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Ethical Theory

Presented by: Subhash Yadav Sanjay Kumar Mallik

Contents
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Definition Personal ethics and Business ethics Morality of Law Management and Ethics Normative Theories Some more Normative Theories of Business Ethics Teachings of Church Gandhian Principle of Trusteeship Business and Islam Conclusion

Ethical Theory
Definition of Ethics: Many ethicists prefer to call ethics as study and philosophy of human conduct , with an emphasis of determining right and wrong.
The American Heritage Dictionary define ethics as

The study of the general nature of morals and specific moral choices; moral philosophy ; and the rules or standard governing the conduct of the members of a profession.

In sum, ethics as a moral and normative science refers to

principles that define human behavior as right, good and proper.

Personal Ethics and Business Ethics


y Personal ethics refers to the set of moral values that form

character and conduct of a person.

y Organization ethics describes what constitutes right and wrong

or good and bad, in human conduct in the context of an organization.

y Organization ethics concerned with the issue of morality that

arises in any situation where employers and employees come together for the specific purpose of producing commodities or rendering services for the purpose of making profit.

y An organization can be defined as a group of people who work

together with a view to achieving a common objective.

Morality and Law


y Morality refers to human conduct and value. Ethics refer to study

of human character or behavior in relation to moral values, that is, the study of what is morally right or morally wrong.
y An action can be illegal, but morally right: During the

freedom struggle many wanted freedom fighters had hidden themselves in the houses of patriotic Indians to save themselves from prosecution and imprisonment. Though this was against the British law in India, this patriotic deed of freedom loving Indians was no doubt an admirably brave and moral action.
y An action that is legal can be morally wrong: It will be legal

for an organization which is running in loss to lay off a few employees but it is not morally right to do so.

Management and Ethics


y Management of any business involves hundreds of decisions.

Ethical issues occur in all decision making process.


y The success of any organization is measured by revenues, profits,

cost-cutting, quality, quantity, efficiency. These objective of organization may run in direct conflict with its social commitment which is measured in terms of obligation to stakeholders, both within and outside organization.

Contd..
y Cost-cutting may be used as a tool to enhance revenue and

profit. In the process of realizing profit, the company may layoff some workers.
y For its own survival, it is necessary that the organization should

maintain its competitive edge in the market. It should produce useful, safe, and quality products and services at affordable prices.
y While doing so, the organization should ensure that the interests

of stakeholders are not adversely impacted. This requires fine balancing act on the part of organization.

Normative Theory
y Ethics is a normative study. It aims to arrive at conclusions about

what things are good or bad, or what actions are right or wrong.
y A normative theory aims to discover what should be, and would

include sentences like companies should follow corporate governance standards or managers ought to act in a manner to avoid conflicts of interests.
y Normative ethics (also known as moral theory) is the study of

what makes actions right and wrong. These theories offer moral principles one could appeal to in resolving difficult moral decisions.

Normative Theory

Consequentialist

Non-consequentialist (Deontological-Duty based) Kantian Theories

Egoism

Utilitarianism

Normative Theories
There are different normative perspectives and ethical principles that often contradict one another . There are consequential and non-consequential normative theory. According to William H Shaw , They are following: Egoism, both as an ethical theory and as a psychological theory. 2. Utilitarianism, the theory that a morally right action results in the greatest good to the largest number of people. 3. Kant s ethics, with his emphasis on moral motivation and respect for persons. 4. Other non-consequential themes: duties, moral rights, and prima facie principles.
1.

Ethical Theories in Relation to Business


EGOISM:
y Egoism is an ethical theory that treats self-interest as the

foundation of morality.

y Egoism contends that an act is morally right if and only if it best

promotes an agent s (persons, groups or organizations) long term interests.

y Decision based on egoism mainly are intended to provide

positive consequences to a given party s interest without considering the consequences to the other parties.

y Philosophers distinguish between two kinds of egoism: personal

and impersonal.

