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Ethical decision making in a business environment.

The issue of effectively integrating ethics into business decision making is a major area of debate confronting today's corporate leaders. Persistent media reports of unethical behavior by corporations, business executives, and governmental officials highlight the need for effective solutions to the ethics dilemma. The ethics dilemma derives from the perceived conflict between the traditional corporate objective of profit maximization and the overall desire for increased social welfare. Although ethically responsible business practices are generally desired, opinions about what these practices are and how they should be encouraged are diverse. The complexity of the current business environment complicates the development and implementation of resolutions to ethical issues facing industry.

John Dobson's article outlines the nature of the corporate structure in which managers, and to some extent the shareholders, are not "free moral agents." Therefore, these groups are not "at liberty to make ethical decision." This lack of moral responsibility is contrary to prevailing opinions. For example, Richard DeGeorge (1986) explains that the diminished feeling of moral responsibility that may accompany decisions of a person or group acting as an agent for others does not suggest the absence of moral responsibility. He further states "Because a corporation acts only through those who act for it, it is the latter who must assume moral responsibility for the corporation." (p. 100)

The article "Ethics of Shareholder Referendums; Corporate Democracy or Hypocrisy?" discusses changes in business conditions that have led to the increased use of the referendum process for approaching controversial decision making. However, using referendums for conflict resolution has its own set of problems. Dobson argues in favor of passing a law requiring corporations to seat a qualified ethicist on their board of directors as an alternative method of resolving the ethical dilemma. The implied role of this board member is to monitor and mediate conflicts between profits and ethics. Although the article provides a new approach to ethical problem solving, some basic problems remain. The concept of ethics is not adequately developed and he fails to discuss implementation of his solution.

Agency theory is used as a basis for recommending the professional ethicist board member. Fama and Jensen (1983) discuss this theory which is based on the separation of ownership and control. Agency theory states that agency problems arise when the decision makers (generally composed of agents or management) do not share the wealth effects of their decisions (generally borne by the shareholders). Agency problems require the establishment of an effective control procedure. When the shareholders are not qualified for roles in the decision process, they often delegate the decision control to other agents, often a board of directors. Yet, the control is not effective unless it limits the decision discretion of the managers. In practice, the board has limited power and control [see The American Law Institute, (1982) for a delineation of the powers and functions of the Board of Directors]. The article fails to specify how the ethicist performs the control function.

Fama and Jensen's (1983) argument supporting the arbitrator position of outside board members to solve agency problems between internal forces of management and shareholdcrs is not directly applicable. The ethicist is not mediating internal conflict between management directors and shareholder directors. The legal requirement for an ethicist is external, and the ethicist represents interests that are external to the firm.

A well thought out framework to integrate profit maximization and social welfare maximization is necessary to obtain a pareto optimal solution for diminishing unethical actions. Two key factors must be included in this framework: 1) There must be clear understanding of what constitutes acceptable ethical behavior; 2) There must be an effective mechanism for ensuring the company follows ethical practices.

We must understand what ethical behavior is before an effective mechanism to enforce ethical behavior can be developed. Traditionally, an ethic is value based and stems from socio-economic contexts. The major theoretical approaches to ethics frequently conflict and the evaluation of ethics may depend more on the framework than the issue.

One test involved in Kantian theory involves a normative ethic. This ethic is one that, at a minimum, all rational people would find acceptable after carefully considering the pros and cons of an issue. The normative approach implies ethical behavior centered on the rights of others and follows the Golden Rule. This approach to ethical decision making allows considerable discretion as it relies on value based beliefs and attitudes. Therefore, even within the normative approach, inconsistent decisions can be made about the ethical nature of a business decision.

The Utilitarian theory of ethics implies that consequences of actions will determine ethical behavior. This approach suggests that outcomes drive the decision, and being responsible for the results of business decisions will promote ethical behavior. Still, some decisions have unintended consequences not considered by the decision process. Unethical actions may result from decisions that were initially believed ethical. Conversely, ethical actions may follow unethical decisions.

The Contractual theory of elhics relies on actual or hypothetical contracts and laws to determine and monitor ethical behavior. Although the contractual approach is considered more suitable to the general business framework, this approach relies on external enforcement of the contracts.

This brief discussion shows that major ethical theories are not precise, and enforcement of ethical actions relies on individual judgement. Even individuals highly trained in the philosophy of ethics do not agree about the application of ethics. The distinction between ethical and unethical behavior is based on the cultural milieu and is a byproduct of social norms. Therefore it is extremely difficult to determine ethical behavior. Mintzburg (1983, page 50) discusses the diversity and changing nature of social norms that derive from new economic and social situations: "Every society or culture contains a whole set of social norms, based on its particular history, religions, philosophies, and the nature of its people and the problems they have faced... While social norms may appear to remain stable being based on long traditions, in fact they are in a continual state of evaluation."

The decision to locate a petrochemical plant in China, as discussed by John Dobson, may appear unethical when viewed with cuffent United States standards. However, consider the decision of locating the plant in an area where jobs are nonexistent and people are dying from inadequate basic shelter and food. In this context the decision to locate the plant in China could be argued to be ethical.

