CHAPTER VII

AN APPROACH TO BUSINESS ETHICS:

Fact-based Value for Fair Trade

CHARN MAYOT

THE BASIS OF BUSINESS

Profit Alone

The liberal outlook on business equated it simply with profit maximization. The sole function of a firm, including its corporate executives, is to make the highest profit for owners and shareholders (stockholders). The rational grounds supporting this idea is the fact that a firm is an economic institution, the private property of the shareholders and owners who invest and take risks in such investments solely for the highest economic added value.

This idea is not only popular, but is grounded in the philosophical writings of Adam Smith (1776), a moral philosopher at Glasgow University who contends that the sole motive of business transactions is self-interest:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages (Wealth of Nations, I. ii).

The moral conclusion drawn by his followers from this statement is that it is a moral duty for the corporate executive to pursue the self-interest of shareholders and owners in maximizing profits:

There is one and only one social responsibility of business ó to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of game, which is to say, engaged in open and free competition, without deception or fraud (Friedman, 1975, p. 133).

There is no other concern for business than this profit maximization:

Welfare and society are not the corporationís business. Its business is making money, not sweet music. . . . In a free enterprise system, welfare is supposed to be automatic, and where it is not it becomes governmentís job, and businessís job is not government (Levitt, 1958 in Beauchamp and Bowie, 84).

Moreover, they hold that in the long run a pursuit of self-interest does not harm any society; on the contrary, it benefits society. "An invisible hand", a static law like that of physics which regulates economic affairs gradually will lead to common benefits. This leads to the conclusion that, however seriously business persons pursue their self-interest, the invisible hand automatically will bring about the common good of a society; the pursuit of self-interest is morally good because of good consequences.

Dangers of Self-Interest Alone

Undeniably, the attempt of todayís world community to establish a free trade association is rooted partly in this ideology. But a poisonous tree produces poisonous fruits; in the same manner an egoistic ideology should bring about egoistic acts. It is self-contradictory to believe that the pursuit of self-interest does no harm at all, but on the contrary, completely benefits society.

Though nowadays the world community advocates free trade, there is not much promise of success without radical change or at least a revision of this fundamental ideology which is the root of the problem. People believe that what is hidden in the mind of each nation is egoism. World trade co-operation is understood as a new form of defence-strategy which developed countries try to impose in order to take advantage of developing nations. Trade associations, global and regional, like WTO, ASEAN, NAFTA, EU, are seen as "trade blocs" in relation to which "many of the countries outside these blocs, naturally including some of the poorest and the least secure in the world, fear being left out in the cold" (Kinnock, 1994, p. 124). The countries outside the blocs realize that any individual country is too weak to rival others and therefore unite only for the purpose of collective defence of trade.

This suspicion is not without justification. When everyone believes that business transactions are rooted in self-interest, why should they not believe that business at the international level, regional and global, are free from self-interest. A change in belief about the root of business transactions is necessary if we want to have a World Trade Association that really works. Co-operation can be achieved only through trust, not distrust. Co-operation in a situation of distrust is only a truce in a war, which awaits combat once again.

The first reason for the need of change in belief is that we are too confident in this paragraph of Adam Smith, while he was neither confident nor consistent. "He is thought to argue that the result of everyone pursuing their own interests will be the maximization of the interests of society. The invisible hand of the free market will transform the individualís pursuit of gain into the general utility of society" (Bishop, 1995). But Smith himself thought that the interests of merchants and manufacturers are basically opposed to those of society while pursuing their own interests. There are numerous passages in the Wealth of Nations in which Adam Smith directly states that the interests of business people conflict with the optimal utility of society as a whole, and that business people pursue their personal goals at the expense of the public good. In one phrase of the same book he wrote:

As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value, every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention (WN, IN, ii, 9).

Every individual is continually expecting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of society he has in his view. But the study of his own advantage, naturally, or rather necessarily, leads him to prefer the employment which is most advantageous to the society (WN, IN, ii, 4).

The second reason against Smithís thesis is based on the fact of a business organization. A firm is a legal person which enjoys some privileges like a physical person. In the past man was defined by his social life: "man is a political animal" or "no man is an island." This can be applied also to a firm. A firm cannot avoid this situation for, as Donaldson contends, it is an "artifact" or manmade entity. It is created by humans who can choose to create or not to create it; contemporary people choose to create it, grant it privileges and let it live among them.

