Mullins L.J. Management and organisational behaviour, Seventh edition

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■ fair standards of advertising and trading;

■ full and unambiguous information to potential consumers.

Increasing concern for social responsibilities to consumers can be seen by the activities

of such bodies as the Consumers’ Association, and the number of television and radio

programmes devoted to this subject. In the case of public corporations there are Users’

National Councils or consumers’ regulatory bodies which are independent and look

after the interests of customers. In the case of local government there is a system of

Commissioners for Local Administration (popularly referred to as ‘Ombudsmen’)

designed to provide an independent investigation of citizens’ complaints over alleged

maladministration.

It is in the area of concern for the community at large that social responsibilities can be

seen most clearly. Organisations have a responsibility not to misuse the scarce factors

of production upon which the wealth of the country depends. Organisations have a

responsibility to society, to respect environmental considerations and take care of

amenities. Some examples under this heading include:

■ the effects and potential dangers of pollution, noise, disposal of waste;

■ the siting and appearance of new buildings;

■ transportation policies, such as the routing of heavy vehicles through narrow village

roads; and

■ avoidance of excessive packaging and more use of biodegradable materials.

Another important area of social responsibility could arguably be to the government.

Organisations should, of course, respect and obey the law even where they regard it as

not in their best interests. What is debatable, however, is the extent to which organisa-

tions should co-operate voluntarily with actions requested by the government. Some

examples are: restraint from trading with certain overseas countries, and the accept-

ance of controls over imports or exports; actions designed to combat inflation, such as

limits on the level of wage settlements; assisting in the control of potential social prob-

lems – for example, the sale of tobacco and the display of health warnings.

The potential range of social responsibilities is substantial. Other organisations or groups

to whom organisations might be regarded as having a social responsibility, or obligation,

are suppliers, trade unions, business associates and even competitors. Examples of

social responsibilities might include: fair standards of trading; honouring terms and con-

ditions of purchase or sale, and settlement dates (for example, payment of accounts);

assistance to smaller organisations; engagement only in fair competition; respect for

even further – for example, by giving recognition to the needs of developing countries;

limiting the extent of political involvement or campaigning; donations to, or sponsor-

ship of, the arts, educational or research institutions, sporting organisations or charities.

Profit and effective performance

Whatever the view of corporate social responsibility, management has as its priority

the need to ensure the survival and effective performance of the organisation. As

Drucker puts it:

The first responsibility to society is to operate at a profit, and only slightlyless important is the

necessity for growth. The business is the wealth-creating and wealth-producing organ of our

society. Management must maintain its wealth-producing resources intact by making adequate

profits to offset the risk of economic activity. And it must besides increase the wealth-creating

and wealth-producing capacity of these resources and with them the wealth of society.

CHAPTER 5 ORGANISATIONAL GOALS, STRATEGY AND RESPONSIBILITIES

165

Community

and

environment

Government

Other

organisations

or groups

The attention given to social responsibilities must involve weighing the costs of meet-

ing these responsibilities against the benefits derived. Provided the cost/benefit

analysis is not detrimental to economic and/or competitive performance, management

must then determine the extent to which, and the manner in which, the organisation

will attempt to satisfy its social responsibilities. The recognition of social responsibili-

ties should form an integral part of strategy and the establishment of objectives and

policies of the organisation.

The first years of the new millennium brought some very sharp reverses in business

fortunes, with enormous sums of money wiped off market values, company collapses

and, of course, a great deal of consequent distress for employees, families and others.

For a while, these events were daily front-page news, along with a dawning realisation

that the financial turbulence would worsen an already difficult position for millions

who were saving towards pensions. Much of the problem was the bursting of an old-

fashioned (but very high-tech) investment bubble. Both the demise of the meteoric but

insubstantial ‘dot-com’ businesses and the hefty over-valuation by many telecoms

companies of the ‘3G’ licences for the next mobile communications technology were

examples of an investment frenzy that came to an abrupt and unhappy end. By the

end of 2001, however, worse news was unfolding. As Kay puts it:

Two companies came to symbolize the triumph and failure of the American 1990s – Enron, the

Houston-based energy business, and WorldCom, a telecoms operator with headquarters in

Clinton, Mississippi. Both companies had grown rapidly through acquisition and for a time

enjoyed iconic status with investment bankers and many investors. The collapse of these busi-

nesses in late 2001 and summer 2002 provoked widespread allegations of fraud and corruption

and was an important factor in the final deflation of the bubble.

