From an international business perspective, some argue that what is ethical

Even though philosophers of all time have reflected about the morality of economic activity, business ethics as an academic field only started in the 1960s. As corporations gained global influence, awareness increased about the risks posed by their activities on the environment, consumers and workers. Bowie argues that the field was born in November 1974, when the first business ethics conference was held at the University of Kansas [36]. In that context, business schools developed their first programs in ethics and social responsibility, generally focused on the study of interactions between laws and business.

In the early 1970s, philosophical ethics entered business schools and concepts such as utilitarianism, deontology and virtue ethics started to be applied to corporate behavior. The pioneers, in general, faced a cold reception in the academy. Colleagues in philosophy departments did not perceive business as a philosophically interesting activity. Colleagues in business schools were skeptical about what a moral philosopher could bring to the moral common sense of executives.

The relevance of business ethics was helped by the publication of John Rawls’ A Theory of Justicein 1971 [37]. The book introduced distributive justice concerns into mainstream philosophical debate which included moral reflections on the role of multinational corporations [38, 39].

Management scholars started to address these issues in the 1980s with the seminal book Strategic Management: A Stakeholder Approach (1984) where Edward Freeman introduced stakeholder theory. This theory emphasized the moral and socio-political dimensions of decision making, in particular the consideration of the rights and interests of the different stakeholders of an organization, and not only the shareholders [40]. This movement was connected to the rise of corporate social responsibility among practitioners.

The deepening of globalization and the international expansion of corporations generated moral dilemmas of increasing complexity. The common sense of executives became insufficient to make complex decisions about gender discrimination in foreign cultures or about drug testing in developing countries.

The first book to offer a systematic treatment of such issues was The Ethics of International Business [41] which uses a social contract device to elucidate the rules that a socially responsible multinational should follow. In Competing with Integrity in International Business, De George presents 10 moral principles that every company must meet anywhere in the world, including respect for human rights, local cultures and cooperation with government [42].

International business ethics research was deeply influenced by stakeholder theory [43]. This requires answering a series of questions about who the stakeholders are, what interests should be considered, and the nature of the balance to be reached. All this was conceptualized through the Pyramid of Corporate Social Responsibility [44, 45, 46].

According to this model, a multinational has four types of global responsibilities toward their stakeholders.

First, to generate economic performance. Companies are expected to produce goods and services on a global scale and to sell them globally for a profit.

Second, they have the responsibility of following the law in countries where they operate.

Third, when the law is not appropriate to guide the ethical behavior, the corporation has an obligation to do what is right. Ethical responsibilities include practices and activities that are expected or prohibited in a society, but are not codified in the law: rules, standards and expectations of what employees, customers, shareholders and the global community regard as fair, equitable and consistent with the protection of stakeholders’ moral rights.

Fourth, corporations have a philanthropic responsibility that reflects a society’s expectation about the involvement of companies in activities that are not required by the law nor generally expected by ethics.

International business ethics investigates the third level of the Corporate Social Responsibility Pyramid: ethical responsibilities that are desirable or prohibited, but are not necessarily codified in law. Theoretical developments for answering this question were based on the adaptation of traditional ethical theories such as libertarianism, utilitarianism, Kantian deontology and virtue ethics to the new challenges posed by globalization (Figure 2).

Figure 2.

The CSR pyramid illustrates the different levels of corporate responsibility. Source: Carroll (1991).

4.1. Libertarianism

The libertarian perspective only accepts the economic and legal levels of the CSR Pyramid and only considers the shareholder as a valid stakeholder. While it has not been defended as a single theoretical framework in the field of business ethics, the view may be summarized by a famous Milton Friedman’s argument in an article published in the New York Times Magazine [47].

According to Friedman, in a democratic society, the majority of citizens determine the laws that govern corporate behavior. Executives are agents of the shareholders and the only common interest that shareholders have is to make money. As an agent, any commitment to anything else than providing returns for shareholders within the rules of the game means that the manager is spending money that is not his, whether that is of the customer (through price increases), the employees (by means of lower wages) or the shareholder (through lower profits). In Friedman’s argument, this would constitute a form of taxation without representation because managers are not democratically elected.

From this follows the famous Friedman’s libertarian definition on the obligation of business: “there is one and only one social responsibility of business–to use it 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” [48].

The Texaco oil company faced a famous scandal after being accused of several oil spills in Ecuador over decades starting in the 1970s. Critics argued that Texaco ignored oil industry standards by dumping untreated waste directly into rivers and streams. The company replied with a libertarian argument: it had always operated in full compliance with Ecuador law and with the approval of Ecuador government. The problem, from a libertarian perspective, is that when Texaco started its operations in the 1970s, the country was under military rule. After democracy returned, it still was a highly corrupt country and it was unclear that the “rules of the game” really reflected the people’s will.

Generally speaking, the libertarian argument assumes that the “rules of the game” are created by democratic governments where the majority of citizens determine the laws that govern corporate behavior. However, many dilemmas in international business ethics arise from the fact that companies operate in non-democratic countries where laws are not the result of popular consent and where enforcement systems are weak.