Conflicting ethical decisions may also arise from conflicting sets of social norms within the same culture. For example, a company obtains preliminary test results suggesting that contact with a specific product on their assembly line may result in a low probability of damage to future offspring. The company may decide that the ethically responsible action is to remove all women of child bearing age from contact with the assembly line. On the other hand, ethically responsible behavior prohibits the company from denying work based on gender or age. The decision is no longer that of distinguishing ethical from ethical behavior, but of determining which ethically relevant factor takes precedent.

Before we can enforce ethical behavior, we must have a clear understanding of what we wish to enforce. The preceding stories show the difficulty of identifying appropriate ethical behavior even in situations where a conflict between the commitment to and the implementation of ethical actions does not exist. Where conflicts between corporate and societal objectives exist, the implementation of an effective solution for making ethically charged decisions becomes even more complex.

An effective solution for ethical decision making must consider barriers to implementation besides understanding the nature of ethical behavior. The specification of a qualified ethicist as a board member only imposes a formal constraint on the composition of the board of directors. Many questions of implementation remain. Does the requirement apply to all corporations, or at what point does the additional cost of the ethicist exceed the benefits to society? For example the potential social gain of adding a professional ethicist to the board of a small "mom and pop" corporation may be small while the relative costs may be prohibitive. At the other extreme, the multinational corporation resides in multiple societies, each with different cultural biases. What is the appropriate method of ensuring that ethical practices are undertaken in a diverse cultural arena? What mechanism exists to guard against the imposition of a particular political view on the company in the name of ethics? What power rests with the professional ethicist to settle conflicts between internal profit and power and external social responsibility?

The recommended professional ethicist solution to moral decision making also suffers from the complexity issue of "passing the buck" as discussed in the paper. Because the ethicist's purpose is to act as the conscience of the company, other board members may abdicate responsibility for considering the moral aspects of their decisions.

Problems of identifying an effective and qualified" ethicist remain. Although there are many consultants who identify themselves as professional ethicists, no formal mechanism of certification exists. The article does not offer a solution to this critical identification problem, but only states that "Corporations should be required, by law, to seat on their boards at least one individual... who in one way or another is a qualified ethicist." Corporations intent on unethical business practices could appoint an outside ethicist that would always accept corporate actions.

In summary, ethical people make ethical decisions. Because some ethical decisions must be based on societal norms, business decisions will reflect the ethical tolerances of the environment in which they operate. A "Big Brother" solution will not resolve the ethical dilemma. Government, through laws and regulation, may help establish the meaning of ethics. However, an effective solution to the dilemma must contain a mechanism in which ethical considerations become a central part of operations. A key component in ensuring ethical performance by modem corporations is the integration of moral reasoning throughout the organization.

Although this task is more difficult than passing a law, the integration diminishes the conflict between ethical practices and acceptable profits. Some US companies already have undertaken this integration and have developed a comprehensive approach to ethical decision making. The experiences of these companies should provide valuable information for improving ethical policies and conduct in a business environment.

A report published by The Business Roundtable (1988), entitled "Corporate Ethics: A Prime Business Asset," analyzed corporate information about ethics and programs for implementing ethical policies and conduct. This report should serve a a basis for developing a framework for ethical decision making that is both practical and effective. The primary lessons derived from this study are as follows: 1. Top management must be committed to ethical conduct

and must provide constant leadership in attending

to and renewing organizational values. 2. Carrying out ethical behavior requires a comprehensive

ethical perspective that all levels of thc company

understand and use. The "code of ethics" cannot

cover all situations but helps guide the judgments and

consciences of people making specific recommendations.

3. A vigorous and continuously renewed process of

implementing ethical behavior is essential. 4. Personnel at all levels of the company must be involved

and committed to ethical performance. 5. Results of programs must be assessed.

A successful method of resolving the ethical dilemma should use a practical framework for decision making. This framework should blend the successful experiences of modern corporations with organizational, social and philosophical theories. Externally imposed ethical control through an outside board of directors member is not an effective solution. The ambiguity of what constitutes ethical behavior makes external control of this behavior difficult if not impossible. Problems with implementing the legal requirement for a professional ethics board member also make this type of control impractical. To be effective, the framework must be integrated into the corporate structure and supported at all levels. The Business Roundtable provides information on business experiences that could serve as a foundation for developing this framework.


[1.] Corporate Ethics: A Prime Business Asset." (1988). New York, NY: The Business Roundtable.

[2.] DeGeorge, Richard T. (1990). "Business Ethics." New York, NY: MacMillan Publishing Company.

[3.] Fama, E.F. and M.C. Jensen (1983). "Separation of Ownership and Control" Journal of Law and Economics, 26 (June),301-325.

[4.] Mintzberg, Henry (1983). "Power In and Around Organizations." Englewood Cliffs, NJ: Prentice-hall.

[5.] "Principles of Corporate Governance and Structure: Restatement and Recommendations." (1982). Philadelphia, PA: The American Law Institute.
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Article Details
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Title Annotation:Symposium: Ethics in Business; response to John Dobson, 13 Review of Business 3, 1992
Author:Klein, Linda S.
Publication:Review of Business
Date:Dec 22, 1991
Previous Article:Ethics of shareholder referendums: corporate democracy or hypocrisy?
Next Article:Deposit insurance: a market-based reform proposal.

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