These events were themselves brought on by the general crisis – a number of commen-

tators have reminded readers of a remark attributed to investment ‘guru’ Warren

Buffet: ‘It’s only when the tide goes out that you see who’s been swimming without

their trunks on.’ These major corporate disasters seemed to many to go beyond the

misguided euphoria of the dot-com boom and to raise questions of the ethics of the

behaviour of these companies and their advisors.

Ethics and business

Ethics is concerned with the study of morality: practices and activities that are consid-

ered to be importantly right or wrong, together with the rules that govern those

activities and the values to which those activities relate.

Business ethics can be seen

as an example of applied ethics – just as medical ethics is about the application of gen-

eral ethics to the human activity called medicine, business ethics seeks to explore the

implications of general ethics for the conduct of business. This apparently obvious

point is important: by taking this stance, one rejects the view that moral principles

have no bearing on business, or that ‘the business of business is business’, as the

common saying has it.

This is not to say that it is easy, or uncontroversial, to apply ethics to business: on

the contrary, this fast-growing subject is characterised by a range of sharply contrasting

views. Some of this controversy is inherent in ethics itself – as will be discussed below,

there is no single clear view of how to judge good and bad, and this must impact on

any application such as business ethics. This particular application of ethics, however,

is also complicated by the fact that ethics mainly deals with good or bad conduct on

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PART 2 THE ORGANISATIONAL SETTING

VALUES AND ETHICS

the part of individuals, resulting in possible difficulties in applying these ideas to

impersonal corporate entities like companies. Is it appropriate to regard companies as if

they were individual people and if not, what allowances should be made? Or, can the

subject be satisfactorily seen as relating to the conduct of individuals as employees of

businesses? Clearly, for very small businesses, the two views merge into one, but for

larger, corporate entities, the position is more complex.

One illustration of this is the diversity of opinion on the issue of corporate social respon-

sibility. On one side of the debate are those who would share Milton Friedman’s view

that the social responsibility of business is to make as much money as possible for the

shareholders, within the rules of the game (fair competition, no deception or fraud,

and so on).

This is an example of agency theory, in which the directors of a company

are seen as agents of the owners and who are duty bound to act so as to maximise the

interests of those owners, this being taken as the reason for owners having made the

investment in the first place.

A more recent development of this general approach is that of Sternberg who pro-

poses a teleological view of business ethics, based upon the pursuit of the business

purpose – that of maximising long-term owner wealth by selling products and

services.

Actions by a firm that are consistent with this aim and which satisfy the

additional tests of common decency (e.g. refraining from stealing, cheating, coercion

and so on) and distributive justice (i.e. ensuring that rewards are proportional to con-

tributions made) are ethical. Actions that fail any one of these three tests are, in this

model, unethical.

At the other end of the spectrum are some forms of stakeholder theory, which

emphasise a much broader set of social responsibilities for business. Cannon, for exam-

ple, suggests that:

There exists an implicit or explicit contract between business and the community in which it oper-

ates. Business is expected to create wealth; supply markets; generate employment; innovate and

produce a sufficient surplus to sustain its activities and improve its competitiveness while con-

tributing to the maintenance of the community in which it operates. Society is expected to

provide an environment in which business can develop and prosper, allowing investors to earn

returns while ensuring that the stakeholders and their dependants can enjoy the benefits of their

involvement without fear of arbitrary or unjust action. The interdependence between society and

business cannot be understated.

The two perspectives provide very different views of how a business should act,

because of their differing assumptions concerning what a business is for. In agency

theory, a business is principally for the shareholders and its actions should mainly be

judged on the criterion of maximising their interests. In the stakeholder view quoted

above, a business is for its stakeholders (who are potentially a very large and diverse

group) and its actions should be designed to balance stakeholder interests. From the

point of view of business ethics – the study of good and bad conduct in business – this

distinction is very important. The use of company resources to support a local commu-

nity project, for example, might be seen as admirable by the stakeholder theorist but

unethical by the agency theorist, in that it would be a misapplication of funds that

belong to the owners (unless, of course, such an investment could be shown to be con-

sistent with the shareholders’ best interests).

Each of the two approaches adopts a different yardstick for judging the ‘goodness’ of

a proposed action by a company. In the agency view, the action has to be shown to be

CHAPTER 5 ORGANISATIONAL GOALS, STRATEGY AND RESPONSIBILITIES

167

CORPORATE SOCIAL RESPONSIBILITY

Differing

assumptions

about a

business

consistent with the duty of maximising owner wealth, which is conceptually relatively

simple, but which necessarily involves assumptions concerning the likely effect of the

proposed action. In the stakeholder view (or, at least in those versions of the stake-

holder view that emphasise an accountability to stakeholders), the task of management

is to balance stakeholder interests. However, managers seeking to do this – often in the

face of loud opposing claims from the various interests – will very quickly encounter

the practical problem of how that ‘balance’ should be defined and recognised.

