Module 3

Introduction
to
Business Ethics
 Contents of Module 1
• Introduction to Business Ethics:
• Ethics: meaning, definition;
• Scope: Normative ethics, Meta ethics, Applied ethics;
• Nature;
• Sources: Morals and Values;
• Normative Theories: Consequentialist theory, Psychological Egoism, Utilitarianism,
Deontological/ Kantian theory;
• Kohlberg’s Six Stages of Moral Development;
• Social Contract Theory by Hobbes;
• Social Contract Theory by John Locke;
• Prisoner’s dilemma;
• Code of conduct and ethics for managers.
 Ethics: Meaning
• The word 'ethics' is derived from the Greek word “ethikos” meaning custom or
character.
• Ethics attempts to find out the nature of morality, and to define and distinguish
what is right from what is wrong.
• Ethics is also called moral philosophy.
• To many philosophers, ethics is just a 'science of conduct'
 Ethics Definition
• Manuel G. Velasquez defines Ethics 'is a study of moral standards whose
explicit purpose is to determine as far as possible whether a given moral
standard (or moral judgement based on that standard) is more or less correct'.
• Karen L. Rich defines ethics as a “systematic approach to understanding,
analyzing, and distinguishing matters of right and wrong, good and bad, and
admirable and deplorable as they relate to the well-being of and the
relationships among sentient beings”.
• Many ethicists assert that there is always a right thing to do based on moral
principle, while others subscribe to the broader view that the right thing to do
depends on the situation.
 Scope of Ethics
• Normative Ethics: Normative ethics deals with standards or norms by which we can
judge human actions to be right or wrong. It deals with the criteria of what is morally
right or wrong. There are three elements emphasized by normative ethics: The person
who performs the act (the agent); The act; The consequences of the act.
• Meta-Ethics: Meta-ethics comprises the area of situational ethics and deals with
logical questions. It delves into the nature of ethical properties, attitudes and
judgements. For example, a media critic’s description of a TV series as ‘good drama’
does not necessarily denote that the program is morally sound. It is the function of
meta-ethics to define such vague concepts in ethical terms.
• Applied Ethics: Applied ethics is the problem-solving branch of moral philosophy. It
uses the insights derived from meta-ethics and the general principles and rules of
normative ethics in addressing specific ethical issues and cases in a professional,
disciplinary or practical field. Applied ethics is the vital link between theory and
practice, the real test of ethical decision-making. Applied ethics often requires not
only theoretical analysis but also practical and feasible solutions.
 Nature of Ethics
• Scientific Nature: Ethics is a normative science which determines norms, moral
values in a person and an individual’s character. It is a systematic explanation of
what is right and what is wrong.
• Variable Nature: Ethics is not static. It is not always the same. Human beings
change and the morality and ethical perspective in them also changes.
• Exclusively for Human Beings: Ethics can only be applied to human beings
who have the capacity for moral judgement.
 Sources of Ethics
• Morals: Moral is a system of beliefs that is taught for deciding good or bad.
Morals are a motivation or a key for leading a good life in right direction.
Morals can be related to ones religion, political system or a business society.
Individual morals include being truthful, courageous, respectful behavior,
keeping the promises etc. Business morals include prompt service,
excellence, quality and safety.
• Values: values are personal beliefs. Values can be bad or good depending on the
person’s choice. It can also be called as intuition or the call of the heart. Values
include patriotism, honesty, honor, compassion etc. Business values include
honesty, accountability, loyalty, integrity etc., All these are not mandatory by
society but depend on individual’s choice.
 Normative Theories
• Ethics is a normative study, that is, an investigation that attempts to reach
normative conclusions.
• It aims to arrive at conclusions about what things are good or bad, or what actions
are right or wrong.
• In other words, 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'.
• This is the study of moral standards which are correct or supported by the best
reasons, and so 'attempts to reach conclusions about moral rights and wrong, and
moral good and evil‘.
• For instance, the stakeholder theory has a 'normative thrust and is closely linked to
the way that corporations should be governed and the way that managers should
act. There are different normative perspectives and ethical principles that often
contradict one another.
 Classification of Normative Theories
Normative Theories

