APPL I ED ET H I C S:

BUSIN E S S E T H I C S
JOY G. ARELLANO
BUSINESS
-as an enterprise directed
towards accumulation and
growth of profit, is prone to
many unethical practices,
especially by those who
are in power
•the world of business is full
with examples of behavior that
attempt to circumvent society's
ethical standards not solely
because it does not recognize
the good, but because it finds
the good too costly, and
therefore, counter-intuitive to
the profit motive
• some business engage in illegal and unfair labor
practices;
• some do not pay their workers proper wages;
• some do not maintain a safe working environment;
• some force workers to work overtime without extra
pay;
• some engage in fraud by selling products that do
not perform as advertised;
• some enter illegal contracts that bypass legal
codes;
• some damage the environment;
• some are involved in monopolies and cartels that
effectively control the price of consumer goods
3 BASIC NORMATIVE THEORIES IN BUSINESS ETHICS
DERIVED FROM JOHN HASNAS
• John Hasnas is a professor of business at Georgetown’s
McDonough School of Business and a professor of law
(by courtesy) at Georgetown University ‘Law Center in
Washington, DC, where he teaches courses in ethics and
law. Professor Hasnas is also the Executive Director of
the Georgetown Institute for the study of markets and
ethics, whose tripartite mission is to produce high-
quality research on matters related to the ethics of
market activity, improve ethics pedagogy, and educate
the broader, non-academic community about ethical
issues related to the functioning of markets.
 1. THE STOCKHOLDER THEORY
• states that “businesses are merely arrangements by which one group of people – the
stockholders – advance capital to another group – the managers – to be used to
realize specified ends
• holds that managers pursue their bottom line (a company's net income) by legal and
non-deceptive means
• there are no ethical constraints on a manager’s obligation to increase profits, the
theory contends that the ethical constraints society has embodied in its laws + the
general ethical tenet of honest dealing constitute the ethical boundaries for a
manager’s pursuit to increase profitability
• it is the people who invested money in the company that serve as the
main source of business decisions
•FOR EXAMPLE: if a manager deems it morally necessary to
spend 10% of the company’s earnings on socially oriented
activities involving children of employees but does this without the
knowledge and approval of the stockholders, then the manager
action is deemed wrong in this theory as the manager violated
his/her financial and executive obligation to the stockholders.
Put in ethical terms, the manager’s duty to honor contractual
agreements overrides his duty to promote happiness of the
greatest number.
2. THE STAKEHOLDER THEORY
• holds that “the management’s fundamental
obligation is not to maximize the firm’s financial
success but to ensure its survival by balancing
the conflicting claims of multiple stakeholders”
• STAKEHOLDER – any individual or group that stands to benefit or
suffer from decisions made by a corporation
• 2 principles: a) Principle of corporate legitimacy and b) Stakeholder
fiduciary principle
• these principles seeks to ensure that all interests related to the firm
are given a voice, esp. in decisions that have potentially injurious
effects on stakeholders
1. PRINCIPLE
OF CORPORATE LEGITIMACY. The corporation should be
managed for the benefit of its stakeholders: customers, suppliers,
owners, employees, and local communities. The rights of these
groups must be ensured, and further, the groups must participate, in
some sense, in decisions that substantially affect their welfare.