THE SOCIAL INFLUENCE OF A FIRM

Firms nowadays influence life in almost all its aspects: private, social, economical, etc. It depends on people for its creation, but after being created people rely on it in many respects: it hires, rewards, and fires people. It is influenced by people in many ways; its policy and strategy are mandated by an executive board in compliance to the laws and governmental policies. It helps people to enjoy a more luxurious life with goods, and services; but it also can harm man and community with unsafe products, pollution, environmental depletion, etc.

Moreover, many firms nowadays wield tremendous social power. Big firms make tremendous changes in society or even transform it completely. In a small village most inhabitants may be farmers, but if one day an oil company discovers there a reserve of crude oil large enough to be turned to commercial purpose, the small village will turn into an industrial site and the life of the people living in that village will change. In the age of globalization the whole world becomes a small village in which a small flower when cut from its branch can affect the whole world. For example, Thailand is a relatively small country; however, in terms of economy it can influence a giant country like China. Chereon Phokaphan plc. has invested billions of dollars in China and hires there at least 100,000 persons.

At the beginning of this century in terms of politics, we had two kinds of politicians "politicians by profession" and "business politicians". At the end of this decade almost all politicians are "business politicians" and a "politician" with no connection to any business is uncommon.

For instance the ratio of "politicians" to "business politicians" in the 1920s was 124 to 77. This proportion remained relatively stable until the early 90s when it changed to 151 to 116. By 1995, however, it had reversed to 115 to 208.

Before this decade in Thailand politics exerted pressure on business, but in this decade the situation has reversed. Business becomes the pillar of political parties for financial resources, which paves the way for businesses to have their people in the cabinet. Governmental policies nowadays are indirectly set by business policies. According to the traditional democratic social contract theory, parliament represents the population of the whole country which entrusts it with their political power. Now in this country it represents firms which support its members financially, rather than the people who elected them.

STAKEHOLDERS

This assures us that a firm by nature is not "an island in the sea" or an "oasis in the desert", but a socio-political entity. By necessity it has certain relationships with other constituencies (stakeholders). These major constituencies (stakeholder) which influence and are influenced by a firm include customers, employees, owners/investors, suppliers, competitors, community, business press (mass media), governmental authorities and creditors. On one hand, business depends on these to a large extent to execute its goals; on the other hand, it can influence society strongly bringing both benefit and harm.

Each constituency influences and is influenced by a firm in different manners as follow:

1. Customers exchange resources for the products of the firm, and in return receive benefits from the products purchased. Customers provide the lifeblood of the firm in the form of revenue. The firm supplies them with goods and services that suit their needs with rational price and quality. In turn they expect the corporation to remain true to the promise of rational price and quality as well as after-sale services.

The sustenance of this relationship depends on a mutual trust between producers and customers. Human consumption behaviors are partly rational. For example a young couple who want a car for their family surely has studied all brands of cars available in their domestic market whose price is commensurate with the amount of money they want to spend. Their decision to buy one of them implies belief in the safety and quality of the car and in the after-sales service provided by the producer or its agent. If the product fails to satisfy this need, trust eventually will be lost.

2. Employees exchange their labor, physical or intellectual, for the rewards1 offered by the firms. In return for their labor and loyalty, they expect security, wages, benefits, fair and equal treatment,2 and meaningful work. It is the duty of the corporation to provide them with these and to carry them through difficult times.

To achieve their expectations, employees are expected to follow the instructions of management most of the time, to speak favorably about the company, and to be responsible citizens in the local communities in which the company operates. Wherever and whenever they are used as means to an end, they must be allowed to participate in that decision for as autonomous persons they have a right to decide regarding their future.

3. Stockholders and owners are financial stakeholders who have invested their capital in the corporation in stocks, bonds and shares. Their main objective is seek maximum returns in the exchange for their investments. Therefore their special claim in a corporation is legitimate in that the money they give either directly or indirectly to the corporation for investment and expansion is their private property. In addition, they also have to take risks to a certain extent in such transactions. "The firm affects their livelihood or, if a substantial portion of their retirement income is in stocks or bonds, their ability to care for themselves when they can no longer work" (Hoffman, 1995, p. 149).

4. Suppliers are vital to the success of the firm, for raw materials will determine the quality and price of the end products. In return the firm is a customer of the supplier and is therefore vital to its success and survival of the supplier. Both parties are so interconnected that they rise and fall together.

