krawcheck began talking to people inside and outside the company to see what they thought. Most told her to just keep her head down and do nothing. One “industry titan” told her there was nothing to be done, that everyone knows stable-value funds are not really stable. Unconvinced, Krawcheck took the problem to Bank of America’s CEO. He agreed to back her up and put company money into the depleted stable-value funds to prop them up.

Krawcheck opted to be honest and ethical by helping the small investors and felt good about it. “I thought, ethical business was good business,” she says. “It came down to my sense of purpose as well as my sense of my industry’s purpose; it wasn’t about some abstract ethical theorem . . . the answer wasn’t that I got into the business simply to make a lot of money. It was because it was a business that I knew could have a positive impact on clients’ lives.”

But the story does not really have a happy ending. Krawcheck writes that she thought at the time she had done the right thing and still had her job, a win/win outcome of a very tough ethical dilemma. However, speaking out did come at a cost. Krawcheck lost some important and powerful allies within the company, and although she did not lose her job at that time, she writes “the political damage was done; when that CEO retired, the clock began ticking down on my time at Bank of America, and before long I was ‘reorganized out’ of that role.”

Critical Thinking

  • Could you do what Sallie Krawcheck did and risk being fired a second time? Why or why not?
  • Krawcheck went on to start her own firm, Ellevest, specializing in investments for female clients. Why do you think she chose this route rather than moving to another large Wall Street firm?
Underestimating and Overcharging

Suppose you are a supervising engineer at a small defense contractor of about one hundred employees. Your firm had barely been breaking even, but the recent award of a federal contract has dramatically turned the situation around. Midway through the new project, though, you realize that the principal partners in your firm have been overcharging the Department of Defense for services provided and components purchased. (You discovered this accidentally, and it would be difficult for anyone else to find it out.) You take this information to one of the principals, whom you know well and respect. He tells you apologetically that the overcharges became necessary when the firm seriously underestimated total project costs in its bid on the contract. If the overcharges do not continue, the firm will again be perilously close to bankruptcy.

You know the firm has long struggled to remain financially viable. Furthermore, you have great confidence in the quality of the work your team is providing the government. Finally, you feel a special kinship with nearly all the employees and particularly with the founding partners, so you are loath to take your evidence to the government.

Critical Thinking

What are you going to do? Will you swallow your discomfort because making the overcharges public may very well put your job and those of one hundred friends and colleagues at risk? Would the overall quality of the firm’s work on the contract persuade you it is worth what it is charging? Or would you decide that fraud is never permissible, even if its disclosure comes at the cost of the survivability of the firm and the friendships you have within it? Explain your reasoning.

Summary

Employees should understand that there are limits to what can be posted about their employer online, just as there are limits to what they can say in the workplace, and that the First Amendment generally does not protect such speech. Whistleblowers are protected, and sometimes rewarded, for their willingness to come forward, but they can still face a hostile environment in some situations. Employees should not use whistleblowing as an attempt to get back at a boss or employer they do not like; rather, they should use it as a means to stop serious wrongdoing.

Assessment Questions

Going to an official government agency and disclosing an employer’s violation of the law is ________.

  1. insider trading
  2. whistleblowing
  3. free speech expression
  4. tattle telling

B

True or false? Most U.S. companies prohibit employees from disclosing or discussing salaries among themselves.

False. Generally speaking, labor law gives workers the right to discuss among themselves the specifics of their individual employment agreements, including matters of salary.

True or false? The First Amendment does not protect employees at work who criticize their boss or their company.

True

What kind of information can employees post online under the protection of federal statute?

Employees can post information online about wages, hours, and working conditions, and that speech is protected by federal statute.

What is typically not an appropriate motive for reporting the employer to authorities, unless the company is breaking the law?

Employees should not seek revenge on a boss with whom they are angry. Of course, even if an employee has a personal revenge motive, if the company is actively breaking the law, it is still important that the wrongdoing be reported.

What should the employees usually try first before going public with an accusation that their company may be breaking the law?

The employee should usually try internal reporting channels first, to disclose the problem to management before going public.

