Ethical Decision Making in a Business Environment

Article excerpt

The issue of effectively integrating ethics into business decision making is a major area of debate confronting today's corporate leaders. Persistent media reports of unethical behavior by corporations, business executives, and governmental officials highlight the need for effective solutions to the ethics dilemma. The ethics dilemma derives from the perceived conflict between the traditional corporate objective of profit maximization and the overall desire for increased social welfare. Although ethically responsible business practices are generally desired, opinions about what these practices are and how they should be encouraged are diverse. The complexity of the current business environment complicates the development and implementation of resolutions to ethical issues facing industry.

John Dobson's article outlines the nature of the corporate structure in which managers, and to some extent the shareholders, are not "free moral agents." Therefore, these groups are not "at liberty to make ethical decision." This lack of moral responsibility is contrary to prevailing opinions. For example, Richard DeGeorge (1986) explains that the diminished feeling of moral responsibility that may accompany decisions of a person or group acting as an agent for others does not suggest the absence of moral responsibility. He further states "Because a corporation acts only through those who act for it, it is the latter who must assume moral responsibility for the corporation." (p. 100)

The article "Ethics of Shareholder Referendums; Corporate Democracy or Hypocrisy?" discusses changes in business conditions that have led to the increased use of the referendum process for approaching controversial decision making. However, using referendums for conflict resolution has its own set of problems. Dobson argues in favor of passing a law requiring corporations to seat a qualified ethicist on their board of directors as an alternative method of resolving the ethical dilemma. The implied role of this board member is to monitor and mediate conflicts between profits and ethics. Although the article provides a new approach to ethical problem solving, some basic problems remain. The concept of ethics is not adequately developed and he fails to discuss implementation of his solution.

Agency theory is used as a basis for recommending the professional ethicist board member. Fama and Jensen (1983) discuss this theory which is based on the separation of ownership and control. Agency theory states that agency problems arise when the decision makers (generally composed of agents or management) do not share the wealth effects of their decisions (generally borne by the shareholders). Agency problems require the establishment of an effective control procedure. When the shareholders are not qualified for roles in the decision process, they often delegate the decision control to other agents, often a board of directors. Yet, the control is not effective unless it limits the decision discretion of the managers. In practice, the board has limited power and control [see The American Law Institute, (1982) for a delineation of the powers and functions of the Board of Directors]. The article fails to specify how the ethicist performs the control function.

Fama and Jensen's (1983) argument supporting the arbitrator position of outside board members to solve agency problems between internal forces of management and shareholdcrs is not directly applicable. The ethicist is not mediating internal conflict between management directors and shareholder directors. The legal requirement for an ethicist is external, and the ethicist represents interests that are external to the firm.

A well thought out framework to integrate profit maximization and social welfare maximization is necessary to obtain a pareto optimal solution for diminishing unethical actions. Two key factors must be included in this framework: 1) There must be clear understanding of what constitutes acceptable ethical behavior; 2) There must be an effective mechanism for ensuring the company follows ethical practices. …