Contd..
y The personalist theory argues that person should pursue there

long-term interest , and do not dictate what others will do.


y Impersonal egoists argue that everyone should follow their best

long-term interest. It doesn t mean that an egoist will act against the interest of society. They may be able to safeguard their interest without hurting the interest of others.
y When an organization performs or safeguards its interest

without hurting the interest of others, then we can say that the organization acts ethically.

Psychological Egoism
y Ethicists who propose the theory of egoism have tried to derive

their basic moral principle from alleged fact that humans are by nature selfish creatures .
y According to proponents of psychological egoism, human beings

are so made that they must behave selfishly. They asserts that all human actions are motivated by self-interest and there is nothing like unselfish actions.
y Whistle-blowing in an organization to bring to the notice of top

brass the unethical acts practiced down the line, or by top executives, is an attempt by the whistle blower to either take revenge or become a celebrity.

Criticism of the theory of Psychological Egoism


1.

Egoism as an ethical theory is not really a moral theory at all: Those who espouse egoism have very subjective moral standard, for they wanted to be motivated by their own best interests, irrespective of the nature of issues or circumstances. assumes that all actions of men are motivated by self interest: It ignores and undermines the human tendency to rise above personal safety as proved in thousands of examples of personal sacrifices at the times of calamities such as floods, earthquakes and other natural disasters. every human act to self-interest and self-serving, the theory does not take a clear stand against so many personal or organizational vices such as corruption, bribery, pollution, gender and racial discrimination.

2. Psychological egoism is not a sound theory inasmuch as it

3. Ethical egoism ignores blatant wrongdoings. By reducing

Utilitarianism: Ethics of Welfare


y Utilitarianism is an ethical mentalist theory holding that the

proper course of action is the one that maximizes the overall "good" of the society. The most influential contributors to this theory are considered to be Jeremy Bentham and John Stuart Mill.

y It is thus a form of consequentialism, meaning that the moral

worth of an action is determined by its resulting outcome.

y Utilitarianism was described by Bentham as "the greatest

happiness or greatest felicity principle".

y Ethics is nothing but art of directing the actions of man so as to

bring about the greatest possible happiness to all those who are concerned with these actions.

Contd..
y Summarized, the utilitarian principle holds that An action is

right from an ethical point of view if and only if the sum total of utilities produced by that act is greater than the sum total of utilities produced by any other act.
y The utilitarianism principle assumes that we can some how

measures and add the quantities of benefits generated by an action and deduct from it the measured quantities of harm that act produced, and determine thereby which action produces the greatest total benefits or the lowest total costs.

Analysis of Utilitarian Theory


When we analyze the utilitarian theory, there are certain inferences and implications of the theory that we must take into account:
y

When utilitarian says that practising the theory will lead to the greatest happiness for the greatest number , we should include the unhappiness or pain that may be encountered along with the happiness. One s action will affect other people in different degrees and thus will have different impacts.

Contd..
y

Maximization of happiness is the objective of utilitarianism not only in immediate situation but in long term as well. Utilitarianism agree that most of the time we do not know what would be the future consequence of our actions. Utilitarianism does not expect us to give up our own pleasure while choosing among possible actions.

Contd..
In organizational context it should be understood that:
1.

It provides standard for a policy action namely, if it promotes welfare of all, more than any other alternative, then it is good.

2. The theory provides an objective means of resolving conflicts

of self interest with the action for common good.


3.

The theory provides a flexible, result oriented approach to ethical or moral decision making.

Problems with the Utilitarian Theory


y It concerns the measurement of utility. Utility is a psychological

concept and it differs from person to person, place to place, and time to time. Hence, it cannot be the basis for a scientific theory.
y Karl Marx argues that human nature is dynamic, so the concept

of a single utility for all humans is one-dimensional and not useful.


y It concerns with lack of predictability of benefits and costs. If

they cannot be predicted, then they cannot be measured.


y It concerns the lack of clarity in defining what constitutes

benefit and what constitutes cost. This lack of clarity creates problems, especially with respect to social issues that are given different interpretations by different social or cultural groups.