5. The local community is an interactive aggregate of individuals who grants the firm the right to build facilities; in turn, a community benefits from the taxes levied and the economic and social contribution of the firm. In return for the provision of local services, the firm is expected to be a good citizen, as is any person, natural or artificial. The firm cannot expose the community to unreasonable hazard in the form of pollution, toxic waste, and so on. If for some reason the firm must leave a community, it is expected to work with local leaders to make the transition as smooth as possible.

6. Competitors are those who are eager to match or better the corporationís products, reputation, and price appeal. Competition does not necessarily exclude co-operation and there is much empirical evidence showing that co-operation among competitors can help both side grow and resolve their defects. One of the major causes for the failure of planned market economies has been the lack of competition.

7. Trade press (mass media) reports the positive or negative business transactions of the firm to the public. They are watchdogs who keep an eye on the daily practice of the firms so as to maintain benefits for the public. They can generate both good and bad images of a firm for the public; firms, in turn, can generate their financial well-being through advertising.

8. Governmental authorities are representatives of the legislative, administrative and judicial bodies who enforce the laws concerning the business transactions of the firm. They expect a firm to conform to the laws. Firms, in turn, can affect the economic well-being of the state though tax payments.

9. Creditors grant loans in order for firms to establish or to expand their business. On the one hand the capability for establishing and expanding a corporation depends on loans granted. And on the other hand, the creditorsí survival is dependent on the profit earned and the interest charged from their customers.

By nature this relationship is a complex and multitiered environment. The stakeholders in each circle are closely connected with other stakeholders in the same circle and all, at the same time, are closely connected with stakeholders in other circles.

The very nature of the relationship between a firm and its constituencies reveals the danger of a pure pursuit of self-interest in the system and of violation of the golden rule. As mentioned earlier, a firm is a social unit which influences human life in all aspects. Nowadays, business has entered politics and absorbed some of the administrative and legislative power from individual citizens. If the business is based purely upon self-interest and if its sole responsibility is to maximize profits, as Milton Friedman and Theodore Levitt suggest, this administrative and legislative power will be abused. Keith Davis (1975) argues that:

If business has the power, then a just relationship demands that business also bear responsibility for its action in these areas. . . . The iron law of responsibility is that . . . in the long run, those who do not use power in a manner which society considers responsible will tend to lose it.

A firm is not an "island in the sea", but is created to function in a society, among human beings. It is allowed privileges and authority to use for its prosperity almost all the resources which belong to the society, but it is a common ethical practice that one has to give back when one receives. To preach that business is born solely from self-interest and is to act solely in these terms is to tell business to hurt its mother.

In sum, this makes clearer what was stated in the second section, namely, that if the ideology proposed by Adam Smith (including Milton Friedman and Theodore Levitt) be applied to the forum of global trade association, each national representative represents a collective of individual firms of the same nation, and each trade bloc represents a collective of individual firms in the same region, all pursuing their self-interest. They are then just new forms of collective individualists who form an association not for the purpose of real co-operation, but out of egoism. The term "co-operation" is only bait to attract prospective victims into a trap. Everyone in the forum believes the pursuit of self-interest to be hidden behind all trade negotiators, including oneself. This turns business into war between different firms, nations and trade blocs. Negotiations are only attempts to postpone the eruption of a full trade war by maintaining a cold trade war. If trade negotiations are believed to be a disguise in which each firm, nation, or trade bloc tries to draw as much benefit as possible from its rival, negotiations must fail even before they really begin.

AUíS OUTLOOK ON BUSINESS ETHICS

Professor Kirti Bunchua (1995) in his "Foundation of Professional and Business Ethics" argues that business transactions should be conducted in such a way that in realistic circumstances it leads to authentic happiness for each individual. Authentic happiness in reality will be possible if, and only if, all the interests of all parties involved (individual persons, local and global community, as well as the eco-system) are heeded.

Goals

By nature, all human activities aim at particular ends, as Aristotle writes: "Every science and every investigation, and likewise every practical pursuit and undertaking appears to aim at some good: consequently, the good has some well-defined object at which all things aim" (Nicomachean Ethics). Authentic happiness is the final end, because this is valuable in itself. We do not seek happiness for purposes other than happiness itself. This authentic happiness does not mean equal economic distribution; difference there is acceptable as long as the happiness of society is maintained. Everyone is happy with the portion he has and no one is left to suffer from lack of basic needs. Authentic happiness is the enjoyment of happiness by all members of the society, with no one left to suffer.

This authentic happiness is possible due to the fact that each human being is inherently endowed with capabilities (creative, adaptive and co-operative) which drive them to strive for the attainment of this goal. These capabilities have been embedded in persons in their untiring search throughout history.