Although difficult to reconcile in practice, the two approaches are not completely

incompatible: to a stakeholder theorist, shareholders count as one type of stakeholder,

but not the only type to which duties are owed by the firm. Likewise, Sternberg

acknowledges the importance of understanding and remaining aware of the various

stakeholder groups and of actively managing relationships between the company and

these groups, because doing so is likely to be consistent with maximising owner

wealth. As she points out, however, ‘taking account’ of something is importantly dif-

ferent from ‘being accountable’ to it.

It is also worth emphasising that a company seeking to maximise its owners’ long-term

wealth may well do very good things for its ‘stakeholders’, not necessarily through any

direct intent, but in pursuit of its main duty. Providing customers with excellent prod-

ucts and services is the central example, of course, but this form of intelligent

self-interest may also – for example – drive a firm to build strong, trusting relationships

with its suppliers and distributors (because it will be better off as a result), or an attrac-

tive working environment for its employees (because it wishes to recruit and keep the

best, in order to be able to compete more effectively).

Even beyond its immediate commercial relationships, an intelligently self-interested

company may deliberately set out to build strong relationships with other stakehold-

ers, or to take a principled stance on an issue such as the use of child labour, because to

do so is to maximise owner value. The ‘value’ in question is not just next year’s divi-

dends, but refers to the value of the investment as a whole and thus obliges the

management to think long term as well as short term and to consider the impact of

company actions as broadly as possible.

In the UK, the report of the RSA inquiry ‘Tomorrow’s Company’ referred to the con-

cept of an imaginary ‘operating licence’ granted to a company by the public, which

can be effectively suspended or withdrawn if a company appears to be behaving

badly.

Doing business effectively and well relies upon hundreds, sometimes thou-

sands of transactions every day of the year. If some of these transactions become more

difficult because trust has been squandered and co-operation has been withdrawn,

then the firm will start to lose out to its better-behaved competitors and its owners’

wealth will start to suffer.

The large-scale issues of corporate social responsibility are to do with how a company

should conduct itself within society: these questions certainly have an ethical aspect,

as has been discussed, but they are not the whole of business ethics. Day-to-day deci-

sions made by individual managers are not usually made on the basis of some detailed

calculation of the consequences for shareholder value (however theoretically desirable

that might be) and more general ethical considerations must play a part in resolving

the dilemmas that sometimes arise in practice.

The scope of business ethics is very broad, because anything done by a company or its

employees can be done ethically or unethically. The following list is not intended to be

exhaustive, but rather to illustrate the all-pervasive nature of ethical questions in

business:

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PART 2 THE ORGANISATIONAL SETTING

Intelligent

self-interest

BUSINESS ETHICS

■ behaviour towards customers, suppliers, distributors and competitors: for example,

marketing and selling, fair competition, intelligence gathering, inducements and

incentives;

■ treatment of employees: for example, recruitment, rewards, training, promotion, dis-

missal, employee and employer rights and duties;

■ treatment of other stakeholder groups: for example, local communities, govern-

ments, interest groups;

■ effect on the natural environment: for example, pollution, recycling, sustainability;

■ conduct in international operations: for example, use of power, respect for human

rights, ‘delocalisation’ of operations to lower-cost environments.

These questions can be complex, since there is no single view in general ethics of what

makes something right or wrong. One school of thought emphasises duties, things

that must be done (or refrained from) irrespective of the consequences. This deonto-

logical point of view holds that goodness or badness is only evident in the action itself:

that, for example, lying is bad because it is bad in itself. By contrast, a consequential-

ist view of ethics holds that the goodness or badness of a proposed action is only

evident in the consequences of that action: whether a lie is good or bad depends upon

the consequences of that particular lie at the time. Utilitarianism, for example, is a

consequentialist theory, in that it seeks to maximise the net happiness for everyone

affected by a particular action (‘the greatest good for the greatest number’, as it is

sometimes expressed). The perspectives on corporate social responsibility discussed

above are also to some extent consequentialist, in that they are mainly concerned with

an assessment of the effects of a firm’s actions.

Both duties and consequences (or ‘means’ and ‘ends’ in the familiar saying about

the latter justifying the former) are plainly important in the way we deal with ethical

issues in everyday life. Unfortunately, however, they are very different ways of reason-

ing, which can lead to contradictory outcomes in some cases. An exclusively

duty-based view of ethics, for example, must sooner or later run into problems such as

absolutism, or the difficulty of deciding which duty should take precedence over others

in a particular situation. If, for example, both lying and killing are held to be inher-

ently wrong, is it acceptable to lie in order to avoid a killing? And whatever answer is

given, how do we know? An exclusively consequentialist view of ethics also entails

methodological problems of forecasting reliably what the consequences of an action

may be and of deciding how to measure those consequences. Some forms of utilitarian-

ism can be very unjust to small minorities, by allowing their unhappiness (i.e. as a

result of some proposed action) to be offset by the increased happiness of a much

larger number.