Endnotes

1Women’s Bureau, “Pay Secrecy Fact Sheet,” U.S. Department of Labor, Women’s Bureau, August 2014. https://www.dol.gov/wb/media/pay_secrecy.pdf.
2Kurt Stanberry and Forrest Aven, “Employer Restrictions on Salary Discussions among Employees: The Changing Landscape,” World at Work Journal 23, no. 1 (2014).
3Labor Law News Blog, “Can Employees Discuss Pay and Salaries?” GovDocs, April 23, 2014. https://www.govdocs.com/can-employees-discuss-pay-salaries/.
4Erin Mulvaney, “An Employee Spoke Out on Glassdoor. Now the EEOC Is Suing His Company,” BenefitsPRO, August 6, 2017. http://www.benefitspro.com/2017/06/08/an-employee-spoke-out-on-glassdoor-now-the-eeoc-is?page_all=1&slreturn=1517773094.
5Erin Mulvaney, “An Employee Spoke Out on Glassdoor. Now the EEOC Is Suing His Company,” BenefitsPRO, August 6, 2017. http://www.benefitspro.com/2017/06/08/an-employee-spoke-out-on-glassdoor-now-the-eeoc-is?page_all=1&slreturn=1517773094.
6Erin Mulvaney, “An Employee Spoke Out on Glassdoor. Now the EEOC Is Suing His Company,” BenefitsPRO, August 6, 2017. http://www.benefitspro.com/2017/06/08/an-employee-spoke-out-on-glassdoor-now-the-eeoc-is?page_all=1&slreturn=1517773094.
7Alan Farnham, “7 Richest Snitches: Time to Rat Out Your Boss?” ABC News, September 17, 2012. http://abcnews.go.com/Business/biggest-whistleblower-rewards/story?id=17222028.
8Alan Farnham, “7 Richest Snitches: Time to Rat Out Your Boss?” ABC News, September 17, 2012. http://abcnews.go.com/Business/biggest-whistleblower-rewards/story?id=17222028.
9Shaheen Pasha, “Enron’s Whistle Blower Details Sinking Ship,” CNN Money, March 16, 2006. http://money.cnn.com/2006/03/15/news/newsmakers/enron/.
10Sallie Krawcheck, “When to Risk Your Career for Ethical Reasons,” Fast Company, January 1, 2017. https://www.fastcompany.com/3067239/when-to-risk-your-career-for-ethical-reasons.
11Sallie Krawcheck, “When to Risk Your Career for Ethical Reasons,” Fast Company, January 1, 2017. https://www.fastcompany.com/3067239/when-to-risk-your-career-for-ethical-reasons.

Glossary

pay secrecy
a policy of some companies to prevent employees from discussing their salary with other workers
qui tam provision
the section of the False Claims Act of 1863 that allows private persons to file lawsuits for violations of the act on behalf of the government as well as for themselves and so receive part of any penalty imposed
whistleblowing
the act of reporting an employer to a governmental entity for violating the law

Recognizing and Respecting the Rights of All

VIII

Introduction

37

The globalization of the economy highlights one of the advantages of a diverse workforce that can interact effectively with customers all over the world. (credit outside, clockwise from top left: modification of “GenoPheno” by Cory Zanker/Flickr, CC BY 4.0; credit: modification of “Look at that!” by Gabriel Rocha/Flickr, CC BY 2.0; credit: modification of “Eyes” by “Dboybaker”/Flickr, CC BY 2.0; credit: modification of “doin’ work” by Nick Allen/Flickr, CC BY 2.0; credit: modification of “Man Young Face” by “gentlebeatz”/Pixabay, CC 0; credit: modification of “Training” by Cory Zanker/Flickr, CC BY 4.0; credit: modification of “los bolleros” by Agustín Ruiz/Flickr, CC BY 2.0; credit: modification of “Pithorgarh to Dharchulha on Nepal Border in Uttarakhand India (158)” by “rajkumar1220”/Flickr, CC BY 2.0; credit: modification of “mother and child” by Peter Shanks/Flickr, CC BY 2.0; credit: modification of “Afghan women at a textile factory in Kabul” by Andrea Salazar/Wikimedia Commons, Public Domain; credit: modification of “Open kitchen” by Dennis Wong/Flickr, CC BY 2.0; credit middle left: modification of “Begging for the photographer” by Pedro Ribeiro Simões/Flickr, CC BY 2.0; credit middle right: modification of “Calling it a day” by Staffan Scherz/Flickr, CC BY 2.0)


This is a collage of different photos showing a diverse range of people. There is a transparent outline of a map of the world over top of these photos. Photos around the outside, clockwise from the top left: A person is working outside on a laptop. A group of four people are sitting on a bench. This photo is a close up of a person with darker skin tone’s eyes. A person wearing a construction hat and vest is using a jackhammer. This photo is a close up of a person with medium skin tone’s eyes. People at a table are all listening to someone writing on a board during a meeting. Two people in chef outfits are working together. This photo is a close up of a person with lighter skin tone’s eyes. A woman is holding a baby. A room is filled with sewing machines in a row with people working at each machine. A group of five people in chef outfits are working together. The center right photo shows a person with a bicycle. The center left photo shows two people sitting against a concrete wall.