Holding the government of Ecuador, the sole responsible for the consequences of Texaco’s operations merely because Texaco operated lawfully is to set an extraordinarily low standard for the conduct of multinational corporations. It would imply that corporations should not be regarded as morally responsible for any behavior so long as the government in power legally sanctioned the conduct.

4.2. Utilitarianism

Initially developed by Jeremy Bentham and John Stuart Mill and with over 200 years of history, utilitarianism is a durable ethical theory that is also an important foundation for economics and social policy [49, 50]. It was adapted to international business ethics by Gerard Elfstrom [51]. In its simplest form, utilitarianism holds that ethically correct decisions need to comply with the Utility Principle, which prescribes maximizing benefits and minimizing damages to all stakeholders.

Facing a dilemma, the utilitarian moral decision-making process goes as follows [52]:

1. Identify all the relevant alternative actions,

2. List all the stakeholders who will be affected by the alternative courses of action,

3. Assess how the stakeholders will be affected by the alternative actions, computing the balance of benefit to harm for each stakeholder affected by each act,

4. Choose the act which maximizes utility (which results in the greatest total balance of benefit to harm).

Pastin and Hooker [53] use a utilitarian argument against the Foreign Corrupt Practices Act. Maitland [54] presents utilitarian considerations on behalf of sweatshop manufacturing since it tends to benefit citizens of developing societies.

Card and Krueger [55] build on utilitarian thinking when they argue that corporations could raise sweatshop wages to the subsistence level without sacrificing profitability. According to the Utility Principle, this would be the right decision as it tends to improve the situation of workers without harming shareholders. Arguments against the Child Labor Deterrence Act, which sought to prohibit the importation of products made from child labor into the United States, were also made on utilitarian grounds. According to the argument, the law would harm stakeholders such as the owners of the Bangladesh clothing industry (because they would lose the American market) and the children employed in the factories (because they would lose their only source of income) [56].

While we lack space here to review its different varieties, generally speaking, utilitarian perspectives have typically faced three main complications: difficulties for stakeholder identification, difficulties in defining the expected result of different courses of action and lack of consideration for individual rights that might conflict with the Utility Principle.

First, it is not always easy to determine who are the stakeholders affected by a decision, which makes it difficult to measure the balance between benefits and damages. In the case of the Child Labor Deterrence Act, are children the only stakeholder who will be affected if the clothing industries close in Bangladesh? Should the children’s families count as a stakeholder too, since they rely on the working children for economic support? Whether one considers or not the family as a stakeholder has an impact in the utilitarian calculation of benefits and harm, and as a consequence, may end justifying a completely different decision.

Second, the morally correct decision depends on the expected result of different courses of action. However, the outcome of each alternative is usually hard to predict. Depending on the empirical assumptions and the probability the decision maker attributes to each scenario, the Utility Principle might suggest diametrically opposed decisions. How are factory owners expected to react to the Child Labor Deterrence Act? Will they close the factories and leave thousands of children out of work? Or will factory owners hire adults (which cost a bit more) and absorb a small reduction in profits? If more adults have income, will their children go to school and improve their future opportunities through education? Making a moral decision requires answering a number of highly speculative questions about expected outcomes.

Third, when comparing the benefits and costs of a decision, utilitarianism may not properly consider individual rights. This is usually a problem in clinical testing dilemmas. Let us imagine a pharma company that is developing a drug for curing a deadly disease in children. Having the tests done in a country with lower standards could greatly accelerate the release of the drug, potentially saving the life of millions. The cost would probably be a handful of preventable deaths in an emerging country. Some could argue, from an utilitarian point of view, that the benefits of conducting the tests far outweigh their cost. Hence, it would be morally permissible. Critics, however, argue that this utilitarian calculation is unfair toward the subjects in the emerging country. Generally speaking, an important problem of utilitarian thinking is that promoting the greatest good for the greatest number can affect fundamental rights of minorities [57].

4.3. Kantian deontology

Bowie [58] pioneered the introduction of Kantian thinking in business ethics. Building on this work, Evan and Freeman developed a Kantian model for stakeholder management. Bowie [59] made the first comprehensive and systematic effort to apply Kantian ethics in business, in combination with contemporary theories of organization and strategic management.

Kantian morality is based on the premise that humans are autonomous beings that have an intrinsic dignity and universal rights. Kant proposes the categorical imperative as a test for assessing whether the principles upon which an action is based are morally acceptable. Kant offers different formulations of the categorical imperative [60].

The formulation “work only according to a maxim such that you can want at the same time that it becomes universal law” can be applied to bribery. If bribery (secret payments to gain an advantage over others) became a universal behavioral law, then the practice of making secret payments to gain advantages would make no sense. Since they fail the categorical imperative test, bribes are immoral.

The formulation “work as if, through your maxims, you were always a legislative member in a universal kingdom of ends”, translated to business, may mean that organizational structures should treat all people with equal dignity and respect. From this formulation arise obligations such as the consideration of all the interest groups affected by the decisions, the establishment of relations of justice and in cases where it is necessary to benefit one group over another that the decision is not taken with an Utilitarian parameter such as the number of members of each group.