Nor is the choice restricted to means and ends in ethics: several further approaches

can be distinguished in western thought, including:

■ Virtue ethics, based upon an analysis of desirable human qualities that lie between

undesirable extremes (the virtue of ‘courage’, for example, lies between the undesir-

able extremes of ‘cowardice’, at one end and ‘foolhardiness’ at the other).

■ Ethical relativism, which holds that goodness and badness are largely or entirely

determined by the prevailing values of the time in question and may thus change

from one period to another, or one culture to another.

■ Emotivism, which suggests that statements about ethics are essentially statements

about the speaker’s attitudes, and that it is therefore futile to search for any ethical

‘truths’. The statement ‘Lying is bad’ is, from this point of view, saying little more

than ‘I don’t like lying’.

CHAPTER 5 ORGANISATIONAL GOALS, STRATEGY AND RESPONSIBILITIES

169

No single view

of right or

wrong

Ethical decision-making at work

How, then, are ethical choices to be made by people working for organisations? No

simple and universal answer is available – ethical awareness is something that can be

cultivated and the different perspectives will often help to shed light on a particular

dilemma. Some perspectives may appear to be better suited to particular situations:

whereas, for example, it is difficult to avoid some sort of consequentialist component

in thinking about how a company should act, it is also clear that duty-based arguments

must also weigh heavily in thinking about the ethical treatment of people such as

employees. The German philosopher Kant’s view that we should always treat other

people as ends in themselves and never simply as means is surely an important princi-

ple for decent human resource management and one that would often be seen as more

important than the prospect of short-term gain.

Personal integrity and individual values are important elements in ethical decision-

making at work, but the increasingly common company, professional or industry codes

of conduct may also provide support and guidance. This is not to say that these ethical

‘resources’ will always provide clear and comfortable guidance – sometimes, people in

organisations will experience tension between the conflicting demands of, say, their own

personal values and the demands placed on them by their organisation. If these conflicts

become intolerable and cannot be resolved through normal means, then an individual

may decide to become a ‘whistleblower’ in the public interest, by taking the high-risk

approach of placing the problem in the public domain for resolution. Codes of conduct

can help to reduce the risk of painful situations like this by providing a published set of

values to which the individual can appeal, rather than taking the risk wholly personally.

(I am grateful to my colleague, Richard Christy, Department of Business and Management,

University of Portsmouth for providing the above information on values and ethics.)

As part of the growing attention to the concept of corporate social responsibilities

there are a number of pieces of recent legislation which arguably relate to the concept

of business ethics and organisational accountability. Although it is not in the scope of

this book to provide detailed aspects of legal provisions, we should recognise the exis-

tence of such legislation, including the Human Rights Act 1998, the Public Interest

Disclosure Act 1998 and the Local Government Act 2000.

The Human Rights Act 1998 came into force on 2 October 2000 and incorporates

into English law rights and liberties enshrined in the European Convention on Human

Rights. The provisions apply to the acts of ‘public authorities’ and make it unlawful for

them to act in a way incompatible with a right under the Convention. The Act is

designed to provide greater protection for individuals, and to protect them from

unlawful and unnecessary interference. Everyone has the right to respect for their pri-

vate and family life, their home and their correspondence. The Act is likely to have a

significant effect on people both as citizens and at work.

The Public Interest Disclosure Act 1998, which has become known widely as the

‘Whistleblower’s Act’ is designed to protect people who expose wrongdoing at their

workplace, to provide reassurance that there is a safe alternative to silence and to pro-

vide a safeguard against retaliation. Employers need to establish clear internal

procedures by which members of staff can raise any matters of personal concern.

The Local Government Act 2000, the so-called ‘New Ethical Framework’, requires

all local authorities to provide codes of conduct to promote high standards of behav-

iour. The government has distinguished between general principles of conduct in

public service and the code of conduct containing specific actions and prohibitions

that demonstrate the principles are being observed.

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PART 2 THE ORGANISATIONAL SETTING

RELATED LEGISLATION

McEwan summarises the separate histories of corporate social responsibility, business

ethics and corporate governance, and suggests a method of enquiry which attempts to

integrate these different perspectives on business through three broad levels of enquiry:

■ A descriptive approach that draws attention to the values and beliefs of people from

different cultures and societies which influence their attitudes towards the various

activities of business in their home countries and abroad.

