History of Business Ethics
Thomas F. McMahon
Concern about ethical issues in business goes back as far as history itself; there has always been some form of mandate for people in commerce. The Egyptians were not to take money for passage across the river until after the passenger was safely there. In the Old Testament, interest was not to be taken on loans. For Aristotle, interest was also not to be levied on loans because money was ‘‘consumed’’ in its first use (like fruit) and therefore had no other use for which interest could be extracted. Cicero asked about price justice for goods in a starving city. Dionesian Roman Law prescribed that justice requires granting to each person what is his or her due.
Arguments against the position of the Roman Catholic Church toward business can be traced to scholastic theologians, especially to Thomas Aquinas. Some claim that, for Aquinas, a just price was determined by the inherent nature of the product and not by the market forces of supply and demand, although subsequent studies have shown that the medieval scholars acknowledged market forces in determining business ethics. In the medieval period the guilds furnished protection and standards for their respective groups. The Reformation and trade in the new world opened new horizons for business and its practices, including slavery, an upcoming middle class of merchants, and a rising sense of nationalism. Much later, Adam Smith’s Wealth of Nations fits well into the over all surge into developing an industrial society and setting minimum standards for business behavior. Ethical principles such as Kant’s categorical imperative and Bentham’s utilitarianism also served the industrial revolution and its new ethical choices (see kantian ethics ; utili tarianism). However, no set of ethical principles or practices emerged to guide the business practices of employers and employees. In the late nineteenth century the underpinning concepts of business ethics – power and rights – were exercised in such interacting arenas as courts of law, unions, trade associations, and professional societies (see rights). Social Darwinism, with its new evolutionary social ideology of progress in an industrial society, became prominent. In 1881 Pope Leo XIII reacted by writing his famous social encyclical (letter) on capital and labor. He used natural law principles and the theories of Thomas Aquinas to fortify his arguments for the rights of labor. The 1886 Haymarket riots in Chicago, however, exemplify conflict between employer and employees during this period of industrial growth.
In the early twentieth century, most of the books on business ethics were general in approach and provided an overview on an issue or a specific aspect or problem. For example, they did not deal with an overall problem of business ethics. The exception was Sharp and Fox (1937), who covered pricing, lying, and other topics relating to the economics of business. Issues dealing with employee rights, the environment, and international ethics would come at a much later date.
The first breakthrough for a general interest in business ethics came in Baumhart’s revealing study, ‘‘How ethical are businessmen?’’, published in 1961 when the electrical industry price fixing scandal shook the United States (Baumhart and Raymond, 1961). It was the first empirical study which showed that ethical issues and problems were found in every industry, in most companies, and on all levels of the managerial pyramid. This revelation came at a time when business enjoyed an outstanding reputation for providing goods and services, where it was assumed that executives and managers acted in an ethical manner.
Following Baumhart’s study, the principle to solution approach to ethical problems in business was frequently, but not exclusively, pursued through natural law concepts in conferences, textbooks, and general interest books. Furthermore, the manager was himself (sic) responsible and accountable: business ethics was personal and individual – it was not corporate. Issues and problems were generally perceived from an individualistic viewpoint. For example, the highest executives of the General Electric Corporation believed that the company did not have any responsibility for the managers who fixed prices. Padded expense ac counts, bribery, ‘‘call girls,’’ cheating, lying, pricing, and wages were some of the popular topics which were discussed and written about. Most of the concerns were personal, not corporate: how was this executive or manager responsible for his ethical problem? Courses in institutions of higher learning were generally called Business Ethics and were frequently taught in philosophy departments, although some were given by business law or management departments (see business ethics).
The 1964 US Civil Rights Act and subsequent social legislation triggered an awareness of concerns which affected employees, the environment, and the community, both local and national. The term ‘‘business ethics’’ was frequently replaced with the phrase ‘‘the social responsibilities of business,’’ thus incorporating prevailing social norms and expectations. The change of name reflected the shift in emphasis from the personal ethics of the manager to the overall position of the company on such issues as racial and sexual discrimination, air and water pollution, plant closing, and employee rights, the companies becoming legally and ethically responsible for implementing these changes. ‘‘Responsibility’’ as such implies having assumed an obligation and is thus accountable and prescriptive in nature. Responsibility also refers to rights as well as to obligations. Further more, the philosophical approach to business ethics shifted from natural law to utilitarianism and Kant’s categorical imperative. Rawls’s theory of distributive justice became a necessary tool in the teaching of business ethics. By 1975, US colleges and universities offered over 550 undergraduate and graduate courses on business ethics, although most institutions used titles such as Business and Society. Textbooks and case books on business ethics proliferated, writ ten primarily by philosophers who specialized in applied ethics. Bowie, Cavanagh, Davis, Donaldson, De George, Frederick, Garrett, Goodpastor, Sethi, Steiner, Velasquez, Walton, and Werhane are just a few of the authors who published anthologies and textbooks on business ethics. Centers for research and pro grams on business ethics as well as endowed chairs multiplied; business ethics became recognized as a distinct discipline in academia. Indeed, in 1976 the prestigious Academy of Management added a Social Issues in Management division.