Consequentialist Non-consequentialist

Psychological Deontological/
Egoism
Kantian theories

Utilitarianism
 Consequentialist Theories
• The term consequentialism was coined by Gertrude Elizabeth Margaret Anscombe in her essay
"Modern Moral Philosophy" in 1958.
• Consequentialism is an ethical theory that judges whether or not something is right by what its
consequences are. For instance, most people would agree that lying is wrong. But if telling a lie
would help save a person’s life, consequentialism says it’s the right thing to do.
• The theory holds that the consequences of one's conduct are the ultimate basis for any judgment
about the rightness or wrongness of that conduct. Thus, from a consequentialist standpoint, a
morally right act (or omission from acting) is one that will produce a good outcome.
• For example, let’s suppose economists could prove that the world economy would be stronger,
and that most people would be happier, healthier, and wealthier, if we just enslaved 2% of the
population. Although the majority of people would benefit from this idea, most would never
agree to it. However, when judging the idea solely on its results, as classic consequentialism
does, then “the end justifies the means.”
• In keeping with the goal of consequence ethics, zero-tolerance for any form of discrimination
against employees protects individuals while promoting the greater good of the workplace
community.
 Consequentialist Theories contd….
According to Consequentialist theory:
• Right actions  right outcomes  Best
• Wrong actions  right outcomes  Best
• Right actions  bad outcomes  Bad

• Criticism:
• No one knows whether an action results in good or bad
• No one can define “what is good” and “what is bad”
 Psychological Egoism
• Ethicists who propose the theory of egoism have tried to derive their basic moral
principle from the alleged fact that humans are by nature selfish creatures
• Therefore, it can be said that egoism is an ethical theory that treats self-interest as
the foundation of morality.
• 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.
• According to these proponents of psychological egoism, human beings are so made
that they must behave selfishly.
• They assert that all actions of men are motivated by self-interest and there is
nothing like unselfish actions.
• To them, even the so-construed self-sacrificial act like, say, whistle-blowing in an
organization to bring to the notice of the top management 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.
 Psychological Egoism- Criticism
• Generally, the theory is criticized on the following grounds:
• Egoism as an ethical theory is not really a moral theory at all: Those who
advocate egoism have very subjective moral standard for they want to be
motivated by their own best interests, irrespective of the nature of issues or
circumstances. They never try to be objective, and everything is viewed
subjectively based on whether it would promote their own self-interests or not.
• Psychological egoism is not a sound theory as much as it 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 times of calamities such as floods, earth-
quakes and other natural disasters.
 Utilitarianism
• There are two names associated with utilitarian philosophy, they are Jeremy
Bentham (1748–1832) who is generally considered the founder of traditional
utilitarianism, and philosopher cum classical economist, John Stuart Mill (1806–
73).
• Bentham viewed the interests of the community as simply the sum of the interests
of its members.
• According to the utilitarian principle, a decision is ethical if it provides a greater
net utility than any other alternative decision.
• There are certain inferences and implications of the theory:
• One's actions will affect other people in different degrees and thus will have different
impacts;
• Maximization of happiness is the objective of utilitarians not only in the immediate situation,
but in the long run as well;
• Utilitarian agree that most of the time we do not know what would be the future
consequences of our actions;
 Utilitarianism
• Generally, the theory is criticized on the following grounds:
• Utility is a psychological concept and is highly subjective. It differs from person
to person, place to place, and time to time. Therefore, it cannot be the basis for a
scientific theory.
• Another problem of the utilitarian theory concerns the lack of predictability of
benefits and costs. If they cannot be predicted, then they cannot be measured
either.
• A second problem concerns the intractability to measurement that arises while
dealing with certain benefits and costs.
 Deontological/ Kantian theory
• Kantian ethics refers to a deontological ethical theory developed
by German philosopher Immanuel Kant that is based on universal moral laws,
such as “Don’t lie. Don’t steal. Don’t cheat.”
• The term deontology is derived from the Greek deon, “duty,” and logos,
“science.”
• Deontology is simple to apply. It just requires that people follow the rules and
do their duty. This approach tends to fit well with our natural intuition about
what is or isn’t ethical.
• Unlike consequentialism, which judges actions by their results, deontology
doesn’t require weighing the costs and benefits of a situation.
• In deontological ethics an action is considered morally good because of some
characteristic of the action itself, not because the product of the action is good.
 Deontological/ Kantian theory
• If you want to earn money  work
Hypothetical imperatives
commands to follow if you want something
• If you want to be class topper  study well