■ A normative approach which identifies sets of values and beliefs as a basis for

making ethical decisions at the individual, group, or senior management level in an

organisation.

■ An analytical approach which attempts to explore the relationship between these

normative values and beliefs and other value-systems or ideologies such as political

or religious beliefs and culture or other social customs.

CHAPTER 5 ORGANISATIONAL GOALS, STRATEGY AND RESPONSIBILITIES

AN INTEGRATED APPROACH

A friend of mine once said he thought business people go

through an ethics lock on their way into work and I expect

it would not be hard to find many people to agree with him.

But how true of business as a whole is the negative pic-

ture people can derive from unfortunate personal

experiences or from regular media reports of the latest

business scandal? For the fact is that interest in ethical

business behaviour has grown in popularity among busi-

nesses in the UK and elsewhere in the past 10 years, just

as the provision of teaching business ethics has also

increased in business schools.

Why the interest? Is it a matter of saying that the sicker

people are, the more they develop an interest in medicine?

What makes companies ethical?

For some people or firms, developing an interest in

business ethics may just be a case of following fashion, of

climbing on to the ethics bandwagon while retaining the

option of discreetly abandoning it should the fashion pass

or recession deepen.

Probably, keeping up with Jones plc is one reason for the

growing popularity among businesses of developing a code

of conduct or for beginning to include a politically correct

sentence on ‘social responsibility’ in company reports.

Another reason or motive for a business taking an inter-

est in ethics can be in response to pressure.

For example, Royal Dutch/Shell’s recent decision to

give more attention to human rights on the international

scene was obviously influenced by the public hostility

aroused by its record in Nigeria, which blew up at the com-

pany’s annual general meeting in May 1997. Similarly,

public exasperation over the mis-selling of private pensions

in the UK in the late 1980s is spurring some insurance

companies on to faster efforts to provide justice for those

victims who are still suffering.

In other words, keeping various awkward customers

and irritating pressure groups off their back can lead many

people in business to conclude that it makes for a simpler

life if they keep to the straight and narrow.

A third possible reason for pursuing ethics in business, of

course, is the prospect of profits. Part of the folk-wisdom of

business ethics is that it pays to be ethical: good ethics is

good business. But this justification of ethics in business is

just sufficiently true to be misleading.

For one thing, as the Irish 19th century philosopher

Richard Whately once put it, honesty is the best policy but

he who is governed by that maxim is not an honest man.

T S Eliot put it less paradoxically but more poetically when

he observed that the greatest treason is to do the right

thing for the wrong reason.

Quite apart from the question of motive, however, acting

ethically in business can in fact be quite expensive and

seeking an ethical response to many of the modern chal-

lenges facing business can be a costly exercise.

Highly respected companies such as Levi Strauss,

Marks & Spencer, Johnson & Johnson and others have a

long-standing ethical reputation and they clearly profit from

it. But they have to keep working at it.

Levi Strauss needed to take time out to formulate and

justify its policy on human rights; Johnson & Johnson

whipped Tylenol off the shelves at the first whiff of product

defect; and Marks & Spencer is currently engaged in litiga-

tion with Granada TV in the UK to defend its integrity in

dealing with overseas suppliers.

If there is an ethics dividend, it has to be earned –

through set-up or recurring costs in time and resources

and possibly also in terms of opportunity costs. If my per-

sonal or corporate survival in business depends on using

unethical means to secure a contract or to meet a deadline

and I refuse to take such steps, then in the short term I

may wake up honest and unemployed or my business may

soon find itself ethical but on the way out.

If ethical business does pay off, it will only do so over time

as an investment and if one is still around to reap the

benefit.

Business ethics: what’s in it for you?

EXHIBIT 5.1



171

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PART 2 THE ORGANISATIONAL SETTING

There is one more reason why a company may decide

to conduct its business on ethical lines and that is because

the people involved consider it is simply the right thing to

do – not because it’s fashionable or profitable or makes for

a quiet life.

Treating people with honesty, fairness and respect is

then a matter of moral principle, not of expediency.

Of course, it does not follow that in order for business

conduct to be ethical it has to be unprofitable or uncom-

fortable. Some people hold, at least implicitly, the strange

moral belief that an action will only be ethical or the right

thing to do if it hurts. It is a view that sounds suspiciously

like medicine having to taste awful for it to do good.

Another Irishman, George Bernard Shaw, once wrote caus-

tically that the English think they are being moral when in

point of fact they are only being uncomfortable.

