CHAPTER-TWO

ETHICAL THEORIES IN BUSINESS

When it comes to determining a set of rules, guidelines or principles to follow in the business
industry, many will agree that it is difficult for everybody to agree on one due to the complexities
of dealing with human nature. Therefore, to a certain extent, the field of business ethics tries to
come up with solutions to handle problems that arise within the business environment. On the
contrary belief, one should not be confused with the meaning of morality and ethical theory.
Morality has got to do with principles or rules that are used by people to decide between wrong
and right. Meanwhile, ethical theory tends to provide guidelines that justify an action to be right
or wrong when settling human conflicts.

2.1. Ethical Theories in General

In this part we will see the major theories that have shaped the ethical discourse. Philosophers
starting from pre Socratic ancient Greece have developed thoughts regarding ethical values. It is
practically impossible to list down all the theories of the great minds in such a brief note. We
have then confined ourselves to the evaluation of the most repeatedly cited theories in ethical
discussion. Generally speaking theories on what is the right or wrong to conduct oneself can be
categorized in two big forms i.e. Normative Relativism and Absolutism/Universalism.

Theories that fall in the normative relativism class present all moral points of view as relative.
Hence the moral of one person are not necessarily equal to the moral of others making it
impossible to say that certain norms of values are better than norms and values. As the old
saying "when in Rome, do as Romans" claim this theory pin points the need to act according to
the values of a particular society or group. For a realist truth or the right conduct varies from
place to place. There can be no universal truth. Hence everything depends on various factors to
be stated moral or immoral.

Quite contrary to this belief absolutists believe in the existence of systems of norms and values
that is universally applicable to everyone, everywhere and every time. The notion of ethical
universalism preaches the presence of moral codes that surpass the barriers of variation in the
form of culture, language or territory and with application for all human beings alike. In essence
an act performed by Mr. A in country X deemed unethical is also unethical if performed by Mr.
B in country Y as the standards utilized or the moral reasoning in place to set responsibility are
universal in nature.

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Evaluated from practical grounds both aspects are found to be ethically suspect. One cannot
deny the existence of certain universal moral codes although we cannot guarantee for the
uniform understanding of actions as right or wrong by all people alike which tantamount the
difference in thought process and reasoning of humans. The four core points of base for the
development of ethical theories are:

1. The Action: Some ethical theories emphasis the action under scrutiny to establish the right
or wrongness of the act. Without due emphasis for questions like who acted or what was the
impact of the act or with what intention the actor engages in the conduct. The act by itself is
a basis to develop ethical standards. Deontology ethical theory is an example of this typology
while the general remark of your parents does not lie under any circumstance can be an
example of conduct base for ethical standard. Here lying which is the act is the bases for
formulating what is right and wrong.

2. The Result of the action: Other ethical theories are concerned about the consequence that
followed the act. An act is evaluated as ethical or not by the end result or result that follows
it. Assuming every act will have a certain consequence it is the consequence that is the bases
of moral evaluation. Let us assume you have lied despite your parent’s advice. An ethical
theory based on result will not automatically judge the behavior as unethical. It rather asks
the question "so what?” What happened as a result of your action of lying? Hence by
developing a certain standard on the result it will judge the result as acceptable or not.
Teleology ethical theory is an example of this type of theory.

3. The Actor: Apart from action related theories certain ethical theories look in to the
personality of the actor. The assumption being a righteous person will engage in an ethically
good act while a person with no character qualities will most likely end up in an ethical act.
Looking in to the personal traits of the actor to judge the morality of an act as set by
Aristotle’s virtue theory is categorized under this heading.

4. The Intention of the Actor- Intention is a state of mind grasped by the actions of an
individual. The factors pre and post the act will help in understanding the real intention of a
person engaged in an act. A person may hit a pedestrian in his car. To judge his act wrong or
right knowing the intention of the driver in trying to escape hitting four people and ending up
killing one may be a basis for establishing morality of his act. In this evaluation we did not
look at the actor, or the action of hitting a person with a car or the result of death of a person.
We rather looked in to the intention that led the person do the act. Some ethical theories base
their analysis on actor’s intention. In the following sections of the chapter, let us now see the
selected ethical theories which can be applied in business ethics.

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Questions

 What is ethical universalism?

 What is ethical relativism?
 Of the four bases used to establish moral theories which one is the best in your opinion? Why
do you say so?

