Business Ethics and Corporate Responsibilitiy

Business Ethics & Corporate Responsibility
Hartman & Werhane
BUSINESS ETHICS AND CORPORATE RESPONSIBILITY
A PRIMER
Laura Hartman and Patricia Werhane

Hartman & Werhane
BUSINESS ETHICS AND CORPORATE RESPONSIBILITY1
A PRIMER
Laura Hartman and Patricia Werhane
I. Introduction............................................................................................................................. 3

II. Learning Objectives ................................................................................................................ 4

III. Why are ethics and ethical issues important in the business environment? ........................... 4

IV. What is meant by “ethics?” What is meant by “business ethics?” ......................................... 5

A. Ethics................................................................................................................................... 5

B. Business Ethics ................................................................................................................... 5

C. Ethics and Self-Interest ....................................................................................................... 6

D. Corporate or Organizational Terminology.......................................................................... 7

V. Application of Ethics to Decision-Making ............................................................................. 9

A. Origins of Ethics: Value formation..................................................................................... 9

B. Ethical decision-making and moral judgment .................................................................. 11

VI. What is an Effective and Ethical Decision-Making Process in Business? ........................... 13

A. The Shareholder-Managerial Model ................................................................................. 13

B. The Stakeholder Approach ............................................................................................... 16

C. Globalizing the Stakeholder Model .................................................................................. 17

C. A Framework for Effective, Ethical Decision-Making..................................................... 19

VII. Conclusion: Take-Aways from This Booklet ....................................................................... 21

VIII.Appendix A: A Note on Five Traditional Theories of Moral Reasoning ............................. 23

IX. Appendix B: Principles ......................................................................................................... 34

A. The Ten Commandments.................................................................................................. 34

B. The Bill of Rights, the First 10 Amendments to the U.S. Constitution, 1891 .................. 34

C. United Nations Universal Declaration of Human Rights ................................................. 35

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©2012 Laura Hartman and Patricia Werhane. Do not copy without permission.

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I. Introduction
Ethical issues have been a part of business decisions since the beginning of commerce and
exchange. But, only fairly recently have management theorists and business organizations begun
to think systemically about how to integrate ethical decision-making into management strategy.
The purpose of this discussion is to help managers and companies become more aware of ethical
issues, to develop reasoning skills they can use in thinking through these issues, and to
encourage persistence or courage with which to implement ethical actions, often in face of
difficult obstacles.
Ethical awareness and integration have an impact on organization-wide strategic

objectives that are both far-reaching and long-term. An ethical decision-making process can
encourage individual accountability. In turn, this responsibility enhances the risk culture within
the firm so that risk management is understood as a shared undertaking. The firm that can
capitalize on this strategy is not only less vulnerable to risk but also significantly more
effectively prepared to face any challenges it might face in the future.
Though one might point to the rogue person in business who truly strives – intentionally
– to engage in unethical behavior, it is exceedingly more likely that business people generally are
trying to do the ‘right’ thing. Therefore, one of the key issues that we will address is why
seemingly decent decision-makers might engage in wrongful acts. There are numerous stumbling
blocks to ethical behavior, and we will examine them during the course of the brief discussion
that follows. Consider, though, that if acting ethically were the easy option in a dilemma and, if
the incentives were perfectly aligned with obvious profitability, no successful business person
would ever be tempted to make the unethical choice. But that is not the case.
Other factors are at play that encourage unethical behavior. One of the primary reasons
an otherwise decent person might act unethically is an inability to recognize ethical issues before
they become overwhelming. A second reason that people reach unethical decisions is a lack of
courage. We need to recognize that doing the right thing is not always the easiest path, even in
the face of tremendous risk to others. Consider the pressure on BP’s oil rig workers who felt the
whistleblower process was useless. “The rig survivors … said it was always understood that you
could get fired if you raised safety concerns that might delay drilling. Some co-workers had been
fired for speaking out.”2 Fear might also occur because managers originally base decisions on
intuitions but then later cannot state good reasons for these decisions and find themselves
wavering. Being ethical is tougher than one might imagine. A third reason is that, as managers,
we must manage the decision-making processes of those with whom we work; so it is vital to
recognize the influence we each have on the ethical behavior of others. We will consider other
options later in our discussion.
Many students are suspect when faced with the discussion of ethics in their standard
business curriculum, wary that the purpose might be to indoctrinate them with a particular set of
values or to discredit their own decision systems. To the contrary, the central objective of any
effective exploration of ethics is (1) to stimulate an awareness of ethical dilemmas, (2) to
2
Steinberg, Richard M. “How Did BP’s Risk Management Lead to Failure?” Compliance Week (July 20, 2010),

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develop a reasoning process with which to respond to them, and (3) to practice application of the
process using real-life case scenarios.
II. Learning Objectives
After completing this booklet, the reader will be able to

• Explain why ethics and ethical issues are important in the business environment.
• Define what is meant by “ethics” and by “business ethics.”
• Describe an effective, ethical decision-making process.
• Identify two models for prioritizing ethical decision-making in a business setting.
• Demonstrate the application of stakeholder management theory and the decision-
making framework.
III. Why are ethics and ethical issues important in the business environment?
A study of 60 high-profile European business failures found that, while 63% of those businesses
failed for reasons “related to economic problems and the risks of entrepreneurship,” a
surprisingly large number - 37% - collapsed due to “fraudulent or unethical behavior by
company managers and employees.” In most cases, the company apparently lacked a structure in
which a dominant manager or owner was adequately reviewed and corrected for taking any
illegitimate actions.3
It is not always complete business failures that result; it could simply be a massive drain on
company resources caused by fraud. In a single year, U.S. organizations lose more than $1
trillion of the U.S. gross domestic product to fraud, an estimated 7% of their annual revenues (or
the equivalent to $70,000 for every $1 million of revenue). These ethical failures are responsible
for over half of all quality costs, or 5-15% of all operating costs. In fact, they can be the single
largest quality cost item in many firms.4
A second reason is probably obvious. What we do and how we behave as managers and
companies affects other human beings and other organizations. Indeed, if commerce did not
affect others, it would be ineffective as a business! For example, a strong ethical tone from senior
leadership lowers retaliation and pressure to be unethical within organizations. (See Figure 1.)
Both of these cultural factors within firms not only pose significant costs but also high legal risks
and enormous challenges to productivity. So, it matters deeply how business and managers
behave, since their actions can greatly benefit or greatly harm other people.
3
Last year according to Fortune Magazine and the Telegraph, in 2016 the largest corporate scandals in the United
States and Europe were due to fraud or unethical behavior. http://fortune.com/2016/12/28/biggest-corporate-
scandals-2016/ see also, http://www.telegraph.co.uk/business/2016/04/13/bad-for-business-ten-notorious-corporate-
scandals/
4
Sharon Allen, “The New ROE: Return On Ethics,” Forbes (07.21.09),; “The ROI of an Effective Ethics Program,”
(July 1, 2005); “The Construction Industry’s Ethical Dilemma” (Aug. 1, 2005).

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Figure 1. Strong Ethical Tone from Senior Leadership Reduces Retaliation and Pressure to be Unethical
Strong Ethical Tone from Senior Leadership Reduces Retaliation and Pressure to be Unethical
Most organizations prefer that managers make the “Right” decision. It is less expensive in the
long run, creates less vulnerability and protects reputation. But, how do you determine the
“Right” decision? We will discuss the process of that determination in the next sections.
IV. What is meant by “ethics?” What is meant by “business ethics?”
A. Ethics
Ethics is the study of what individuals, groups, organizations and governments ought to do, as
opposed to what they actually do. In other words, it is applying our value structures to the
decisions we make about how we should live our lives (or the decisions we make as members of
groups, organizations or governments). Although the terms “ethics” and “morals” are often used
interchangeably, “morals” usually refers to the underlying values, ideals, beliefs and moral
norms that we use to make those decisions and guide our behavior. “Ethics” is the explicit
reflective consideration and evaluation of our ideals, beliefs, practices and norms – it is the
practice or act of applying those morals to our decisions.
B. Business Ethics
Business ethics focuses these same questions on the business environment and involves the study
of what managers, entrepreneurs and corporations ought to do, all things considered, in creating
value and avoiding harm to other individuals, companies or governments. It is not necessarily
descriptive of what companies in fact do or how they in fact behave but, again, applies a value
structure to the question of how businesses should be run.
Because it deals with organizations and because organizations work under the auspices of
governments, business ethics operates on at least three levels: the level of the individual

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employee, manager, executive, entrepreneur or customer, the organizational level of the

company or corporation and the other organizations with which companies interact, and the
macro level of government that grants life to companies through incorporation, regulates their
behavior, and is often a customer as well. (See Figure 2.)
•Incorporator
Government •Regulator
•Customer
•Company
Organization •Corporation
•Other corporations
•Employee
•Manager
Individual •Executive
•Entrepreneur
•Customer
Figure 2. Ethical decision-making operates on at least three different levels
C. Ethics and Self-Interest

It is sometimes contended that ethics has to do with altruism or benevolence, and that being self-
interested is antithetical to being ethical. Entrepreneurs and other firm executives are self-
interested since they are interested in creating value-added including profits for themselves, and
managers are interested in creating value for their companies. Given these clear interests, then,
can one be ethical in business?
The confusion lies in a fuzzy notion of self-interest. Each of us as individuals is self-interested;

that is, all of our interests surround ourselves. But, many of those interests are also other-
directed; that is, not all of my interests involve myself as the object of those interests. Moreover,
even individuals, and by analogy companies, that seem only interested in themselves are not
necessarily evil. If one simply minds one’s own business, does not interfere with others or their
projects, is not selfish or greedy when those unintentionally hurt others, and acts with integrity in
the marketplace, one would thereby be considered minimally ethical.
Moreover, companies do not have to be philanthropic in order to be ethical. But they do have to
treat the employees and managers fairly, compete with integrity, produce quality products or
services, and safeguard the investments of their shareholders or owners. This might even be
considered to be self-interested. After all, it is good business and it is good ethics, and those
matter in the marketplace.