In this connection it has become mandatory to quote

Gordon Gekko, the financial lizard in the film Wall Street and

described by another character as having had an ethics by-

pass at birth. ‘Let’s face it, ladies and gentlemen, greed is

good,’ is probably the best-known quote from the film.

But self-interest is not greed, except when it gets out of

hand. Yet another Irishman, the philosopher William

Berkeley, took the sensible line that at heart ethics consists

in striking the right balance between two basic human feel-

ings: concern for one’s self and concern for others.

In other words, there is no reason why ethical behaviour

should not also be advantageous or popular or be

rewarded; and when that turns out to be the case in busi-

ness it can be counted as a bonus.

Mixed motives, or having several legitimate reasons for

doing something, is a common human experience in ethics

as in any other area of life. The time to worry would be

when the various motives we may have for running a busi-

ness on ethical lines leave no room for the explicitly ethical

one. Or when the ethics motive is considered disposable or

made conditional on continuing business success.

What counts as business ethics?

The very idea of business ethics makes some people uneasy.

Partly this may be because they wonder at all the busybody

fuss these days about trumpeting ethics and would much

prefer just quietly getting on with running a decent business

without having to get embarrassingly mawkish.

Others feel the term ethics sounds judgemental and moral-

ising, like being preached at. This may have been one reason

for the modern movement in business ethics initially favouring

the idea of ‘social responsibility’ as more user-friendly and less

threatening when applied to business behaviour.

However, quite apart from the fact that ethical reflection is

not necessarily doctrinaire and that it has been around for

some 4000 years as a human concern in all walks of life –

including that involving the exchange of goods and services –

the idea of ‘social responsibility’ is itself ambiguous and can

lead to confusion when it is applied to business activities.

The social responsibility movement in business was a

popular phenomenon in the 1970s in the US as society’s

expectations of business were becoming more vocal and

its demand more socially oriented.

It was against that background that the Nobel laureate

economist Milton Friedman drew the ire of many business

ethicists when he defiantly declared in the title of his

famous 1970 New York Times Magazine article that ‘the

social responsibility of business is to increase its profits’.

The article has become a classic. It was, and still is,

read by many people as attacking the very idea of business

ethics and as immorally advocating profitability as the sole

criterion of business behaviour.

But Friedman’s ethical opponents got it wrong in making

him a whipping boy for their indignation. For one thing, they

ignored the small matter that tucked away in his article is

the explicit statement that business should be conducted in

conformity with the basic rules of society – both those

embodied in law and those embodied in ethical custom.

More fundamentally, Friedman’s critics failed to appreci-

ate that in attacking the then fashionable American ‘social

responsibility’ movement he was not rubbishing the appli-

cation of ethical standards to business conduct. What he

was taking issue with was the modish trend of diverting

business from its proper role in society and applying its

resources to tackle society’s various ills.

Interestingly, it was around that time that some politi-

cians in the UK were exhorting businesses to exercise

‘good citizenship’ by espousing various community pro-

jects and in the process overloading business with social

expectations as well as seeming to make corporate philan-

thropy a surrogate for government public spending and

concern for social justice.

The idea of social responsibility applied to business

received welcome precision from the US scholar Archie

Carroll, who showed that it could be broken down into four

quite different components:

■ A business can be socially responsible through its eco-

nomic profitability, in being a going concern providing

goods and employment and paying taxes and creditors.

■ It can discharge its social duties through legal compli-

ance, in respecting the laws of the land.

■ Corporate social responsibility can cover community

involvement in contributing to the solving of social

problems.

■ Finally, a company can show how socially responsible it

is through the ethical respect it accords its stakeholders

in treating all its constituents fairly.

Carroll’s analysis usefully brought several things to light.

For one thing it confirmed that Friedman was not hostile to

the business ethics component of social responsibility but

to another one, corporate involvement in the community

through, as he charged, management spending sharehold-

ers’, employees’ and customers’ money on what it

(management) arbitrarily and undemocratically describes

as ‘good causes’.

Carroll’s scheme also makes it clear that business

ethics is distinct from the mere legal compliance and is fre-

Exhibit 5.1 continued

CHAPTER 5 ORGANISATIONAL GOALS, STRATEGY AND RESPONSIBILITIES

173

quently more demanding. It also shows that no amount of

social involvement or extramural activity on the part of a

company or its members can substitute for the social

responsibility involved in running an ethical business and

giving a fair deal to the various parties who are now

increasingly identified as stakeholders.

Stakeholders? What stakeholders?

Perhaps we need another Milton Friedman today to blow

the whistle on much of the rhetoric surrounding the

increasingly fashionable idea of stakeholders.