2.2. Specific Ethical Theories for Business Decisions

2.2.1. Utilitarianism/Consequentialist (Teleology or Result Based) Approach

According to the theory contributed by Jeremy Bentham and John Stuart utilitarianism is an
ethical theory based on the notion of utility/benefit. The assumption of this theory incorporates
the ideas that an action is morally right if:

1. It produces the greatest good for the greatest number of people.

2. The net benefits over costs are greatest for all affected, compared with the net benefits of all
other possible choices.
3. Its benefits are greatest for each individual and if these benefits outweigh the costs and
benefits of the alternatives.

You can see the consequentialist/utilitarianism approach as all the three tents put an emphasis
on what an act produced coined in terms of greater good, greater net benefit. Hence
utilitarianism is a term for any view that holds actions and policies to be evaluated from what
they can produce as a net benefit and the cost they entail on society. Measured as such a morally
right action is one that produces more benefit than its comparative cost. This theory is also
referred as teleological referring to result. The theory can be used for any type of approach that
advocates for selection of policy that maximizes benefit and minimizes cost.

Utilitarianism could be categorized in to rule based and act based utilitarianism based on the
emphasis they give to a principle or act as a yardstick to measure utility. Those who use rules
tend to choose one that can bring greatest net benefit while those who emphasized on act tend to
evaluate the act and the result of the act to chose one over the other as ethical. Bear in mind that
both look in to the consequence of the act to formulate their theory only difference being the
emphasis they render to principles of conduct with its result or action of a person with its result.

Values of Utilitarianism theory

The following are the list of values that the Utilitarianism theory contributes as part of ethical
discussion:

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1. Advocates maximizing utility: As the core theme of the theory is utility any person who
wants to be ethical is expected to choose that behavior which results in maximizing benefit to
the mass. This act if carried by all will end up in cumulating actions with advantages to the
mass with minimum cost. This will ease the effort in bringing the greater good to society.

2. Matches well with moral evaluation of public policies: Most public policies are designed
taken the voice of the majority. Even when oppositions persist so long as the result of the
policy is benefit to the greater number the notion of democracy calls for the action to be
taken. Hence utility to the majority is a notion that is in line with long standing public policy
design.

3. Appears intuitive: Many people to evaluate acts rightness by using the result of the act and
its impact on the mass is a simple theory to understand and concur with.

4. Helps explain why some actions are generally right and others are generally wrong:
Society has already classified acts as right and wrong in human interactions. We can explain
such division using the concept of utility.

5. Influenced economics and the concept of efficiency: Economics as a field of social science
is concerned on the notion of utilizing limited resources in an efficient manner. Economic
theories are about bringing social welfare by employing the best mechanism of resource
utilization. Utilitarianism also speaks about benefit and cost, greater utility, greater number
of people hence effectively influencing economic thoughts.

Yet as a limitation of the theory a number of other factors are enumerated by scholars. The core
oppositions raised on utilitarianism in the following six interrelated webs of questions. Each
shows the weak link of utilitarianism and the need for an alternative ethical theory a necessity.
Here are the points.

1. No agreement exists about the definition of “ good” for all concerned: Is it truth, health,
peace, profits, pleasure, cost reductions, or national security?

2. No agreement exists about who decides: Who decides what is good for whom? Whose
interests are primary in the decisions?

3. The actions are not judged, but rather their consequences: What if some actions are
simply wrong? Should decision makers proceed to take those actions based only on their
consequences?

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4. Utilitarianism does not consider the individual: It is the collective for whom the greatest
good is estimated. Do instances exist when individuals and their interests should be valued in
a decision?

5. The principles of justice and rights are ignored in utilitarianism: The principle of justice
is concerned with the distribution of good, not the amount of total good in a decision. The
principle of rights is concerned with individual entitlements, regardless of the collective
calculated benefits.

2.2.2. Rights Theory (A Moral & Legal Based Approach)

The term rights and duty is at the heart of any moral discourse. Right is defined as an
entitlement one asks from another. This other could be a fellow human being, a group of person,
an institution or a government. A duty is what others are entitled to ask from you. When one
claim something from the other it is also expected that somewhere in the line he is expected to
do something or refrain from doing something in relation to his transaction with others. Rights
and duties always go hand in hand. Rights can be classified in to different parts based on their
sources. In ethical discourse we talk more about Moral/Human rights. Yet a moral right
discussion is expected to include legal rights, contractual rights or Natural rights.

⎬ Legal rights are entitlements that are limited to a particular jurisdiction or legal system. For
instance a company licensed in Ethiopia has a legal right to work and earn profits in
Ethiopia. For this same company to exercise its legal rights in other countries it needs to be
allowed by the law of that specific country. Hence legal rights are country specific and what
is allowed as a right of a person in one country may not be a right in another.