Effective business managers in the twenty-first century need to be aware of a broad array of ethical choices they can make that affect their employees, their customers, and society as a whole. What these decisions have in common is the need for managers to recognize and respect the rights of all.

Actively supporting human diversity at work, for instance, benefits the business organization as well as society on a broader level ((Figure)). Thus, ethical managers recognize and accommodate the special needs of some employees, show respect for workers’ different faiths, appreciate and accept their differing sexual orientations and identification, and ensure pay equity for all. Ethical managers are also tuned in to public sentiment, such as calls by stakeholders to respect the rights of animals, and they monitor trends in these social attitudes, especially on social media.

How would you, as a manager, ensure a workplace that values inclusion and diversity? How would you respond to employees who resisted such a workplace? How would you approach broader social concerns such as income inequality or animal rights? This chapter introduces the potential impacts on business of some of the most pressing social themes of our time, and it discusses ways managers can respect the rights of all and improve business results by choosing an ethical path.

Diversity and Inclusion in the Workforce

38

Learning Objectives

By the end of this section, you will be able to:

  • Explain the benefits of employee diversity in the workplace
  • Discuss the challenges presented by workplace diversity

Diversity is not simply a box to be checked; rather, it is an approach to business that unites ethical management and high performance. Business leaders in the global economy recognize the benefits of a diverse workforce and see it as an organizational strength, not as a mere slogan or a form of regulatory compliance with the law. They recognize that diversity can enhance performance and drive innovation; conversely, adhering to the traditional business practices of the past can cost them talented employees and loyal customers.

A study by global management consulting firm McKinsey & Company indicates that businesses with gender and ethnic diversity outperform others. According to Mike Dillon, chief diversity and inclusion officer for PwC in San Francisco, “attracting, retaining and developing a diverse group of professionals stirs innovation and drives growth.”

Living this goal means not only recruiting, hiring, and training talent from a wide demographic spectrum but also including all employees in every aspect of the organization.

Workplace Diversity

The twenty-first century workplace features much greater diversity than was common even a couple of generations ago. Individuals who might once have faced employment challenges because of religious beliefs, ability differences, or sexual orientation now regularly join their peers in interview pools and on the job. Each may bring a new outlook and different information to the table; employees can no longer take for granted that their coworkers think the same way they do. This pushes them to question their own assumptions, expand their understanding, and appreciate alternate viewpoints. The result is more creative ideas, approaches, and solutions. Thus, diversity may also enhance corporate decision-making.

Communicating with those who differ from us may require us to make an extra effort and even change our viewpoint, but it leads to better collaboration and more favorable outcomes overall, according to David Rock, director of the Neuro-Leadership Institute in New York City, who says diverse coworkers “challenge their own and others’ thinking.”

According to the Society for Human Resource Management (SHRM), organizational diversity now includes more than just racial, gender, and religious differences. It also encompasses different thinking styles and personality types, as well as other factors such as physical and cognitive abilities and sexual orientation, all of which influence the way people perceive the world. “Finding the right mix of individuals to work on teams, and creating the conditions in which they can excel, are key business goals for today’s leaders, given that collaboration has become a paradigm of the twenty-first century workplace,” according to an SHRM article.

Attracting workers who are not all alike is an important first step in the process of achieving greater diversity. However, managers cannot stop there. Their goals must also encompass inclusion, or the engagement of all employees in the corporate culture. “The far bigger challenge is how people interact with each other once they’re on the job,” says Howard J. Ross, founder and chief learning officer at Cook Ross, a consulting firm specializing in diversity. “Diversity is being invited to the party; inclusion is being asked to dance. Diversity is about the ingredients, the mix of people and perspectives. Inclusion is about the container—the place that allows employees to feel they belong, to feel both accepted and different.”