The term started life in 1963 and was a neat play on

words to express the useful social and ethical idea that in

addition to shareholders, or those holding ‘stock’ in a com-

pany, lots of other people were also affected by the

company and had a ‘stake’ in how it behaved. The moral

corollary was that the company ought to take their various

interests into account alongside those of the shareholders

in all its activities.

The defining work of stakeholder theory was produced

by the US academic Edward Freeman in the 1980s.

Initially the stakeholders in a business were identified as

its workforce, its customers, its suppliers and its surround-

ing community. Next, as the stakeholder theory developed,

the term became used umbrella-like to cover all those indi-

viduals and groups, including shareholders, whose

interests are seriously affected by a firm’s behaviour.

Equally, they can all be regarded as investing in it each in

their own way, whether through their capital, their working

lives, their purchasing loyalty, their supplier commitment, or

their local support and infrastructure.

The ethical challenge of stakeholder theory was identi-

fied as finding ways for a business to satisfy all these

parties. In the UK this stage of stakeholder thinking was

reached rather late in the day, in the Royal Society of Arts’

1995 study Tomorrow’s Company, which identified the

future competitive success of UK business as dependent

on what it termed the ‘inclusive company’, that is, one

which takes care to build fruitful relations with all its major

stakeholders.

A more recent development, again in the UK, has been

the hijacking of the term ‘stakeholder’ by social planners

and politicians for mainly ideological purposes. First jour-

nalist and author Will Hutton’s ‘stakeholder capitalism’

aimed to counter City short-termism by ‘republicanising’

the financial system.

Then came UK Prime Minister Tony Blair’s advocacy of

a ‘stakeholder economy’ (when he was leader of the

Opposition) echoed by the TUC, the trade union umbrella

group, apparently involving equal participation by all but

looking to some more like restoring power to the unions

under another name. Another Labour politician, Frank Field,

now a junior minister at the department of social security,

came up with ‘stakeholder welfare’, which emphasised that

all the recipients of welfare should have a say in its disposi-

tion. Other politicians contented themselves with invoking

the vague feel-good vision of a ‘stakeholder society’.

From the viewpoint of business ethics the reality of the

stakeholder idea is that it brings a valuable wide-angle

approach to the conduct of a business by alerting it to all the

parties in society who can be helped or hurt by its actions.

But as a theory for business strategy it suffers from sev-

eral major weaknesses. For one thing, the more

participants we locate in the ethical landscape of business,

the more scope there inevitably is for their various interests

to compete and conflict – and stakeholder theory offers no

way to arbitrate between rival stakeholder claims. Pushed

far enough, in fact, it can be shown that at some remove

everyone has a stake in just about everything in today’s

global economy.

These lead to attempts to distinguish and prioritise

between different classes of stakeholders – internal and

external, primary and secondary, major and minor, financial

and others, all to little practical effect.

Sometimes stress is laid on one class of stakeholder,

either to advocate compensation by a version of positive

discrimination or as part of a political rather than a business

agenda. And at the other extreme, not many people, in

business at least, would go so far as to espouse the view of

Freeman and Gilbert that the very purpose of a company is

to serve as a vehicle for co-ordinating stakeholder interests.

But in any case, apart from seeking a moratorium on

use of the term stakeholders to prevent its becoming more

and more vacuous, perhaps we should not get hung up on

its theory and simply value the idea as an ethical corrective

to any view that would concentrate attention on the inter-

ests of a firm’s financial investors to the exclusion of every

other consideration.

The cost of ownership

One of the most pressing ethical issues in business today

is to find ways of narrowing the too-wide gap between

management and ownership by increasing management

accountability to owners and also by encouraging owners

to pay the ethical dues of ownership, which extend beyond

financial risk.

The idea of ownership responsibility on the part of the

shareholders has been rejected by the UK Institute of

Directors as ‘simplistic’ on the strange logic that there are

frequently too many shareholders for them to act respons-

ibly. Yet, responsibility spread thin or even spread unevenly

does not for that reason cease to be responsibility, both in

the aggregate and for individuals.

The challenge is to find imaginative ways for a multitude

of owners first to acknowledge and then to discharge their

moral responsibilities for the broad lines of the conduct

engaged in by the company they partly own.

It is encouraging, in fact, from an ethics point of view to

note the ways in which ‘shareholder activism’, already quite

buoyant in the US, has begun to appear in the UK and

elsewhere as large institutional investors increasingly begin

to take note of their responsibilities and to exercise them.

Such activism is not simply triggered by poor financial

performances but is also beginning to arise over various

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PART 2 THE ORGANISATIONAL SETTING

issues that arouse shareholder or public disquiet, including

seeking ways to control ‘ratcheting’ executive remuneration

and introducing the reality check of results – adverse no

less than favourable – to assess the true corporate value of

senior executives.

