The Business Ethics Blog

Business Ethics is an academic discipline, as well as a field of practical expertise and increasingly a central business function.

There are many ways to educate yourself about Business Ethics as a field of study and understanding. But if your interest in the topic is sufficiently deep, you could do worse than to read a handful of papers by some of the leading scholars in the field.

So here are five of what I regard as essential readings in business ethics, along with an explanation of their significance.

The List

In order to say anything useful about ethical issues in the marketplace, you first need to understand something about how markets work, how they fail, and what the ethical argument for their existence is. And simply being in business doesn’t guarantee that you understand markets, any more than being an athlete guarantees that you understand physiology. You need to go to someone who has a deep understanding just of one particular market — the market for mobile phones, say, or for cars — but of markets in general.

So the first bit of essential reading is a decent chunk of…

1. Adam Smith’s The Wealth of Nations. (It’s freely available online, and I recommend reading at least the first three chapters of Book 1, Volume 1.) Smith, one of the great philosophers of the Scottish Enlightenment, wasn’t the first to speculate about how economies work, but he’s generally thought of as the guy who more or less got it right. Smith is to economics what Darwin is to biology. In The Wealth of Nations, Smith outlines the basic way in which trade produces mutual advantages, the way those advantages encourage specialization, and — importantly — the way self-interest is sufficient to get the whole process started. (But a word of caution: Smith is often wrongly thought to have encouraged greed. Nothing could be further from the truth. For useful correctives, read Nobel-prizewinning economists Ronald Coase and Amartya Sen.)

#2. My next suggestion is to read something by Edward Freeman on what’s known in academic circles as “Stakeholder Theory.” His co-authored piece called “Stakeholder Capitalism” would do, as would any of a number of papers he’s authored or co-authored over the last 3 decades. The basic idea that Freeman defends is that corporate managers shouldn’t see themselves as beholden primarily to shareholders, but rather as ethically obligated to balance the interests of a wide range of stakeholders. The idea is attractive, but also deeply flawed, for reasons that the next two readings explain. One way or the other, the stakeholder idea forms an important part of the debate over how we should think about the central obligations of managers. (For my review of one of Freeman’s recent books on the notion, see here: Review of Managing for Stakeholders.)

#3. The best antidote to Stakeholder Theory is to read Joseph Heath’s “Business Ethics Without Stakeholders”. Heath argues that the stakeholder idea, however evocative, only muddies the water without providing managers with any useful direction. Heath’s paper basically outlines the fundamental debate over shareholders-vs-stakeholders in business ethics. In that regard, it’s a useful summary of the field. Heath argues that shareholder-driven and stakeholder-driven theories of business ethics both have virtues, but that both are also subject to fatal flaws. Heath argues for an alternative, which he calls the Market Failures theory. According to the Market Failures theory, the guiding ethical notions for businesses ought to be to honour the preconditions for market efficiency. In other words, they shouldn’t engage in the kinds of behaviours that make markets fail: they shouldn’t seek to profit from information asymmetries, or from externalities, or from exercising monopoly power.

#4. A bit of middle ground can be found in the work of John Boatright, including especially his article “What’s Wrong—and What’s Right—with Stakeholder Management”. In previous writings, Boatright has generally not been a fan of stakeholder theory. But in this paper, he says that the stakeholder idea can play a legitimate role in the corporation, if used properly. In particular, Boatright says that the stakeholder idea should only be held up as an ideal, a source of a sense of mission, a motivator reminding corporate insiders that all participants need to find long-term benefit. He says that the stakeholder idea is much less likely to serve the role that Freeman and his fans think it ought to play, namely that of a principle for corporate governance.

#5. All of the above is aimed at helping frame the question of how businesses (or people in business) ought to behave. But sometimes the problem isn’t with knowing the answer, but with putting it into action. And that seems to be a problem. After all, there’s a good deal of wrongdoing in the world of business. And yet look around you: most of the people you know (starting with yourself!) are pretty decent, honest folks. How do so many good people end up doing bad things.

In this regard, I have to recommend another paper by Joseph Heath, namely his “Business Ethics and Moral Motivation”. Heath points out that, when asked about what motivates wrongdoing, most people say it has a lot to do with greed, or with other deep character flaws. The trouble with this, he says, is that the scholars who study wrongdoing in the most depth — namely, criminologists — long ago considered and rejected those as key factors in wrongdoing. The real source of trouble, says Heath, lies in the ability people have to offer themselves excuses, and in particular to redescribe their behaviour their behaviour in ways that lets them rationalize it. “Sure, I took the money. But I wasn’t stealing — I was just taking what I was owed.” To get people to behave better, you need to help them see that such rationalizations are unsupportable, and we need to work to avoid institutional cultures that actually encourage thinking in those ways.

So that’s my list. It’s admittedly a particular take on the field — all of the authors cited above are philosophers. But hey, I’m a philosopher by training, and so I’m committed to the idea that an understanding of fundamental principles always helps. As someone once said, there’s nothing so practical as a good theory. Reading these won’t guarantee excellence in ethical decision-making, but they will help you understand what is fundamentally at stake in our ongoing exploration of what behaviour is right, and what behaviour is wrong, in the world of business.

Here is a reading list that is typical of the one I use for my 1-term undergraduate Business Ethics courses. In some cases, there are hyperlinks directly to the work in question. In other cases, unfortunately, the link just leads to an abstract. Note that for the last decade, most of my teaching has been in a Philosophy department, and so this list includes more philosophical readings, and fewer case studies, than would be the case for a course at a business school.