Workplace diversity is not a new policy idea; its origins date back to at least the passage of the Civil Rights Act of 1964 (CRA) or before. Census figures show that women made up less than 29 percent of the civilian workforce when Congress passed Title VII of the CRA prohibiting workplace discrimination. After passage of the law, gender diversity in the workplace expanded significantly. According to the U.S. Bureau of Labor Statistics (BLS), the percentage of women in the labor force increased from 48 percent in 1977 to a peak of 60 percent in 1999. Over the last five years, the percentage has held relatively steady at 57 percent. Over the past forty years, the total number of women in the labor force has risen from 41 million in 1977 to 71 million in 2017.

The BLS projects that the number of women in the U.S. labor force will reach 92 million in 2050 (an increase that far outstrips population growth).

The statistical data show a similar trend for African American, Asian American, and Hispanic workers ((Figure)). Just before passage of the CRA in 1964, the percentages of minorities in the official on-the-books workforce were relatively small compared with their representation in the total population. In 1966, Asians accounted for just 0.5 percent of private-sector employment, with Hispanics at 2.5 percent and African Americans at 8.2 percent.

However, Hispanic employment numbers have significantly increased since the CRA became law; they are expected to more than double from 15 percent in 2010 to 30 percent of the labor force in 2050. Similarly, Asian Americans are projected to increase their share from 5 to 8 percent between 2010 and 2050.

There is a distinct contrast in workforce demographics between 2010 and projected numbers for 2050. (credit: attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This graphic shows four pie charts. Two are titled “Workforce Makeup by Race, 2010 to 2050” and two are titled “Workforce Makeup by Ethnicity, 2010 to 2050.” For workforce makeup by race, the left chart is for 2010 and is broken down into 81 percent white, 12 percent black, 5 percent Asian, and 2 percent all other. The right chart is for projected 2050 and is broken down into 75 percent white, 12 percent black, 8 percent Asian, and 5 percent all other. For workforce makeup by ethnicity, the left chart is for 2010 and is broken down into 85 percent non-Hispanic and 15 percent Hispanic. The right chart is for projected 2050 and is broken down into 70 percent non-Hispanic and 30 percent Hispanic.

Much more progress remains to be made, however. For example, many people think of the technology sector as the workplace of open-minded millennials. Yet Google, as one example of a large and successful company, revealed in its latest diversity statistics that its progress toward a more inclusive workforce may be steady but it is very slow. Men still account for the great majority of employees at the corporation; only about 30 percent are women, and women fill fewer than 20 percent of Google’s technical roles ((Figure)). The company has shown a similar lack of gender diversity in leadership roles, where women hold fewer than 25 percent of positions. Despite modest progress, an ocean-sized gap remains to be narrowed. When it comes to ethnicity, approximately 56 percent of Google employees are white. About 35 percent are Asian, 3.5 percent are Latino, and 2.4 percent are black, and of the company’s management and leadership roles, 68 percent are held by whites.

Google is emblematic of the technology sector, and this graphic shows just how far from equality and diversity the industry remains. (credit: attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This graphic shows three pie charts and is titled “Google Workforce by Gender.” The chart on the left is “Overall” and is broken down into 69 percent men and 31 percent women. The chart in the middle is “Technology” and is broken down into 80 percent men and 20 percent women. The chart on the right is “Leadership” and is broken down into 75 percent men and 25 percent women.

Google is not alone in coming up short on diversity. Recruiting and hiring a diverse workforce has been a challenge for most major technology companies, including Facebook, Apple, and Yahoo (now owned by Verizon); all have reported gender and ethnic shortfalls in their workforces.

The Equal Employment Opportunity Commission (EEOC) has made available 2014 data comparing the participation of women and minorities in the high-technology sector with their participation in U.S. private-sector employment overall, and the results show the technology sector still lags.

Compared with all private-sector industries, the high-technology industry employs a larger share of whites (68.5%), Asian Americans (14%), and men (64%), and a smaller share of African Americans (7.4%), Latinos (8%), and women (36%). Whites also represent a much higher share of those in the executive category (83.3%), whereas other groups hold a significantly lower share, including African Americans (2%), Latinos (3.1%), and Asian Americans (10.6%). In addition, and perhaps not surprisingly, 80 percent of executives are men and only 20 percent are women. This compares negatively with all other private-sector industries, in which 70 percent of executives are men and 30 percent women.

