Business Ethics Analysis

A business is not one that lives in isolation; it can be an integral part in a community’s success or demise and has social responsibilities to; the community, stakeholders, and anyone who may be affected by a company’s actions. Corporate social responsibility is a term that is never used lightly and is a key role in the development of a successful and morally healthy business. “The objectives of a corporation are to outperform its competitors, presumably through preferred competitive strategies” (Joseph Heath 123).
There are three main models by; Freeman, Friedman and Heath discussing corporate social responsibilities and all have distinct differences between their moral obligations, and the way they perceive business should be ran in a morally ethical way. Heaths argument is there is a fiduciary relationship between the company and its stakeholders. Heath argues that one must recognize this relationship and understand that all parties including the business and the stakeholders must gain from a company’s decision.
Heath discusses that a company must take into consideration their social and moral obligations when making decisions that will fill this fiduciary relationship, but must be done by using socially and lawfully accepted actions. “A corporation is an artificial person and in this sense may have artificial responsibilities, but ‘business’ as a whole cannot be said to have responsibilities” (Milton Friedman 65).

Friedman argues that if a corporation is a separate identity and can be viewed as a person then it may have social responsibilities, and the corporate executive is the person that decides these responsibilities and has a direct responsibility to his employers. “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. (Milton Friedman 65) In this Friedman is arguing that the social responsibility of an executive is to engage in any activity that they see as the most profitable to maximize the companies profits. Also stating that it would be morally wrong to diminish profits in any way. If an executive feels obligated to donate to a charity of his choice then he is able to do so. If he would like to donate a portion of all employees pay then he is imposing something that can be considered a tax.
Because the executive is solely responsible for his employees, he must think of them before all, even if he feels that there is an outcome that would be more beneficial to the community. An example would be “at the expense of corporate profits, he is to hire ‘hardcore’ unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty” (Milton Friedman 66). Even though the executive may feel that he is helping the community, his number one objective is selfishly for his employees.
Even though by hiring these employees, the company is helping the community that the company is running, spending more money on training these recruits is money that does not help the company in any way. Friedman argues that the only social responsibility they have is to make money and they have a social responsibility to the stakeholders. The community around the company is a separate identity to each company and it must then fend for itself. The executive by having his own social responsibilities is wanting to spend the money of the; consumer, stockholder, and employees.
Spending these people money in a way that he sees fit, is not necessarily the way they would like their money to be spent. The executive may feel that it is his social responsibility to help a local maternity home that is going to close if someone does not step forward and help them with funding, as they are a not for profit organization. This money, according to Friedman, is not the executives money to spend and is cutting into company’s profits. Even though the company would be helping out a just cause, Friedman argues that the executive does not have the power to spend the stakeholders money on something of his choice.
Friedman’s argument that a companies only social responsibility is to make money is extremely flawed and immoral. Most people would agree that the main goal of a company is to turn a profit, and to be sustainable, this Friedman is correct in saying. Where he starts to be mislead is when he does not think that there are any social obligations of a company. Friedman says that businesses must “increase its profits so long as it stays within the rules of the game” (Milton Friedman 65). What are the rules of the game, many would say it is the law, correct?
Would child labour be considered within the rules of the game for a North American based company? Most people would agree that child and slave labour is wrong and against the law for these companies. What if child and slave labour was used in a different country? If a company had product made in a foreign country and imported back to North America, this would be okay because it is legal in the manufacturing countries? This is something that Friedman overlooked when coming up with his argument, saying that you must stay within the rules.
This situation would be considered in the rules but is it morally and ethically correct? They are maximizing profit, but are supporting slave labour and also moving North American jobs into other countries. An executive must have the power to intervene in this situation and must be able to force change in an ethical and morally right way. Friedman argues that by staying within these rules, the company is maximizing sales but many consumers are more aware of child labour and will not buy products if child labour is used.
With consumers being so connected through media and internet, it is nearly impossible to cover your manufacturing processes and in turn will actually decrease your sales and your brand recognition. Edward Freeman’s stakeholder theory argues that anyone who is affected by the outcome of the company is considered a stakeholder. More specifically stakeholders would be; consumers, distributors, manufacturers, employees and people within the community that the company is located.
Companies that are in a highly completive market, such as electronics, are faced with social responsibilities on a large scale, especially in the past decade as globalization has become much more widespread and imported electronics are considered the norm for these products. Companies that are located in North America are finding it harder and harder to compete with the low wages and are looking to the orient to reduce costs, which increases profits.
But what Freeman says is that the community has a fiduciary agreement with all stakeholders, which includes the community and the people who are affected by the company’s closure or movement. A company who is run under the assumption that they do have a fiduciary relationship with the community as well, will look at other techniques that they can make a higher profit margin then to move the entire company. They may look for lesser taxes from the town and may even ask the employees to take a pay cut, so they are not forced to move.
Even though this act is an act that takes time and effort, the fiduciary relationship that they have developed with this community and are withholding is much more important to them and the values that their company has. Edward Freeman’s view on business is that of an invisible hand. He feels that management can only do things for the greatest good of everyone, and no one person can be in a losing situation when making decisions. One person will clearly gain more from a decision then the rest of the people but everyone must still gain.