• Rules are Categorical Imperatives  commands to follow regardless of your desires

• Formulation 1: Universalizability Principle: If you can do it, everyone can do it.
• Formulation 2: Formula of Humanity: Treat others as an end and not as a means
 Deontological/ Kantian theory
• Deontology is also be criticized.
• One criticism of deontology relates to who decides the norms of behavior. Often
the people who decide these norms are people who have power of some kind
(e.g., religious leaders, governmental officials). However, there is no reason to
assume those individuals have any greater ability to decide what is right than
other members of society.
• Second, deontology can potentially lead to post-hoc justification for many
different behaviors. If what is considered the correct behavior depends solely on
the context, then one could argue the reason they behaved in a certain way was
based on contextual factors that others did not observe or consider.
Difference between Consequentialist and Deontology
Consequentialist Deontology
Places the emphasis predominantly on Places the emphasis predominantly on actions.
consequences.
Concerned primarily with the consequences of Concerned primarily with the observance of
action. certain prima facie duties, based on basic
moral principles.
Moral conflicts are resolved by determining Moral conflicts are resolved by determining
which alternative outcome is better for those which prima facie duty is the more pressing.
concerned.
 Kohlberg’s Six Stages of Moral Development
• Lawrence Kohlberg’s stages of moral development, a comprehensive stage
theory of moral development based on Jean Piaget’s theory of moral judgment
for children (1932) and developed by Lawrence Kohlberg in 1958.
• Kohlberg’s theory focuses on the thinking process that occurs when one decides
whether a behavior is right or wrong. Thus, the theoretical emphasis is on how
one decides to respond to a moral dilemma, not what one decides or what one
actually does.
Kohlberg’s Six Stages of Moral Development
Obedience and punishment orientation
Pre-Conventional
Self-interest orientation