Technology companies are generally not trying to hide the problem. Many have been publicly releasing diversity statistics since 2014, and they have been vocal about their intentions to close diversity gaps. More than thirty technology companies, including Intel, Spotify, Lyft, Airbnb, and Pinterest, each signed a written pledge to increase workforce diversity and inclusion, and Google pledged to spend more than $100 million to address diversity issues.

Diversity and inclusion are positive steps for business organizations, and despite their sometimes slow pace, the majority are moving in the right direction. Diversity strengthens the company’s internal relationships with employees and improves employee morale, as well as its external relationships with customer groups. Communication, a core value of most successful businesses, becomes more effective with a diverse workforce. Performance improves for multiple reasons, not the least of which is that acknowledging diversity and respecting differences is the ethical thing to do.

Adding Value through Diversity

Diversity need not be a financial drag on a company, measured as a cost of compliance with no return on the investment. A recent McKinsey & Company study concluded that companies that adopt diversity policies do well financially, realizing what is sometimes called a diversity dividend. The study results demonstrated a statistically significant relationship of better financial performance from companies with a more diverse leadership team, as indicated in (Figure). Companies in the top 25 percent in terms of gender diversity were 15 percent more likely to post financial returns above their industry median in the United States. Likewise, companies in the top 25 percent of racial and/or ethnic diversity were 35 percent more likely to show returns exceeding their respective industry median.

Companies with gender and ethnic diversity generally outperform those without it. (credit: attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)


This graphic shows two sets of bar graphs titled “Likelihood of Financial Performance above Industry Median by Company Diversity Quartile.” The first set of charts on the left shows “Gender-diverse companies.” The bar on the right shows the first quartile and says 54 on it. The bar on the left shows the fourth quartile and says 47 on it. This section is shorter than the right bar, but above the bar is a section that says plus 15 percent that goes up to the height of the bar on the right. The second set of charts on the right shows “Ethically diverse companies.” The bar on the right shows the first quartile and says 58 on it. The bar on the left shows the fourth quartile and says 43 on it. This section is shorter than the right bar, but above the bar is a section that says plus 35 percent that goes up to the height of the bar on the right.

These results demonstrate a positive correlation between diversity and performance, rebutting any claim that affirmative action and other such programs are social engineering that constitutes a financial drag on earnings. In fact, the results reveal a negative correlation between performance and lack of diversity, with companies in the bottom 25 percent for gender and ethnicity or race proving to be statistically less likely to achieve above-average financial returns than the average companies. Non-diverse companies were not leaders in performance indicators. Positive correlations do not equal causation, of course, and greater gender and ethnic diversity do not automatically translate into profit. Rather, as this chapter shows, they enhance creativity and decision-making, employee satisfaction, an ethical work environment, and customer goodwill, all of which, in turn, improve operations and boost performance.

Diversity is not a concept that matters only for the rank-and-file workforce; it makes a difference at all levels of an organization. The McKinsey & Company study, which examined twenty thousand firms in ninety countries, also found that companies in the top 25 percent for executive and/or board diversity had returns on equity more than 50 percent higher than those companies that ranked in the lowest 25 percent. Companies with a higher percentage of female executives tended to be more profitable.

Achieving equal representation in employment based on demographic data is the ethical thing to do because it represents the essential American ideal of equal opportunity for all. It is a basic assumption of an egalitarian society that all have the same chance without being hindered by immutable characteristics. However, there are also directly relevant business reasons to do it. More diverse companies perform better, as we saw earlier in this chapter, but why? The reasons are intriguing and complex. Among them are that diversity improves a company’s chances of attracting top talent and that considering all points of view may lead to better decision-making. Diversity also improves customer experience and employee satisfaction.

To achieve improved results, companies need to expand their definition of diversity beyond race and gender. For example, differences in age, experience, and country of residence may result in a more refined global mind-set and cultural fluency, which can help companies succeed in international business. A salesperson may know the language of customers or potential customers from a specific region or country, for example, or a customer service representative may understand the norms of another culture. Diverse product-development teams can grasp what a group of customers may want that is not currently being offered.

Resorting to the same approaches repeatedly is not likely to result in breakthrough solutions. Diversity, however, provides usefully divergent perspectives on the business challenges companies face. New ideas help solve old problems—another way diversity makes a positive contribution to the bottom line.