If management decided to all take 80% of the profits as bonuses and pay out only 20% dividends to their stockholders, this would not be fair. By the management team taking an 80% bonus they are gaining an extreme amount, but the stockholders are at a loss because it shows that sales are lower, therefore the dividends will be lower. If management decided to take 10% of profit to take the whole company to an amusement park, and the top 5 managers to a destination trip while still paying out dividends plus a bonus for an extremely good year. This would be an example of how Freeman thinks is fair.
Everyone is gaining from this reward, but some people are gaining better rewards then others, in this case the better rewards or the higher gain will be awarded to the 5 managers. In a perfect world Freeman is correct in arguing that everyone must gain in a business decision, and everyone must be thought of. Take into consideration the electronic company that was discussed earlier. What if this electronics company were to go through all of this trouble of getting lower taxes, having the employees take a price cut, and in the end the company goes bankrupt because they were fulfilling their corporate social responsibility?
Would this be fair to the company? Heath says “The flaws that are encapsulated within Freidman’s shareholder model are fundamental to why his model is used as a representation of the wrong point of view” (Joseph Heath 116). Heath argues that Freeman is more concerned about the balance between the Stakeholders and the community then the overall profits of the company. Freeman also states that “the ‘Competitors’ are not necessary to the survival and success of the firm”(Freeman 74).
Competitors are an integral part of the success of another business unless that business is in a monopoly. Competitors can have a major affect on the success of a business by either pushing them to be better, or to push them into unethical ways and taking advantage of their suppliers to keep up. For freeman to argue that competitors are not considered stakeholders just does not correlate with the rest of his argument, because as he said before, stakeholders are anything that can be affected by the company’s success or demise.
Heaths main argument is that of the market failure, he describes the market failure as; “a situation in which the competitive market fails to produce a Pareto-efficient outcome” (Heath 123). He argues that with market failure, business operation as a whole becomes more successful for the greater good of the country. He believes that corporate social responsibility consists of the shareholders and strictly the shareholders and argues that there are still corporate responsibilities to competitors because of market failure.
Heath says that when the market is thriving so are all of the competitors and the business you are operating. Heath argument is very evident in sports and how there are rules. The rules of a game must be followed and all athletes must be at a fair and equal advantage as the rest of the participants. If an athlete were to involve themselves in an enhancement drug, this is unethical because it is against the rules. It is always said that winning isn’t everything, but when it comes down to competitive sport, people will do anything to become winner, and they do not think that by doing this it will affect the sport.
This person would have a huge advantage over the rest of the athletes and would then win the competition, or in our case monopolize all of the business. Just as in sports, “business steroids” are not part of the rule book and should be seen as extremely unethical and seen as a path to success of one, but demise of the rest. “the obligation is to be a team player and to compete fairy, but not necessarily to let the other side win” (Heath 125). This is where Heaths market failure really comes into play and can help alleviate the scepticism that people may have in the stakeholder model. The fundamental problem with stakeholder theory is that it tries to eliminate the adversarialism of the managerial role, rather than merely imposing constraint upon it”(Heath 125). Heath is arguing that instead of just putting constraints onto the managers, they are trying to eliminate competition entirely. “The point of permitting profit-maximizing behaviour among firms in the first place is to promote price competition, along with all the beneficial ‘upstream’ and ‘downstream’ effect of such competition, such as technical innovation and quality improvement”(Heath 123).
The main premise of heath is that he would like there to be a consistent up and down demand in the market, and a health competition between each supplier. If all companies play by the same ethical rules, they are all considered to be equal and therefore are leaving it to management to manage that company into success. “Thus the central of focus of business ethics, in an intrafirm context, involves promotion cooperative behavior within these agency relationships” (Heath 123).
With doing this Heath hopes to develop Pareto efficiency among each competitor and have health competition which will develop a better end product. This product will satisfy the needs of the; consumer for lower prices, which will make demand for the product to go up, this drives sales up, which will give the employees security. This is the exact model and outcome Heath is looking for in a company. An environment that everyone is gaining from the decisions of the company and there are no factors that are negative towards any of the shareholders.
In conclusion you can clearly see that all three theories are correct in their own ways, but that Heaths theory of Market Failure is more current in today’s society. With Heaths ethical practice, managers can fill their fiduciary relationship with not only the shareholders, but also the competitors. “If firms were to behave more ethically, according to this conception, the resuly would be an enhancement of the benefits that the market provides to society, and the elimination of many of the persistent weaknesses”(Heath 126).
Works Cited Freeman, Edward R. “A Stakeholder Theory of the Modern Corporation: Business in Ethical Focus: An Anthology, Broadview Press, 2008: 69-78 Friedman, Milton. “The Social Responsibility of Business is to Increase its Profits: Business in Ethical Focus: An Anthology, Broadview Press, 2008: 65-69 Heath, Joseph. “Business Ethics without Stakeholders: Business in Ethical Focus: An Anthology, Broadview Press, 2008: 110-126