⎬ Moral rights may apply to legal rights in selected circumstances as not all rights recognized
by law are treated moral automatically. The interlink between law and morality is yet visible.
Moral rights are universal societal values based on norms of the society. Moral authority is
determined by individual rights guaranteed to all in the pursuit of freedom of speech, choice,
happiness and self-respect.

⎬ Contractual rights are special kind of rights emanating out of an agreed term set by parties.
With a desire to perform a certain act people will enter in to mutually agreed consensus
promising to do as stated in the contract. A contractual right must be governed by the laws of
a nation governing contracts yet moral rules can also be applied for these rights. Moral rules
that apply to contracts include:

 The contract should not commit the parties to unethical or immoral conduct;

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  Both parties should freely and without force enter the contractual agreement;

 Neither individual should misrepresent or misinterpret facts in the contract; and

 Both individuals should have complete knowledge of the nature of the contract and its
terms before they are bound by it.

Up on fulfillment of all this rules the rights that emanate from contracts are expected to be
fulfilled. Failing to do so creating an unethical conduct of the party in breach. The wide spread
liberal thought which has questioned the long standing belief of society about the wrongness of
most conducts as sex before marriage , gay marriage, abortion, and the like was born out of
rights theory. By employing too much emphasis on the complete freedom that need to be
attributed for people to do whatever they feel is right as long as their actions does not result in
harming others or have a negative implication to society.

Scholars have raised the following as the limitations of the principle of rights as to be
employed in ethical discourse:

1. The justification that individuals are entitled to rights can be used to disguise and manipulate
selfish, unjust political claims and interests.

2. Protection of rights can exaggerate certain entitlements in society at the expense of others.
Fairness and equity issues may be raised when the rights of an individual or group take
precedence over the rights of others. Issues of reverse discrimination, for example, have
arisen from this reasoning.

3. The limits of rights come into question. To what extent should practices that may benefit
society, but threaten certain rights, be permitted?

2.2.3. Justice (Principle of Fairness and Equity) Approach

Justice approach is based on the assumption that every person must be appropriated with fair
share of benefits and costs in order to claim a morally proper act have taken place. When the
basis for a moral evaluation is designated by the extent opportunities, wealth and
burden/hardships are distributed among society the principle employed is said to be principle of
justice. Principle of justice is composed of the notions of equality and fairness. A conduct
which does not favor these two elements can be said to be unethical. In explaining the
components of justice, the two distinctive questions as to:

 Whether each person has an equal right to the most extensive basic liberties that are
compatible with similar liberties for others(Equality); and

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 Whether Social and economic inequalities are arranged so that they are both (a) reasonably
expected to be to everyone’s advantage and (b) attached to positions and offices open to
all(Fairness of opportunities.) If the response to the above questions is yes then justice is
served hence moral.

Building on ancient scholar’s thoughts on justice theory, justice further classified in to four
different areas of focus.

1. Compensatory Justice: Concerns compensating someone for a past or present harm or

injustice. For example, affirmative action programs are justified as compensation for
injustice that minorities have suffered. While a person who defames another and affects his
reputation is made to pay compensation as part of present injustice he inflicted on another.

2. Retributive Justice: Means punishment to someone who has inflicted harm on another. A
criterion for applying this justice principle is: Does the punishment fit the crime?

3. Distributive Justice: Refers to the fair distribution of benefits and burdens. Have certain
stakeholders received an unfair share of costs accompanying a policy or action? Have others
unfairly profited from a policy? A tax system where by those who profit more pay more and
the collected tax goes to building infrastructure has the element of distributive justice.

4. Procedural justice: Designates fair decision practices, procedures, and agreements among
parties. This criterion asks, “ Have the rules and processes that govern the distribution of
rewards, punishments, benefits, and costs been fair? The common phrase due process refers
to the procedural justice aspect.

These four classifications of justice can be used as guidelines in developing a moral authority
and arguing as to the morality or otherwise nature of a conduct of a person or an institution.
Although the contributions made by the concept of justice to ethical reasoning is paramount.
However, just like the other theories, critics have their own concerns about the theory. The major
short comings and questions are:

1. Outside the jurisdiction of the state and its judicial systems, where ethical dilemmas are
solved by procedure and law,
2. Who decides who is right and who is wrong?
3. Who has the moral authority to punish whom?
4. Can opportunities and burdens be fairly distributed to all when it is not in the interest of
those in power to do so?

