Business Ethics And Sustainability

That business action has impact or consequences is undeniable. One need only examine cases such as the recent importation of contaminated berries infecting Australian consumers with Hepatitis A, Union Carbide disaster in Bhopal India in the 1980s when a parts of a battery factory exploded sending toxic fumes into the air, settling in and around the town of Bhopal causing in excess of 8000 deaths. Other examples such as the Nestle infant milk scandal, the melamine powder in milk products by a Chinese company part owned by New Zealand dairy cooperative Fonterra in 2008, the financial harm caused to millions by the toxic loan scandals that pre-empted the global financial crisis, etc, etc. Clearly harm has been caused and unethical practices and poor decision making undertaken by management. But who is responsible?

Do we hold the individual who made the decision responsible, the group, project team or committee who made the oversaw a project or a decision, the CEO and the Executive group, the Board of Directors or the actual Organisations, in whose name the individuals and groups acted? Once we have determined who is responsible what sort of justice is appropriate? Whilst retributive and compensatory justice can be exacted upon an individual- how can both be applied to an organisation? Should an individual acting on the organisation’s behalf be solely held accountable?

This unit will examine the difficult and controversial topic of the moral responsibility of organisations. It will examine the concept of personhood and agency and the conditions under which an organisation can be held morally responsible for its actions.

Learning objectives

This unit has the following learning objectives:

1. To understand the range of perspectives on whether an organisation can be considered a moral entity

2. To understand the concept of personhood and its the characterises

3. To understand and recognise the role of agency as a decision limiting factor in decision making

4. To canvas the various positions on whether and organisation can be held morally accountable for its actions

At the heart of CSR and Business Ethics is the debate as to what an organisation is for, i.e. the purpose of business, and whether an organisation as an artificial entity, should have the same rights and responsibilities as people. In other words should we hold an organisation, as a legal person, morally responsible for its decisions and any benefits and harms that flow as a result? Farrell, Fraedrich and Farrell (2015) identify that individuals may engage in unethical behaviour believing they are advancing the interests of the organisation. Harrison (2001) suggests that in a modern firm, business activities are invariably established and controlled through a company structure, rather than by an individual.

In business ethics the discussion concerning the extent of corporate moral responsibility primarily focuses on the organisation as a rational but limited entity. This is because we establish businesses and companies to do limited things. For example, The Ford Motor Company was established as a company to make cars, Qantas is a company that provides air travel etc. These are legal structures under which business activity takes place. In the eyes of the law, these organisations are in fact “legal persons” with many of the similar rights and responsibilities that true human beings have. But clearly a company is not a true person with flesh and blood and a brain. Because organisational actions are limited only to achieve its stated ends or goals such as profit or sales, some argue that so too are its moral responsibilities. This concept is often referred to as social obligation described by Robbins (1990) or the responsibility of an organisation is to achieve its objective solely within the limits of the law. (this will be canvassed further in the topic on Corporate Social Responsibility) Donaldson (1989) describes another perspective that the organisation, whilst a legal person, is not a corporeal one and thus not capable of intent. If only corporeal rational entities are capable of intent, this would suggest that an organisation, as a legal entity, couldn’t be held morally accountable for its actions.

Allison (1998) argues a moral relationship lies at the basis of agreements and contracts between two people or two organisations. He argues that without the basis of trust, business cannot proceed. Thus ethics is fundamental to business conduct. This view suggests that the organisation is a moral player in society with duties and responsibilities. In order advance its interests it must engage in behaviour that is accepted as the minimum moral standard.

One of the most seminal works which challenged the notion of corporate moral responsibility and practice in business was by Milton Friedman in his famous essay “The Social Responsibility of Business is to Increase its Profits", originally published in the New York Times magazine in September of 1970. Friedman argued strongly that organisations were in fact limited entities that only engaged in the manufacture of products and or the provision of services. He maintained that the limited nature of organisations meant that they could not have a conscience in the same way that human beings had a conscience and therefore should not be expected to act as a moral person. Moreover, Friedman argued that the agents of the organisation, specifically managers who held the responsibility for decision-making within the organisation, were bound to make decisions only with respect to the objectives of the firm. Their only duty was to maximise profits for the shareholders of the organisation.