The Watergate affair and payoffs to foreign government officials in the 1970s shifted emphasis once again in business ethics. Media attention on questions about who told subordinates to act illegally and/or unethically pierced the corporate veil of secrecy; personal account ability within institutional structures became the arena of concern. The question was: Who told whom to do what as it affected society? At the same time, payoffs to foreign government officials precipitated the 1977 Foreign Corrupt Practices Act. It also set the stage for discussing not only the issue of personal accountability, but also the question of cross cultural differences and incompatible legal systems: Whose ethics does a business person follow when she/he is in a foreign country? Finally, business ethicians became concerned with political and social structures that permitted humans to be treated in an inhumane manner, such as apartheid, child labor, and land division. These changes led to a newer view of business decision making in the form of what authors refer to as ‘‘social responsiveness,’’ which requires a reaction of social pressures but also the ‘‘long run role in a dynamic social system’’ (Sethi, 1974), which in turn should be anticipatory and preventative. Frederick (1978) calls corporate social responsibility CSR1, which has a philosophic underpinning. He names corporate social responsiveness CSR2, which refers to the capacity of the corporation to respond to social pressures; it is a more pragmatic effort in reacting to the corporate environment. While social responsibility relates more clearly to rights and obligations, social responsiveness reacts to pressures which are in effect various forms of power exercised by different groups affecting the corporation. Davis and Blomstrom, Post, Sethi, Wilson, and others have developed various categories to illustrate social responsiveness. Carroll has combined social responsibility, social responsiveness, and social issues to produce the ‘‘corporate social performance model.’’
Two sets of events in the 1980s encouraged business ethicians to consider insider trading and an unprecedented number of acquisitions and mergers. The former challenged the ethical as well as the legal practices of the financial community. First of all, using insider information unbalanced the competitive environment, but discussion on what constituted insider information left much gray area, while the law challenged violators like Boesky (see insider trading).
Freeman (1984) and others developed the notion of stakeholders: ‘‘an individual or group who can affect or is affected by the actions, decisions, policies or goals of the organization.’’ The notion of stakeholder broadened the relationship of the firm to different, and perhaps previously disregarded, elements in society, such as special interest groups, social activists, environmentalists, and institutional social investing (see stakeholder theory). The proliferation of mergers and acquisitions occasioned ‘‘downsizing,’’ ‘‘rightsizing,’’ and ‘‘re organization,’’ which resulted at times in massive terminations of employees, including executives and managers. Middle management positions were frequently eliminated, employees felt a loss of job security, and they redirected their loyalty in the firm. Furthermore, the term ‘‘business ethics’’ now included the broader view of social issues. Authors included the social responsibilities of business, business and society, and perhaps even public policy under the now more generic ‘‘business ethics.’’ Indeed, the founding of the Society for Business Ethics resolved the concern of individual and social issues of business once and forever. Business ethics included both.
In the late 1980s and 1990s business ethics assumed an international flavor. European philosophers and business school professors in particular began to develop their own approaches. Up to this time, the Europeans and others depended primarily on material produced by American scholars. The political and economic changes in the Eastern European countries and the forming of the European Community raised specific issues in business ethics that had not been adequately treated previously by Ameri cans, such as language and cultural changes when working in foreign countries. The Euro pean approach has strong philosophical tenets as well as interests in dealing with the ethics of economics. It also questions the moral individualism of American decision making, which is closely linked to individual persons. Indeed, these new problem type approaches should have a greater interdisciplinary analysis. The European approach is more collegial and investigates long term interests of all concerned. Business ethics is thus conceived as a consensual ethic, possibly a result of the different variations of European social democracy. The European Business Ethics Network (EBEN) is the institutionalized network for European ethicians. Enderle, Mahoney, Ryan, and van Luijk are familiar names in the European setting.
Political events such as the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT) raise business ethics issues. These agreements have international implications for business ethics in terms of jobs, relocation, investing, environment, and discrimination, both racial and sexual. It is too early to determine the precise ethical application of these issues, which standards will apply, and how they will be implemented. Furthermore, the legal disintegration of apartheid raises new problems in business ethics, such as ownership of property, foreign investing, and equal job opportunity (see equal opportunity).
International business ethics is different from national business ethics inasmuch as there is no sovereign power to settle claims; there are different derivative values from different cultures; there are problems of communication; and there are differences in interpretation and application.
The one constant in the history of business ethics has been change: in emphasis, in philosophy, in topics, in cases. Change is also noticeable in accountability: from the individual to the corporation and then returning to the individual within the corporation. Changing economic, financial, and marketing functions shifted pro duction and distribution, which in turn brought new and sometimes different ethical problems. Business ethics has also broadened its scope from national and regional issues to international and global concerns. All this change has produced a complexity in business ethics that requires thorough inquiry and innovative solutions.
Bibliography
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Cavanagh, G. F. (1976). American Business Values in Transition. Englewood Cliffs, NJ: Prentice-Hall.
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