Kantianism: Ethics of Duty


y Immanuel Kant's theory of ethics is considered deontological for

several different reasons: i. Kant argues that to act in the morally right way, people must act from duty. ii. Kant argued that it was not the consequences of actions that make them right or wrong but the motives of the person who carries out the action.

y Kant stressed that the action must be taken only for duty s sake

and not for some other reason. When we act out of feeling, inclination, or self-interest, our actions have no true moral worth.

y The core idea of his theory is that an action is right if and only if

we can will it to become a universal law of conduct. This means that we must never perform an action unless we can consistently will that it can be followed by everyone.

Organizational Importance of Kantian Philosophy


y Kant introduces an important humanistic dimension to business

decisions. Kant gives more importance to individuals.

y For Kant an action has moral worth only when it is done with a

sense of duty.

y The two formulations of Kant are as follows: 1.

To act only in ways that one could wish others to act when faced with the same circumstances.

2. Always to treat other people with dignity and respect.

To sum up, to Kant, reason is the final authority for morality. Blind beliefs or rituals cannot be the foundation for morality.

Normative theories
y Presently there are three normative theory of business ethics that have evolved over a period of time .

Normative Theories of Business Ethics

Stockholder theory

Stakeholder Theory

Social Contract Theory

Stockholder Theory
y The stockholder theory , also known as shareholder theory ,

expresses the business relationship between the owners and their agents, who are the managers running the day-by-day business of the company.
y As per the theory, businesses are merely arrangements in which

one group of people , namely , the shareholders advance capital to another group namely, the managers to realize certain ends beneficial to them. In this arrangement managers act as agents for shareholders.
y The managers are empowered to manage the capital advanced by

the shareholders and duty bound by their agency relationship to carry on the business exclusively for the purpose outlined by their principals.

Contd..
y According to the strict interpretation of the stockholder theory,

managers have no option but to follow the dictates of their masters.

y If the stockholders vote by a majority that their company should not

produce any obnoxious product which in the perception of the managers would be profitable business proposition the managers still have to abide by the decision of the owners of the company.

y The stockholder theory has been succinctly summarized by

economist Milton Friedman who asserted thus there is one and only one social responsibility of business to use its resources and engage in the activities designed to increase its profits so long as it stays within the rules of the game , which is to stay engaged in open and free competition without deception or fraud .

Contd..
y The theory stresses that managers should pursue profit only by legal

, non-deceptive means. A lot of adverse criticism against the theory could have been avoided had the critics appreciated the stockholder theory did not stresses that managers were expected to pursue profit at all costs , even ignoring ethical constraints .

y The stockholder theory is also associated with the line of utilitarian

argument adopted by liberal classical economists. One s pursuit of profit , goaded by one s enlightened self interest in a free market economy leads collectively to the promotion of general interest as well , guided as it is by Adam Smith s Invisible Hand .

y Apart from this Consequentialist line of thinking in support of the

stockholder theory, there is another deontological argument as well to buttress it. The argument runs like this : stockholders provide their capital to managers on the condition that they use it in accordance with their wishes.

Criticism of the Stockholder Theory


y Robert C. Solomon , in his Ethics and Excellence (1992) finds it

not only foolish in the theory, but cruel and dangerous in the practice and misled from its nonsensically one-sided assumption of responsibility to a pathetic understanding of stockholder personality as Homo Economicus .

y Many ethicists wish to dismiss the theory as impractical and

even foolish, it is because of its perceived association with the utilitarian supporting argument and neo-classical economists, faith in invisible hand of the market forces.

y Another criticism of the stockholder theory is based on a false

analogy . It goes like this : if governments of democratic societies have a moral justification to spend the taxpayer s money for promoting the common welfare of people without taking their consent, then it might mean , by inference , that businesses are also justified in carrying out social welfare activities without the consent of the stockholders .