Interpersonal accord and conformity

Conventional
Authority and social-order maintaining
orientation

Social contract orientation

Post-Conventional
Universal ethical principles
 Kohlberg’s Six Stages of Moral Development
• Level 1: Pre-conventional level: At the pre-conventional level, morality is
externally controlled. Rules imposed by authority figures are conformed to in
order to avoid punishment or receive rewards. This perspective involves the idea
that what is right is what one can get away with or what is personally satisfying.
Level 1 has two stages.
• Stage 1: Punishment/obedience orientation: Behaviour is determined by
consequences. The individual will obey in order to avoid punishment.
• Stage 2: Instrumental purpose orientation: Behaviour is determined again by
consequences. The individual focuses on receiving rewards or satisfying
personal needs.
 Kohlberg’s Six Stages of Moral Development
• Level 2: Conventional level: At the conventional level, conformity to social
rules remains important to the individual. However, the emphasis shifts from
self-interest to relationships with other people and social systems. The
individual strives to support rules that are set forth by others such as parents,
peers, and the government in order to win their approval or to maintain social
order.
• Stage 3: Good Boy/Nice Girl orientation: Behaviour is determined by social
approval. The individual wants to maintain or win the affection and approval of
others by being a “good person.”
• Stage 4: Law and order orientation: Social rules and laws determine behavior.
The individual now takes into consideration a larger perspective, that of societal
laws. Moral decision making becomes more than consideration of close ties to
others. The individual believes that rules and laws maintain social order that is
worth preserving.
 Kohlberg’s Six Stages of Moral Development
• Level 3: Post-conventional or principled level: At the post-conventional level, the
individual moves beyond the perspective of his or her own society. Morality is
defined in terms of abstract principles and values that apply to all situations and
societies. The individual attempts to take the perspective of all individuals.
• Stage 5: Social contract orientation: Individual rights determine behavior. The
individual views laws and rules as flexible tools for improving human purposes. That
is, given the right situation, there are exceptions to rules. When laws are not
consistent with individual rights and the interests of the majority, they do not bring
about good for people and alternatives should be considered.
• Stage 6: Universal ethical principle orientation: According to Kohlberg, this is the
highest stage of functioning. However, he claimed that some individuals will never
reach this level. At this stage, the appropriate action is determined by one’s self-
chosen ethical principles of conscience. These principles are abstract and universal in
application. This type of reasoning involves taking the perspective of every person or
group that could potentially be affected by the decision.
 Kohlberg’s Six Stages of Moral Development Model
• Criticism:
• Kohlberg’s theory, though extremely influential, was based on research that
used only boys as subjects. In the 1980s the theory was criticized by the
American psychologist Carol Gilligan for universalizing patterns of moral
development exhibited by boys and ignoring the distinct patterns characteristic
of girls.
• Kohlberg’s Moral Judgment Interview (1969) is a rather lengthy structured
interview requiring trained interviewers and scorers.
 Social Contract Theory by Hobbes
• Social contract theory explain that people live together in society in accordance with an agreement
that establishes moral and political rules of behavior.
• Some people believe that if we live according to a social contract, we can live morally by our own
choice and not because a divine being requires it.
• Thomas Hobbes (1588-1689) proposed that a society without rules and laws to govern our actions
would be a dreadful place to live. Hobbes described a society without rules as living in a “state of
nature.”
• In such a state, people would act on their own accord, without any responsibility to their community.
Life in a state of nature would be Darwinian, where the strongest survive and the weak perish. A
society, in Hobbes’ state of nature, would be without the comforts and necessities that we take for
granted in modern western society. The society would have:
• No place for commerce
• Little or no culture
• No knowledge
• No leisure
• No security and continual fear
• No arts
• Little language
 Social Contract Theory by Hobbes contd…
• The state of nature was therefore a state of war, which could be ended only if
individuals agreed (in a social contract) to give their liberty into the hands of a
sovereign, on the sole condition that their lives were safeguarded by sovereign
power.
• For Hobbes the authority of the sovereign is absolute, in the sense that no
authority is above the sovereign, whose will is law.
 Social Contract Theory by John Locke
• Locke differed from Hobbes.
• Locke conceived of the state of nature not as a condition of complete license but
rather as a state in which humans, though free, equal, and independent, are
obliged under the law of nature to respect each other’s rights to life, liberty,
and property.
• Individuals nevertheless agree to form a commonwealth (and thereby to leave
the state of nature) in order to institute an impartial power capable of arbitrating
disputes and redressing injuries.
• Accordingly, Locke held that the obligation to obey civil government under the
social contract was conditional upon the protection of the natural rights of each
person, including the right to private property.
 Social Contract Theory
• Society comes to a collective understanding — a social contract — that it is in everyone’s
interest to enforce rules that ensure safety and security for everyone, even the weakest.
• The social contract is unwritten, and is inherited at birth.
• Through the social contract can deliver society from a state of nature to a flourishing society
in which even the weak can survive.
• The degree to which society protects the weak may vary-- however, in the society, it is
agreed to the contract and need the contract to ensure security for all.
• Social contract (1762): State results from a contract between individuals in their personal
capacity and individuals in their corporate capacity.
• A, B, C and D etc. in their individual capacity surrender all rights to A+B+C+D etc as a
corporate whole.
• The corporate whole that is people as a whole are sovereign-The characteristics of this
sovereignty are its unity, individuality, permanencies, in alienability and its absolute and
unpresentable character.
• The government is dependent on the sovereign of the people.
 Social Contract Theory- Criticism
• The social contract theory is unhistorical. It is merely a fiction.NO EVIDENCE
IN whole range of history to show that the state has ever been deliberately
created as a result of voluntary agreement.
• It gives government too much power to make laws under the guise of protecting
the public.
• If we do accept the contract and wish to abide by it, we may not fully
understand what our part of the contract is or ought to be.
 Prisoner’s Dilemma
• The typical prisoner's dilemma is set up in such a way that both parties choose
to protect themselves at the expense of the other participant. As a result, both
participants find themselves in a worse state than if they had cooperated with
each other in the decision-making process. The prisoner's dilemma is one of the
most well-known concepts in modern game theory.
• The prisoner’s dilemma presents a situation where two parties, separated and
unable to communicate, must each choose between co-operating with the other
or not. The highest reward for each party occurs when both parties choose to co-
operate.
Prisoner’s Dilemma
 Prisoner’s Dilemma contd…
• Ways to Combat Prisoner’s Dilemma:
• Solutions to prisoner’s dilemmas focus on overcoming individual incentives in favor of
the common good. In the real world most economic and other human interactions are
repeated more than once. This allows parties to choose strategies that reward co-operation
or punish defection over time.
• Another solution relies on developing formal institutional strategies to alter the incentives
that individual decision makers face. Finally, behavioral biases will likely develop over
time that undermine “rational” individual choice in prisoner’s dilemmas and lead groups
of individuals to “irrationally” choose outcomes that are actually the most beneficial to all
of them together.
 Ethical Dilemma
• An ethical dilemma is a moral situation in which a choice has to be made between
two equally undesirable alternatives.
• Dilemmas may arise out of various sources of behaviour or attitude, as for
instance, it may arise out of failure of personal character, conflict of personal
values and organizational goals, organizational goals versus social values, etc.
• A business dilemma exists when an organizational decision maker faces a choice
between two or more options that will have various impacts on
• The organization's profitability and competitiveness; and
• Its stakeholders.
• 'In situations of this kind, one must act out of prudence to take a better decision.
As we can see, many of these ethical choices involve conflicts of values.’
• According to Louis Alvin Day," these conflicts can arise on different levels.
'Sometimes, there is an inner conflict involving the application of general societal
values.
 Structure of Ethical Dilemma