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D. Corporate or Organizational Terminology
Corporate Responsibility. Much of commerce is conducted by corporations, and most of

commercial capital is concentrated in large companies. Thus, management literature sometimes
refers to business ethics as “corporate responsibility,” with the focus on corporate behavior. In
this booklet, we use the term “business ethics” since we focus both on managerial and corporate
behavior. It is individual managers and executives, as well as groups of managers and
executives, who act as agents for corporations. Moreover, since a significant portion of
commerce is also conducted by entrepreneurs or small businesses, they too should be included in
this analysis.
Corporate Social Responsibility. Another even more common term in management literature is
the expression, “corporate social responsibility.” This term originally referred to the
responsibilities of corporations to their external communities, the environments throughout
society in which they operate, thus the use of the term “social.” It is also sometimes used to refer
to corporate philanthropic or volunteer activities. More recently, it has been used to refer to a
company’s legal, social and ethical responsibilities to its employees, managers, suppliers,
customers, shareholders and the communities in which it operates (Carroll, 1991), thus
incorporating business ethics into the more broad definition. In this booklet, we shall use the
term “business ethics,” since it clearly distinguishes the legal responsibilities of business from its
ethical obligations.
CSR has earned mainstream recognition in the past several years through the emergence of a
more strategic approach to the activities that would normally fall under the social responsibility
umbrella. By realizing that contributing firms possess a competitive advantage in particular
arenas, the subfields of strategic philanthropy, reputation management and brand positioning
have converged. Certainly depending on how it is managed, some of these efforts can mean
tremendous gains for underserved communities while others have received criticism.
“When a well-run business applies its vast

resources, expertise, and management
talent to problems that it understands and
in which it has a stake, it can have a
greater impact on social good than any
other institution or philanthropic
organization.”
Source: Porter, M.E. and M.R. Kramer, “Strategy and Society: the link between
competitive advantage and corporate social responsibility,” Harvard Business
Review (Dec. 2006), pp. 78-03.
Corporate Citizenship. A third term that is used to refer to some of these similar activities is
“corporate citizenship.” Sandra Waddock, a Boston College professor and leader in this area of

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scholarship, aligns CSR with corporate global citizenship. “The premise [of the notion of
corporate citizenship] is that businesses operate successfully in society when they respect and are
responsible to stakeholders, a balance is needed among sectors in society and with nature, and
that vision and values can result in distinctive competencies that lead to value-added for
companies of the 21st century.” (Waddock, 2002) This definition focuses on the corporation and
its relationships to society and the environment. These are important elements of business ethics
and corporate responsibility, and in our discussion we shall incorporate that focus under the
broader umbrella of “business ethics.”
Business ethics and the Law. The law provides some very important touchstones for ethical
decision-making. But legal norms and ethical norms certainly are not identical nor do they
always agree; otherwise, the ethical standard for any corporation would simply be “follow the
law.” Some ethical standards, such as treating one’s employees with respect, are not legally
required though may be ethically warranted. Conversely, some actions that are legally
permissible, such as firing an employee for no reason, or polluting when there are no legal
restrictions, would fail ethical standards.
In addition, for firms whose decisions impact individuals across cultural borders (which today
encompasses more and more organizations), the distinctions between legal norms and ethical
norms become significantly more apparent. For instance, while it may be illegal to discriminate
on the basis of gender in one country, it may be perfectly legal to do so in another country. An
organization’s ethical standards might create a unified code of ethical conduct for the
organization, worldwide, but challenges remain when they apply that code in particular cultures.
Case No. 1 illustrates such challenges.
Ethics and Compliance. Since the corporate ethical and financial meltdowns at the beginning of
the Twenty-First Century, there has been both a corporate and a public preoccupation with
compliance, partly encouraged by the passage of the Sarbanes-Oxley Act in 2002 (also known as
the “Public Company Accounting Reform and Investor Protection Act”), a law designed to
reduce corporate fiscal and ethical misbehavior.
As a result of the Act, most medium and large corporations now have compliance officers as
well as compliance training aimed at training managers about corporate and legal rules and
regulations. These programs are indeed worthwhile; but they should not be confused with ethics
and ethics programs, which are designed to establish guidelines and to encourage proper
behavior whether or not it is covered by the law or falls under Sarbanes-Oxley. Attention to
compliance and rule-following does not necessarily produce ethical managers. The following
diagram outlines these distinctions and locates risk (see Figure 3).

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Link between Ethics, Compliance & Risk
Reputation
Brand Essence
Procedures, Training, Monitoring, Auditing Compliance
Ethical foundation of the organization

Mission, Core Values,
Ethics
Organizational Culture, Industry, Leaders’ behavior
Family Law Custom Culture Self Religion Underlying values
Figure 3. Link between ethics, compliance & risk
As studies by scholars Gary Weaver and Linda Trevino have shown, companies with compliance
programs have more difficulty with employee compliance than companies with ethics and
compliance programs. Apparently, asking questions of what one should do and why ethics and
compliance are important help to internalize right-thinking behavior in managers, while
programs that focus solely on compliance lead to the temptation to game the system and come as
close to disobeying the rules as possible.
V. Application of Ethics to Decision-Making
A. Origins of Ethics: Value formation

As we discussed above, business ethics has to do with what managers, entrepreneurs and
corporations ought to do. This entails making value judgments and applying values to decisions
and behavior, both one’s own and the decisions and behaviors of others and of organizations, as
well. These values are derived from common-sense morality (e.g., do not lie, steal, cheat or
murder), from social, religious and cultural norms, from professional and corporate codes, from
country norms such as our Bill of Rights, and from more general statements such as the United
Nations Declaration of Human Rights.
Some of these values are core values, such as personal, professional and corporate values that we
consider the highest priority or most fundamental, and most likely, those values an individual or
an organization will not sacrifice for some other consideration. For example, in the United
States, the value of personal freedom is seldom sacrificed for some other more utilitarian
consideration. For some companies, they will not permit the value of their product or brand to be
diluted under any circumstance, even when it could produce an increase in sales in some
markets.

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If ethics is the application of our values to our behavior, ethics has two components:
• Our internal compass, which dictates how we view or judge the ethics of our own actions;
and
• Our external compass, which orients our judgment of others, as well as the perception
and judgment of us by others.
Let us consider the application and implications of each. When faced with a decision, there are
plenty of times when the only one whose answer you seek is your own. In many circumstances,
as long as you do not infringe on someone else’s opportunity to make a decision, her rights or
freedoms, then you may necessarily be looking to your own set of values in order to reach a
determination of what is ethical or unethical in a particular situation. To reach that conclusion,
you will judge your actions or decision according to your own personal standards, your internal
compass. Of course, that means that you must actually know what those standards are.
However, the answer to the question of whether someone is acting ethically depends in part on
the external values against which the judgment will be made. So there are also plenty of times
when others’ values must also be considered before a decision ought to be made; so you must
consider as well the external compass. Sources for this external compass might include:
• Organizational standards (company codes, guidelines, statements)

• Professional standards (industry codes, statements of conduct, codes of ethics)
• Social standards (spiritual statements, including religious mores, community standards,
personal and family group expectations)
The external compass is also called the “newspaper test.” How would you feel if what you did
were on the cover of the newspaper tomorrow? Proud or ashamed? What if everyone in your
office knew about your decision, everyone in your industry, your family? Moreover, in any of
these circumstances, you have to prioritize your values: which are the most important?
• Which would you not sacrifice, even for your own personal gain or the profitability of
your company?
• Which would you be proud to brag about?
• As a manager which would you expect your employees to emulate?
• Which would you be proud to say, “My company did the right thing?”
In any of these circumstances, your decision about what to do, or what your team or company
should do, depends on the consequences of both being unethical and being perceived as
unethical. We use this conclusion in order to guide the development of our values, which in turn
underpins our everyday decision-making in life and in business.
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B. Ethical decision-making and moral judgment

