The Importance of Ethics in Business

Chapter 4: General Ethical Theories and Business Ethics

By Mark Schafer, Bryce Jones, Aries Quintero and Tristan Porter

I. The Basics of Ethics

The junk bonds of the 1980’s, the Enron scandal, and the 2008 financial crisis are events in which business leaders acted unethically. Each of these events had a dramatically negative effect on a multitude of innocent U.S. citizens. For instance, the remarkable fallout from a single, middle-sized American company, Enron, can be observed.The following video emphasizes how large of an effect a few people acting unethically can have. Not only did these unethical actions affect the shareholders, but it also led to the unemployment of hundreds of individuals in both Enron and the accounting firm, Arthur Anderson, according to the video. In addition to this, the effect that it had on Enron’s suppliers, customers, Arthur Anderson’s clients, as well as any of the other parts of the connected community went completely unknown.

A larger scale example of ethical implications was noted in the 2008 American financial crisis. It would be hard to say that ethics was fully to blame for the crisis, but most experts would agree that the economic crisis got out of hand partially due to ethics. Unethical actions such as loose bank to bank lending and the financing of a massive amount of subprime mortgages around the countrywere two major examples of greed blinding the eyes of those in power, ultimately coming back to cripple the entire economy.[2] Subprime mortgages are loans to borrowers with poor or below average credit. In order to protect themselves, banks charge higher interest rates on these mortgages to help cover possible defaults on the loans.[3]

In order to gain a better understanding of why people believe what they do and the values that drive these different ways of thinking, it is necessary to define ethics.Ethics is the set of rules, principles, or values that each person possesses in order to guide their decision making as to a certain course of action to take.Ethics helps us determine the balance of following our own interests and those of others.

1. Overlap Theory

Before we review a few of the many ethical theories, we must acknowledge that neither law nor ethics have existed independent of one another. Overlap theory suggests that two normative practices (telling what to do and what not to do) law and morality overlap substantially and agree about what is right and wrong. Murder, stealing, and breaking promises often violate both legal and moral codes. However, the overlap is not complete. Law and morality may not overlap completely because (a) the law is wrong and may need to be changed, (b) some things that morality may approve of cannot be legally enforced, and (c) society may not want legal enforcement involved in personal moral issues. Consider overlap theory, as you learn more about other ethical theories and about business law itself.

B. Free Will vs. Behaviorism

Most of us operate under the idea that we have choices that we can freely make. Yet there are psychologists and philosophers that believe “free choice” is an illusion. For them, everything that we do is based on cause and effect. That, in effect, we are no different than plants and animals and everything else in the universe. This position is known as “behaviorism.” But the opposite position--“free will”--is an important assumption of religion, morality, and law. Only with free will can someone be blamed for their actions. Only with free will can someone be considered good or bad. Much of the justification for punishing someone (either legally or otherwise) for a wrongdoing is based on the idea that the person is blameworthy and could have made a different choice. The idea that we treat those who commit crimes but are insane differently is that they are not blameworthy in the same way as someone who is sane. For those who believe in behaviorism, “good,” “bad,” and “blameworthy” are concepts with no validity. Punishment may be acceptable but only as a causal factor to deter people from doing things that we want to stop.

C. Objectivity or Subjectivity of Ethics

Science can be seen as an objective area of knowledge. Scientific matters are subject to debate, but good arguments can be given for what is generally accepted. Beyond that, tests and studies can be done usually to verify what is scientifically accepted. Still, there are large areas of science where there are no clear answers and considerable disagreement. For example in physics, most of the universe is considered to be made of dark matter and dark energy.Physicists do not yet know or agree on what these things are. Every area of science has particular issues, which are controversial. Despite this,people consider science to be objective.

Some matters in life are obviously more subjective. For example, whether or not a particular food is delicious to eat is something that people disagree on. One can argue whether broccoli is delicious or not but it comes down to our particular tastes. It is basically subjective in nature.Is ethics or morality objective or subjective? There is considerable debate over many moral issues such as abortion, capital punishment, and legalized suicide

Nonetheless, many areas of morality are generally agreed upon. These may include unprovoked and unnecessarymurder, stealing, rape, lying andbreaking promises as well. There are societies where there are considerable differences about some moral issues, but not usually about random killing.If one believes that ethics and morality is purely a matter of personal “taste” or perhaps just a matter of what a particular society believes, then one is a “subjectivist” concerningmorality. Reasons to change others’ minds are like “propaganda.”

