CHAPTER I: The Role of Business in Social and Economic Development

Lesson 2: The Social Function of Business

Time Frame: Week 2

Content Standard:

The learner demonstrates an understanding of the purpose of establishing business enterprises.

Performance Standard:

The learner shall be able to explain the purpose of business organization and their role in socioeconomic
development.

Learning Competencies:

At the end of this module, the learner shall be able to:

1. Show how these organizations contribute to socioeconomic development.

LESSON CONTENT
Why should Business be Ethically Sensitive?
In 2002, all businesses worldwide produced more than $40 trillion worth of goods and services. Businesses
play a major role in keeping any economy alive. It is therefore necessary to ensure the proper and ethical
governance of businesses. The people who are directly involved in businesses must behave in an ethical manner
in managing and operating a business. Otherwise, no one would be willing to invest or loan money to the business.
Thus, businesses must be managed with moral perspective. Unethical business-dealing threatens the survival of
human society, and in some cases, destroys the fiduciary relationships of people.
By beginning to study the social function of business, we begin to be introduced to fundamental concepts
of what is right or wrong in our human conduct and their implications for business as an important human activity.
The fundamental reason for examining the activities of business from the social and ethical perspective is for the
promotion of the common good, protection of the individuals’ interests, and the preservation of the human society
in general. Without this ethical consideration, business will be a chaotic human activity because there will be no
common understanding and agreement about what is the right and wrong human conduct.
Given the long list of prominent business scandals just around the turn of the 21st century, there is no
escaping the fact that ethical reasoning is vital to the practice of business and finance. Integrity is paramount for
a successful managerial career: one must grasp the norms of ethical behavior if one wants to succeed in the field
of finance and business. In addition, the central role of corporate leaders in setting the ethical tone for their
organization is widely accepted.
In the first few years of the 21st century, the corporate world has come under increasing pressure to behave
in an ethically responsible manner. In particular, accountability failures have led to bankruptcies and restatements
of financial statements that have harmed countless shareholders, employees, pensioners, and other stakeholders.
These failures have created a crisis of investor confidence and caused stock markets around the world to decline
by billions of dollars.
Ethics are moral principles that guide the conduct of individuals. Unfortunately, business managers and
employees sometimes behave in an unethical manner. A number of managers of companies in the last
decades engaged in accounting or business fraud. These ethical violations led to fines, firings, and lawsuits. In
some cases, managers were criminally prosecuted, convicted, and sent to prison.
The following are the for main reasons that may persuade a business to act ethically:
1. Legal reasons, of which there are several different sorts;
2. Public image reasons, which again, might encompass a number of different types;
3. Pragmatic reasons, acknowledging that sometimes, acting ethically might be the most direct path to
business success; and
4. Moral reasons, where it is affirmed that these reasons are different from each of the other three types.
The Role of Business in Poverty Alleviation
Poverty is experienced and understood differently by different people in different regions and at different
times. Broadly, “poverty” is conceptualized as a deficiency or shortage of some sort, typically in comparison
either to the living standards of others within the same society or culture (called “relative poverty”), or to a
universal measure of adequate provision (called “absolute poverty”). Historically, this shortage has been
considered synonymous with lack of income, or at least insufficient income to meet a household’s daily needs.
Economic definitions of poverty tend to concentrate on either income or expenditure. The former measures
absolute poverty in terms of where a household’s income falls on the universal poverty line, whereas the latter