Ethical decision-making and ethical action require four steps:
1. Awareness of an ethical problem
2. Ability to reason about ethical issues
3. Having the motivation to act ethically
4. Having the persistence (or courage or fortitude) to

implement the ethical action in the face of inevitable obstacles
Figure 4. Four steps of ethical decision-making and ethical action:
awareness, ability to reason, having the motivation, and having the persistence.
It is sometimes relatively easy to spot ethical issues. But, it is more difficult to reason through
the problem and to arrive at a resolution. That is where ethical theories can be helpful. (See
Figure 5 and Appendix A: A Note on Five Types of Moral Reasoning, for a more detailed
discussion of ethical theory.)
There are various approaches. First, sometimes one has an intuition—“I just feel this is the right
thing to do,” or “I just think that this is wrong.” These are valuable feelings that should be
cultivated. But, they are also grounded on a more general idea that helps us check on these
intuitions. As human beings, and as organizations of which we form a part and depend on, we are
parts of larger communities; as such, we have certain moral duties to others or to our
communities.
The validation of these duties is to ask oneself whether this is something that we would want
others to do, either to ourselves or to other people or organizations? Could we imagine this
decision becoming a general moral principle for everyone or for every company to follow? Does
this decision respect others as equal human beings with equal dignity? Obvious examples that
would not pass any of these tests would be slavery or indentured labor. This approach to
decision-making is identified as “deontology” or “universalism.”
A second approach, and one to which most of us appeal frequently, is more utilitarian. It asks us
to examine the possible outcomes of a decision. Will it create benefits, or more benefits than
harms? What is the value-added, not merely monetary, but other value creation as well? What is
the overall long-term effect of this decision? This approach is identified as “utilitarianism.”
A third approach derives from the first, and reinforces the importance of respect for human rights
and dignity. One simply asks, are any human rights as stake in this decision? Are any basic
freedoms or human welfare issues being violated or possibly violated? A good way to validate
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this question is to check your decision against the Ten Commandments, the Bill of Rights or the
U.N. Declaration of Human Rights, found in Appendix B of this booklet.
A fourth approach asks the simple question, “Is this action fair?” Does it treat each individual
and each organization involved as an equal? Does it provide equal opportunity or at least not
invalidate equal opportunities? Does it involve lying or cheating, insider “deals,” or some other
subterfuge that would give special advantages to some parties and not to others? This is
identified as “justice.”
Another form of justice is called “distributive justice,” and asks how we should distribute goods,
services, money, opportunities, offices, and awards fairly. In our society, we have many forms of
distribution. We distribute voting equally for every adult; we distribute welfare based on need;
we tax people proportionally, based on income; and we try to give equal opportunities in sports
and the workplace. We distribute promotions and pay, at least in theory, on merit. It is the latter,
hiring, promotion, and benefits, and compensation that may arises as issues in business ethics.
Finally, and this is more personal, but works on the organizational level as well, one might ask,
“How do you want to live your life?” The question raises the issue of character or virtue. What
kind of moral character does each of us want to develop and what kind of organizational culture
do we want to work within and contribute to? How do we want to be thought of and
remembered? How might a virtuous person or person of character reach this decision?
• Is this something that we would want other individuals or

companies to do?
“Do the Right Thing”/ • Could we imagine this decision becoming a general principle?
Universalism or Deontology • Does it pass the publicity test?
• Does this decision respect others as equal beings with equal
dignity?
• Will the decision create benefits, or more benefits than harms?

Cost/Benefit
Cost/Benefit Analysis:
Analysis: • What are the values added?
Utilitarianism • What is the overall long-term effect of this decision?
• Are any human rights at stake in this decision?

Rights-Based
Rights-Based • Are any fundamental freedoms or human welfare issues being
violated or possibly threatened?
• Does it treat each individual, each stakeholder, and each

organization involved as an equal?
Fairness and
Fairness and Justice
Justice • Does it provide equal opportunity?
• Does it offer any special advantages to some parties and not
to others?
• Do you live the life you want to live?

Character and
Charactera andVirtue
Virtue • How would a virtuous person or a good company make this decision?
• Is this a positive or negative precedent for managerial or corporate?
Figure 5: Five Theories of Moral Reasoning
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VI. What is an Effective and Ethical Decision-Making Process in Business?
There are at least two standard approaches to reaching an ethical decision in business, each of
which has a different value prioritization: The shareholder-managerial model and the
stakeholder model.
A. The Shareholder-Managerial Model
In 1970, Nobel Prize economist Milton Friedman famously argued that “there is one and only
one social responsibility of business – to use its resources and engage in activities designed to
increase its profits . . .” But, the conclusion of that statement is not always included in its oft
citation: “. . . so long as it [business] stays within the rules of the game, which is to say, engages
in open and free competition without deception or fraud” (Friedman, 1970). Friedman
subsequently further explained his perspective in a later article in Reason,
Maximizing profits is an end from the private point of view; it is a means from the social
point of view. A system based on private property and free markets is a sophisticated
means of enabling people to cooperate in their economic activities without compulsion; it
enables separated knowledge to assure that each resource is used for its most valued use,
and is combined with other resources in the most efficient way (Friedman, 2005).
One way to explain Friedman’s point of view is to think of managers as employees or fiduciary
agents of the corporation and its assets. Thus, the primary duty of managers, according to
Friedman, is to take care of those assets or investments, in other words, to maximize the return
on the investment of shareholders. Where organizations seek to engage in social responsibility in
the form of philanthropy, Friedman contends that no manager or executive has the discretion to
use shareholder money in that way unless it can be justified by an increase in shareholder value.
For example, the supermarket chain, Whole Foods, has an objective to give away 5% of its net
profits. Friedman critiques that, “Whole Foods Market’s contribution to society – and as a
customer I can testify that it is an important one – is to enhance the pleasure of shopping for
food. Whole Foods has no special competence in deciding how charity should be distributed.
Any funds devoted to the latter would surely have contributed more to society if they had been
devoted to improving still further the former” (Friedman, 2005).
R. E. Freeman defines this approach as a “managerial model,” which, during the last 50 years,
has positioned shareholders as the most important priority for managers in their decision-making.
“This mindset has dealt with the increasing complexity of the business world by focusing more
intensely on ‘shareholders’ and ‘creating value for shareholders.’ It has become common
wisdom to ‘increase shareholder value,’ and many companies have instituted complex incentive
compensation plans aimed at aligning the interests of executives with the interests of
shareholders.” (Freeman, 2010; Freeman, Harrison & Wicks, 2007, 23)
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Graphically, this Managerial Model can be depicted as a hierarchical model. (See Figure 6.)
Managerial Model: Hierarchical View
Figure 6: Managerial Model: Hierarchical View
The Managerial View with shareholders at the top does not ignore other “stakeholder” groups –
those individuals, groups and organizations who affect or are affected by the firm. But these
other individuals and groups are thought of as means to increase shareholder value. Thus, while
Whole Foods’ CEO John Mackey’s central mission of customer satisfaction is critical to the
success and the profitability of Whole Foods, its importance is an instrumental to shareholder
value.
Freeman explains that the incongruity of the Managerial Model is that it

. . . puts shareholders’ interests over and above the interests of customers, suppliers,
employees, and others, as if these interests must conflict with each other. It understands
a business as an essentially hierarchical organization fastened together with authority to
act in the shareholders’ interests. Executives often speak in the language of hierarchy as
‘working for shareholders,’ ‘shareholders are the boss,’ and ‘you have to do what the
shareholders want.’ On this interpretation, change should occur only when the
shareholders are unhappy, and as long as executives can produce a series of incrementally
better financial results there is no problem (Freeman, Harrison & Wicks, 2007, 23,
emphasis added).
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According to this view, the only change that counts is change oriented toward
shareholder value. If customers are unhappy, if accounting rules have been compromised,
if product quality is bad, if environmental disaster looms, even if competitive forces
threaten, the only interesting questions are whether and how these forces for change
affect shareholder value, measured by the price of the stock every day.” (Freeman, 2007,
4)
The challenge with this orientation, Freeman points out, is that managers tend to focus internally
to the firm, and are insufficiently aware of nor attentive to the interests of other stakeholder
groups that might have an impact on the organization (see Figure 6). In addition, these other
stakeholders might be sources of innovation and growth for the firm (such as customers or
employees); yet, they are traded against the interests of shareholders – often inappropriately
since the interests are far more aligned than the inwardly-focused manager can even notice
(Freeman, Harrison & Wicks, 2007, 23, emphasis added).
Managerial Model: Inward Focus
Figure 7: Managerial Model: Inward Focus
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B. The Stakeholder Approach

