Firms have to ensure they obey the law: but they also face ethical concerns, because their reputations
depend on a good image.
Ethics: a set of moral principles to guide behaviour.
Whereas the political environment in which an organisation operates consists of laws, regulations and government agencies, the social environment consists of the customs, attitudes, beliefs and education of society as a whole, or of different groups in society; and the ethical environment consists of a set (or sets) of well-established rules of personal and organisational behaviour.
Social attitudes, such as a belief in the merits of education, progress through science and technology, and fair competition, are significant for the management of a business organisation. Other beliefs have either gained strength or been eroded in recent years:
(a) There is a growing belief in preserving and improving the quality of life by reducing working hours, reversing the spread of pollution, developing leisure activities and so on. Pressures on
organisations to consider the environment are particularly strong because most environmental damage is irreversible and some is fatal to humans and wildlife.
Key term
(b) Many pressure groups have been organised in recent years to protect social minorities and under- privileged groups. Legislation has been passed in an attempt to prevent discrimination on grounds of race, sex, disability, age and sexual orientation.
(c) Issues relating to the environmental consequences of corporate activities are currently debated, and respect for the environment has come to be regarded as an unquestionable good.
The ethical environment refers to justice, respect for the law and a moral code. The conduct of an organisation, its management and employees will be measured against ethical standards by the customers, suppliers and other members of the public with whom they deal.
3.1 Ethical problems facing managers
Managers have a duty (in most entities) to aim for profit. At the same time, modern ethical standards impose a duty to guard, preserve and enhance the value of the entity for the good of all touched by it, including the general public. Large organisations tend to be more often held to account over this than small ones.
In the area of products and production, managers have responsibility to ensure that the public and their
own employees are protected from danger. Attempts to increase profitability by cutting costs may lead to dangerous working conditions or to inadequate safety standards in products. In the United States, product liability litigation is so common that this legal threat may be a more effective deterrent than general ethical standards. The Consumer Protection Act 1987 and EU legislation generally is beginning to ensure that ethical standards are similarly enforced in the UK.
Another ethical problem concerns payments by companies to government or municipal officials who
have power to help or hinder the payers' operations. In The Ethics of Corporate Conduct, Clarence Walton refers to the fine distinctions which exist in this area.
(a) Extortion. Foreign officials have been known to threaten companies with the complete closure of
their local operations unless suitable payments are made.
(b) Bribery. This refers to payments for services to which a company is not legally entitled. There are
some fine distinctions to be drawn; for example, some managers regard political contributions as bribery.
(c) Grease money. Multinational companies are sometimes unable to obtain services to which they are
legally entitled because of deliberate stalling by local officials. Cash payments to the right people may then be enough to oil the machinery of bureaucracy.
(d) Gifts. In some cultures (such as Japan) gifts are regarded as an essential part of civilised
negotiation, even in circumstances where to Western eyes they might appear ethically dubious. Managers operating in such a culture may feel at liberty to adopt the local customs.
Business ethics are also relevant to competitive behaviour. This is because a market can only be free if competition is, in some basic respects, fair. There is a distinction between competing aggressively and competing unethically.
3.2 Examples of social and ethical objectives
Companies are not passive in the social and ethical environment. Many organisations pursue a variety of social and ethical objectives.
Employees
(a) A minimum wage, perhaps with adequate differentials for skilled labour
(b) Job security (over and above the protection afforded to employees by government legislation) (c) Good conditions of work (above the legal minima)
(d) Job satisfaction
Suppliers may be offered regular orders and timely payment in return for reliable delivery and good
service.
Society as a whole
(a) Control of pollution
(b) Provision of financial assistance to charities, sports and community activities
(c) Co-operation with government authorities in identifying and preventing health hazards in the products sold
As far as it is possible, social and ethical objectives should be expressed quantitatively, so that actual results can be monitored to ensure that the targets are achieved. This is often easier said than done – more often, they are expressed in the organisation's mission statement which can rarely be reduced to a quantified amount.
Many of the above objectives are commercial ones – for example, satisfying customers is necessary to stay in business. The question as to whether it is the business of businesses to be concerned about wider issues of social responsibility at all is discussed shortly.
3.3 Social responsibility and businesses
Arguably, institutions like hospitals, schools and so forth exist because health care and education are seen to be desirable social objectives by government at large, if they can be afforded.
However, where does this leave businesses? How far is it reasonable, or even appropriate, for businesses to exercise 'social responsibility' by giving to charities, voluntarily imposing strict environmental
objectives on themselves and so forth?
One school of thought would argue that the management of a business has only one social responsibility, which is to maximise wealth for its shareholders. There are two reasons to support this argument.
(a) If the business is owned by the shareholders the assets of the company are, ultimately, the shareholders' property. Management has no moral right to dispose of business assets (like cash) on non-business objectives, as this has the effect of reducing the return available to shareholders. The shareholders might, for example, disagree with management's choice of beneficiary. Anyhow, it is for the shareholders to determine how their money should be spent.
(b) A second justification for this view is that management's job is to maximise wealth, as this is the best way that society can benefit from a business's activities.
(i) Maximising wealth has the effect of increasing the tax revenues available to the State to disburse on socially desirable objectives.
(ii) Maximising wealth for the few is sometimes held to have a 'trickle down' effect on the disadvantaged members of society.
(iii) Many company shares are owned by pension funds, whose ultimate beneficiaries may not be the wealthy anyway.
This argument rests on certain assumptions.
(a) The first assumption is, in effect, the opposite of the stakeholder view. In other words, it is held that the rights of legal ownership are paramount over all other interests in a business: while other stakeholders have an interest, they have few legal or moral rights over the wealth created. (b) The second assumption is that a business's only relationship with the wider social environment is
an economic one. After all, that is what businesses exist for, and any other activities are the role of the State.