Lecture 6: (Chp 3)

Business Ethics -
Normative
Theories
 Philosophical Ethics and Business
Contents of lecture
1. Introduction
2. Moral Agency
3. Moral Philosophy
(Teleological, Virtue Ethics, Deontological, Justice Ethics)
4. Triangle Ethics, and Fraud triangle
5. Applying Case
 1. Ethics and Business-Introduction
Competitive in the Marketplace (Flowing of Order)
1. Supplier: You can’t cancel your order with us
- I have to lay off my employees
2. Purchasing Manager: I am not happy to do this, but I do have
a responsiblity to purchase at the lowest cost.
3. Utilitarianism and Business: Profit maximization & Public
Policy.
Profit: ROI, ROE, ROS
Public Policy: Protector to demand and supplier
 Philosophical Ethics and Business
What is right? (Reposition or Restructuring)
The laid off cases:
Company ABC has five plants, Martha has ben worked for 15
years. Her bos told her, company will have to laid off 200 workers,
luckily her job won’t be affected.

Rumors spread over:

Is the plant closing?
Am I going to lose my job?
How much my severance payments?
 Ethical Decisions of Stakeholders
1. Gather the facts: historical facts; current situations?
2. Ethical issues: Don’ts jump to solution without first identifying
the actual issue.
3. Identifying the affected parties: Stakeholders (Shareholders;
Investors, Suppliers, Employees, Bankers, Taxes
Department).
4. The consequences of decisions: Advantages and
disadvantages- (cost and benefit analysis)
5. Identify the Obligations: Long-term Debts
Obligations – Treasury Bonds
 2. Moral Agency

What is NORM/Standards

Moral agency is an individual's ability

to make moral judgments based on

some notion of right and wrong and to

be held accountable for these actions. 

 (2.1) Moral responsibility

- A person is responsible deserving of blaim

- Ready to accept the consequences of misbehavior
- Ready to evaluate and make corrections: obligations,
knowledge, freedom, choice, accountability, agency,
praise, blame, intention, pride, shame, conscience, etc
- Freedom it does mean everybody is free to speak , to
do, to judge, to threats other. It is a rule or norm, which
is public can accept.
 (2.1) Moral Responsibility
- Harming employees: James Hardie
- Environmental degradation: Union Carbide
Bophal; BHP – Ok Tedi mine, Pulp in Porsea
- Tsunami & Earthquake: Aceh, Nias, Lombok
- Floods: India, Jakarta, Kalimantan

- Cases of student
plagiarism, cheating
Ethical principles in principal-agent relationships

Principal

Contract (conflict of interest)

Agents Third Party

Negotiate
Ethical principles in principal-agent relationships

 An agent acts for/represents a principal

 Agents are not ethically allowed to do what the principals are
not ethically allowed to do.
 Agents cannot exonerate themselves for unethical actions.
Agents are responsible for the actions they perform, whether
they are under command or on behalf for another.
 The principal is morally responsible for the actions of their
agents. Agency involves the delegation of authority but not the
complete delegation of responsibility.
(De George, 1992)
3. Moral philosophy: Three perspectives

Teleological - Virtue Ethics Deontological

Describing the
(Egoism) character as the Kantian Ethics
Utilitarianism driving force an Justice Ethics
ethical behavior.
Consequence - Motivation Non-
based - Integrity Consequential
Duty based

RMIT University©2010 School of Management 11 11

 (3.1) Teleological

1.1. Utilitarianism- Defenitions

1.2. Utilitarianism - Responses

1.3. Utilitarianism - Applications

1.4. Utilitarianism - Limitations

 (3.1) Teleological

1.1. Utilitarianism- Defenitions

- Concern with decisions that promote of good in the world.

- An ethical decision is one that maximizes good.

- Consequences (pleasure, health and satisfaction) and

• pain (sadness, sickness and disappointment).

- Best decision is one that yields greatest net benefit.

 (3.1) Teleological
1. 2. Utilitarianism - responses
2. Rule utilitarianism – Examine the consequences of
having everyone follow a particular rule and calculate
the overall utility of accepting and rejecting the rule.
E.g. 1st class passengers in airline, 1 child policy,
(Utility function theory).
3. Act utilitarianism – Examine the consequences of each
individual act and calculate the utility each time the act is
performed. E.g. firing Gatsby in L1’s exercise because
it is in the best interests of Appleberg Electric
Ferrell et a. (2005)
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 (3.1) Teleological
1. 3. Utilitarianism – applications
2. Define the problem
3. Identify the stakeholders that affected by the problem
4. List the alternative courses of action for resolving the
problem
5. Identify and calculate the short- and long-term costs
and benefits for each alternative courses of action
6. Select the one course of action that yields the
greatest sum of benefits over costs for the greatest
number of people, (Cost and Benefit analysis).
 (3.1) Teleological
 1.4. Utilitarianism- limitations
 Too much focus on ethical ends can lead to ignoring
moral consideration of the means.
 The measurability of consequence: difficult to
evaluate all consequences. For example, those who
are affected in the future.
 Stakeholder analysis: rights of some stakeholders are
ignored
 Fairness: e.g. workers who might be retrenched lack
representation or voice in the decision
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3.2. Virtue Ethics

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Motivation – Maslow Theory
(April 1, 1908 – June 8, 1970)

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Virtue Ethics, Career, Knowledge.