In contrast to the shareholder-focused Managerial Model, R.E. Freeman advocates another
perspective. In the past, many companies have operated in a vacuum with limited interaction
with stakeholder groups beyond direct customers. Today, more and more companies understand
that they operate instead in a dynamic system where interaction with diverse stakeholders is
fundamental to business success. While some stakeholders have a particular interest in a specific
area, most are concerned with several issues. Setting the boundaries of a firm’s role and
responsibilities vis-à-vis its stakeholders is often a question of dialogue and negotiation.
The term “stakeholder” is sometimes used in the popular literature to refer to a firm’s external
constituents, e.g., the community or even the environment. At first consideration, it might appear
that stakeholder theory does not focus on shareholders; but that would be an incorrect
interpretation. Shareholders or owners are important stakeholders; they are simply no more
important than other stakeholders. Moreover, the stakeholder approach recognizes that, if a
decision-maker were to place shareholders above other stakeholders, in fact shareholders would
lose out. Placing customers, employees, the community or other stakeholders at a lower priority
level can cost the organization from a strategy perspective, which costs shareholders in real
dollars.
Clearly, the stakeholder model is not intended to serve
as a critique of profitability.
Instead, it demonstrates how profitability is one element
of a more complex economic model –
one that includes ethical decision-making as a vital component of strategy.
The idea behind a stakeholder perspective is that business is embedded in a complex set of social
and economic networks. One cannot extricate or separate one part of that network, e.g.,
shareholders, because business affects and is affected by a number of individuals, organizations,
and communities, and it is in these interrelationships that businesses develop and grow. Thus,
business has responsibilities to those stakeholders. The normative intent is to remind us that all
stakeholders, including firms, are people or groups of people so all company interactions are
between and among people. This should make a normative difference, but sometimes it does not.
Enron forgot that energy trading affected real live customers and their well-being. So trading
became a game; unfortunately real people were the pawns in that game.
But how does ethical decision-making look different under a stakeholder approach compared to a
shareholder model? Freeman explained that one needs to understand business “as a set of
relationships among groups which have a stake in the activities that make up the business.
Business is about how customers, suppliers, employees, financiers (stockholders, bondholders,
banks, etc.), communities and managers interact and create value. To understand a business is to
know how these relationships work. And, the executive’s or entrepreneur’s job is to manage and
shape these relationships.” (Freeman, Harrison & Wicks, 2007)
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John Mackey, CEO of Whole Foods explains the tenuous balance between shareholders and
other stakeholders and demonstrates that he and Friedman are relatively aligned.
. . . [W]e have not achieved our tremendous increase in shareholder value by making
shareholder value the primary purpose of our business. In my marriage, my wife’s
happiness is an end in itself, not merely a means to my own happiness; love leads me to
put my wife’s happiness first, but in doing so I also make myself happier. Similarly, the
most successful businesses put the customer first, ahead of the investors. In the profit-
centered business, customer happiness is merely a means to an end: maximizing profits.
In the customer-centered business, customer happiness is an end in itself, and will be
pursued with greater interest, passion, and empathy than the profit-centered business is
capable of. Not that we’re only concerned with customers. At Whole Foods, we measure
our success by how much value we can create for all six of our most important
stakeholders: customers, team members (employees), investors, vendors, communities,
and the environment. (Friedman, Mackey & Rodgers, 2005)
A typical stakeholder map may look like the one below (see Figure 8).
A Typical Stakeholder Map
Figure 8: A Typical Stakeholder Map
C. Globalizing the Stakeholder Model

In his book, The World is Flat (2005), Tom Friedman contends that, in a global economy, we
cannot escape each other. The world has gotten smaller, and according to Friedman, there are no
longer externalities; whatever a company does affects others - and that is inescapable, just as
what happens in one culture affects the rest of us. As an example,
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[t]he hardware in a Dell Inspiron 600m laptop comes from factories in the Philippines,
Costa Rica, Malaysia, China, south Korea, Taiwan, Germany, Japan, Mexico, Thailand,
Singapore, Indonesia, India and Israel; the software is designed in America and
elsewhere. The corporations that own or operate these factories are based in the United
States, China, Taiwan, Germany, South Korea, Japan, Ireland, Thailand, Israel, and Great
Britain. And Michael Dell [CEO of Dell] personally knows their CEOs…” (Wright,
2005)
Thus, complex stakeholder interrelationships must be part of managerial strategy as ways to

created value-added for primary stakeholders. Indeed, as Freeman himself writes, “Corporations
are not the center of the universe, and there are many possible pictures.” (Freeman, 2010, 216)
One was of visualizing this less corporate-centric universe is to consider a stakeholder map of
the global economy in which there are many and equal stakeholders. Novo Nordisk, a Danish
pharmaceutical firm, places its patients with diabetes in the center of its map, to remind its
managers and researchers what is most at stake for Novo Nordisk: the development of successful
drugs. (See Figure 9.) Pfizer Switzerland has created a stakeholder map based on a system, with
no center at all, instead including itself as one of many players in a complex, networked
economic and political environment (Werhane, 2010). (See Figure 10.)
Stakeholders at Novo Nordisk
Figure 9: Stakeholders at Novo Nordisk
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A Systems Model: Pfizer
Government(s) Competition Public/Private

Uninsured
&Regulators Insurers
Pharma Physicians/ Hospitals &

Industry Prescribers HMO’s Pharmacies
Clinics
Pfizer Media LDC –

Patients
Switzerland Patients
Created by Sybille Sachs, University of Zurich
Figure 10. A Systems Model: Pfizer
C. A Framework for Effective, Ethical Decision-Making

Given these above approaches to ethical decision-making, we can now develop a framework for
ethical decision-making in business. A typical framework for resolving ethical dilemmas might
include the following process.
1. Facts: What are the facts? What are the biases or unverified assumptions? Often times,
one is faced with pieces of information and it is the decision-maker who must recognize
that, together, these facts comprise an ethical issue to be explored and resolved.
2. Issues: What are the issues in this scenario or case? Which ones present ethical
challenges? The challenges might arise through facts, as above or, alternatively, a
decision-maker could be presented with an ethical issue about which she or he must
gather all relevant facts. Whether the facts give rise to the issue, or the issue is presented
and the decision-maker must gather the facts, an appropriate resolution requires
comprehensive awareness of both elements.
3. Alternatives: What viable alternatives are available? Think “out of the box” and consider
what might be some more innovative alternatives that would not ordinarily present
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themselves. Strive to move beyond those that are presented to you to those that you or
your organization can create anew.
4. Stakeholders: Who are the stakeholders involved in connection with each alternative?
Be aware that different alternatives might implicate new stakeholders; therefore, who
affects or is affected by each alternative? Who has the power and how might it be used
most effectively? Are there some stakeholders who are more important in this instance
than others? If so, why?
5. Impact: Examine the impact of each alternative on each stakeholder.
6. Guidance: At this point in the decision process, you have gathered information and have
applied stakeholder processes to analyze potential outcomes. Additional assistance may
be available from external sources or other resources:
a. Guidelines from your profession, your organization and your own espoused
values
b. Guidelines from your own values prioritization and those of your organization or
profession.
7. Action: What is the best or “least worst” choice? Which is viable, practical, and
achievable? (See questions below.)
8. Monitor Outcomes: Now monitor the resulting outcomes, both short-term and long-
term. What might have to be changed? What was worthwhile? Can this be used as a
model for other firm and managerial agendas? How could you use each decision as a
basis for learning, development and training processes?
Seen graphically, the decision framework is represented in Table 1 with follow-up questions in
Table 2.
1. Facts
Ø Obtain the facts
2. Issue(s)
Ø identify the dilemma
3. Alternatives
Ø what choices do you have (look not only to a & b, but also to y & z!)
4. Stakeholders
Ø who has an interest? What are their motivations? How much power does each hold?
5. Impact of alternatives on each stakeholder?
Ø stakeholders’ resulting impacts on you? benefits/harms, rights/wrongs?
6. Additional assistance
Ø guidance from ethical theory, your profession, or you organization
7. Action
Ø now what?
8. Monitor outcomes
Table 1: Ethical Decision-Marking
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Principled Approach
• Does this pass the “mirror” test?
• Is this a model of “right” behavior [precedent] both locally and globally?
• What would most ethical person or company do?
• Will it stand the test of time?
Utilitarianism
• Who is harmed, who benefits? How should we prioritize stakeholders interest?
• Is the company being only self-serving or we considering others?
• Does it violate any moral minimums?
“Rights Talk”
• What rights are at stake?
• Does this violate any basic rights?
• How does this action fit with the local culture/social/religious context(s)?
Fairness
• Are we (company or manager) using a fair process?
• Does each stakeholder have equal opportunity?
• Are we transparent? [publicity test] Are we respecting local norms and if not, why not?
Virtue and Character

• Is it consistent with your personal or corporate code?
• Am I acting in line with my personal and corporate integrity?
• Is this consistent with local values [what a community admires, not what it practices in fact]?
Legal questions
• Is this action legal – locally – by home country standards – internationally?
• Where’s the legal line?
Table 2: Action – How to choose?
VII. Conclusion: Take-Aways from This Booklet
• What did you learn from reading this booklet?

