The challenge of defining and applying business ethics standards

Business Ethics

Everybody can agree that business needs to be conducted ethically. The problem with business ethics, however, is that there is no clear concept of what precisely is meant by the phrase 'ethical'. Managers have different stakeholders to concern themselves with. They operate businesses that are subject to multiple sets of laws simultaneously. They are subjected to the ethical judgment from dozens or hundreds of different cultures, each with its own ethical standards, and some with many different sets of ethical standards. It is no wonder that many firms stick to basic platitudes regarding ethical behavior. Pinning down specifics is almost impossible. As a consequence, however, we have situations that arise with alarming consistency in which managers make choices that would seem to violate every ethical standard conceivable.

This paper is going to examine the issue of business ethics. The first step will be to define what "business ethics" actually means, and understand why the term varies so widely for so many different people. The next step will be to introduce the practical, business element to the issue, explaining the role of managers and the ways in which ethical considerations affect their decision making. From there, this paper will investigate the complexity of the issue by looking at the key dimensions -- stakeholders, intercultural elements and legal elements and the role of government. From this, a conclusion will be drawn about the nature of business ethics and how managers should incorporate the concept into their decision-making.

Defining Business Ethics

Business ethics as a discipline is an offshoot of the philosophical study of ethics, with the concepts therein applied to practical situations as faced by managers. Ethics itself is the application of ethical norms to everyday life, so business ethics therefore is the application of ethical norms to business (deGeorge, 2005). This leaves us with the issue of defining ethical norms. They are standards of behavior that are relatively uniform within a culture or society. The society has typically outlined what the norms are, and these norms are generally understood by members of society. Society then enforces these norms through a number of means. The rule of law is one of the most important mechanisms for enforcement of social norms, but it is certainly not the only one. As long as there is a negative response from society at large that can be reasonably anticipated, then the action could reasonably be deemed to be unethical.

Importance of Business Ethics

Business ethics is an important field of study specifically because the corporation is an independent rational actor (Fisse & Braithwaite, 1993). As such, the actions of the corporation have been decoupled from the actions of the individuals who act on the corporation's behalf, for the most part. The ramifications of this are clear -- the corporation is a part of this world. Its actions affect the world around us for better and for worse. As the corporation functions within these bounds, it then becomes imperative that the corporation take into consideration the impact of its decisions and actions on the external world. The acceptability standards of these actions are set by the prevailing ethical norms.

The corporation as a legal and rational entity, of course, does not act in and of itself. The corporation the sum total of the actions undertake on its behalf by agents. Thus, there is no rational action save for that conducted on behalf of the corporation by agents (Ibid). These agents are the staff of the organization. The agency element adds a unique layer of complexity to business ethics. As agents, the role of managers within the organization is to direct activities with the expected objective of increasing shareholder wealth. This underlying premise is known as shareholder primacy, in which the manager's most important obligation is to the shareholders. Some theorists have even suggested that shareholder primacy has been responsible for some of the most visible ethical lapses in the past decade (Heath, 2009). Agency theory is rooted in game theory, wherein all managers are viewed to be rational actors.

While this theory is evidently contentious among ethicists (Ibid.), it is widely promulgated in business and serves as a valuable starting point for the discussion of business ethics. This is because poor business ethics often arises from conflict between the rational choice made to benefit one stakeholder vs. The rational choice that would have benefited another. Kenneth Lay and Jeffrey Skilling cooked the books at Enron because it benefited them personally, despite the fact that it did not, in the long run, benefit the shareholders of Enron. Indeed, in Lay's case it did not benefit him in the long-run; his actions were the result of a misinterpretation about what would happen in the long run (Barrionuevo & Eichenwald, 2006). This offended the ethical norms against managers violating their role as agents. Other ethical conflicts stem from adhering to the agency relationship, however. This can be the case for a manager whose firm pollutes the environment in the interest of enhancing shareholder profit. The ethical norm may hold that the pollution was excessive because the damage it did to society as a whole was more significant than the benefit the action gave to the shareholders. Shareholder primacy, we can therefore see, is secondary to the ethical conflict that arises from an agent placing one stakeholder's needs above the needs of other stakeholders.

The agency problem is typically addressed with a sub-category of business ethics that focuses specifically on corporate governance. Corporate governance is "the structure that is intended to make sure that the right questions get asked and that checks and balances are in place to make sure the answers reflect what is best for the creation of long-term, sustainable value." (Monks & Minow, 2003). What this means is oversight -- the board of directors is to oversee management and ensure that management's actions are consistent with those expected of agents of the shareholders.