Section 1: The Market

In order to say anything sensible about ethics in the marketplace, you need first to understand at least a bit about the marketplace itself, and the basic underlying mechanisms. So…

• Adam Smith, The Wealth of Nations (Vol 1, Book 1, Ch. 1-3)

But a lot of people misunderstand Smith, especially his view on the role of self-interest in the marketplace. So I recommend reading these two Nobel-prizewinning economists, both of whom believe that Smith is far too important to get wrong:

• Ronald Coase, “Adam Smith’s View of Man” (Coase explores Smith’s moral psychology, and points out that Smith neither thought people are entirely selfish, nor thought they should be).
• Amartya Sen, “Does Business Ethics Make Economic Sense?” (Sen points out that, on Smith’s account, self interest merely explains what motivates people to engage in exchange. That’s important, but it leaves lots to be explained. And, Sen argues, much of what remains to be explained requires a richer set of values than the popular, cartoonish version of Smith usually includes.)

Section 2: For Whose Benefit?

In this section, we read about “stakeholder theory,” along with modifications of, and objections to, that idea.

• R. Edward Freeman, et al., “Stakeholder Capitalism” (In this and many other papers published over the last quarter century, Freeman defends the idea that corporate managers have strong, positive obligations not just to corporate shareholders, but to a wide range of stakeholders.)
• Kenneth Goodpaster, “Business Ethics and Stakeholder Analysis” (Goodpaster offers a friendly amendment to Freeman’s theory. He says we should understand stakeholder theory as implying that managers have strong fiduciary duties to shareholders, and regular non-fiduciary duties to other stakeholders — such as the duty not to lie, not to steal, etc.)
• John Boatright, “What’s Wrong—and What’s Right—with Stakeholder Management” (Boatright says that the stakeholder idea can play a legitimate role in the corporation, but only as a motivator, giving corporate insiders a sense of mission. He says that the stakeholder idea is unlikely to serve as a good principle for corporate governance.)
• Alexei M. Marcoux, “A Fiduciary Argument against Stakeholder Theory” (Marcoux argues that the relationship between corporate managers and their shareholders is in important ways very similar to that between doctors and their patients or lawyers and their clients. As a result, he says, shareholders — and shareholders alone — have a strong claim to managers’ loyalty as fiduciaries.)
• Joseph Heath, “Business Ethics Without Stakeholders” (Heath argues that shareholder-driven and stakeholder-driven theories of business ethics both have virtues, but that both also have fatal flaws. He argues for an alternative, which he calls the Market Failure theory, according to which the ethical compass of a corporation should be to avoid behaviours that tend rob the market of its promise as a mechanism for mutual benefit.)

Section 3: Decision-Making

The last section of the course deals with individual decision-making, and barriers to making good decisions.

• Aviva Geva, “A Typology of Moral Problems in Business” (Geva argues that not all problems in business ethica are of a single kind. She presents a framework for categorizing such problems, and argues that diagnosis is the first step towards effective resolution.)
• Caroline Whitbeck, “Ethics as Design: Doing Justice to Moral Problems” (Whitbeck says that ethics classes too often treat ethical dilemmas as if they were multiple-choice problems, in which the decision-maker merely needs to choose from the available alternatives. Instead, Whitbeck suggests that we think of ethics in a more active way as a design process, involving seeking a best available solution given a set of objectives and a range of constraints.)
• Joseph Heath, “Business Ethics and Moral Motivation: A Criminological Perspective” (Heath says that the “folk” theories regarding why people do bad things are generally deeply flawed, rejected long ago by thorough criminological studies. He says the key to wrongdoing is the process of rationalization or “neutralization,” according to which the wrongdoer finds ways of redescribing their own behaviour in order to soothe their own conscience.)
• Nina Mazar, On Amir, and Dan Ariely, “The Dishonesty of Honest People: A Theory of Self-Concept Maintenance” (Ariely and colleagues ask why it is that so many honest people engage in dishonesty. They propose a theory according to which people frequently find ways to be just a bit dishonest, but not so dishonest as to stop them from thinking of themselves as decent people.)

Here are a few other items I have sometimes included:

• The Corporation (this film is deeply flawed, but useful pedagogically)
• Allen Buchanan, “Toward a Theory of the Ethics of Bureaucratic Organizations” (Buchanan argues that the distinctive problem of bureaucratic organizations is the multi-layered agency problems that are endemic to them. He thus suggests that the distinctive ethics of such organizations must involve an attempt to inculcate norms that combat agency problems at all levels.)
• Michael E. Porter & Mark R. Kramer, “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility” (A very sane, practical approach to CSR. Much better than their later work on “Creating Sustained Value.”)
• Ronald Coase, “The Nature of the Firm” (This is a ground-breaking paper by the Nobel-prizewinning economist. Coase argues that the existence of corporations — and the size of particular corporations — can be explained in terms of the need to minimize transaction costs.)
• Enron: The Smartest Guys in the Room (video) (This is a terrific documentary, avoiding the cheap-and-easy explanations for the biggest business scandal in recent decades. See my review here: Enron DVD)

It’s important to note what this list leaves out. Absent are direct discussion of workplace health and safety, honesty in advertising, product safety, environmental issues, and so on (though the readings above do of course draw examples from those sorts of topics). A different sort of course would deal with those, one by one, in some depth. The hope in my course is to provide students with the philosophical grounding to think about those sorts of practical issues in a well-informed way.