• How might this process help you make more effective, ethical decisions?
• Can you apply the decision model to cases you will do in class? To other issues you have
experiences or might experience in the workplace as an employee or manager?
• What did you learned that will be useful in your career?
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References
Carroll, A. B. (1991). The pyramid of corporate social responsibility: Toward the moral
management of organizational stakeholders. Business horizons, 34(4), 39-48.
Freeman, R. E. (2010). Strategic management: A stakeholder approach. Boston, MA:
Cambridge University Press.
Freeman, R. E., Harrison, J. S., & Wicks, A. C. (2007). Managing for stakeholders: Survival,
reputation, and success. New Haven: Yale University Press.
Friedman, M. (1970). The social responsibility of business is to increase its profits. New York
Times Magazine, 13, 32-33.
Mackey, J., & Friedman, M. (2005). Rethinking the social responsibility of business. Journal of
Reason, 10, 15-17.
Freidman, T. (2005). The world is flat. New York, NY: Farrar, Straus and Giroux.
Werhane, P. H. (2011). Globalization, mental models, and decentering stakeholder
approaches. Stakeholder theory, 111-129.
Wright, R. (2005). Reading between the lines: The incredible shrinking planet. What liberals can
learn from Thomas Friedman’s New Book’. Retrieved from http//www.slate.com/id/2116899
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VIII. Appendix A: A Note on Five Traditional Theories of Moral Reasoning
UVA-E-0092
A NOTE ON FIVE TRADITIONAL THEORIES OF MORAL REASONING5
The study of ethics and the analysis of moral decision-making are traditions as old as philosophy
itself. The development of procedures for ethical decision-making and reasonable standards for
behavior are part of every culture, and the description of values, moral beliefs and mores of a
society, institutions, or particular individuals are part of the way we define and describe people,
collectives, and states. Yet the tasks of justifying moral beliefs and integrating them into ordinary
life, and the processes involved in applying ethical standards to everyday decision-making are
incomplete and exasperating since everyday decision-making is a process that sometimes
challenges those beliefs.
In business, the process is more difficult because economic goals and exigencies often appear to
override other considerations. Integrating ethical considerations into managerial decision-making
without pushing aside economic considerations is neither easy nor without risk. Yet ignoring
normative considerations in economic affairs is itself a normative decision that overlooks
elementary facts: (1) most economic decisions are choices where the decision-makers could have
chosen otherwise; (2) every such decision or action affects people, and an alternative action or
inaction would affect them differently; and (3) every decision or set of decisions is embedded in
a belief system that presupposes some basic values or their abrogation.
The term “ethics” or “ethical” is often used to refer to good behavior, and the term “morals”
sometimes refers to the mores or norms of a particular community. We shall usually use the term
“morality” interchangeably with “ethics.” The term “ethics” will be used as a generic word
referring to the analysis, the process, and the normative elements of decision-making, including
what is right or wrong, good or bad, how we should act, and the standards for judging conduct.
An ethical judgment includes evaluating bad as well as good decisions, actions, motives, and
behavior.
Philosophical ethics is the study of moral discourse, the analysis of the nature of moral
principles, and the study of the nature and justification of moral terms. The task of business
ethics includes studying the appropriateness of moral discourse in economics, analyzing the
moral status of institutions such as corporations, which, like individuals at least in some sense,
5
This case was prepared by Patricia H. Werhane. It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright ã 1994 by the University of
Virginia Darden School Foundation, Charlottesville, VA. Reprinted with permission, all rights reserved. To order
copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
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appear to make moral decisions, and scrutinizing the relativity of moral principles, both in an
institutional setting and in the multinational arena.
Ethics is also empirical or descriptive. The collection of information on business, business

values, or the belief structure of a particular corporate culture, descriptive data analysis of the
actual decision-making habits of managers, and the analysis of case studies are all part of
business ethics’ empirical work.6
Ethics is also more explicitly normative; ethicists study and develop moral standards, rules, and
procedures for ethical decision-making. In business ethics, the viability of those standards and
procedures includes the possibility of their practical application in particular contexts.
The distinction between descriptive and normative ethics is a critical one; it allows us to
introduce distinctions important in any ethical analysis. In such discussions, one wants always to
distinguish between what is accepted practice in a particular situation or set of contexts, and what
a particular institution or culture holds to be acceptable or valuable, even when such ideals are
not practiced throughout the society. Such distinctions become even more acute when dealing
with multinational contexts. For example, in the now famous case of Lockheed’s negotiations
with the Japanese in the 1970s for a Lockheed TriStar contract, what appeared to be accepted
practice in Japan—for managers to make “sensitive payments” to governmental officials in order
to get contracts—turned out to be unacceptable to the Japanese.
What is accepted practice, of course, is not always moral, and this distinction leads to another,
that between what is legal and what is ethical. What is enacted into law is often grounded on
ethical principles, such as basic human rights or the principles of justice. Most legal systems do
not cover all ethical considerations, and indeed, we often appeal to moral principles to judge the
law. But not all laws are ethical, as witnessed in South Africa, where until recently it was illegal
not to discriminate. Sometimes the law reflects actual practices of a community, but often
practices of a community circumvent the law. Thus, we want to keep in mind the distinctions
between what is legal, what is acceptable or held to be of value, and what is, in fact, accepted
practice.
Let us turn to a brief discussion of some important components of five prominent, traditional ethical
theories. This discussion, while not conclusive or complete, will help us develop a framework for
moral reasoning and decision-making that takes into account and answers the demands of some of
the various approaches to moral reasoning while having practical applications.
Utilitarianism
Whenever one analyzes an ethical issue in business, one’s concern is with the economic costs
and benefits of the alternatives. Although such an approach appears to be primarily economic, it
is buttressed by a well-known ethical theory, utilitarianism. Linking what is universally desired
with what is desirable, the utilitarian argues that what is most important and universally valued is
the satisfaction of desires or interests, human pleasure or happiness, or the reduction of human
6
Kenneth Goodpaster, “The Concept of Corporate Responsibility,” Just Business ed. Tom Regan (New York:
Random House, 1984) 294–99.
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suffering. Moreover, a utilitarian points out that whatever one’s motives or intentions, we judge
human action in terms of its outcomes; that is, we measure the positive or negative utility of an
action itself, not merely what it was meant to achieve. The best sort of decision, then, is one that
maximizes human interests, best satisfies desires or pleasures, or minimizes harm. (Human
interests include life, health, wealth, human dignity, autonomy, or mere pleasure.)
A utilitarian measures harm and benefit in terms of their qualitative and quantitative merit, long-
term and short-term results, or immediate or latent satisfaction. In making a moral decision, one
takes into account how a particular action or set of decisions would affect the greatest number of
people, evaluating each person’s interests impartially.7 The best kind of moral decision-making,
then, applies the principle of utility impartially over the range of persons affected by the decision
or its outcomes, weighing each person and his or her interests equally, seeking equitable, if not
equal, distribution of benefits or harm. The best outcome either maximizes the interests (or
contributes to the happiness) of the greatest number, leading to more benefits than harm for most
people, or at a minimum, reduces harm, all things considered.
Some utilitarians argue that one judges each act separately according to its utility. Others argue
that one generalizes decision-making, judging a decision in accordance to the rule it embodies. In
each instance, the utilitarian asks whether this sort of action is the kind of action that ordinarily
produces a balance of the benefits and/or a reduction of the harm. Utilitarians are sometimes
accused of developing a theory that does not focus on what is uniquely human because animals,
too, seek pleasure and avoid pain. But a utilitarian would respond that only human beings can
make choices, distinguish between pleasure and benefit, and determine what is in their best
interests. Thus, only humans can direct and maximize utilitarian concerns.
Making choices on the basis of utility is a very basic, normative, decision-making practice. This
is standard fare not only for business, but also for everyday choices and for public policy. Yet it
may be the case that utilitarianism cannot account for all that is at issue in a decision, even a
decision in business. It could be the case that some sorts of practices are wrong for other reasons,
despite their widespread practice or utility. For example, blacks in South Africa have the highest
standard of living of any blacks in Africa. Yet the question remains, are these positive benefits
always justified if the means to achieve them are questionable by some other standard? The
famous nineteenth-century utilitarian John Stuart Mill answered this question by arguing that
freedom is unique and of the primary interest of human beings, and that other interests and
benefits are secondary to freedom, including economic welfare. So benefits are not utility
maximizing, according to Mill, if basic freedoms are violated or not realized.8
From another utilitarian perspective, one could ask Mill whether we can always justify
sacrificing economic benefits for freedom, even if this causes widespread human suffering as,
say, a revolution in South Africa surely will do. One can see, then, that a balance must be struck
between the very basic value of freedom and the other, very basic need to alleviate human
7
As John Stuart Mill says, “As between his [the agent’s] own happiness and that of others, utilitarianism requires
him to be as strictly impartial as a disinterested and benevolent spectator.” Utilitarianism (Cleveland: Meridian
Books, 1968), 268. Mill also quotes Bentham as saying, “Everybody to count for one, nobody for more than one”
(319).
8
John Stuart Mill, Utilitarianism, especially chapter five.
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suffering. In multinational operations, these questions are important, because the aim of every
multinational company is to increase economic benefit, both for itself and, in the process, for the
host country. But if those benefits cost a society in terms of losses to other interests or freedoms,
the company is usually challenged to rethink its operative goals.
Utilitarianism raises some important considerations that must be accounted for in any decision
matrix, including the following:
• Any decision must be impartial, treating each person equally but no more than equally.
• Ideally, no decision is acceptable that increases harms of any sort, even to a small number
of people.
• An ideal decision is one that maximizes the pleasures, preferences, desires, interests, or
well-being of the greatest number.
Rule-Based Morality
When we raise those questions about utilitarianism, we appeal to a second set of traditional ethical
theories sometimes called deontology or rule-based morality. The father of this point of view is the
eighteenth-century German philosopher Immanuel Kant. Kant argued that ethics and ethical
decision-making concerns what is uniquely human, which is our ability to make rational, free
choices from a number of possible alternatives. Moreover, according to Kant, moral decisions have
to do with what we can bring under our control, that is, our choices and our intentional actions
rather than the consequences of our actions, which we cannot always regulate. According to Kant,
moral choices and moral actions also have to do with actions that apply to all human beings. The
best moral choices are those that you would want others to make, even when you cannot make
yourself an exception, and that respect others as persons. A moral act, then, can be defined as an
act done from a sense of principle, which is that principle you would want others to adopt in their
actions and that respects others as moral agents. In contemporary terms, a moral act would be an
act that reasonable persons would agree was right, that you would expect others to do, that could
be embodied into a universally applicable law, and that respects people and respects them equally.
From a Kantian perspective, we might ask the following kinds of questions when deciding what
action to take:
• Does the action set positive or negative precedents?