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 Virtue & Moral Agency
A good human being possesses two core
virtues:
1. Integrity – to have educated oneself so
that one is unable to be one kind of
person in one social context, while
quite another in other contexts.
2. Constancy – to pursue the same goods
(objective) through extended periods of
time.
(MacIntyre
, 1999)

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3.3 Deontology - Duty based theories

School of Management 21 21
School of Management 22 22
School of Management 23 23
 Kantianism
 Motive/intention of the act is important
than outcome
 If you feel comfortable allowing everyone
in the world to see you commit an act and
if your rationale for acting in a particular
manner is suitable to become a universal
guiding principle, then committing that act
is ethical.
 Good actions have intrinsic value, actions
are good if and only if they follow a moral
 Kantianism- key factors
- Decisions based upon abstract universal principles:
honesty, promise keeping, fairness, justice, respect.
- Focus on doing what is 'right' rather than doing what will
maximise societal welfare – what is good (as in utilitarianism)
Two formulations of the categorical imperative
 “Always act in such a way that the maxim of your action
can be willed as a universal law of humanity.”
 “Always treat humanity, whether in yourself or in other
people, as an end in itself and never as a mere means”:
ethics of respect.
School of Management 25 25
 Kantianism - Advantages & Limitations
 Produces universal moral guidelines, e.g. Honesty.
 Motive is always taken to be more important than outcome. At
times, this is debatable. E.g. bribery to get job done. But what if
everyone starts bribing to get job done?
 (Hence, it is often argued that Kantianism should be considered
in conjunction with utilitarianism thinking)
 Often involves emotions, which can be wrong at times
 Difficult to determine which rule, principle, right to follow/takes
precedence. E.g. Kantianism may indicate that free speech
rights is “good”; but privacy of others is also “good”.
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 3.4.Justice Ethics: Responsiveness

1. Justice Ethics - Functions

2. Justice Ethics - Actions
3. Justice Ethics - Applications
4. Justice Ethics - Limitations

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 1. Justice Ethics - functions
 Justice – fair treatment and due reward in
accordance with ethical or legal standards

 Managers adopting this theory will provide

the same rate of pay to workers who are
similar in level of skills, responsibility
instead of gender, personality, favouritism

 Protects the interests of stakeholders who

may be under-represented or lack power

 The basic moral question is: How fair is an

action?
 2. Justice Ethics - Actions
1. Distributive – Based on evaluation of
outcomes or results. Benefits derived; equity
in rewards
2. Procedural – Based on processes or
activities that produce the outcome or
results. Decision-making process; level of
access, openness and participation
3. Interaction – Based on evaluation of one’s
perception of whether he/she is treated
fairly. Communication process
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 3. Justice Ethics-application

 Benefits and burdens are identified

 Benefits and burdens are assigned
to stakeholders
 A judgement is made to determine
whether the benefits and burdens
are distributed fairly
 4. Justice Ethics - limitations
 Protects those who lack voice/influence
 Benefits/burdens can be hard to define/quantify
 The rights of some may have to be sacrificed in order to
ensure a more equitable distribution of benefits
 Need to be highly trained (i.e. Judges etc.)

Comparing Utilitarianism with Justice Ethics

 Similar in defining costs (burdens)/benefits
 But, utility is based on net gain which may not consider the
issue of fairness
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 Confucian Ethics
Main principles:
1. Humanity to others and have esteem for yourself
2. Proper action and social harmony
3. Sense of right
4. Respect to/for elders

Emphasizes making profits with human virtue.

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 Consequential vs. Non-Consequential

 An issue of benefits vs. right

 Most people in most situations tend
to use both approaches
 On the other hand, empirical
evidence shows that managers
place a greater concern on utility
(outcomes) than rights/justice

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 4. Triangle of Business Ethics
Ethics - most principles, work place
Sensitivity environment, gamesmanship,

loyalty, peer pressure, job security

that influence ethical decisions

Ethical Ethical - rewards, punishment,

Behavior Incentives and requirement for
Doing “the right things” ethical behavior
rises above a rulers based mindset
that ask, “is it legal”
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Fraud of Triangle

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 Conclusions
 Provide alternative perspectives not
achievable from a single theory.
 Likely to improve decision maker’s
moral awareness and understanding
of the ethical issues involved in the
dilemma.