Setting an ethical agenda for business

The mounting interest in the subject of ethical business is

reflected in the increased resources devoted to it in busi-

ness schools and management departments, often with the

encouragement of business.

Certainly such teaching institutions have a major

responsibility to provide tomorrow’s business men and

women with the competence and confidence to tackle the

expanding portfolio of ethical challenges with which man-

agers are being increasingly confronted.

How business schools set about equipping their students

for such a responsible role will vary, understandably and

desirably, but the overall aim must be to inform and stimulate

thinking on ethical issues and to help prepare students to

recognise and manage ethical issues as these arise.

A useful model in this context is that described as ‘ethi-

cal business circles’ (see Figure 5.4), which views the

company’s various activities as occurring within a series of

expanding circles moving out from the centre.

The innermost circle considers the internal workings of

the business and the way in which individuals and col-

leagues are treated. Here topics that can usefully be

examined include discrimination, confidentiality, telework-

ing and issues of loyalty as having implications not just for

workers but also for management and even shareholders.

Moving out to a second circle provides the opportunity

to concentrate on the ethics of customer relations and

marketing, including the pricing and advertising of goods

and services.

The third expanding ethical business circle focuses

attention on relations with other companies, including

timely payment of suppliers, working with suppliers who

may mistreat their workforce, and ethical aspects of mer-

gers and acquisitions and insider trading.

Finally, the fourth, outer, circle considers how the com-

pany relates to the locality in which it is situated and covers

such topics as self-regulation, cultural diversity, bribery, the

physical environment and working with the community.

Taking such a systematic approach to the discipline of

business ethics ensures that all the major business rela-

tionships are covered in principle but allows flexibility to

choose examples of ethical issues in each circle as indi-

cated by recent events or current trends.

This helps to reinforce the realisation that there are no

ethical ‘no-go’ areas in business. It also ensures a sense of

proportion so that students do not think business ethics is

solely about finance because that is where mega-scandals

and media interest are most to be found.

Moreover, putting emphasis on the firm as the main

moral agent also tries to ensure that ethical issues are not

viewed as simply individual problems in a business setting.

Exploring ethical business through the medium of the

company can also usefully throw light on the individual,

corporate or systemic features that contribute to various

wrongdoings.

Some ethical lapses in business can be entirely per-

sonal, arising from need or greed or entrepreneurial

brazenness on the part of individuals, whether on the trad-

ing floor or in time-share selling. Other wrongdoings may

be influenced by a corporate culture of excessive pressure

for results or of inadequate supervision – whether in banks

or on building sites – through ignorance or laziness. And

yet other occasions for unethical behaviour can be more a

feature of industry, including the free-floating bonus system

in financial trading or the payment by commission in the

insurance industry.

Thinking ethical issues through, as courses in business

ethics ought to be encouraging, also displays the poverty

and occasional triviality of approaching dilemmas simply by

applying as a piece of moral litmus paper the questions,

what would you tell your children or how would like to see

your decision reported in tomorrow’s paper?

These homespun resources prompt two further ques-

tions, which at least may show up their inadequacy. One is,

how old are the children – and, anyway, since when have

youngsters been such moral experts? And the other is,

what newspaper did you have in mind?

Many of the most intractable ethical issues in adult life,

including business, are not a simple unqualified choice

between good and bad but a forced choice between good

and good.

Devoting careful thought and analysis to major issues,

such as what to do about the working practices of suppli-

ers in developing countries or how to handle demands for

extortion as contrasted with offering bribes or the pros and

cons of dealing with regimes with appalling human rights

records, can lead one to conclude that ethical answers are

not always as clear cut and sharp-edged as children or

tabloid headlines might prefer them to be.

Looking back now on the controversy surrounding trade

with South Africa can be salutary in this respect. Who was

right: the companies that pulled out and supported boycott

and international disapproval of apartheid or the compa-

nies that stayed on and used the Sullivan Principles and

other strategies to erode apartheid from the inside, while

also ensuring there would be a viable economy after the

social revolution?

There is, of course, no answer to the question. But it

remains a good question. It suggests in this case that

maybe both ethical approaches actually had right on their

side and that each was effective in its own way.

The case of South Africa may also illustrate the more

general consideration that ethical problems, whether in

business or elsewhere in life, do not always have to have

one, and only one, right answer. Why should they? People

often seem to prefer the security of certainty, including

moral certainty, to the discomfort of living with the pro-

visional or the partial truth.

Exhibit 5.1 continued