By contrast, prominent management theorist Peter Drucker argued that the relying on the market mechanism to ensure appropriate organisation behaviour was insufficient. He suggested that an important question needed to be raised regarding corporate ethics that went beyond the boundaries of philosophy to include broader issues in society. These views have been referred to as the socio-economic perspective which challenges the conditions of the pure market, suggesting that due to imperfections, no market can be considered perfect and that rather than let imperfections arise, resulting in poor use of resources or hazards including issues of safety, managers must make conscious decision in the interests of society, in effect to act in the interests of the common good, not just the interests of the shareholders (Collins and McLaughlin 1997). This debate will be canvassed in more specific detail in Unit 10 of this course.

Is Moral Agency Important for Organisations?

This is an extremely important question to address, because if organisations cannot be held morally responsible for their actions, then the whole CSR debate comes irrelevant because no firm would engage in an activity solely because it is the right thing to do. Organisations would be under no obligation to do anything other than the minimum legal requirement of society. You would also have a contradictory situation of organisations operating in countries with different laws and legal systems engaging in actions that might be deemed legal in one country yet illegal in another. Organisations that may be faced with the prospect of being charged with violating countries laws could simply move their headquarters to another jurisdiction and avoid even the minimum responsibility for its actions.

Individuals, Agency and the Organisation

When people become employees of an organisation they become an agent of that organisation. According to MacDonald (2015) agency theory describes the relationship that exists between principals, typically the owners or shareholders of an organisation and their agents- the managers and employees of the organisation.

The concept agency essentially recognises that the owners of large organisations cannot manage all aspects of a business, furthermore investors may not wish to be actively involved in the day to day management of business activities. So these principals delegate the responsibility for the management of business activity to managers and employees, their agents, who they expect to act in the interests of the organisation and thus shareholders.

The notion of rational decision-making assumes that organisations act according to a purpose, (goals and objectives). The concept of agency states that the agent must act in accordance with the interests of the organisation (Donaldson 1988). Therefore the individual is constrained from acting with freedom and autonomy, as their behaviour is fact determined by the organisation. Individuals as officers /agents must make decisions for and in the name of the organisation, must decide by sole reference to the objectives of the organisations. If this is true then this would suggest that there is no place for individual values, beliefs or issues of morality.

There are two significant problems with the concept of agency.

1. The first is the loss of control that owners of a business experience when they delegate decision making to their agent. A common fear is that agents will make decisions that of benefit to themselves rather than the principal. A concept we explored in the previous unit known as a conflict of interest. As such organisations need to develop and implement controls that insure good decision making.

2. The second problem is the common misconception that agents must maximize profits for shareholders. Agents are bound to advance the interests of the organisation. In some situations maximizing profit may not be in the best interest due to the harm or reputation risk associated with a particular course of action. For example cutting safety inspections and regular maintenance for an airline might reduce costs and increase profits in the short term, but prospective passengers may prefer to fly with other carriers once it becomes known that the airline is compromising safety for profit. We also need to recognize that public sector and NGOs and many other organisations are not shareholder based yet agency still applies.

Do we therefore consider that these constraints of acting solely with reference to the organisations goals and objectives, to be mitigating factors that lessen an individual’s responsibility if they make decision that unwittingly leads to harm to other individuals or to society in general? In other words we are suggesting that individuals are duty bound to make decisions that maximizes profit, reduce costs, increase sales, within the limits of the law, and if by chance unintended harm was to occur as a result of the decision, they as individuals should not be held responsible?

If so, this would give credence to the arguments that business is amoral in nature and that individuals acting as agents, and indeed organisations themselves, cannot be held morally responsible for their actions.

Buchholz (1989) presents two perspectives concerning this issue; the traditional view is that those involved in decisions do so on a conscious basis, thus they are individually responsible, and the opposing view that as the individuals make decisions collectively or contribute to them collectively, the responsibility must be assigned collectively and not to individuals. These concepts are used in order to discuss whether an organisation can be considered to be morally responsible for their actions. They relate to levels of discretion within an organisation, the way in which work is integrated amongst the various component parts, integration and coordination and strategies for controlling individual behaviour.

Exercise 1 Holding an individual Accountable

Think about your current or previous employment.

What duties do you believe you have to your organisation?

How are you held accountable for the work and the decision you make? When you make a decision in the workplace, do you consider yourself personally responsible for your actions, or do you believe it is the organisation that assumes responsibility for your decisions?

Prepare a brief summary of your views for discussion in class

Can we consider a Corporation to be person?

As discussed in the previous Unit, when we talk about moral responsibility it usually is concerned with holding people accountable- for their actions, when committed knowingly and freely. However, an organisation is not a person- it’s a legal entity- an artificial construct which has no corporeal form, thus unlike a person it is difficult to talk about the intent of a corporation.

