Golden rule of profit maximization

Analysis Paper For A Finance Case, 5

THEORETICAL BASES FOR ANALYZING THE ETHICS OF A DECISION

Adapted from a chapter by John R. Deckop, in Vida Scarpello (ed). The Handbook of Human Resource Management Education: Promoting and Effective and Efficient Curriculum, Los Angeles: Sage Publications, 2008. Philosophers have pondered ethical questions for millennia, and have developed numerous

theoretical perspectives to aid in ethical decision-making. The range and depth of philosophical

theories on ethical decision-making can be daunting. So much so that arguably, presenting all

the major philosophical perspectives, and their nuances, is likely to fail from a pragmatic

standpoint because there is no way most students can absorb, much less apply on a day-to-day

level, so much material.

So this analysis will be restricted to the two “dominant” (Beauchamp & Bowie, 1997)

philosophical perspectives on ethics: utilitarianism and universalism, and will deal with only the

most general features of these theories. Things will be complicated a little, in that a third

theoretical perspective that is a subset of utilitarianism will also be discussed: profit

maximization.

The goal is to provide three perspectives (utilitarianism, profit maximization, and

universalism) on ethical decision-making that can actually be easily remembered, taught, and

used in daily decision-making. Later other perspectives will be overviewed, including theory

that challenges the two dominant perspectives.

Utilitarianism

The theory. Utilitarianism, developed primarily in the 19th century, can be understood by the

common phrases “The greatest good for the greatest number” and “The ends justify the means.”

The utilitarian believes that the potential outcomes of a decision should be analyzed to see who

benefits and who is harmed. The decision that results in the most total benefit compared to harm

is the best decision. The utilitarian is often portrayed figuratively as holding a scale, with the

benefits on one side being weighed against the harm on the other.

A critical aspect of this theory is that a decision can result in harm to some individuals and

still be the most ethical course of action. As long as benefit versus harm is maximized, the “ends

justify the means.” From a utilitarian perspective, an organizational downsizing for example

would be ethical as long as the good that comes from it, perhaps in the form of long-term

company health and shareholder value, outweighs the harm to dismissed and current employees,

and other stakeholders.

To conduct a utilitarian analysis, one must first conduct a stakeholder analysis. Put simply, a

stakeholder analysis assesses the effects of the alternate decisions facing the firm on all that are

affected by the decision. Specific methods for conducting stakeholder analyses can be complex,

though all make explicit the nature of the effects and why they will occur. Based on a

stakeholder analysis, a utilitarian can assess whether or not the overall benefit of a decision

exceeds the overall harm that the decision will cause.

Some criticisms of the theory. One criticism of utilitarianism is that the ends may not always

justify the means. Universalism, the other dominant ethical theory to be discussed below, argues

that humans have inherent worth and thus fundamental rights that should not be violated under

any circumstances. Thus, for example, while a utilitarian may defend drug testing, a universalist

might argue that drug testing fundamentally violates an employees right to privacy. Another

example relates to sweatshops – a utilitarian would argue that exceedingly poor treatment of

employees can be justified if the benefits to the firm and the community it resides in are large

enough. A universalist might disagree, arguing the exposing employees to extremely dangerous

conditions is not justified under any circumstances.

Another criticism of utilitarianism relates to potential self-serving biases of the person making

the decision. The utilitarian decision-maker in theory should weigh the benefits and harm too all

affected parties without bias. That may be difficult to do if the decision-maker has a significant

stake in the decision. Owners of sweatshops often reply that poor working conditions are

necessary to stay competitive and provide jobs for the community. Is this true, or just what the

owner tells himself as self-justification for getting rich? Similarly, a supervisor may fire a

subordinate with whom she has a conflict, telling herself that this termination is good for the

company, when in reality the decision may be self-serving. And even when the decision-maker

attempts to be unbiased with respect to self-interest, a variety of decision-making biases can

nevertheless result in unethical decisions when attempting a utilitarian solution (e.g., Messick &

Bazerman, 1996).

Profit Maximization

The theory. Profit maximization, as an ethical perspective, is a prescription of what has been

termed “neoclassical economics” (Hosmer, 2008). The basic principle of profit maximization is

that decisions made by firms, and employees within firms, should attempt to maximize firm

profit in the long-run, subject to assumptions or constraints.

The clearest explanation of profit maximization as an ethical imperative is probably the article

by Milton Friedman (1970), titled “The Social Responsibility of Business is to Increase Its

Profits.” Profit maximization is actually a subset of utilitarianism, because Friedman and other

neoclassical economists argue that if all firms strive to maximize long-run profits (subject to

constraints) then the overall societal welfare, in terms of benefit versus harm, will be maximized

(Evan & Freeman, 1988). Why is this so? The explanation of this requires a detailed economic

analysis, which is usually covered in basic economics courses. As Hosmer (2008) suggests, it

may make sense to simply accept these economic arguments, as they are rigorously derived

given the assumptions that underly the model.