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assesses relative poverty in terms of whether a household can afford to buy the basic goods necessary for survival
within their specific context (typically with the consequences for nutrition and hunger highlighted).
Businesses can help alleviate poverty with programs and projects that aim to improve the living conditions
in underdeveloped communities. With the alleviation of poverty, people become more capable workers and
professionals able to take advantage of the goods and services that businesses have to offer. When businesses
thrive, so does the entire community.
Continuing Extreme Poverty in the Midst of Economic Growth
There are three highly plausible causes of the constant existence of poverty amidst economic growth. First,
economic growth is rarely uniformly distributed across a particular location or country. For an instance, only
China’s and India’s coastal parts have booming economic growth than the regions located away from the coast
since only those regions located or near the coast are highly involved in world trade and investments. Second, is
the failure of the government to evenly distribute economic goods among all communities. The government tend
to neglect the poor and favor those who belong to the upper class of society, may it be intentional or unintentional.
Or more precisely, sometimes, the government tend to favor only the part of society from which they can benefit
greatly. The third and last reason could be attributed to cultural biases and discrimination within a particular
society, whether or not those biases and discriminations are embedded in the legal and political systems.
Areas of Business Most in Need of Ethical Attention
Each role in a business organization involves unique responsibilities (such as the obligations of an
employee to an employer of the fiduciary duties of the management to the shareholders) that determine what a
person should do. Ethical issues arise in relationships with every corporate constituency, including: (a)
employees; (b) customers; (c) suppliers; (d) shareholders; and (e) society as a whole.
In the case here in the Philippines, it would be good to examine issues relating to the following:
The Social Responsibilities of Capitalist Business Practices
Milton Friedman, an American economist, originally stated that the only social responsibility of business
is to increase its profits. However, William Sauser came to disagree, in a sense, that he stated in the Journal of
Business Ethics article, “Ethics in Business: Answering the call”, that business organizations have four levels of
responsibility:
(1) Earning profit;
(2) Legal responsibility;
(3) Ethical responsibility; and
(4) Discretionary responsibility.
Responsibilities of businesses beyond profit making have come to be called Corporate Social
Responsibility (CSR), which is defined by the World Business Council for Sustainable Development (WBCSD)
as a continuing commitment by business to behave ethically and contribute to economic development while
improving the quality of life of the workforce and their families, the local community, and the society at large.
With this, more and more companies are embracing CSR because of profitability, and also because more managers
now believe that being a better corporate citizen is a source of competitive advantage.
The Morality of Advertising
Advertising presents several ethical issues, one of them being Deceptive Advertisements. Deceptive ads
are those that make false statements about or misrepresent the product, for example, the picture presented in the
advertisement is different from the actual product. Deceptive ads may occur not only through sentences or
propositions but also through pictures, individual words, or through certain combinations of objects which can
deceive the eye and the mind. A typical example of deceptive advertising is one where the pictures from the box
of product do not look the same as the contents of the product. In this case, the picture is said to be deceptive.
Article 108 of the Consumer Act of the Philippines (R.A. 7394) declares that “The State shall protect
consumers from misleading advertisements and fraudulent sales promotion practices.” Article 110 also adds that
“It shall be unlawful for any person to disseminate or to cause the dissemination of any false, deceptive or
misleading advertisement by Philippine mail or in commerce by print, radio, TV, outdoor advertisement or other
medium for the purpose of inducing or which is likely to induce directly or indirectly the purchase of consumer
products or services. An advertisement shall be false, deceptive or misleading if it is not in conformity with the
provisions of this Act or if it is misleading in a material respect. In determining whether any advertisement is
false, deceptive or misleading, there shall be taken into account, among other things, not only representations
made or any combination thereof, but also the extent to which the advertisement fails to reveal material facts in
the light of such representations, or materials with respect to consequences which may result from the use or
application of consumer products or services to which the advertisement relates under the condition prescribed
in the said advertisement, or under such conditions as are customary or usual.”