This later point is usually is the most often cited fact used to rebuff the arguments that a corporation should be held morally responsible for its actions, i.e. because it is not a conscious living entity and thus cannot make decisions knowingly (consciously) and freely.

What do we mean by personhood?

According to French (in White 1993) there are different notions of what constitutes personhood, based on Locke's account of personal identity.

· Firstly, the term person is described by Locke embodying the concept of conscious action, these actions having merit and so belongs only to intelligent agents capable of law, happiness and misery.

· Secondly, that conscious persons have memory are capable of extending themselves into the past and thereby become concerned and accountable for their actions.

However, as was identified in the introductory Unit, not all people are automatically morally responsible for their actions. Personhood is conferred on people when:

1. They are considered sentient and fully aware of themselves.

2. The capacity to make rational and informed decisions.

3. They have the capacity to assess the impact (consequences) of their actions on others.

4. They have memory that allows for reflection on past practice as a means of projecting judgments into the future

5. They have and act with “purposefulness”, which can also be referred to as intent- a critical feature for assigning moral responsibility.

A person satisfying these conditions is considered to be a “moral agent.” However, there are limits to this concept that can result in some cases, in a failure to adequately establish moral responsibility. For example, a deceased person still has certain legal rights such as to have his or her will executed, yet we cannot establish a deceased person as a moral agent because we cannot hold them accountable for anything (Werhane and Donaldson 1993). So if we are to assign moral responsibility to an organisation is must satisfy the conditions of personhood.

Clearly an organisation is not a person. It is an artificial construct created by people with a limited purpose- i.e. to produce a product or service. Perhaps the most accepted legal definition of an organization or corporation is that offered by Chief Justice Marshal in 1819, that an organization "is an artificial being, invisible, intangible, and existing only in the contemplation of the law. Being the mere creation of the law, it possesses only those properties which the charter of its creation confers up.”

Using Organisational Structure and Policies as “Artificial Consciousness”

Daft and Steers (1986) identified that an organisation is a deliberately structured activity system, where organisational tasks and activities are sub-divided between separate departments. The organisation possesses a hierarchy of authority, with clearly defined responsibility and decision-making systems. Having an activities system means that the organisation carries out specific tasks, through the use of knowledge, technology, people and machines to transform inputs into outputs. Individuals within the organisation undertake directed activities that are linked together to accomplish the overall task or fulfil the purpose of the organisation.

Shaw and Barry (2013) suggest that organisations can be viewed as having moral dimension because they employ corporate internal decision (CIDs) structures which parallel the decision making structure of an individual. CIDs amount to established policies and procedures for accomplishing specific tasks and goals. It lays out lines of authority and stipulates under what conditions people's actions become official corporate actions (Shaw and Barry 1998). Organisational structure encompasses these concepts of responsibility, accountability and autonomy, measured by levels of discretion. However, moral responsibility can be affected by uncertainty, difficulty or minimal involvement. The extent to which these variants lessen a person’s responsibility depends greatly on the seriousness of the wrong.

French (1993) argues that CID in effect absorbs the intent and acts of individual persons into an organisational decision-making process. Whilst no individual may have pursued a particular course of action charted by the CID, French contents that the organisation did. This constitutes the basis of making corporate acts intentional, thus morally responsible (Shaw and Barry 1998). Danielson (1998) concurs referring to the system of policies and procedures which constitute the decision making system of an organisation as a form of constraint on organisations that can be considered as a form of artificial morality thus making organisations accountable for their decisions, resulting actions and outcomes. He puts forward an example in which the agents, as straightforward maximisers, recommended as rational by the theory of rational choice, cannot attain optimal outcomes due to the constraints of the decision making system. CIDs collect data from both the internal organisation and external environment about the real and possible impact of its actions. It monitors work conditions, employee efficiency and productivity. These facts are assessed in a rational manner before a decision is taken. Goodpaster and Matthews argue that as a result there is no reason why organisations cannot show the same kind of rationality and respect for persons that individual human beings can when making such decisions (White 1993). Donaldson (1989) agrees suggesting that a corporation can be a moral agent if moral reasoning enters into its decision-making procedure and if its decision making process controls not just the company's actions but also its structure of policies and rules (Shaw and Barry 2013).