The notion of corporate governance is applied to the concept of business ethics as follows. Society determines the ethical norms. If companies do not adhere to these ethical norms, there will be consequences. These can be in the form of legal punishments (fines, jail time) or they can be in the form of market punishments (boycotts, reduced sales). Companies whose behavior is consistent with the ethical norms will face no punishment; those whose behavior is inconsistent will face punishment. If the costs of punishment are higher than the benefits of the actions, then the managers as rational agents of the shareholders should not undertake the activity. The role of corporate governance is the board of directors ensuring that management makes the right choices.

This issue is foggier than it appears, however. The concept of rational decision-making is based on certain assumptions, some of which do not often hold true in practice. One of these is that the outcomes are predictive. There is not perfect information either for the managers or for society by which it can hold management accountable. Thus, what are sometimes seen as ethical lapses were simply calculated, rational risks that management took and lost. This brings us to a fundamental point about ethics, one that dramatically complicates the issue of business ethics.

There are two main schools of ethics -- deontological and consequentialist. The former refers to a philosophy that right and wrong are absolutes no matter the outcome; the latter refers to the philosophy that the outcome is more important, and is the standard by which an action's ethics should be judged. Different people within a society can subscribe to one school of thought or the other but more often they will subscribe to a mix of both, sometimes depending on specific circumstance and other times depending simply on whim. Thus, even with a small, homogenous group, there is not often a clear ethical norm.

Further Complications

Agency theory presupposes that ethical dilemmas in business can be resolved easily, because of shareholder primacy. Ultimately, society will dictate the punishments for transgression, against which the managers can make their rational decisions. This theory also presupposes perfect information on the part of the other stakeholders. However, it is evident that external stakeholders do not have perfect information. As a result, it is impossible to determine with complete accuracy the degree to which moral outrage will flow from a given decision. What are characterized as rational decisions on the part of managers are therefore more akin to gambles based on assumptions about the reactions of the various stakeholder groups.

Stakeholder analysis is a popular way of analyzing the ethics of business decisions. In simplest terms, the impacts of the decision on the various stakeholders are weighed, along with the importance of that stakeholders and the intensity of those impacts. Ultimately, management is expected to derive ethical guidance from such a stakeholder analysis (Goodpaster, 1991).

With any decision there are myriad stakeholders. They are both internal and external; direct and indirect. Because information is imperfect, most external stakeholders are unlikely to be able to make a reasonable deontological assessment of a manager's decision; they therefore tend to base their ethics on consequentialist doctrine. The less direct the impact, the more likely the stakeholder is to use consequentialist considerations to just the actions of managers. For example, government did not react to the need for improved governance and pass Sarbanes-Oxley until after multiple scandals had occurred. Millions of Americans lost money and faith in the financial system was eroded, threatening further harm. If the scandals had not resulted in outcomes so severe, it is unlikely that SOX would ever have been dreamed up.

Given the emphasis on consequentialist assessment, the onus on managers is therefore to fully assess society's reaction to the expected outcomes of their actions. This works mainly when managers properly assess the expected outcomes -- something the likes of Kenneth Lay and Bernard Ebbers did not do. These outcomes must consider the impacts on the gamut of stakeholders. Ethical problems occur when there is goal conflict between the stakeholder groups (Heath, 2006). For example, the decision to develop an environmentally sensitive piece of land weighs the mutually exclusive outcomes, one of which is negative to, for example, endangered species; the other negative to workers who otherwise would be unemployed and in poverty. In such situations, there is little a manager can do other than to rephrase the question such that another outcome is possible, something that is not always possible.

One of the most contentious issues in business ethics is that of ethics within the context of international business. Given that ethical standards are inconsistent within our own communities, expanding the scope of operations internationally inevitably increases the complexity of ethical decision making in business. There are several contentious issues. One is the application of home country ethics to foreign countries, or vice versa. Firms such as Nike have run into controversy in North America, for example, for working conditions in overseas facilities. The wages and conditions in question were superior to the average in the region of production, but inferior to those in North America. Cross-cultural ethical conflict is an area that emerges when a firm goes international with its operations.