If one believes that what is right and wrong morally are subject to universal rules, based on the ability to give good reasons for these rules, then one is an “objectivist” in regard to morality. Being an objectivist does not mean that one sees that all issues in morality are crystal clear. It does mean that some things are clear and that good reasons can be given to back up a position. For example, there are some fairly clear cut reasons why random killingis wrong,based on the pain of the one killed, the unhappiness created in others, and the sense of fear created in society. If one thinks that random killing is wrong because of good reasons and that it is not just a matter of personal or societal opinion, then that is an objectivist position.

Thus, it is possible, if one is an objectivist, to recognize that (1) some moral rules are clear cut, (2) some moral issues are not clear, and (3) that some societies may differ on particular issues. Historically, an objectivist might argue that slavery was acceptable to most societies two hundred years ago, but despite the beliefs of thosesocieties, slavery was still wrong. If one thinks that according to their society slavery is wrong,then it is just a matter of personal or societal beliefs; this is a subjectivist position.

For a subjectivist, any moral issue could change based on personal or societal beliefs. An objectivist tends to believe that the basic rightness or wrongness is based on reason and does not change even though personal or societal opinions change. Again, an objectivist may realize that some issues have not been settled.

An objectivist may believe that rightness or wrongness are based on religious beliefs or other reasons. Alternatively, an objectivist may believe that religion and reason go hand in hand.

Although many ethical opinions are not always universal, there are certain basic ethical values that are expected of leaders in the business world. Businessmen and women may at times feel isolated when the public so easily criticizes them for making mistakes or acting unethically. This feeling is exacerbated because most people, in general, are allowed to commit similar ethical faults, without the same scrutinyas businessmen and women. So we must ask then, is it unfair for us to hold businessmen and women to a higher standard than most of the average population?

II. The Importance of Ethics in Business

Unfortunately, for businessmen and women, it may benecessary to hold them to this higher standard. In general, all professions in which people’s ethical decisions affect more people than themselves must be held to higher ethical standards than the general public. This is not only true for business professions. Surgeons are ethically responsible for their patients’ well-being, public defenders are ethically responsible for fairly representing all clients, and politicians are ethically responsible for representing the opinions of the public that elected them. The key difference for businesses is that it’s often easier for them to act unethically. It is obvious if a doctor screws up a surgery or if an attorney is simply not trying due to a bias.On the contrary,it isn’t as obvious when accountants are performing illegal “off-balance-sheet” transactionsor if banks are loaning out much more money than they could come up with if the loans defaulted. Many unethical actions that businessmen and women could pursue are difficult for most people to understand, but can nevertheless have detrimental effects to many people.

Business ethicsare more universalized than regular ethics.2 They are the ethical values that all businessmen and women are expected to uphold in order to create stability and trust when dealing with monetary matters. This trust and stability in the financial system can be illustrated through loans. Loans are the backbone of any financial system. For loans to occur there must be a sense of trust that the person receiving a loan will pay back the principle as well as the interest. Without this necessary trust, credit could not exist in an economy. This trust easily becomes broken if businessmen and women act unethically to create some skepticism in dealing with money. Many organizations such as AICPA, the American Institute of Certified Public Accountants, within the finance and accounting field create ethical pillars in which they expect a certified accountant or capital manager to uphold. They, like many other governing organizations of fields, have released a document stating certain ethical pillars that they believe should be universal for all accounting/finance workers. This list is as follows:

Article 1 Responsibilities
In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.
Article II The Public Interest
Members should accept the obligation to act in a way that will serve the public interest, honor public trust, and demonstrate commitment to professionalism.
Article III Integrity
To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.
Article IV Objectivity and Independence
A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.
Article V Due Care
A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability.
Article VI Scope and Nature of Services
A member in public practice should observe the principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.[4]

By following this list of business ethics, finance and accounting professionals should not be as tempted to act in a way that could risk losing money for clients through immoral actions.

In order to better understand various stances on business ethics, it is important to first discuss general ethical philosophies. Since ethics are morals that guide peoples’ lives, it is important to first note how they may be driven by religion, secular thought, or a mixture of both.