2. STAKEHOLDER FIDUCIARY PRINCIPLE. Management bears a fiduciary

relationship to stakeholders and to the corporation as an abstract
entity. It must act in the interest of the stakeholders as their agent,
and it must act in the interest of the corporation to ensure the
survival of the firm safeguarding the long-term stakes of each group.
• FOR EXAMPLE: A manufacturing firm sources its raw materials
from an indigenous tribe in an underdeveloped community,
the stakeholder theory obligates the firm to make sure that
the people are fairly compensated for their product. it is
unethical to buy their goods at an unfairly non-competitive
price even if these people do not really know how the
market works.
• ANOTHER CASE: If a factory opens its operations in a local
community, it must ensure the health of the people and the
surrounding areas without compromising the firm’s operations. This is
particularly applicable to those firms using or producing hazardous
chemicals. Even if the community is not a direct stakeholder, it is still
an ethical consideration if the firm’s operations could affect the people
around it’s base.
 3. THE SOCIAL CONTRACT THEORY
• “all businesses are ethically obligated to enhance the welfare of society by
satisfying consumer and employee interests without violating any of the
general canons of justice”
• posits an implicit agreement between businesses and society that the
latter only tolerates the existence of the former if it can directly benefit
from it
• the terms of the agreement is the canon upon which the specific
obligations of the government to its people are drawn from it
• when businesses are legally recognized as agents, society “authorizes
them to own and use land and natural resources and to hire members of
the society as employees”
 FOR EXAMPLE. Laguna Technopark, Inc.
and its locators are committed in giving
back to its stakeholders and nearby
communities through its various
Corporate Social Responsibility (CSR)
programs. As spearheaded by the
Laguna Technopark Locators CSR
Group, some of its institutional programs
include medical/dental missions,
environmental conservation/clean-up
drives, and educational support
services.
CORPORATE SOCIAL REPONSIBILITY. a company’s strategic initiative to contribute to the well-being
of society and the environment
REIDENBACH & ROBIN’S CONCEPTUAL MODEL OF
CORPORATE MODEL DEVELOPMENT
• argue that there are certain organizational behaviors that
exhibit a business’ level of moral development
• objective measure or standard against which the prevailing
ethical culture of a business may be judged as either
ethical or unethical
• corporate moral development model was inspired by
Lawrence Kohlberg’s “Stages of Moral Development”
• not a continuous process and not all undergo each of all
the 5 stages
STAGE 1: THE AMORAL ORGANIZATION
•here, the organization is absorbed on increasing their sales
and profits, with no concerns in regards to ethics and
morality
•survival and profit generation are the only objectives the
organization is absorbed with
•top management rules by power and authority; employees
respond by acquiescing
•reward system supports a ‘go along’ type of behavior; those
who dare question the management are expelled from the
organization
STAGE 2: THE LEGALISTIC ORGANIZATION
•when the legalistic phase is reached, the
organization starts to be more concerned about
policies, regulations, and laws
•although the corporation is still fixated on profitability,
it nevertheless attempts to comply with all respective
policy frameworks: in other words, it does only what it
is required to do
•“exhibit compliance with the letter of the law as
opposed to the spirit of the law” to avoid any legal
complications
STAGE 3: THE RESPONSIVE ORGANIZATION
•at this point, the organization tries to achieve a balance
between profitability and ethical business for
expediency purposes
•it is becoming more sensitive to ethical and societal
topics and tries to encapsulate some moral concerns in
its way of doing business.
•however, at this stage, the corporation’s mentality is
not yet proactive
•in other words, these types of firms are inclined to give
in to societal demands, realizing that they have an
obligation to operate with society in mind
•concern for other stakeholders begins to manifest
STAGE 4: THE EMERGING ETHICAL ORGANIZATION
• is all about achieving a greater balance between
ethics and profit generation
• here, management shows greater commitment to
moral values and ethical beliefs are starting to
become a part of the company’s culture
• recognizes the existence of social contract The Boeing Company is
an American
between business and society multinational
• various instruments are used to make sure the firm corporation that
designs, manufactures,
conducts business ethically, such as handbooks, and sells airplanes,
policy statements, committees, ombudsmen, and rotorcraft, rockets,
satellites,
ethics program directors; no expertise on ethics telecommunications
yet equipment, and missiles

• example: Boeing facilitates ethics training worldwide. The

company also provides
programs and installed a toll-free number for leasing and product
support services.
employees to report ethical violations
STAGE 5: THE ETHICAL ORGANIZATION
•the highest level a corporation could climb up to
•at this stage, there is a perfect balance between ethical practices and
profitability
•top management and leaders are strongly embracing ethical and
moral behavior as part of the company’s culture, even when this is
sometimes against profitability
•normative moral theories are used and ethical training programs are
continuous
•a firm has now imbibed ethics in its corporate culture
•there is a perfect harmony of the correct actions to the ethical action