1 Chapter 3 Contents

 The business environment

 Moral responsibilities
 Corporate social responsibilities (CSR)
 Narrow V/S Broader
 The invisible hand & other arguments
 Corporate responsibilities
 Institutionalization ethics within the corporation

Ajmal Khan-MBA Finance

Email: Ajmal.khanzai1985 mobile 0770665566
2
The Business Environment
In the united states there are four basic forms of business organization: Sole
proprietorship, partnership, corporation and limited liability companies.

Sole proprietorship:
A business form for which there is one owner. This single owner has
unlimited lability for all debts of the firm.

Partnership
A business form in which two or more individuals act as owners. In a general
partnership all partners have unlimited liability for the debts of the firm; in a
limited partnership on or more partners may have limited liability
3 Continuation
 Corporation
A business firm legally separate from its owners its distinguishing feature
include limited liability easy transfer of ownership, unlimited life and
an ability to raise large sum of capital.

 Limited Liability Company (LLC)

A business form that provides its owners called members with corporates
style limited personal liability and the federal tax treatment of a
partnership.
4 Moral responsibility
When a person perform or fails to perform a morally significant
action, we sometimes think that be or she deserves a particular kind
of response. Praise and blame are perhaps the most common form
this reaction.

Example:
One who encounters a car accident may be worthy of praise for
having saved a child from inside the burning car or alternatively one
may be worthy of blame for not having at least used one ‘s cell phone
to call for help
5 Moral responsibility
Examples:
If you leap into the river and rescue a drowning child, you are responsible for
the child being saved and deserve to be praised.

If you are playing with your car radio and accident occurs so you are
responsible for that accident and you deserve to be blamed

If accident resulted from your having suffered from heart attack then you
would not be seen as morally responsible
6 Corporate Social Responsibility (CSR)

CSR in Equation Form Is the Sum of:

Economic Responsibilities (Make a profit)
Legal Responsibilities (Obey the law)
Ethical Responsibilities (Be ethical)
7 Corporate Social Responsibility (CSR)

Responsibility Societal Expectation Examples

Economic Required Be profitable. Maximize
sales, minimize costs, etc.

Legal Required Obey laws and regulations.

Ethical Expected Do what is right, fair and

just.
8
Narrow v/s Broader view
Narrow view:
According to this view the only responsibility of a corporation is to maximize its
profit without any deception and fraud. Corporations can participate in social
activities only if it is in the best interest of that corporation.

Broader view
Corporations have other responsibilities also rather than maximization of profit
like…
 Caring for consumers..
 Caring for employees..
 Caring for environment………
9
Outcome of the two Views

Corporations are the integrated part of a society it is not something

separate, so it must care for the society.

Example:
If any company producing chemicals and discharge its waste in a
river, damaging the commercial and recreational fishing are, should
be held responsible for this action?
10 Should corporate responsibility be broadened
We have few arguments In this regard….

 The invisible hand argument.

 The hand of government argument.
 The inept custodian argument.
11 The invisible hand argument
Adam smith claimed that when each of us acts to promote our own economic
interest we are led by an invisible hand…. To promote the general good.
If business are permitted to seek self interest they will satisfy our material
need to great extent. According to this argument corporations should be held
morally responsible for their economic role (Producing goods and services.
For this they can be blamed or praised
But corporations should not be held responsible for non-economic role like
Racial injustice, poverty or pollution…
12 The Hand of Gov’t Argument
They will pollute the environment, allow racial and gender inequalities and
deceive customers.
They will do anything (Legal or illegal) which can bring profit for them
How can we broadened the corporate moral responsibility through the strong
hand of government by systems of laws & regulations
The government will provide moral direction to the corporation
13
The inept custodian argument
Corporate executives lack social & moral expertise to make other than
economic decision (Profit)
So to change corporate executives with non-economic responsibilities would
be to put social welfare in the hands of inept custodian.
These executives are the limited in their activities than profit maximization
14 Summary

 Invisible –Hand-Argument – Corporations are Free-Market

 The-Hand-Of-Government – Corporations cannot be trusted,

government must control

 The Inept-Custodian Argument – Corporate executives are not

qualified on social issues
15 Institutionalizing Ethics within the Corporation

How can we institutionalize ethics in the corporation?

1:Corporation should acknowledge the importance, even necessity of conducting business
morally. They must be committed to ethical behaviors.

2:Corporations should make a real effort to encourage their members to take moral
responsibilities seriously .

3: Appointment of ethical committees, dealing ethical issues facing organizational members in

their work place.
16 Examples of corporate moral responsibilities

1:Don’t pollute
2:Don’t misrepresent the product
3:Don’t bribe
4:Improve the skills of your employees
5:Seek to hire the disables
6:Contribute to the education
7:Locate plants in economically depressed areas
17 Corporate responsibility towards consumers

Consumer the most important stakeholder of a corporation. If consumer do

not buy, commercial business cease to exist.
Consumer ,s interest should be foremost when business are designing and
delivering the products.

Examples.
1: The duty to inform consumer truthfully about the product contents, purpose and uses.
2: The duty not to misrepresent or conceal information's about a product.
3: The duty to take “due care” to prevent any foreseeable injuries..
18 Consumer Rights

Related rights the consumers have in their social contract with corporations are.

 The right of safety…to be protected from harmful products.

 The right to know about the product…..full information

 The right to be heard…..complaints.

 The right to be compensated…if any harm is done to consumer.

19 Corporate responsibility in advertising

 Advertising is to inform consumers about product and motivate them to

purchase. Advertising is big business and it is significantly effecting the
consumer.
 Corporate ethical responsibility in advertising is not to deceive or conceal
the truth about the product….
Like…
 Inserting harmful chemicals into products without informing the buyer
is deceptive advertising.
 Giving false statements in ADS is also deception.
20 Arguments about Advertising

Arguments that justify advertisement……

 without advertisement consumers would be uninformed about the product.
 Firms across globe use ads as competitive weapon.
 Ads increase consumption and spending.
 Ads boost a country exports.
Arguments against advertising……..
 Advertisement are false statements
 conceal facts
 Deceive consumers with profit goal in mind but not consumer welfare.
21 Deception and Unfairness in ADS

Deceptive techniques in advertisement are….

1. Ambiguity
2. Conceal facts
3. Exaggeration
22 Ambiguity(uncertain)

When ads are ambiguous, they can be deceiving…..

For example..
The (continental baking company) was charged with such ambiguity in its
ad…
Eating the (profile bread) would lead to weight loss.
The fact was that the bread contained the same calories
23 Conceal Facts

When advertisers conceal facts, they neglect to mention or

distract consumers away from information, Knowledge of
which would probably make their product less desirable.
For example…
SHELL used to advertised that its gasoline had no ”platform ate” but
neglected to mention that all other brands did .
24 Exaggerations

Advertisers can mislead through exaggeration

that is by making claims unsupported by evidence .

For example…
A claim that pain reliever is 50% stronger than aspirin.
25 Product Safety

 The degree of safety associated with using the product…

 Product is safe if the risk are known and judged to be acceptable or
reasonable by the buyer.
Corporate responsibility for product safety

1:Duty of disclosure…
If the product that the consumer is buying posses any defect and
can cause any harm. the consumer should be informed.
2: The duty not to misrepresent:
Selling a product in such a way to deceive the buyer like….giving
false information's about the product.
26 Product Safety

 Business should give priority to the safety of the product…

 Business should abandon the misconception that accidents occurs
exclusively as a result of product misuse.
 Business must monitor the manufacturing process itself regularly.
 Companies should investigate consumers complaints about the products.