• Is it an action that is acceptable to other reasonable persons?
• Is it “legislatible?” For example, is it applicable to other similar situations?
• Does it respect or at least not denigrate human dignity?
Kant’s analysis introduces us to a criterion for moral assessment that is not simply an evaluation
of utility or foreseeable outcomes or merely reflects law, codes, or societal mores. Some actions
are judged to be wrong not merely because of their positive or negative outcomes, but also
because they violate standards for acceptable behavior or moral rules. For example, most of us
would agree that we should avoid deception, keep promises, respect the basic rights of everyone
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equally (e.g., the rights to life, freedom, and privacy), treat people fairly, and avoid causing
harm. These rules are standards of ordinary morality that reasonable people would agree should
hold for everyone. Reasonable people advocate and defend those standards (and others), because
it is in the best interest of all of us if these rules are followed, and it is usually not in our long-
term interest if these rules are habitually violated. Moral rules set the criteria for acceptable
behavior by specifying how all are expected to act, without making an exception for ourselves.
Since they are general standards, moral rules help us to evaluate laws, codes, and social
practices. But where do moral rules come from? There are a number of tempting explanations.
Perhaps moral rules are God-given or part of human nature. But proving that is the case involves
us in religious debates that would take us far astray. Another way to derive moral rules is through
a thought experiment. Imagine that you, your family, and your colleagues are on a spaceship
heading for a distant planet that you are going to populate. You are not sure how long the
journey will take or what the conditions will be when you arrive. During the journey, you and the
other passengers must set up the guidelines for behavior and the standards for law and justice
that will regulate the new colony. Since you do not know in advance what your status will be on
the new planet, you are likely to choose guidelines that will give fair opportunities to all settlers,
including yourself and future generations. Under those conditions, you are likely to set
guidelines that specify equal rights to life and basic liberties, protect contracts and promises,
punish lying, stealing, cheating, and murder, and provide everyone with an equal opportunity to
achieve well-being. Assuming that the spaceship travelers are reasonable people, the guidelines
or rules you develop will be those agreed upon by all members of the party. One can think of
moral rules, then, as those rules reasonable people, in ignorance of their own circumstances or
future, would agree are the best standards for their own behavior and the behavior of others.
Moral standards have exceptions, because there are times when one cannot respect all moral
rules or respect them equally. For instance, when one’s life is threatened, one often must kill in
self-defense. But one can override standards (e.g., that everyone has a right to life) only when
one has good reasons, reasons that other reasonable people would accept as being sound (e.g.,
self-defense) because they appeal to another standard (e.g., equal rights include my right to life
and freedom).9
Moreover, although moral rules are general rules, how they are interpreted depends, in part, on
the context of a particular situation. For example, one would not be required to never lie, even in
extreme circumstances such as national emergencies or war.
Some commonly held moral rules include:
• nonmalevolence (avoid harming others)

• keeping promises, honoring contracts
• respecting persons and their rights
• mutual aid (for one’s family, and/or community, and/or nation, and/or world)
9
Adam Smith, Lectures on Jurisprudence, ed. R. L. Meek, D. D. Raphael, and P. G. Stein (Oxford: Oxford
University Press, 1978), especially A (i.ii.12-14); and Bernard Gert, Morality (New York: Oxford University Press,
1988), especially chapters 1-7.
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• respect for property (however defined)
A Rights Approach
The idea of the respect for human dignity leads us to a third tradition, derived from rule-based
morality, which claims that independently of the culture, historical context, or the social
institutions in which they find themselves, human beings have certain moral rights simply by
virtue of being human. Everyone should be entitled to realize these rights, though in fact they
may not be universally recognized.
Those who hold that human rights are basic moral claims argue that certain rights (in particular
the rights to life, freedom, equal opportunity, and the right not to be harmed) are necessary for
human dignity. Without those rights, life as a full human being is impossible because rational
choice and control of one’s life would not be an option.
Philosophers often distinguish between positive and negative rights. Negative rights are the
rights not to be interfered with, harmed, or threatened, and the right to be free to do as one
pleases so long as those actions do not interfere with others’ similar rights. It is often argued that
basic rights include only negative rights, because only those sorts of rights apply universally to
every human being. Some negative rights include:
• the right to life

• the right to liberty
• the right to personal respect
• the right to be left alone
Negative rights are distinguished from positive rights or welfare rights. These more controversial
rights include rights to a decent minimum standard of living, food, housing, education, and
(sometimes) employment. Even those who defend only negative rights, however, sometimes
qualify that defense by arguing that, without minimum standards of well-being, rights to life and
freedom could not be entertained or enjoyed.
Some examples of positive rights include:
• the right to survive

• the right to personal security and safety
• the right to a decent standard of living
• the right to education
Utilitarian theories, rule-based morality, and a rights approach all entail a theory of moral
obligation. That is, if benefits or a minimization of harm are desirable, then obligations are built
into our decision-making to achieve that end. If certain rights are basic to the human condition,
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then one has equal obligations to respect the rights of all humans equally. But what is the extent
of one’s obligations? Are one’s duties merely negative ones; that is, not to cause or increase
harm, not to infringe on others’ rights, and to act in such a way that one does not set negative
precedents or violate norms of common sense morality? Or are one’s duties positive ones; that is,
to maximize human interests, to be proactive in setting positive precedents, and to enforce
human rights?
There are no simple answers to those questions. In part, the answers have to do with one’s ability, the
context in which one is operating, and societal expectations. But the questions are important in
business ethics because they concern the extent of corporate obligations. Business makes a unique
contribution to the economic well-being of our society. Yet sometimes the public expects business to
be proactive by taking a positive role in social responsibility.
The debate about the extent of positive and negative obligations of business cannot be resolved
absolutely. The discussion of rights and obligations does, however, lead to certain tentative
conclusions:
1. Managerial decision-making must question any action, set of actions, or corporate goals
that, on balance, contribute negatively to human well-being or contribute harm to human
rights or human dignity. A prudent business decision is one that, at the least, recognizes
minimum obligations not to worsen the status or viability of these ideals.
2. Ordinarily, any actions that, on balance, weaken human rights or contribute to their
violation are not acceptable, even when these actions result in economic benefits.
Virtues and Virtuous Character
The question of self-restraint and prudence in business decision-making introduces the notion of
managerial virtue. In the preceding analysis of traditional ethical theories, we have neglected one
important aspect of ethics that is central to a discussion of behavior: virtue. It is often argued that
business, like other social phenomena, is a practice or a set of social practices. What is important
and often ignored in this analysis is the character of the managers who are engaged in such
practices: their virtues and vices. In a point of view derived from Aristotle rather than Kant, the
cultivation of excellence in moral character is crucial for managers. Business is part of a
community and managers need to see themselves as good citizens in that community. The
development of moral character is a necessary condition for good business people and therefore
for ethical excellence in business.
In a contemporary Aristotelian analysis, Robert Solomon cites six Aristotelian virtues as being
central to business. These virtues can be broken down as follows:
• community or social responsibility