Doing what is A bad outcome or

Either Results in
morally right Bad effects

Doing what is
Or Results in
morally wrong A good outcome
 How Ethical Dilemma in Business affect the Stakeholders
• Ethical dilemmas in business can be best explained by the triangle with the stakeholders as its
vertices. The stakeholders in this case can be broadly classified into shareholders, employees
and the society at large.
• Several corporate managements are in a dilemma whether it is worth their while to act
ethically and practice corporate governance in their companies. Investing in ethical practices
and being fair to all stakeholders will cost the corporates dearly.

• When there is an equitable distribution of wealth among all the three, namely, the
shareholders, employees and the society, there will be peace and harmony and all-round well
being. The corporation will earn the goodwill and the support from all of them. If this balance
is tilted in favor of anyone in particular, then the corporation will be in trouble ultimately.
 Code of conduct and Ethics for managers
• While exercising the duties and responsibilities, managers must observe the following ethical values:
• Integrity: Integrity is the cornerstone of all values. A business manager should be morally upright. It
is this characteristic that distinguishes a professional manager from a mercenary.
• Impartiality: A manager should look at and treat all aspects of an issue in a fair and
unprejudicedness manner.
• Responsiveness to the public interest: Though a manager is paid to serve the interests of the stock-
holders of the company, public interest is no less important. In fact, managers should consider it as of
paramount importance, if they have to be successful in their tasks.
• Accountability: Accountability is one of the basic characteristics of a good business manager.
Business managers are responsible for all their actions and are accountable to all the stakeholders:
stockholders, creditors, employees, consumers, government and the society at large.
• Honesty: A cardinal ethical value that a manager should possess is this quality. Managers should be
fair, just and sincere both in character and behavior. They should not indulge in any unethical practice
and should be free of deceit and untruthfulness.
• Transparency: Good business managers should be transparent and set standards for others to follow.
They should be frank and open. Their actions should be easily discussed and understood by others.
 Benefits of managing ethics in workplace
• Attention to business ethics has substantially improved society: Establishment of
anti-trust laws, unions, and other regulatory bodies has contributed to the
development of society. There was a time when discriminations and exploitation of
employees were high, the fight for equality and fairness at workplace ended up in
establishing certain laws which benefited the society.
• Ethical practice has contributed towards high productivity and strong team
work: Organizations being a collection of individuals, the values reflected will be
different from that of the organization. Constant check and dialogue will ensure that
the value of the employee matches the values of the organization. This will in turn
result in better cooperation and increased productivity.
• Changing situations requires ethical education: During turbulent times, when
chaos becomes the order of the day, one must have clear ethical guidelines to take
right decisions. Ethical training will be of great help in those situations. Such training
will enable managers manning corporations to anticipate situations and equip
themselves to face them squarely.
 Benefits of managing ethics in workplace
• Ethical practices create strong public image: Organizations with strong
ethical practices will possess a strong image among the public. This image
would lead to strong and continued loyalty of employees, consumers and the
general public. Conscious implementation of ethics in organizations becomes
the cornerstone for the success and image of the organization.
End of the Module 3