The Challenges of a Diverse Workforce

Diversity is not always an instant success; it can sometimes introduce workplace tensions and lead to significant challenges for a business to address. Some employees simply are slow to come around to a greater appreciation of the value of diversity because they may never have considered this perspective before. Others may be prejudiced and consequently attempt to undermine the success of diversity initiatives in general. In 2017, for example, a senior software engineer’s memo criticizing Google’s diversity initiatives was leaked, creating significant protests on social media and adverse publicity in national news outlets.

The memo asserted “biological causes” and “men’s higher drive for status” to account for women’s unequal representation in Google’s technology departments and leadership.

Google’s response was quick. The engineer was fired, and statements were released emphasizing the company’s commitment to diversity.

Although Google was applauded for its quick response, however, some argued that an employee should be free to express personal opinions without punishment (despite the fact that there is no right of free speech while at work in the private sector).

In the latest development, the fired engineer and a coworker filed a class-action lawsuit against Google on behalf of three specific groups of employees who claim they have been discriminated against by Google: whites, conservatives, and men.

This is not just the standard “reverse discrimination” lawsuit; it goes to the heart of the culture of diversity and one of its greatest challenges for management—the backlash against change.

In February 2018, the National Labor Relations Board ruled that Google’s termination of the engineer did not violate federal labor law

and that Google had discharged the employee only for inappropriate but unprotected conduct or speech that demeaned women and had no relationship to any terms of employment. Although this ruling settles the administrative labor law aspect of the case, it has no effect on the private wrongful termination lawsuit filed by the engineer, which is still proceeding.

Yet other employees are resistant to change in whatever form it takes. As inclusion initiatives and considerations of diversity become more prominent in employment practices, wise leaders should be prepared to fully explain the advantages to the company of greater diversity in the workforce as well as making the appropriate accommodations to support it. Accommodations can take various forms. For example, if you hire more women, should you change the way you run meetings so everyone has a chance to be heard? Have you recognized that women returning to work after childrearing may bring improved skills such as time management or the ability to work well under pressure? If you are hiring more people of different faiths, should you set aside a prayer room? Should you give out tickets to football games as incentives? Or build team spirit with trips to a local bar? Your managers may need to accept that these initiatives may not suit everyone. Adherents of some faiths may abstain from alcohol, and some people prefer cultural events to sports. Many might welcome a menu of perquisites (“perks”) from which to choose, and these will not necessarily be the ones that were valued in the past. Mentoring new and diverse peers can help erase bias and overcome preconceptions about others. However, all levels of a company must be engaged in achieving diversity, and all must work together to overcome resistance.

Companies with Diverse Workforces

Texas Health Resources, a Dallas-area healthcare and hospital company, ranked No. 1 among Fortune’s Best Workplaces for Diversity and No. 2 for Best Workplaces for African Americans.

Texas Health employs a diverse workforce that is about 75 percent female and 40 percent minority. The company goes above and beyond by offering English classes for Hispanic workers and hosting several dozen social and professional events each year to support networking and connections among peers with different backgrounds. It also offers same-sex partner benefits; approximately 3 percent of its workforce identifies as LGBTQ (lesbian, gay, bisexual, transgender, queer or questioning).

Another company receiving recognition is Marriott International, ranked No. 6 among Best Workplaces for Diversity and No. 7 among Best Workplaces for African Americans and for Latinos. African American, Latino, and other ethnic minorities account for about 65 percent of Marriott’s 100,000 employees, and 15 percent of its executives are minorities. Marriott’s president and CEO, Arne Sorenson, is recognized as an advocate for LGBTQ equality in the workplace, published an open letter on LinkedIn expressing his support for diversity and entreating then president-elect Donald Trump to use his position to advocate for inclusiveness. “Everyone, no matter their sexual orientation or identity, gender, race, religion disability or ethnicity should have an equal opportunity to get a job, start a business or be served by a business,” Sorenson wrote. “Use your leadership to minimize divisiveness around these areas by letting people live their lives and by ensuring that they are treated equally in the public square.”

Critical Thinking

Is it possible that Texas Health and Marriott rank highly for diversity because the hospitality and healthcare industries tend to hire more women and minorities in general? Why or why not?

Summary

A diverse workforce yields many positive outcomes for a company. Access to a deep pool of talent, positive customer experiences, and strong performance are all documented positives. Diversity may also bring some initial challenges, and some employees can be reluctant to see its advantages, but committed managers can deal with these obstacles effectively and make diversity a success through inclusion.