This authentic happiness can be described as "happiness in the happiness of others". If the pursuit of self-interest is for the benefit of the individual, how can it create public well-being. In contract, a good tree bears safe and sweet fruit so that if everyone acts not only for oneís own happiness, but for that of others, happiness is more likely to result. This vision paves the way for trust, which leads finally to co-operation.

This vision is based upon the nature of a firm. By the nature of its relationship with its constituencies, the form is a society in which with numerous members each in a different role. Each member is insufficient in himself/herself, but in co-ordination contributes to the perfection, survival and sustenance of the whole. Each functions simultaneously both for oneís own happiness and for that of others. When this perspective is applied to business activities, profit-making is not an end in itself, but a means to the final end which is authentic happiness.

This is not to ignore the vital role of profit in business; indeed it is a moral duty of corporate executives to make profit in a proper rate and manner. Capital invested in a firm is the private property of owner or shareholder (stockholders) and it must be invested so as to generate added valued. Investment in what does not generate added value is an unethical extravagance. However, the freedom to invest for profit is not a license to abuse and bring suffering to others. In line with Friedman, Levitt contends that "the function of business is to produce sustained high-level profit. The essence of free enterprise is to go after profit in any way that is consistent with its survival as an economic system" (Levitt, 1958, in Beauchamp and Bowie, p. 83-84). This statement, though not completely wrong, is only partly correct. Profit is not an end in itself, but a means for authentic happiness. In the traditional free market perspective, the corporate executive believes that his or her "primary responsibility is to the shareholders because they are the owners of the company" (Sorell and Hendry, 1995). But, moreover, a firm and its corporate executives has the responsibility to make profit that leads to authentic happiness not only for the shareholders and owners, but for all members who affect and are affected by the firmís decisions. Hence, our textbook, Foundation of Professional and Business Ethics, the chapters: "Man-for-Himself", "Man-with-Others", "Man-for-Others" and "Man-for-the World" lay out this broad perspective of corporate responsibility.

Areas of Corporate Responsibility

Theodore Levitt contends that corporate activity is limited only by two constraints: economic and legal. But these two are not enough to guarantee authentic happiness. To attain its purpose corporate responsibility must be extended to all areas: economic, legal, ethical and philanthropic.

(a) Economic responsibilities: a corporation must be profitable; this is the foundation upon which all other areas rest.

(b) Legal responsibility: a corporation must obey the law of the country. Law is the social codification of right and wrong. Every corporate transaction must be in accord with these rules.

(c) Ethical responsibilities: a corporation must be ethical. Every corporate transaction, decision and policy is bound by the obligation to do what is right, just and fair. Negatively, it must avoid harm to all parties; positively, it must enhance the authentic happiness of all.

(d) Philanthropic responsibilities: as a legal person in the community a corporation, must be a good citizen contributing resources to the community and improving its quality of life. Though voluntary, this is an urgent need of modern society. Nevertheless, it can never override the three preceding responsibilities. Charitable contributions are not licenses for a firm to do something wrong.

Vision and Ethical Theories

The vision does not dictate any particular ethical theory, but aims at enhancing "authentic happiness according to reality" among members in a society. Our vision starts with the "facts" of the business environment, and draws the "ought" out of such facts. All ethical theories are recognized to contain both strengths and weaknesses. Through due to their different criteria utilitarianism and deontology can lead to different decisions, even on the same issue, neither completely excludes the other. Their conflicting judgments do not necessarily mean that they can be accommodated to each other in no respect. Both supply the other with its missing perspectives.

Both modern approaches are subject to maladies from which their much heartier and more robust ancestor was spared. At the same time, the truth that is missed in utilitarianism, and (some say) is found in deontology, is also found ó and found much more richly ó in traditional teleology (Macdonald and Beck-Dudley, 1994, p. 616).

W.D. Ross, as cited by Shaw and Barry (1992, pp. 73-4), contends that the integration of different ethical theories is necessary because "we see ourselves . . . under various moral obligations that cannot be reduced to the single obligation of maximizing happiness. . . . We are intertwined with other people in very specific contexts and have, as a result, certain moral obligations . . . there should not be a single answer for all cases." Professor Kirti Bunchua in his Foundation of Professional and Business Ethics comments that they are not contradictory, but paradoxical. This means that they seem opposed to each other on first glance, but in depth can be combined.