The Moral Person View: Problems and Issues

Donaldson (1988) acknowledges that organisations are made up by rules, policies procedures and power coalitions, thus it is possible to establish what is deemed as acceptable within these frameworks, however, he suggests that it is not possible to determine what the combined rules, policies and other organisational systems, in themselves intend. However intention in itself does not constitute moral agency. It is incorrect to suggest that whatever an organisation does it necessarily intended to do. Different members of the organisation may have very different perceptions of the function and purpose of the organisations. A manager may view it as maximising profit, others as providing a salary, a community service or a quality product. This may suggest that organisational members may interpret the purpose of introducing an ethics system with decision-making guidelines, codes, training and other support mechanisms differently. Donaldson (1989) refers to this as the difficulty in establishing the locus of intentions. The moral person view assumes that anything that can behave intentionally is a moral agent. This is problematic when we consider that other beings and non-persons such as animals, machines and artificial intelligences can be said to act with intent, however we would not credit them with moral agency.

The problem with considering organisations from the moral person perspective is its implications. If organisations are to be seen as persons, then they should have, not only the same moral responsibilities as a person, but also the same rights and benefits. It can be seen that organisations are afforded some of the same rights as people, the right to own property and enter into agreements, the right to sue the right to privacy. They do not however have all the rights of people. For example organisations do not have the right to social security or the right to vote in the political process. Many rights seem logically impossible to attribute to an organisation. These arguments seem to suggest that organisations fail to qualify as moral persons (Donaldson 1989).

There are also several other key areas of the moral person view that can be challenged. The argument that it is difficult to establish the locus of intent could be due to the organisation itself by not clarifying its purpose to its agents through appropriate mission statement and internal procedures such as orientation programs and clear job descriptions and or the hiring of ineffective/incompetent agents.

A person who claims to be skilled in a particular discipline when they are not is regarded as having committed fraud or be seen to be incompetent. It is suggested that one cannot diminish overall responsibility due to the failure of the organisation to inform and educate its agents in the performance of their duties. It could be argued that this is the same as individual negligence or incompetence. Many organisations have mission statements or goal statements that serve the purpose of defining the organisation’s reason for being. A failure to adequately convey these to organisational members may be a case of poor communication or poor internal strategies. However, it should not be interpreted as an example of mitigating factor limiting the moral responsibility of organisations. Moral responsibility and accountability are recognised in the case of the individual, so too should it be for the organisation. In terms of rights, whilst it is correct to say that organisations do not have the right to vote, they engage in the political process through donations to political parties designed to advance their own interests. In addition, they do in fact receive welfare from governments in some cases directly as cash benefits, but most often through tax concessions, rebates and other forms of inducements. Thus it can be seen that rights are exercised, although in a different fashion to people.

Are Organisations more like a machines rather than people?

One of the major arguments against organisational moral responsibility has been based on the concept that, because of the constructed nature of organisations, i.e. they are an artificial person with their components parts of departments and sections such as planning, human resources, finance, production marketing etc. all working separately yet contributing to the final output, are more consistent with those of machines than those of persons. Like a machine an organisation is also composed of parts, which can be unrelated and often operate independently of each other, but achieve synergy when they work together effectively.

The arguments against moral responsibility based on this similarity to machines, is that an organization’s single purpose prohibits any ability to engage in actions other than those consistent with that purpose. Thus it is impossible for organisations to make moral agreements or compacts, as they are incapable of moral relations. A compact is a bilateral promise and hence a compact can be made only between beings that are capable of making promises.

A formal organisation is unable to make promises, because it cannot commit itself to a performance, or course of action, that might conflict with the pursuit of its goal. The principle of rationality, when applied to formal organisations, makes no allowance for the principle that promises ought to be kept. In fact, if the keeping of promises were contrary to the goals of the organisation, rationality would require that the promises be broken (Danielson 1995). Thus Ladd (1993) maintained that organisations, as machines, are incapable of moral constraint.

Look at the photo of a production line. It’s a mechanistic solution to the production of a car. The success of the production line is the sequential nature of small tasks being completed that then adds to the next. Each task in itself is not a car- if at any point a problem occurs- the car cannot be completed and the line typically stops

Mechanistic Production Line or Conscious?

Now think about a decision in an organisation that starts at the bottom of a company and slowly moves up the hierarchy, each level of management adding content and authority before the decision is finally approved as senior level. Is this not similar to a production line? Each level only contributes a part to the final decision, so is it more like a machine?

But the difference is its people who make these decisions- not machines- So is there a difference?