• excellence
• public identity
• membership and loyalty
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• integrity
• good judgment
• integration or wholeness
The six civic virtues are mapped against what Solomon calls the passions of the social self:
loyalty, honor, and a sense of shame. The aim of the model is the common good, the well-being
of society, of which business is an integral part. The strength of this framework is its focus on
personal character and moral excellence in a social setting in which the individual is not
isolatable from that setting.10
Although personal moral excellence is a necessary condition for business decision-making, what
is peculiar or even unique to applied ethics of which business ethics is a part, are the kinds of
moral dilemmas faced in real-life settings. Solving the kinds of dilemmas that often confront
individuals in institutional and market contexts requires skills in moral reasoning that go beyond
character; the decision-maker must take into account the precedents and precedent-setting
standards that entail impartial generalizations projecting beyond a particular business situation.
What is unique or at least interesting about business decision-making is that it is inherently
contextual and utilitarian even as it demands the application, or setting out, of principles or rules.
The development and exercise of good moral character is a necessary condition for moral
managerial decision-making. But managerial virtue is not enough, in itself, to solve the moral
dilemmas in business. This analysis suggests that any framework for ethical decision-making
should include the minimum requirement that the manager avoid doing business with other
managers and businesses that consistently exhibit or practice negative virtues. Otherwise, the
proliferation of vices in business is economically encouraged and allowed to flourish.
Social Justice
Social justice, a fifth set of issues, is linked to traditional ethical theories. Justice is ordinarily
synonymous with fairness, the requirement of consistency, equity, and impartiality. Justice
requires treating similar cases similarly and treating persons as equals except when they have
relevant differences. This formal, comparative definition is usually supplemented with a
noncomparative one, the stipulation that each person is to be given his or her due (what one has a
right to claim as a person, or what one deserves or is owed because of need, merit, contracts,
effort, contribution, or some other appropriate criterion). These two definitions complement each
other as if we focused on treating persons as equals, it would be possible for us to treat every
person impartially but poorly. The comparative stipulation is necessary, too, or else we could
give each person his or her due in individual instances without being consistent or impartial.11
Justice concerns both processes and outcomes, and often the criteria for evaluating whether a
process or outcome is just are different. A process would be fair if it treated all persons or
institutions impartially and as equals and if the procedures gave each person his or her due in that
10
Robert C. Solomon, Ethics and Excellence (New York: Oxford University Press, 1992): especially Part III.
11
Alan Gewirth, “Economic Justice: Concepts and Criteria,” Economic Justice ed. Kenneth Kipnis and Diana T.
Meyers (Totowa, NJ: Rowman & Allanheld, 1985): 9–10.
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context. Treating persons and institutions impartially and as equals does not entail treating every
person equally. Rather, it implies two criteria. The first and most obvious criterion is the ideal of
offering equal opportunities for all participants in a particular process. A just process does not
discriminate based on inequality when the inequality hurts people’s opportunity to participate in
the process. For example, when an NFL team such as the Chicago Bears holds a tryout, everyone
who wants to (even women) should be allowed to try out, but most of us should not be allowed
on the team because we are not qualified to play. The second criterion is giving each person his
or her due. For example, if you have two children, one of whom is sick, and you have medicine
for only one child, it would be fair to give the medicine only to the sick child rather than
distribute it equally to them.12
In a process, justice is an ideal and seldom achievable, but there are clear cases of injustices that
could have been avoided. For example, airlines used to bar men from applying for positions as
flight attendants. The airlines’ process of hiring was unfair because gender is not a relevant
qualification for becoming a flight attendant.
Two criteria for determining the justice of any process, based on the principles of treating similar
cases similarly and giving each person his or her due, are evaluating a process in terms of equal
opportunity and treating people as equals. Those principles serve as guidelines underlying the
development of rules and policies. Nevertheless, a process could be unfair, yet produce a balance
of benefits and harm very much like a fair process. For example, ordinarily women are not
allowed to try out for major sports teams. Women have not brought suit against teams or leagues,
however, because 99.9 percent are physically unqualified. Even if the process of selection was
changed, the outcome is not likely to be different.
It is tempting to try to develop one principle of justice that encompasses all human activities and
phenomena. But what should this principle be? Is it most fair to distribute social goods equally?
What about the inequality of human needs? What about agreements or contracts, one’s efforts
and contributions, or societal rules? Several criteria have been suggested as ideals of distributive
fairness: equality, need, effort, contribution, merit or virtue, contracts and other agreements,
societal mores or rules, and even chance.13
A more subtle approach was proposed by Michael Walzer. Walzer points out that different
societal activities (what Walzer calls “social spheres of interest”) embody distinct social-justice
criteria that govern both the distribution of opportunities in processes and the ideal distribution of
outcomes. What might be considered a fair method of distribution for one set of societal
activities could be inappropriate for another.14 For example, in a politically democratic society,
we use the criterion of equality to distribute the right to vote, but this measure is unacceptable
when we are hiring. Welfare distributions are based on the principle of need. The lottery is based
on chance. The Academy Awards are (allegedly) based on merit.
12
Ronald Dworkin, Taking Rights Seriously (Cambridge: Harvard University Press, 1977): especially pages 225–29.
13
Diana T. Meyers, “Reason, Unreason, and Economic Justice,” Economic Justice ed. Kipinis and Meyers, 1. See
also Gregory Vlastos, “Justice and Equality,” Social Justice ed. Richard B. Brandt (Englewood Cliffs, NJ: Prentice-
Hall, Inc., 1962).
14
Michael Walzer, Spheres of Justice (New York: Basic Books, 1983).
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Hartman & Werhane
In the market, we use a number of criteria to judge the fairness of both economic processes and
market outcomes. The most prominent criterion is a contract. Contracts made between
reasonable persons are considered binding and fair under normal conditions, whatever the
distribution of outcomes, so long as both parties are in a similarly competitive, informed position
and so long as the contract does not violate any basic rights. For example, voluntary employment
contracts are usually valid except when one tries to sell oneself into slavery. The market also
allocates and distributes rewards in terms of contribution; at least ideally, it does so. A fair process
of employment entails equal opportunity and qualifications in hiring, employment contracts, and
the criteria of effort and contribution in retention, reward, and promotion.
We tend to focus on the fairness of market processes, arguing that unequal economic
distributions that result from fair market processes are not unfair because they are a result of
effort, contribution, an efficient market, and fair competition. Nevertheless, because no market
process is completely impartial and distributive advantages are not always identical to what
people are due, we sometimes balance these inequalities or externalities with laws that govern
the distribution of opportunities (EEO legislation) or outcomes (graduated income tax and taxes
on corporate earnings). Moreover, because no activity is purely isolated from any other, social
spheres overlap, and externalities often produce untoward consequences. Any corporation has to
take into account the effect of externalities as well as the fairness of procedures, even when it has
no intention of creating harm, violating rights, or engaging in inequitable activities.
In sum, a framework for ethical decision-making must use fair procedures and account for unjust
outcomes.
1. Any decision and procedure for implementation should:

a. treat each person as an equal
b. give each person his or her due (i.e., what is owed because of need, merit, virtue,
contracts, moral rules, or law)
At the same time,
2. Any outcome that is a result of unfair procedures should be subject to review and
revision.
3. Any procedure, even an ostensibly fair one, that produces unfavorable outcomes should
be subject to review.
Finally, all these theories demonstrate that, although an ethical decision is rational, it is not based
merely on facts. Facts are critical because we need to take into account the context of our
decisions so that what is harmful or unjust (or conversely beneficial or just) makes sense in that
situation or set of situations. At the same time, moral decision-making demands a justificatory
procedure that is not merely subjective because a moral decision must be an impartial decision
that is publicly defensible. Moral reasoning, then, is not merely articulating what one thinks,
believes, or feels. Moral judgments are not merely personal opinions, although they may result in
opinion. Rather, moral judgments, like other judgments, must be logically defensible and
publicly acceptable. Each of the foregoing theories sets out minimum standards for an acceptable
moral decision that can serve as nonrelative criteria for moral judgments. For it is surely the case
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that any business decision that on balance increases harm to interests or rights, that promulgates
vices, or that creates more injustice than the status quo cannot be an acceptable one.
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IX. Appendix B: Principles