CONCLUSION

The above strategy is considered a "win-win" strategy in which all parties are allowed to share the benefits of business activities. In contrast, the vision proposed by Smith and Levitt leads to only "one win", namely, the people who own capital or have greater economic power. Moreover, their vision provides roots for antagonism and distrust making the business world a Hobbesian war or Darwinian struggle for survival by the fittest. This would be but a new weapon of the developed countries to threaten the developing countries in an era of economic war. There can be no free trade without fairness; trade can be implementated only in an atmosphere of fairness, trust, care, and mutual sharing. Hence, the old ideology be replaced by a new vision if the world community is to have global economic co-operation ó which, in fact, means world peace in this era.

NOTES

1. The rewards can take various forms such as salaries, bonus, retirement pension, fringe and benefits.

2. I admit Immanuel Kantís second principle: "act so that you treat humanity, whether your own person or in that of another, always as an end never as a means only" (Kant, 1969, p. 444). This implies that both employers, employees and human parties involved are to be treated with respect for their human dignity and sacredness. However I do not take the rule absolutely.

REFERENCES

Bishop, John D. (1995). "Adam Smithís Invisible-Hand Argument". Journal of Business Ethics, 14(3). pp. 165-180. The Netherlands: Kluwer Academic Publisher.

Bunchua, Kirti. (1995). Foundation of Professional and Business Ethics. Bangkok: Assumption University Press.

. (1991). "The Pyramid of Corporate Social Responsibility: Towards the Moral Management of Organizational Stakeholders". Business Horizon. August/July, pp. 39-48.

Davis, Keith. (1975 : Business Horizon). "Five Propositions for Social Responsibility". Republished in Archie B. Carrol. (1977). Managing Corporate Social Responsibility. Boston; Little, Brown and Company (Inc.), pp. 46-51.

Donaldson, Thomas. (1982). Corporation and Morality. Englewood Cliffs, NJ: Prentice-Hall.

Donaldson, Thomas and Preston, Lee (1995). "The Stakeholder Theory of the Corporation: Concepts, Evidence, Implication," Academy of Management Review, 20(1):65-91. Freeman, R. E. (1984). Strategic Management : A Stakeholder Approach. Boston; Pitman.

Frederick, William C.; Post James E. and Keith Davis. (1992). Business and Society: Corporate Strategy, Public Policy, Ethics. 7th Ed. New York; McGraw-Hill, Inc.

Friedman, Milton. (1962). Capitalism & Freedom. Chicago: The University of Chicago Press.

. (1970). "The Social Responsibility of Business Is to Increase Its Profits." New York Time. Reprinted in Harvard Business Review: Ethics for Executives Series.

Hoffman, W. Michael and Frederick, Robert E. (1995). Business Ethics: Readings and Cases in Corporate Morality. (3rd Ed). New York; Mc Grawhill, Inc.

Kant, Immanuel. Grounding for the Metaphysics of Moral. trans by James W. Ellington (1981). Hackett Publishing Company.

Kinnock, Neil. (1994). Beyond Free Trade to Fair Trade. California Management Review. 36(4).

Levitt, Theodore. (1958). "The Dangers of Social Responsibility". Harvard Business Review : Guides to Corporate Social Responsibility. (No. 58507), pp. 27-38.

Macdonald, James E. and Beck-Dudley, Caryn L. (1994). "Are Deontology and Teleology Mutually Exclusive?" Journal of Business Ethics, 13:8, pp.615-623.

Schotter, Andrew. Free Market : A Critical Appraisal. St. Martin Press; New York, 1985.

Shaw, William H. and Vincent Berry. (1992). Moral issues In Business Ethics. (5th ed.).California; Wadsworth Publishing Company.

Smith, Adam. (1976). An Inquiry Into the Nature and Causes of the Wealth of Nations. (WN). Oxford University Press; Oxford, 1993.

Sorell, Tom and Hendry, John. (1995). Business Ethics. 2nd Ed. Oxford OX2 8DP; Butterworth-Heinemann.

Weiss, Joseph W. Business Ethics: A Managerial Stakeholder Approach Belmont. Wadsworth Publishing Company, 1994.

William M. Evan and Edward, Freeman R. Edward. (1990) "A Stakeholder Theory of the Modern Corporation: Kantian Capitalism" republished in Business Ethics: Readings and Cases in Corporate Morality. Michael W. Hoffman and Robert E. Frederick (eds.) 3rd. ed. New York; Mc Grawhill, Inc. 1995, p. 352.