Kantian deontology advises managers to identify the rights of the different groups affected by a decision and to choose a course of action that does not violate any. Because of its non-consequentialist nature, Kantian ethics avoids the problem of the aggregation of benefits and damages that affects utilitarian models.

Pharmaceutical companies must sometimes decide to test new therapeutic methods in societies with weak health regulations. From a utilitarian perspective, the risk of a few deaths in a developing country could be justified if it leads to accelerating the launch of a new therapy with the potential to save millions. From Kantian morality, however, this option would be illegitimate because it does not respect the dignity of the individuals who will be subjected to the tests [61]. Kantian arguments were frequently used to defend the right of employees not to be discriminated against, of consumers not to be deceived and of communities to enjoy a healthy environment.

However, Kantian ethics has also faced a number of criticisms. Different people can come up with different answers regarding the universalization of action maxims. Depending on the assumptions, many alternative formulations of rights could be made between different stakeholders [62]. Some argue that Kantian ethics is too speculative, demanding and unrealistic to apply in organizational contexts. Solomon believes that Kantian concepts are inadequate to address the specific context of business and the particular roles people play in companies: “people do not do ethics that way” [63].

4.4. Virtue ethics

Virtue ethics is a venerable tradition that can be traced back to Plato and Aristotle in the West and to Confucius in the East. Recently, this stream of thought aroused a renewed interest, mostly due to the work of MacIntyre [64]. In the early 1990s, Solomon [65, 66] introduced Aristotelian ethics in the organizational field.

Virtue ethics starts with the idea that the basis for moral judgments is not the isolated individual but the community. A corporation is, above all, a community where managers fulfill roles with specific obligations. In many cases, there are no general rules on how to behave. Dilemmas cannot be solved with the instrumental reason, as if it were the resolution of a technical problem through the application of a universal law to a particular case. It is necessary to resort to practical reason, good judgment, or as Aristotle called it, phronesis.

The manager’s ability to make the ethically correct decision depends on his or her character. There are different virtues of character relevant to business, including honesty, courage, generosity, tolerance, integrity and prudence. Virtues are not static character traits that a manager possesses or does not possess. They are enduring traits that are cultivated through experience in the resolution of ethical dilemmas. In every situation where the executive is confronted with an ethically complex decision, virtue ethics suggests identifying what virtue is at stake and then asking what a virtuous person would do.

As the manager acquires this habit of thinking, his character will develop and his habits of ethical decision making will become more successful. To the extent that more members of the corporation go through this process and acquire the virtues of good character, the organization as a whole will tend to the common good [67].

Virtue ethics’ approach seems well adapted to the concrete ethical situations that managers can find in organizations. The theory is able to solve cases where rules seem difficult to apply or when two or more rules suggest courses of action inconsistent with each other. Instead of generating a discussion about which rule has priority over the others (a debate for which executives, because of their training and interests, are often poorly prepared) virtue ethics diverts attention from the principles to the agent. The key question is not what principle or rule is applicable, but what virtue is at stake and what would a virtuous person do.

Virtue ethics has faced two kinds of criticism. First the situationist critique questions the moral psychology assumptions underlying the model of virtuous man. Virtue ethics assumes that actions are a result of character, and that the development of good character results in better moral decision making. Doris [68], however, notes that character traits are less durable than what this model implies. Evidence indicates that small changes in the environment significantly affect decision making and that decisions depend little on the character of the person and much of the situation in which they are made. If this were true, then it would be false that the development of virtues tends to improve ethical decision making, a basic assumption of virtue ethics.

Second, while the focus on the agent may solve a number of problems of rule-based approaches such as utilitarianism and Kantian ethics, the downside is that it is only applicable to individual managers. Corporations, however, also need moral guidance for the development of global codes of ethics. Utilitarian and Kantian approaches, despite their difficulties, are capable of offering criteria of good corporate behavior on which to build globally applicable rules. Virtue ethics, on the contrary, is unable to provide answers to dilemmas at the level of the corporation in relation to business in society. Solomon argues: “a problem with virtue ethics is that it tends to be provincial and ethnocentric. It thereby requires the language of rights and some sense of utility as a corrective”.

Melé [69] believes that some basic rational principles from Personalist ethics could be used as guidelines for virtuous behavior. Melé proposes two principles: the Personalist Principle, including respect and love for people, which prescribes respect of workers and consumers, and forbids exploitation, manipulation and deceptive behavior in commercial transactions; the Common Good Principle, which captures the social dimension of human beings, requires that managers and employees do whatever is necessary to contribute to situational needs and goals of an organization.

While Melé’s proposal is valuable in trying to introduce some principles into virtue ethics, it is still at an early stage of research. At this point, the principles are too general and abstract. It remains unclear that Melé’s proposal could correct the excessively situationalist character of virtue ethics, which makes it unable to provide rules for moral guidance in decision making (Figure 3).

Figure 3.

Different answers from traditional ethical theory to dilemmas in international business. Source: Own elaboration.

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