Commerce Ever Ethical? The Issue

¶ … Commerce ever Ethical?

The issue of ethics in business has become increasingly important in recent years, in particular in light of the wave of frauds and accounting scandals in the early 2000s that led to the passage of the Sarbanes-Oxley Act. This paper will investigate the history of business ethics and the current ways in which ethical programs have developed.

The subjects of business and ethics were disconnected throughout the 19th and early 20th centuries. Even the most basic of ethical philosophies, such as Kant's moral imperative, when ignored by substantial components of industry. Although the underlying philosophies of business ethics existed at the time -- Mill developed utilitarianism during the industrial revolution -- these philosophies seldom found their way into business practice. Ethics were enforced only through the passage of laws. As an example, the Food, Drug and Cosmetic Act was enacted in response to the "elixir of sulfanilamide" scandal, in which over 100 people were killed by a poisonous health product (FDA, 2009).

During the 1960s, social norms began to shift and more interest was paid to the issue of corporate responsibility. There were calls for corporations to measure their outputs in ways beyond the income statement. In response to this, Milton Friedman published his treatise in 1971 arguing that the social responsibility of business was to create profit. The pursuit of other social responsibilities was the responsibility of the shareholders, who are free to do as they please with their profits. Managers, however, act as agents of the shareholders and have only been given a mandate to increase profit.

This ethic has been the prevailing one in business for the most part since then. Other activities, it is argued, are merely an extension of creating profit. Companies undertake environmental initiatives to avoid fines; firms treat their employees well because they view the employees as a source of competitive advantage. However, this did not preclude unethical behavior in the business community. Scandals such as Enron, WorldCom and were created as the result of a disconnect between the money that could be made by committing fraudulent and unethical behavior and the money that could be saved by avoiding such behavior.

Sarbanes-Oxley (SOX) was passed in order to address these ethical lapses. This returns the business world to a point where ethical behavior is defined by the law, rather than by a broader stakeholder perspective. One of the requirements of SOX is that public companies are required to have a code of ethics for its executives, leading to such codes being commonplace today (Verschoor, 2004). This version of corporate governance -- wherein firms talk about their governance programs because they have to -- is a weak form of Kantian ethics. The law dictates the degree of concern companies must have towards ethical issues. When the law tells them to write and publish a code of ethics, they do. Most companies adhere to their ethical codes, but most companies always did. What remains to be seen is whether such ethical codes will over time reduce the incidence of fraud, regardless of what other ethical laws may be written. SOX does place emphasis on the role of the board of directors but inasmuch as the board of directors acts as agents of the shareholders, the role of the board has not actually changed since Milton Friedman defined their ethics (which included a caveat about operating within the law).

While some firms are content to subscribe to the bare minimum of ethical doctrines, others have pursued a broader stakeholder perspective. The stakeholder perspective posits that ethics derives from outcomes, which places it squarely in the consequentialist perspective, and that those outcomes be considered from the perspective of all stakeholders (Phillips, 2003). This represents an advancement on Friedman's theory, since he considered only the perspective of the firm's shareholders. Friedman's theory was built on the idea that the shareholders have put up their money to invest in the firm and allow management to build it, therefore management is an agent of the shareholder. The stakeholder perspective recognizes the contribution of all stakeholders. Employees also make an investment in the firm, and that investment may go beyond for which they are compensated. Customers, suppliers and other groups as well are invested to different degrees. The environment and society at large are also stakeholders who can be both harmed and helped by the company's actions. While Friedman argued that employees, customers and suppliers are all engaged in economic, mutually beneficial transactions with the company, social and the environment are not. Outcomes for those stakeholders are externalities of the firm's behavior. These externalities have a cost but that cost is not typically transferred to the company directly. Therefore, the company must consider these costs in order to be ethical, certainly by utilitarian standards.