The complexity of ethical conflicts would seem to encourage companies to take a more deontological approach to ethical decision-making. After all, in most countries the law reflects the ethical standards of the region. This, however, is only in the long-run, because of a couple of limitations. One is information -- the general public that sets the norms does not always know what the managers are doing. When they do, they compel government to act (e.g. Sarbanes-Oxley). Indeed, the ethical norms in the United States did not change after the scandals leading up to SOX, the public was simply unaware of the activity of the managers in question. In international business, the deontological approach again fails to provide foolproof guidance. This is especially the case where democracy is limited or non-existent. A government may control the laws regarding the conditions under which factory workers travail, but the those laws may not at all reflect the ethical norms of the country, especially under dictatorship. Once again, managers are left searching for a resolution to ethical conflict.

All of these dimensions lend complexity to the issue of business ethics. Theorists today cannot agree on any singular approach to the issue, arguing the above points of agency theory, stakeholder theory and adherence to the law as ethics (Ibid).

Conclusion

That business ethics specifically arises from conflict illustrates the reasons why identifying and resolving ethical dilemmas is so difficult. Each society has its own ethical norms and there is sometimes little consistency between those norms and the norms of another given society. As a result, conflicts inevitably arise. The goal for managers is to control the number of conflicts and provide guidance for conflict resolution. The temptation is for the organization to devise a uniform system by which it can perform this function. The result of this, however, will be failure, as no ethical dilemma is the same . Even operating within the bounds of the law is not an adequate preventative for ethical scandal. What businesses can do, however, is take the time to understand the breadth and depth of the subject of business ethics. They can then set out a framework to help guide their managers to better ethical decision making. This cannot fully eliminate the possibility of ethical lapse, but it can reduce the possibility. Flexibility, knowledge and resources are all critical to this process. When applied well, such measures can not only reduce ethical issues, but improve shareholder value and improve outcomes for external stakeholders as well.

Works Cited:

deGeorge, Richard T. (2005). A History of Business Ethics. Markkula Center for Applied Ethics. Retrieved May 11, 2009 from http://www.scu.edu/ethics/practicing/focusareas/business/conference/presentations/business-ethics-history.html

Fisse, Brent & Braithwaite, John. (1993). Corporations, Crime and Accountability. Retrieved May 11, 2009 from http://books.google.com/books?id=jJ0AUYA71nAC&pg=PA73&lpg=PA73&dq=corporation+rational+actor+ethics&source=bl&ots=0coi6X0tbv&sig=sictZG4yTQv2heEgV2OshTF_QQM&hl=en&ei=wI8ISoD9NKHhtgfJ_vGIBw&sa=X&oi=book_result&ct=result&resnum=1

Barrionuevo, Alexei & Eichenwald, Kurt. (2006). For Ken Lay, Enron's Riches Turning to Ruin. New York Times. Retrieved May 11, 2009 from http://www.nytimes.com/2006/02/26/business/26lay.html

Monks, Robert A.G. & Minow, Nell. (2003). Corporate Governance. Retrieved May 11, 2009 from http://books.google.com/books?id=RGmHAVPhmRwC&dq=business+ethics+corporate+governance&printsec=frontcover&source=bl&ots=h6AZpV875B&sig=PkSgJtkk6Lsy7hekkVrAPayRrjA&hl=en&ei=a5cISr6fOoqjtgfKm5GZBw&sa=X&oi=book_result&ct=result&resnum=7#PPA2,M1

Heath, Joseph. (2009). The Uses and Abuses of Agency Theory. University of Toronto. Retrieved May 11, 2009 from http://www.chass.utoronto.ca/~jheath/agency%20theory.pdf

Heath, Joseph. (2006). Business Ethics without Stakeholders. Business Ethics Quarterly. Vol. 16, Issue 3 pp.533-557.

Donaldson, Thomas. (2000). The Corporate Ethics Boom: Significant, or Just for Show? Knowledge @ Emory. Retrieved May 11, 2009 from http://knowledge.emory.edu/article.cfm?articleid=285

Reidenbach, R.E. & Robin, D.P. (1990). Toward the Development of a Multidimensional Scale for Improving Evaluations of Business Ethics. Journal of Business Ethics. Vol 9, Issue 8, pp. 639-653.

Hanson, Kirk O. (2008). Ethics and the Middle Manager: Creating "Tone in the Middle" Markkula Center for Applied Ethics. Retrieved May 11, 2009 from http://www.scu.edu/ethics/practicing/focusareas/business/middle-managers.html

Goodpaster, Kenneth E. (1991). Business Ethics and Stakeholder Analysis. Business Ethics Quarterly. Vol 1 No. 1, pp. 53-73.