Stakeholder theory
y In a narrow sense, the stakeholders are all those identifiable

groups or individuals on which the organisation depends for its survival.


y In its empirical form , therefore the stakeholder theory argues

that a corporate s success in the market place can best assured by catering to the interests of all its stakeholder , namely shareholders, customers , employees ,suppliers , management and local community .
y To achieve its objective , the corporate would have to adopt

policies that would ensure the optimal balance among them.

Contd..
y Normative Stakeholder theory contains theories of how managers

or stakeholders should act and should view the purpose of organization. Another approach to the stakeholder concept is the so called descriptive stakeholder theory.
y This theory is concerned with how managers and stakeholders

actually behave and how they view their actions and roles. The stakeholder theory deals with how managers should act if they want to flavor and work for their own interests. In some literature the own interest is conceived as the interests of the organization.
y In the past view years the concept of stakeholders has boomed a lot

and academics wrote a lot about the topic. But also nongovernmental organizations (NGOs), regulators, media, business and policymakers are thinking about the concept and are trying to implement it in some way or the other.

Stakeholders of a firm
NGOS Environment Governments

Trade unions
Suppliers

Creditors

competito r

Firm

Customers

Judiciary
Employees Stockholder

Political groups

Critics

Others

Media

Contd..
y However , the stakeholder theory unfortunately carries some sort of

an unclear label since it is used to refer to both empirical theory of management and normative theory of business ethics often intermixed and without distinguishing one from the other .
y The fact that different people want different things from their

relationships with organizations makes it impossible to know with certainty what stakeholders want.
y Stakeholder discussions often focus on allocating some measure of

organizational value or outcome (e.g., who gets how much money from the firm).
y Too often, managers sit in an office trying to divine what

stakeholders want from their relationship with the organization.

Contd..
y Normatively legitimate stakeholders (those stakeholders to whom

the organization has an obligation) take moral precedence over derivatively legitimate stakeholders. Certainly, managers need to know what the stakeholders believe to be in their best interests prior to trying to make this happen-a first priority of sorts.
y If some activist group or competitor threatens the viability of the

organization, managers should expend as much time and effort as necessary to deal with this threat.
y There is one final way that stakeholder theory can provide some

managerial guidance in prioritizing stakeholders.

Contd..
y Running an organization does not license a manager to violate

the norms and standards of society, but instead introduces a brand-new set of moral considerations based on stakeholder obligations.
y Stakeholder Theory to claim that , the enterprise must be a

moral obligation in order to legitimate the claims of stakeholders.


y It provides a response to the argument that the interests of

stakeholders who are directly involved with the activities of an enterprise are already taken into account because they are engaged in voluntary transactions.

Criticisms
y The cause of criticism of this theory

is that there is comparatively little empirical evidence to suggest a linkage between stakeholder concept and corporate performance .

y Stakeholder Theory does not provide an alternative answer to the

question of who, or what, produces economic value. Its focus is on the distribution of the outcomes, the harms and benefits, and not on who produced the harms and benefits.
y It assumes value is produced by the enterprise itself and that

stakeholders have a claim on some of this value because the enterprise is a creature of society.

Contd..
y Stakeholder Theory does not make a clear distinction between

enterprise and corporation, it dramatically overstates the separation of ownership and control, generalizing from corporations to all enterprises.
y Stakeholder Theory is limited to the problem of governance and

control in large corporations the problem of moral justification of Stakeholder Theory turns on the idea that maximizing stockholder wealth or other interests of owners cannot morally be taken as more privileged than the interests of others who have a stake in the enterprise.
y As a normative model, the Stakeholder Theory is limited to

situations where ownership is weak. At best, this would limit Stakeholder Theory to a very small number of very large corporations.

Contd..
y Stakeholder Theory becomes a matter of moralizing about, rather

than effecting change in the organization.

y In the assessment of Clive Smallman The stakeholder model also

stands accused of opening up a path to corruption and chaos ; since it offers the opportunity to the agents to divert wealth away from shareholders to others, and so goes against the fiduciary obligation owed to shareholders (a misappropriation of resources).

y Thus stakeholder model of corporate governance leads to corrupt

practices in the hands of managements with a wide option.