Can we consider a Corporation to be person?

However, Donaldson (1989) proposed that it is necessary to view corporations as more than just machines. To be a moral agent an entity must have reasons for what it does, and some of those reasons need to be moral ones.

This is consistent with the concept of purposefulness, which the great Greek philosopher Aristotle maintained should be the basis for ethical action (Solomon 1992). Given the proper structure, organisations can and should be held morally accountable for their behaviour and be made to stipulate the moral reason that prompted their behaviour. Organisational structure (the conscious decisions made by organisations with regards to hierarchy, responsibility, accountability, communication lines and other design variables) can be identified as the means by which organisations can engage in rational decision making thus be accountable for those actions.

Can an Organisation be Conscious?

Cameron (1980) recognises that organisations change their structures in order to improve their effectiveness. Robbins (1990) suggests that organisations respond to various contingencies, such as the external environment, technology systems, or changing internal power relations and this is most commonly reflected in changes to organisational strategy. Mintzberg (1990) has suggested that effective organisations achieve coherence amongst their component parts and that they do not change one part with considering the consequences to all others.

According to the definition of organisation, as described by some structural theorists, it would appear that an organisation does meet the minimum criteria of being morally responsible, because it has clearly defined goals and consciously changes its structure so as to better achieve those goals (Daft 2010; Daft & Steers 1986; Narayanan & Nath 1993 and Robbins 1990).

Corporate Moral Agency

In this substantial video, recorded on February 28, 2013 Philip Pettit, L.S. Rockefeller University Professor of Politics and Human Values, Princeton University, and Distinguished Professor of Philosophy, from the Australian National University discusses the nature of the corporation and its ability to mimic aspects of a real person. However the issue of whether it should be given the same rights and responsibilities as real person is canvassed in great detail.

http://www.youtube.com/watch?v=UN9SrHGrL2A

Case Study: The BP Gulf Oil Disaster

Reading 1

Ferrell, O.C., Fraedrich J. and Ferrell, L. (2015) Business Ethics Ethical Decision making and Cases, South Western, Ch 8 pp 215-217

The Ferrell et al (2015) text does not have an extended chapter on the concept of the moral corporation and agency; however these few pages do provide an overview of some of the basic concepts that will help with the next readings.

Additional Reading

Reading 2

DeGeorge, R. 2010 Business ethics, 7th edn. Prentice Hall, Upper Saddle River, N.J. Chapter 8

·

Several chapters from DeGeorge’s text are of relevance to this topic including Chapters 4 and 7; however Chapter 8 deals with concepts of the “formal” organisation and how its systems can be viewed as contributing to moral decision making. It also covers the Stakeholder and Shareholder perspectives that are of relevance to Unit 11.

Reading 3

French, P. (1979). “ Organisational Moral Responsibility” in White T (1993) Business Ethics: A Philosophical Reader, MacMillan, New York

8

·

French’s essay presented in White’s reader is an often cited work that provides a succinct summary of the various perspectives on whether an organisation can be considered to be a moral agent.

·

When reading these you should try to make think about to other courses in the MBA including the Strategy, Governance and Leadership, Critical Thinking and Decision Making and that these often do not directly make links to ethics and morality, yet clearly are used in this essay to demonstrate the various perspectives.

Journal Reading 1

Goodpaster, K.E. and Mathews J. B. 1982, “Can a corporation have a Conscience?” Harvard Business Review, January-February, pp 1-9.

This is a seminal article that provides an excellent and accessible overview of the moral corporation debate. The authors have succinctly discussed the notion of personhood and its likeness to morality and the challenges of applying or projecting morality onto an organisation. Importantly they also link the discussion to Adam Smith’s concept of the “invisible hand” an often-cited arguments for ethical outcomes of the market mechanism without ethical intent, the role of management and government.

Journal Reading 2

Velasquez, M 2003, “Debunking Corporate Moral Responsibility” Business Ethics Quarterly, Vol. 13, No. 4. pp. 531-562

In this article, Manuel Velasquez discusses the importance of corporate moral responsibility as an issue in business ethics. He then examines the arguments that the organisation is indeed a separate moral agent based on some of the concepts outlined in this Unit. He challenges the assumptions of organisations acting intentionally and causality and indeed suggests that many who argue for corporate intent misunderstand the concepts of intentional causality and of "as-if" intentionality. He concludes with his own interpretations of these to critical concepts

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MGMT20134 | Week 1 | Page 13

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