A. The Ten Commandments
Exodus 20:1-17(LXX)
I. Thou shalt have no other gods beside me.

II. Thou shalt not make to thyself an idol, nor likeness of anything, whatever things are in the
heaven above, and whatever are in the earth beneath, and whatever are in the waters under
the earth. Thou shalt not bow down to them, nor serve them; for I am the Lord thy God, a
jealous God, recompensing the sins of the fathers upon the children, to the third and fourth
generation to them that hate me, and bestowing mercy on them that love me to thousands of
them, and on them that keep my commandments.
III. Thou shalt not take the name of the Lord thy God in vain; for the Lord thy God will not
acquit him that takes his name in vain.
IV. Remember the sabbath day to keep it holy. Six days thou shalt labour, and shalt perform all
thy work. But on the seventh day is the sabbath of the Lord thy God; on it thou shalt do no
work, thou, nor thy son, nor thy daughter, thy servant nor thy maidservant, thine ox nor
thine ass, nor any cattle of thine, nor the stranger that sojourns with thee. For in six days the
Lord made the heaven and the earth, and the sea and all things in them, and rested on the
seventh day; therefore the Lord blessed the seventh day, and hallowed it.
V. Honor thy father and thy mother, that it may be well with thee, and that thou mayest live
long on the good land, which the Lord thy God gives to thee.
VI. Thou shalt not commit adultery.
VII. Thou shalt not steal.
VIII. Thou shalt not kill.
IX. Thou shalt not bear false witness against thy neighbor.
X. Thou shalt not covet thy neighbor's wife; thou shalt not covet thy neighbor's house; nor his
field, nor his servant, nor his maid, nor his ox, nor his ass, nor any of his cattle, nor
whatever belongs to thy neighbor.
B. The Bill of Rights, the First 10 Amendments to the U.S. Constitution, 1891
Amendment I 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.
Amendment II A well regulated Militia, being necessary to the security of a free State, the right of the
people to keep and bear Arms, shall not be infringed.
Amendment III No Soldier shall, in time of peace be quartered in any house, without the consent of the
Owner, nor in time of war, but in a manner to be prescribed by law.
Amendment IV The right of the people to be secure in their persons, houses, papers, and effects, against
unreasonable searches and seizures , shall not be violated, and no Warrants shall issue , but upon probable
cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the
persons or things to be seized.
Amendment V No person shall be held to answer for a capital, or otherwise infamous crime, unless on a
presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the
Militia, when in actual service in time of War or public danger; nor shall any person be subject for the
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same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be
a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor
shall private property be taken for public use, without just compensation.
Amendment VI In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial,
by an impartial jury of the State and district wherein the crime shall have been committed, which district
shall have been previously ascertained by law, and to be informed of the nature and cause of the
accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining
witnesses in his favor, and to have the Assistance of Counsel for his defence.
Amendment VII In Suits at common law, where the value in controversy shall exceed twenty dollars, the
right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any
Court of the United States, than according to the rules of the common law.
Amendment VIII Excessive bail shall not be required, nor excessive fines imposed, nor cruel and
unusual punishments inflicted.
Amendment IX The enumeration in the Constitution, of certain rights, shall not be construed to deny or
disparage others retained by the people.
Amendment X The powers not delegated to the United States by the Constitution, nor prohibited by it to
the States, are reserved to the States respectively, or to the people.
C. United Nations Universal Declaration of Human Rights
Article 1. All human beings are born free and equal in dignity and rights. They are endowed with reason
and conscience and should act towards one another in a spirit of brotherhood.
Article 2. Everyone is entitled to all the rights and freedoms set forth in this Declaration, without
distinction of any kind, such as race, colour, sex, language, religion, political or other opinion, national or
social origin, property, birth or other status. Furthermore, no distinction shall be made on the basis of the
political, jurisdictional or international status of the country or territory to which a person belongs,
whether it be independent, trust, non-self-governing or under any other limitation of sovereignty.
Article 3. Everyone has the right to life, liberty and security of person.
Article 4. No one shall be held in slavery or servitude; slavery and the slave trade shall be prohibited in
all their forms.
Article 5. No one shall be subjected to torture or to cruel, inhuman or degrading treatment or punishment.
Article 6. Everyone has the right to recognition everywhere as a person before the law.
Article 7. All are equal before the law and are entitled without any discrimination to equal protection of
the law. All are entitled to equal protection against any discrimination in violation of this Declaration and
against any incitement to such discrimination.
Article 8. Everyone has the right to an effective remedy by the competent national tribunals for acts
violating the fundamental rights granted him by the constitution or by law.
Article 9. No one shall be subjected to arbitrary arrest, detention or exile.
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Article 10. Everyone is entitled in full equality to a fair and public hearing by an independent and
impartial tribunal, in the determination of his rights and obligations and of any criminal charge against
him.
Article 11. (1) Everyone charged with a penal offence has the right to be presumed innocent until proved
guilty according to law in a public trial at which he has had all the guarantees necessary for his defense.
(2) No one shall be held guilty of any penal offence on account of any act or omission which did not
constitute a penal offence, under national or international law, at the time when it was committed. Nor
shall a heavier penalty be imposed than the one that was applicable at the time the penal offence was
committed.
Article 12. No one shall be subjected to arbitrary interference with his privacy, family, home or
correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of
the law against such interference or attacks.
Article 13. (1) Everyone has the right to freedom of movement and residence within the borders of each
state.
(2) Everyone has the right to leave any country, including his own, and to return to his country.
Article 14. (1) Everyone has the right to seek and to enjoy in other countries asylum from persecution.
(2) This right may not be invoked in the case of prosecutions genuinely arising from non-political crimes
or from acts contrary to the purposes and principles of the United Nations.
Article 15. (1) Everyone has the right to a nationality.
(2) No one shall be arbitrarily deprived of his nationality nor denied the right to change his nationality.
Article 16. (1) Men and women of full age, without any limitation due to race, nationality or religion,
have the right to marry and to found a family. They are entitled to equal rights as to marriage, during
marriage and at its dissolution.
(2) Marriage shall be entered into only with the free and full consent of the intending spouses.
(3) The family is the natural and fundamental group unit of society and is entitled to protection by
society and the State.
Article 17. (1) Everyone has the right to own property alone as well as in association with others.
(2) No one shall be arbitrarily deprived of his property.
Article 18. Everyone has the right to freedom of thought, conscience and religion; this right includes
freedom to change his religion or belief, and freedom, either alone or in community with others and in
public or private, to manifest his religion or belief in teaching, practice, worship and observance.
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Article 19. Everyone has the right to freedom of opinion and expression; this right includes freedom to
hold opinions without interference and to seek, receive and impart information and ideas through any
media and regardless of frontiers.
Article 20. (1) Everyone has the right to freedom of peaceful assembly and association.
(2) No one may be compelled to belong to an association.
Article 21. (1) Everyone has the right to take part in the government of his country, directly or through
freely chosen representatives.
(2) Everyone has the right of equal access to public service in his country.
(3) The will of the people shall be the basis of the authority of government; this will shall be expressed
in periodic and genuine elections which shall be by universal and equal suffrage and shall be held by
secret vote or by equivalent free voting procedures.
Article 22. Everyone, as a member of society, has the right to social security and is entitled to realization,
through national effort and international co-operation and in accordance with the organization and
resources of each State, of the economic, social and cultural rights indispensable for his dignity and the
free development of his personality.
Article 23. (1) Everyone has the right to work, to free choice of employment, to just and favourable
conditions of work and to protection against unemployment.
(2) Everyone, without any discrimination, has the right to equal pay for equal work.
(3) Everyone who works has the right to just and favourable remuneration ensuring for himself and his
family an existence worthy of human dignity, and supplemented, if necessary, by other means of social
protection.
(4) Everyone has the right to form and to join trade unions for the protection of his interests.
Article 24. Everyone has the right to rest and leisure, including reasonable limitation of working hours
and periodic holidays with pay.
Article 25. (1) Everyone has the right to a standard of living adequate for the health and well-being of
himself and of his family, including food, clothing, housing and medical care and necessary social
services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age
or other lack of livelihood in circumstances beyond his control.
(2) Motherhood and childhood are entitled to special care and assistance. All children, whether born in
or out of wedlock, shall enjoy the same social protection.
Article 26. (1) Everyone has the right to education. Education shall be free, at least in the elementary and
fundamental stages. Elementary education shall be compulsory. Technical and professional education
shall be made generally available and higher education shall be equally accessible to all on the basis of
merit.
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(2) Education shall be directed to the full development of the human personality and to the
strengthening of respect for human rights and fundamental freedoms. It shall promote understanding,
tolerance and friendship among all nations, racial or religious groups, and shall further the activities of
the United Nations for the maintenance of peace.
(3) Parents have a prior right to choose the kind of education that shall be given to their children.
Article 27. (1) Everyone has the right freely to participate in the cultural life of the community, to enjoy
the arts and to share in scientific advancement and its benefits.
(2) Everyone has the right to the protection of the moral and material interests resulting from any
scientific, literary or artistic production of which he is the author.
Article 28. Everyone is entitled to a social and international order in which the rights and freedoms set
forth in this Declaration can be fully realized.
Article 29. (1) Everyone has duties to the community in which alone the free and full development of his
personality is possible.
(2) In the exercise of his rights and freedoms, everyone shall be subject only to such limitations as are
determined by law solely for the purpose of securing due recognition and respect for the rights and
freedoms of others and of meeting the just requirements of morality, public order and the general
welfare in a democratic society.
(3) These rights and freedoms may in no case be exercised contrary to the purposes and principles of
the United Nations.
Article 30. Nothing in this Declaration may be interpreted as implying for any State, group or person any
right to engage in any activity or to perform any act aimed at the destruction of any of the rights and
freedoms set forth herein.
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Business Ethics & Corporate Responsibility

Hartman & Werhane

BUSINESS ETHICS AND CORPORATE RESPONSIBILITY

Laura Hartman and Patricia Werhane

Business Ethics & Corporate Responsibility

BUSINESS ETHICS AND CORPORATE RESPONSIBILITY1

Laura Hartman and Patricia Werhane

Business Ethics & Corporate Responsibility

Ethical awareness and integration have an impact on organization-wide strategic

Business Ethics & Corporate Responsibility

II. Learning Objectives

After completing this booklet, the reader will be able to

Business Ethics & Corporate Responsibility

IV. What is meant by “ethics?” What is meant by “business ethics?”

Business Ethics & Corporate Responsibility

employee, manager, executive, entrepreneur or customer, the organizational level of the

Figure 2. Ethical decision-making operates on at least three different levels

C. Ethics and Self-Interest

The confusion lies in a fuzzy notion of self-interest. Each of us as individuals is self-interested;

Business Ethics & Corporate Responsibility

D. Corporate or Organizational Terminology

Corporate Responsibility. Much of commerce is conducted by corporations, and most of

“When a well-run business applies its vast

Business Ethics & Corporate Responsibility

Business Ethics & Corporate Responsibility

Link between Ethics, Compliance & Risk

Procedures, Training, Monitoring, Auditing Compliance

Ethical foundation of the organization

Family Law Custom Culture Self Religion Underlying values

Figure 3. Link between ethics, compliance & risk

V. Application of Ethics to Decision-Making

A. Origins of Ethics: Value formation

Business Ethics & Corporate Responsibility

• Organizational standards (company codes, guidelines, statements)

Business Ethics & Corporate Responsibility

B. Ethical decision-making and moral judgment

1. Awareness of an ethical problem

2. Ability to reason about ethical issues

3. Having the motivation to act ethically

4. Having the persistence (or courage or fortitude) to

Business Ethics & Corporate Responsibility

• Is this something that we would want other individuals or

• Will the decision create benefits, or more benefits than harms?

• Are any human rights at stake in this decision?

• Does it treat each individual, each stakeholder, and each

• Do you live the life you want to live?

Figure 5: Five Theories of Moral Reasoning

Business Ethics & Corporate Responsibility

VI. What is an Effective and Ethical Decision-Making Process in Business?

A. The Shareholder-Managerial Model

Business Ethics & Corporate Responsibility

Managerial Model: Hierarchical View

Figure 6: Managerial Model: Hierarchical View

Freeman explains that the incongruity of the Managerial Model is that it

Business Ethics & Corporate Responsibility

Managerial Model: Inward Focus

Figure 7: Managerial Model: Inward Focus

Business Ethics & Corporate Responsibility

B. The Stakeholder Approach

Clearly, the stakeholder model is not intended to serve

Instead, it demonstrates how profitability is one element

of a more complex economic model –

one that includes ethical decision-making as a vital component of strategy.