The social contract theory


y The social contract theory is one of the nascent and evolving

normative theories of business ethics. It is closely related to a number of other theories. In its most acknowledged form, the social contract theory stresses that all business are ethically duty bound to increase the welfare of the society by catering to the needs of the consumers and employees without in any endangering the principles of natural justice.

y The social contract theory based on the principle of social

Contract wherein it is assumed that there is an implicit agreement between the society and any created entity such as business unit, in which the society recognizes the existence of a condition that it will serve the interest of the society in certain specified ways.

Contd..
y The theory drawn from the models of the political-social contract

theories enunciated by thinkers like Thomas Hobbes, John Lockeand Jean Jacques Rousseau. All these political philosophers tried to find an answer for a hypothetical situation as to what life would be in a society in the absence of a government and tried to provide an answer by imagining situations of what it might have been the citizens to agree to form one .
y The social contract theory adopts the same approach as the one

adopted by the political theories towards deriving the social responsibilities of a business firm.
y The social contract theory is based on an assumed contract between

business and members of the society who grants them the right to exist in return for certain specified benefits that would accrue to them .

Contd..
y However business firms do not provide an unmixed blessing. The

interests of the public as consumers can be adversely affected by business firms when they deplete the natural resources , pollute the environment and poison water bodies , help to reduce the personal accountability of its member and misuse political power through their money power . y Taking into account these respective advantages and disadvantages , business firms are likely to produce the social welfare element of social contract and enjoin that business firms should act in such a manner so as to: 1. benefit consumers to enable them reach maximization of their wants. 2. benefit employees to enable them secure high incomes and other benefits that accrue by means of employment . 3. ensure that pollution is avoided , natural resources are not fast depleted and workers interests are protected.

Criticism of social cotract theory


y Critics argues that the so-called social contract is no contract at

all . Legally speaking , a contract is an agreement between two or more persons which is legally enforceable provided certain conditions are observed .
y So the social contract is more of fiction than a true contract.

Teachings of Church
y The church always supports and promotes the welfare of the

poor. The church s concern for the marginalized is always expressed through their teaching.
y The less privileged and the marginalized realize the fact that the

wealth is in the hands of a few. This emerging awareness of the mass is supported by the church.
y The social teaching of the church, based on Christian ethics,

comprises sets of principles, guidelines and applications which provide a compelling challenge for individuals as well as corporations in responsible citizenship.

Gandhian Principle of Trusteeship


y The pholosophy of trusteeship implies that an industrialist or

businessman should consider himself to be a trustee of wealth he possesses. He should think that he is only a custodian of his wealth meant for the purpose of business.
y The wealth belongs to the society and should be used for the

greatest good of all.


y It does not recognize capital and assets as individual property. y Gandhi also advocated Sarvodaya, meaning welfare for all. He

was of the firm view that capital and asset should supplement each other.

Business and Islam


Dr. Muzammil H Siddiqi in his article Business Ethics in Islam enumerates the following major principles drawn from the teachings of Prophet Mohammad:
y No fraud or deceit. y No excessive oath in a sale. y Need for mutual consent. y Be restrict in regard to weights and measures. y The prophet was very much against monopoly. y Hoarding is forbidden. y Transaction of things that are forbidden is also forbidden, such

as intoxicants.

Conclusion
y Ethical theories represent the grand ideas on which guiding

principles are based. They attempt to be coherent and systematic, striving to answer the fundamental practical ethical questions: What should I do? How would I live?

Bibliography
y Fernando, A.C.(2009), Business Ethics: An Indian Perspective y y y y

Pearson, New Delhi Murthy, C.S.V(2009), Business Ethics Himalaya Publishing House, Mumbai http:// en.wikipedia.org/wiki/Ethics accessed on 27 July 2011 http://en.wikipedia.org/wiki/Utilitarianism accessed on 27 July 2011 http://www.medindia.net/education/familymedicine/biomedical -ethics-theories.htm accessed on 5 Aug 2011

THANK YOU

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