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5. Applying Theory

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 Tricky presentation
Sam, a sales representative, is preparing a sales presentation
for his firm, Midwest Hardware, which manufactures nuts and
bolts. Sam hopes to obtain a large sales order from a
construction firm that is building a bridge across the Missis
river. The bolts produced by Midwest have a 3% defect rate,
which, although acceptable in the industry, makes it
unacceptable for certain projects, such as those subject to
sudden, severe stress. The new bridge is located near to the
center of a great earthquake zone. If Sam wins the contract,
he will earn a commission of $25,000. But, if Sam tells the
construction firm about the defect rate, the construction firm
may award the job to a competitor whose bolts are more
reliable. Sam is thus in a dilemma on whether to report the
bolts’ 3% defect rate to the construction firm.
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 1.
SamPerspective view from
will conduct a cost-benefit Utilitarianism
analysis to determine
which alternative generate the most utility.
 Building the bridge – improve roadways, transportation
across river; create hundred of new jobs; boost the local
economy; increase revenue for Midwest.
 In contrast, bridge collapse kill or injure
hundreds/thousands of people.
 But bolts only 3% defect rate; earthquake may not occur;
few cars/people at time of disaster.
 Building the bridge create greater utility than not building.
Will Sam report the defect rate? Yes – why?

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 2.
SamPerspective
probably tell the view fromfirmVirtue
construction Ethics
about the defect rate
(honesty) – right thing to do because of the outcome of
the potential loss of lives with the bridge collapse.

 This action will contribute the most positively to his

virtue/integrity as a decision maker

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 Sam3. will be morally
Perspective view from Kantianism
responsible to inform the
construction firm about
the defect rate. The
motive of moral action is
more important than the
potential loss of
commission.

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 Sam will conduct a benefit-burden analysis for the
4. Perspective view fromJustice
various stakeholders (Midwest, construction firm, local
community, government, competitor) and judge
whether the benefits/burdens are fairly distributed
among the stakeholders.
 It is unlikely that with the construction of the bridge will
lead to fairness. E.g. a better qualified competitor
should be more suitable for the job; Lives may be lost
for those using the bridge at the time of the disaster if
Midwest’s bolts are used.
 Sam will probably inform the construction firm on the
bolts’ defect rate.

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 Guidant Consultant
 Identify the main ethical issues of
the case and the affected parties.
 Identify the possible
consequences of the executives’
actions.
 Identify the roles Dr Fogoros
 Identify the executives’
obligations to the affected parties.
 Do you think the executives of
Guidant Corporation acted
ethically? (Justify your opinion
with ethical theories).
 Why do you think Dr Fogoros
statement that the decision of the
Guidant executives ‘to withhold
such data, while statistically
defensible, was questionable’?
adopts and the different positions
he takes.
 Do you think he acted ethically?
How can his actions be justified?
 Are there other cases like this?
1. What is a moral agent, and when is an
organisation morally responsible?
2. What is the difference between consequence
(teleological) based and duty (deontological)
based ethics?
3. What is the difference between utilitarianism,
Kantianism and virtue ethics?
4. Why might normative theory be useful in the
workplace, and how can we use normative
theory to help us make better decisions?
 Tugas Kelompok Untuk Seminar Kedua

Topik: Business Ethics

● Materi diskusi
Norma bisnis
Teleological
Virtue Ethics
Deontological
Kantianism
Justice Ethics
Stewarships (Motivations)
 Paper kelompok 1-4 dikumpulkan tgl 24/10: Seminar tgl 28/10
 Paper kelompok 5-8 dikumpulkan tgl 31/10: Seminar tgl 04/11
 Tugas Kelompok Untuk Seminar Kedua

Topik: Business Ethics

● Kel. 1. Kasus KTP Elektronik (Setya Novanto)
● Kel. 2. Kasus Korupsi oleh Gubernur, Bupati, Walikota,
● Kel. 3. Kasus PT. Garuda Indonesia
● Kel. 4. Kasus PT. Asuransi Jiwasraya
● Kel. 5. Kasus Dosen Univ Maranatha-Dr. Felix Kosim
● Kel. 6. Kasus Rektor UNJ-Prof. Dr. Djaali
● Kel. 7. Perspektif Bisinis, Sudut Pandang Chinese.
● Kel. 8. Perspektif Bisnis, Sudut Pandang Javanese
 References
De George, RT 1992, 'Agency theory and the ethics of agency', in NE
Bowie & ER Freeman (eds), Ethics and agency theory: An introduction, 3
edn, Oxford University Press, New York, pp. 59-74.
Etzioni, A 1996, 'A moderate communitarian proposal', Political Theory, v.
24, n. 2, pp. 155-71.
Ferrell, OC, Fraedrich, J & Ferrell, L 2005, Business ethics: Ethical
decision making and cases, Houghton Mifflin, Boston.
Hartman, LP & Desjardins, J 2008, Business ethics: Decision making for
personal integrity & social responsibility, McGraw-Hill irwin, Boston.
MacIntyre, A 1999, 'Social structures and their threat to moral agency',
Philosophy, v. 74, pp. 311-29.
Singer, M 1997, Ethics and justice in organisations, Avebury, Aldershot.
Trevino, LK, & Nelson, KA 2006, Managing business ethics: Straight talk
about how to do it right, 4 edn, John Wiley & Sons, New York.
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