Assessment Questions

Diversity and inclusion at all levels of a private-sector company is ________.

  1. mandated by federal law
  2. the approach preferred by many companies
  3. required by state law in thirty states
  4. contrary to the company’s fiduciary duty to stockholders

B

Google ________.

  1. has the most diverse workforce of any major U.S. company
  2. uses a strict quota system in its hiring practices
  3. is similar to other technology companies, most of which lag on diversity
  4. promotes women at higher rates than men

C

True or false? Diversity programs may fail due to resistance from employees within a company.

True

Studies have been conducted on the financial performance of companies with high levels of diversity. Briefly discuss the results of such studies.

Studies indicate that the financial performance of companies with a diverse workforce is above average for their industries. The McKinsey and Company study noted in the chapter found that companies featuring great diversity in their workforces typically enjoyed earnings between 15 and 35 percent greater than their respective US industry medians.

Since the passage of federal laws such as the Civil Rights Act of 1964, the percentage of women in leadership positions has improved but not reached parity with that of men. Briefly discuss the percentage of women in leadership positions in different industries and what might be some of the benefits of improving the representation of women.

The percentage of women in leadership positions remains much lower than for men, generally less than 20 percent of positions. The benefits of greater gender diversity in the workforce include improved internal relationships and employee morale and more effective internal and external communication. Studies have also shown that companies in the top 25 percent for executive and/or board diversity had returns on equity more than 50 percent higher than those companies that ranked in the lowest 25 percent.

Endnotes

1Novid Parsi, “Workplace Diversity and Inclusion Gets Innovative,” Society for Human Resource Management, January 16, 2017. https://www.shrm.org/hr-today/news/hr-magazine/0217/pages/disrupting-diversity-in-the-workplace.aspx.
2Novid Parsi, “Workplace Diversity and Inclusion Gets Innovative,” Society for Human Resource Management, January 16, 2017. https://www.shrm.org/hr-today/news/hr-magazine/0217/pages/disrupting-diversity-in-the-workplace.aspx.
3Novid Parsi, “Workplace Diversity and Inclusion Gets Innovative,” Society for Human Resource Management, January 16, 2017. https://www.shrm.org/hr-today/news/hr-magazine/0217/pages/disrupting-diversity-in-the-workplace.aspx.
4Novid Parsi, “Workplace Diversity and Inclusion Gets Innovative,” Society for Human Resource Management, January 16, 2017. https://www.shrm.org/hr-today/news/hr-magazine/0217/pages/disrupting-diversity-in-the-workplace.aspx.
5“Labor Force Statistics from the Current Population Survey. Household Data Annual Averages. 2. Employment Status of the Civilian Noninstitutional Population 16 Years and Over by Sex, 1977 to date,” U.S. Bureau of Labor Statistics. https://www.bls.gov/cps/cpsaat02.htm (accessed July 22, 2018).
6“Indicators (2013),” U.S. Equal Employment Opportunity Commission. https://www.eeoc.gov/eeoc/statistics/employment/jobpat-eeo1/2013_indicators.cfm (accessed January 10, 2018).
7Google, https://diversity.google/annual-report/# (accessed July 10, 2018).
8“Diversity in High Tech,” U.S. EEOC. https://www.eeoc.gov/eeoc/statistics/reports/hightech/ (accessed January 12, 2018).
9Lisa Eadicicco, “Google’s Diversity Efforts Still Have a Long Way to Go,” Time, July 1, 2016. http://time.com/4391031/google-diversity-statistics-2016/.
10Pubali Neogy, “Diversity in Workplace Can Be a Game Changer,” Yahoo India Finance, June 18, 2018. Neogy states that greater diversity in the workplace fosters “creativity and innovation,” “opens global opportunities” for the firm, “fosters adaptability and better working culture,” and generally “improves companies’ bottom lines.” https://in.finance.yahoo.com/news/diversity-workplace-can-game-changer-heres-183319670.html.
11Vivian Hunt, Dennis Layton, and Sara Prince, “Why Diversity Matters,” McKinsey & Company, January 2015. https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters.
12Marcus Noland, Tyler Moran, and Barbara Kotschwar, “Is Gender Diversity Profitable? Evidence from a Global Survey,” Working Paper 16-3, Peterson Institute for International Economics, February 2016. https://piie.com/publications/working-papers/gender-diversity-profitable-evidence-global-survey.
13Daisuke Wakabayashi, “Contentious Memo Strikes Nerve inside Google and Out,” New York Times, August 8, 2017. https://www.nytimes.com/2017/08/08/technology/google-engineer-fired-gender-memo.html.
14Bill Chappell and Laura Sydell, “Google Reportedly Fires Employee Who Slammed Diversity Efforts,” National Public Radio, August 7, 2017. https://www.npr.org/sections/thetwo-way/2017/08/07/542020041/google-grapples-with-fallout-after-employee-slams-diversity-efforts.
15Sara Ashley O’Brien, “Engineers Sue Google for Allegedly Discriminating against White Men and Conservatives,” CNN/Money, January 8, 2018. http://money.cnn.com/2018/01/08/technology/james-damore-google-lawsuit/index.html.
16Daisuke Wakabayashi, “Google Legally Fired Diversity Memo Author, Labor Agency Says,” New York Times, February 16, 2018. https://www.nytimes.com/2018/02/16/business/google-memo-firing.html.
17Michael Bush and Kim Peters, “How the Best Companies Do Diversity Right,” Fortune, December 5, 2016. http://fortune.com/2016/12/05/diversity-inclusion-workplaces/.
18Michael Bush and Kim Peters, “How the Best Companies Do Diversity Right,” Fortune, December 5, 2016. http://fortune.com/2016/12/05/diversity-inclusion-workplaces/.