III. Ethical Theories

A. Religious vs. Secular Ethics

Religious ethics are principles which stem from their faith that people use to guide their decisions. It is important to note that these values are not simply considered religious ethics because they are consistent with a religious view, but rather they come directly from a view that is faith-based. Whether an action is moral or not is a matter of if it is found in scripture rather than learned through secular readings or life experiences.

Secular ethics are ethics that people possess that are not solely faith-based. These ethical values may rise from a multitude of sources including education, life experience, observation, and much more. Secular ethics are incredibly important because they guide the decision making of people that don’t necessarily follow a religion, or follow a religion that has poor ethical values.Secular ethics allow people of this group to live by values that would be considered acceptable in society, but not necessarily have a religious base.

There is not a clearly defined line between religious and secular ethics. Many values that people hold due to a religious basis could be proven through secular experiences or secular writings. For example, the golden rule that states one should treat others as they would like to be treated is demonstrated in a variety of fashions in many religions,and it is agreed upon by most ethics scholars and non-religious people. Secular and religious ethics are typically interrelated and both can be valuable tools in creating a complete mode of ethics to incorporate into anyone’s life.

B.Virtue Theory

“So it follows, since virtue of character itself is a mean state and always concerned with pleasures and pains, while vice lies in excess and deficiency, and has to do with the same things as virtue, that virtue is the state of the character which chooses the mean, relative to us in things pleasant and unpleasant.”[5]This quote by Aristotle discusses the main point of his virtue theory. Virtuetheory emphasizesfinding a middle ground upon pleasure and pain. This is the golden mean theory, which is highlighted in the table below.

Obviously nobody is perfect, and humans tend to act against shaky morals to satisfy immediate pleasures that could lead to long-term pain. Aristotle’s virtue theory tends to create “virtues” or specific rules to live one’s life by in order to find this medium. Virtue theory considers that if people live by the basis of certain virtues, then they will be fulfilling their highest potential of character. Virtues such as respecting the opinions of others, love, or fidelity may all be viewed as facets, that when upheld, can form a good ethical landscape of life. Virtue theory states that if one lives by these virtues, then in all cases to find this medium between pleasure and pain is an act of betterment inthe person’s life.

C. Deontological Theory

Deontological theoryholds a basic belief that there are certain duties or rights that people have. In order to act morally, one must not violate these rules or rights of others. Strict deontological theories, which believe that certain rights must absolutely never be violated in any situation for a person to act ethically, are rare amongst ethics scholars. However, one famous ethics scholar, Immanuel Kant, believes just this.

Immanuel Kant’s categorical imperative discusses a strict rights-based theory. It states that one should “act only on that maxim whereby at the same time you can will that it shall become a universal law”.[6] Kant believes that there are universal maxims or rights that each person possesses, and that these rights should not be broken under any moral action.

Frances Kamm, a contemporary deontologist, adheres to Kant’s categorical imperative but gives examples that would either allow an exception to creating a universal rule or wouldn’t. For example, she believes that killing one person to donate organs to five people would not be acceptable by society’s standards, for the end does not justify the means. However, it would be acceptable for a trolley/train to be diverted onto a track that would kill one person instead of the five it would have originally killed if not diverted.[7]

The problem with Kant’s strict rights-based theory is that there will ultimately present a certain situation in which an average person would say that acting unethically ensured a certain right. It tends to be too objectiveon the basis of ethics, because there can always bean objection to any rule. For example, a typical human right that is generally agreed upon would be that every human has the right to life. Kant would say that under any circumstance this right must not be violated. In a war time situation, most people would say that killing is necessary to protect lives of a greater population. This, however, would be in direct violation of Kant’s categorical imperative because it would be breaking the right to human life. A typical criticism of Kant’s strict rights-based theory is that there are too many instances when this theory cannot be consistent for every person. There are too many cultures, religions, and lifestyles that constitute different ethical rights to create a universal list for all.

In order to cope with the faults of a strict rights-based deontological theory, more modern variations of strict rights-based theories have been created. Most of these theories deal with one major difference. Although they believe in creating a list of duties that all must follow in order to act morally good, these duties are not absolute and can be trumped by a conflicting right of greater importance.