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2.2.4. Virtue Ethics (Character Based) Approach

An ethical theory highly attributed to Plato and Aristotle which relies on the moral values or
character traits of individuals is referred as Virtue ethics. The theory emphasizes the role of one's
character and the virtues embodied in the character to determine right from wrong. As it looks on
the moral character of the person who engages in an action than the action or its consequence it
is the theory with actor based inclination. Moral authority is based on individual character
virtues as truthfulness, integrity and honesty. The theory deemphasizes an act, its consequence or
intention and focuses on the actor. The admirable and desired character traits needed to be
possessed by a person so that moral actions are expected from him are generally the Virtues
while the non-admirable characters if possessed will most likely lead a person to unethical act
are Vices.

These virtues and vices are different from habits which are temporarily manifested by a person
and abandoned with time. Character traits are rather deep embedded in the personality of an
individual and are used to describe the character of that person. It can be said it is of a permanent
habit. Hence it is wrong to attribute a character for a person based on a single action. If you
happen to spot a person insulting another one you may not formulate the character of the person
from such incident.

Virtue ethics claims the possessor of virtues than vice will engage in a moral act while a person
with a character trait of vice will act in an unethical way. This will make the way our moral
develop a very important task and it is up to us to make sure our virtues are in much higher
amount than our vices in our life if we plan to be ethical. The major criticisms against virtue
theory are summarized as follows:

 Virtue ethics fails to adequately address dilemmas which arise in applied ethics, such as
abortion. For, virtue theory is not designed to offer precise guidelines of obligation.

 Virtue theory cannot correctly assess the occasional tragic actions of virtuous people. Since
virtue theory focuses on the general notion of a good person, it has little to say about
particular tragic acts.

 Some acts are so intolerable, such as murder, that we must devise a special list of offenses
which are prohibited. Virtue theory does not provide such a list.

 Character traits change, and unless we stay in practice, we risk losing our proficiency in these
areas. This suggests a need for a more character- free way of assessing our conduct.

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 There is the problem of moral backsliding. Since virtue theory emphasizes long- term
characteristics, this runs the risk of overlooking particular lies, or acts of selfishness, on the
grounds that such acts are temporary aberrations.

2.2.5. Universalism (A Deontological or Duty Based) Approach

Universalism ethical theory is based on universal principles of justice, rights, fairness, honesty
and respect. It claims doing the right thing as the proper moral action under all circumstances
without the need to evaluate the consequence of the action. As it goes contrary to principles of
ethics which preach result of an action as basis of morality it is also referred as non-
consequentiality ethics.

Teleology was result oriented. Deontology is duty oriented calling for the need to carry out our
duty of engaging in the right behavior at all times despite the actions resulting in good results to
the mass. "Do the right thing even when the result will not bring the greatest happiness to
others."

In this regard Immanuel Kant has developed a theory of categorical imperative which makes
people responsible for the benefit of other individuals and humanity at large irrespective of the
consequence of their actions. The categorical imperative consists of two parts.

1. The first part states that a person should choose to act if and only if she or he would be
willing to have every person on earth, in that same situation, act exactly that way. This
principle is absolute and allows for no qualifications across situations or circumstances.

2. The second part of the categorical imperative states that, in an ethical dilemma, a person
should act in a way that respects and treats all others involved as ends as well as means to an
end.

The major weaknesses of universalism and Kant’s categorical imperative include these
criticisms:

 These principles are imprecise and lack practical utility. It is difficult to think of all humanity
each time one must make a decision in an ethical dilemma.

 It is hard to resolve conflicts of interest when using a criterion that states that all individuals
must be treated equally. Degrees of differences in stakeholders’ interests and relative power
exist. However, Kant would remind us that the human being and his or her humanity must be
considered above the stakes, power bases, or consequences of our actions. Still, it is often
impractical not to consider other elements in a dilemma.

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 Finally, what if a decision maker’s duties conflict in an ethical dilemma? The categorical
imperative does not allow for prioritizing. A primary purpose of the stakeholder analysis is to
prioritize conflicting duties. It is, again, difficult to take absolute positions when limited
resources and time and conflicting values are factors

Questions

 What is the core difference between teleological and deontological ethical theories?

 What is the difference between legal, contractual and moral rights?

 Why is virtue theory referred as a person or individual based ethical theory?

 Where do you categorize ethical rules derived from religious texts like the holy bible or holy
Quran from the five ethical theories?

 Explain the difference between the terms Justice, Equity and Fairness by providing relevant
examples for each?

 The phrase Do not do to others what you do not want to be done unto you or do to others
what you want others do to you fits best to which of the five ethical theories?

 Classify the five ethical theories as ethical relativism or ethical absolutism?

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