Glossary

diversity dividend
the financial benefit of improved performance resulting from a diverse workforce
inclusion
the engagement of all employees in the corporate culture

Accommodating Different Abilities and Faiths

39

Learning Objectives

By the end of this section, you will be able to:

  • Identify workplace accommodations often provided for persons with differing abilities
  • Describe workplace accommodations made for religious reasons

The traditional definition of diversity is broad, encompassing not only race, ethnicity, and gender but also religious beliefs, national origin, and cognitive and physical abilities as well as sexual preference or orientation. This section examines two of these categories, religion and ability, looking at how an ethical manager handles them as part of an overall diversity policy. In both cases, the concept of reasonable accommodation means an employer must try to allow for differences among the workforce.

Protections for People with Disabilities

In the United States, the Americans with Disabilities Act (ADA), passed in 1990, stipulates that a person has a disability if he or she has a physical or mental impairment that reduces participation in “a major life activity,” such as work. An employer may not discriminate in offering employment to an individual who is diagnosed as having such a disability. Furthermore, if employment is offered, the employer is obliged to make reasonable accommodations to enable him or her to carry out normal job tasks. Making reasonable accommodations may include altering the physical workplace so it is readily accessible, restructuring a job, providing or modifying equipment or devices, or offering part-time or modified work schedules. Other accommodations could include providing readers, interpreters, or other necessary forms of assistance such as an assistive animal ((Figure)). The ADA also prohibits discriminating against individuals with disabilities in providing access to government services, public accommodations, transportation, telecommunications, and other essential services.

A person with a service dog can usually perform all the essential function of the job, with some assistance. (credit: “DSC_004” by Aberdeen Proving Ground/Flickr, CC BY 2.0)


This image shows a man sitting in a chair and a dog grabbing keys from a table with its mouth.

Access and accommodation for employees with physical or mental disabilities are good for business because they expand the potential pool of good workers. It is also ethical to have compassion for those who want to work and be contributing members of society. This principle holds for customers as well as employees. Recognizing the need for protection in this area, the federal government has enacted several laws to provide it. The Disability Rights Division of the U.S. Department of Justice lists ten different federal laws protecting people with disabilities, including not only the ADA but also laws such as the Rehabilitation Act, the Air Carrier Access Act, and the Architectural Barriers Act.

A key part of complying with the law is understanding and applying the concept of reasonableness: “An employer is required to provide a reasonable accommodation to a qualified applicant or employee with a disability unless the employer can show that the accommodation would be an undue hardship—that is, that it would require significant difficulty or expense.”

The law does not require an employee to refer to the ADA or to “disability” or “reasonable accommodation” when requesting some type of assistance. Managers need to be able to recognize the variety of ways in which a request for an accommodation is communicated. For example, an employee might not specifically say, “I need a reasonable accommodation for my disability” but rather, “I’m having a hard time getting to work on time because of the medical treatments I’m undergoing.” This example demonstrates a challenge employers may face under the ADA in properly identifying requests for accommodation.

The AD