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Basic Employee Rights, Job Description, Other Labor-related Ethical Issues
The Labor Code of the Philippines, a.k.a. PD 442, is a decree instituting a labor code thereby revising and
consolidating labor and social laws to afford protection to labor, promote employment and human resources
development, and ensure industrial peace based on social justice. It lays down rights of workers in relation to
wages, right to self-organization, collective bargaining, security of tenure, and just and humane conditions of
work. Moreover, RA 6727 (Wage Rationalization Act) mandates the fixing of the minimum wages applicable to
different industrial sectors. This law rationalized wage determination by establishing the mechanism and proper
standards through the creation of Regional Tripartite Wages and Productivity Boards (RTWPBs) authorized to
determine the daily minimum wage rates in the different regions.
Book Four of the Labor Code of the Philippines lay down the “Health, Safety, and Social Welfare
Benefits” accorded to workers. Book Five, on the other hand, entitled “Labor Relations,” lays down the policies
of the State with regard to labor. These policies are:
(1) To promote and emphasize the primacy of free collective bargaining and negotiations, including voluntary
arbitration, mediation and conciliation, as modes of settling labor or industrial disputes;
(2) To promote free trade unionism as an instrument for the enhancement of democracy and the promotion of
social justice and development;
(3) To foster the free and voluntary organization of a strong and united labor movement;
(4) To promote the enlightenment of workers concerning their rights and obligations as union members and
as employees;
(5) To provide an adequate administrative machinery for the expeditious settlement of labor or industrial
disputes;
(6) To ensure a stable but dynamic and just industrial peace; and
(7) To ensure the participation of workers in decision and policy-making processes affecting their rights,
duties and welfare.
Insider Trading
Insider trading in the stock market is characterized as the buying or selling of shares of stock on the basis
of information known only to the trader (an “insider,” somebody belonging to the company, as opposed to the
public) or to a few persons. Insider trading, in finance, is the reverse of speculation. It is reward without risk,
wealth-generated – and injury done to others – by an unfair advantage in information. Thus, the morality of insider
trading could be questioned, whether it is ethical or unethical.
The growing importance of ethics in finance has been recognized by people from all disciplines. However,
even among academic researchers, there is still no consensus on what kinds of conduct should be regarded as
unethical. Opponents of insider trading, for example Werhane (1989), strongly believe that insider trading is
inherently immoral or evil in itself. She argues that insider trading, both in its present illegal form and as a
legalized market mechanism, undermines the efficient and proper functioning of a free market. Proponents,
conversely, assert that insider trading is viable and efficient economic means and can be used to serve the best
interests of shareholders and the economy at large. For example, some say that insider trading provided a powerful
incentive for creativity and is the only appropriate way to compensate entrepreneurial activity.
Pollution and Resource Depletion
The Encyclical Laudato Si: On the Care for our Common Home, issued by Pope Francis in 2015, is a
wake-up call to help humanity understand the destruction that man is rendering to the environment and his fellow
man. While addressing the environment directly, the document’s scope is broader in many ways as it looks at not
only man’s effect on the environment, but also the many philosophical, theological, and cultural causes that
threaten the relationship of man to nature and man to each other in various circumstances. Paragraph no. 20,
which is on Pollution, waste and the throwaway culture, states: “Some forms of pollution are part of people’s
daily experience. Exposure to atmospheric pollutants produces a broad spectrum of health hazards, especially for
the poor, and causes millions of premature deaths. People take sick, for example, from breathing high levels of
smoke from fuels used in cooking or heating. There is also pollution that affects everyone, caused by transport,
industrial fumes, substances which contribute to the acidification of soil and water, fertilizers, insecticides,
fungicides, herbicides and agrotoxins in general. Technology, which, linked to business interests, is presented as
the only way solving these problems, in fact proves incapable of seeing the mysterious network of relations
between things and so sometimes solves one problem only to create others.” Business organizations should take
seriously the task of caring for the earth, by regularly embarking on projects seeking to diminish or eradicate
pollution, and to renew the natural resources they tend to use up or deplete.
Whistle Blowing
Whistle-blowing is the act, for an employee (or former employee), of disclosing what he believes to be
unethical or illegal behavior to higher management (internal whistle-blowing) or to an external authority or the

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public or the public (external whistle-blowing). Its status is debated: some see whistle blowers as traitorous
violators of organizational loyalty norms; others see them as heroic defenders of values considered to be more
important than company loyalty. Whistle-blowing is generally considered from the viewpoint of professional
morality. Unfortunately, these “messengers of truth” are almost always the subject of dreadful retaliations; hence,
to decide to “blow the whistle” can be quite difficult and complicated. Whistle-blowing can be taken from the
perspective of duty and rights theories: does anyone have the duty to blow the whistle? If so, whose rights are
being trampled upon? There is also a tendency to judge it based on the motivation of the whistle blower. In a way,
whistle blowers should strive to act like saints. Yet, it is logically impossible to hold both whistle-blowing as
mandatory and whistle blowers as heroes or saints. The ethics student should, thus, carefully weight all the factors
involved and come up with a comprehensive decision criterion or framework.

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