Profit maximization is a powerful tool for ethical decision making because the basic premise

– that business decisions should maximize long-run firm profit – is easy to understand. Yet its

prescriptions may seem “hard-hearted” to some people. For example, Friedman argued that

firms are unethical if they, for example, engage in pollution control beyond the requirements of

the law, if it hurts profits. Or if they hire the hard-core unemployed in order to contribute to the

social objective of reducing poverty. In both cases however, Friedman points out that the

decision-maker is spending someone else’s money (e.g., shareholders, customers) without their

consent. And in doing so, the firm would be making decisions that do not result in the most

economic benefit to society, according to this perspective.

Profit maximization can also be applied to more mundane, every day decisions. Should a

certain employee be terminated? The answer would be yes if, in the decision-maker’s judgment,

the termination is in the best interests of the firm. It would not matter if the employee was only

marginally a subpar performer, or if the termination would result in severe problems for the

employee and his family.

The part about the theory that has not been discussed thus far is the constraints. They are

critical, because the degree to which the constraints are met has direct implication as to whether

profit maximization can be considered an ethical decision basis. Each analysis based on profit

maximization must assess whether the decision maximizes long-run profit, and whether the

constraints are met. What are these constraints? Again, these are covered in a basic economic

course. Put simply, profit maximization and Friedman are saying that a business should

maximize profits while 1. obeying the law, 2., ensuring open and free competition, and 3. not

engaging in deception or fraud. Thus, if a firm makes a decision that in fact maximizes long-run

profit, but in doing so violates one or more of the constraints, profit maximization would say that

this decision is unethical. As discussed above this is because in violating a constraint the decision

does not contribute to the overall economic benefit of society.

The constraints of profit maximization sound straightforward, though the most common

criticism of this profit maximization as an ethical decision basis relates to the interpretation of

these constraints. This and other criticisms will be discussed next.

Criticisms of profit maximization. Profit maximization is considered a subset of utilitarianism

because, as mentioned, the theory states that if all firms seek to maximize profit, the overall

welfare of society will be maximized. But the constraints that must be met for the theory to

apply have undertones of other ethical perspectives. When Friedman says “without deception or

fraud,” he is sounding like a universalist, who would claim that some actions (e.g., deception) are

inherently wrong. He also states in his article that profit maximization should be subject to “the

basic rules of society, both those embodied in law, and those embodied in ethical custom.” How

does one define or identify ethical custom? Using a common philosophical metaphor, this puts

the theory on a “slippery slope,” because without a clear standard of “ethical” (which from a

tautological perspective puts us back at the beginning of all this discussion) almost any decision

could be supported or criticized using this theory. Those decision-making biases discussed

above with respect to utilitarianism in general also apply here. Self-serving and other biases may

well affect whether a decision-maker in a given instance determines that there is free

competition, or no fraud. Another main criticism of profit maximization is that as a utilitarian

theory, it could support doing significant harm to individuals in the name of profit (i.e., the ends

justify the means).

Universalism

The theory. Universalism is probably most associated historically with Immanuel Kant, who

wrote (primarily) in the 18th century. Two key principles are commonly associated with it:

“Never treat another inappropriately as a means to an ends,” and “Would you get what you want

if everyone did it, under similar circumstances?” This second principle, which Kant labeled the

“categorical imperative” bears resemblance to what in Christianity is called the golden rule, or

“Do unto others as you would have them do unto you.” Kant was trying, among other things, to

put “philosophical muscle” on the golden rule. Interestingly, the golden rule is not a principle

limited to Christianity; it is a fundamental tenet in every major religion in the world (Parliament

of the World's Religions, 1993).

Universalism is more than the golden rule, however, and is arguably more useful for

determining ethical decision in a business context. This is because the golden rule supposes the

decision maker is ethical to begin with (e.g., Trevino & Nelson, 2007). If not, the application of

the golden rule may not make much sense. For example, imagine that you are sitting in a café

looking out the window as you sip your drink. Across the street you witness a bank robbery, and

the man who just robbed the bank then walks into the café and sits next to you. He asks you to

tell the police when they arrive that he’s been sitting there for the past hour, thereby providing

him an alibi. Now, if you’re an ethical person (and don’t fear for your life!) you probably won’t

agree to lie. However, what if you’re a bank robber yourself, and think, “do unto others as you

would have them done unto you.” Well, following the golden rule, you’d want him to lie for

you, so that means that you’d lie for him. And that’s not ethical! As such, when applying

universalism, it is important to apply one or both of its key principles and not the golden rule.

Universalism directly challenges utilitarianism, in that the first statement above contradicts

the principle that the ends do not justify the means. It implies that employees have inherent

worth, and that a firm or manager that violates the employee’s inherent dignity and worth by

using them as a means to an end is acting unethically. For example, most would agree that sexual

harassment violates the victim’s fundamental rights as an employee, and is universally wrong, no

matter what.

When applying this perspective, you should ask yourself if no amount of good could make up

for the harm that you’re causing the individual. And if so, that means that the harm is

fundamentally wrong, and unethical according to universalism. This would be the case in the

sexual harassment example above. If not, however, then the action may well be ethical (or not

unethical) by universalist thinking. For example, let’s say an employer decides to downsize its

workforce by 20% in order to avoid bankruptcy. Terminating those employees certainly causes

them harm. However, many do not believe that an individual has a universal right to work for a

particular organization and never lose his/her job, under any circumstances. So a universalist

may consider this downsizing ethical.

The categorical imperative (second statement above) gets at notions of reversibility and

hypocrisy (Schumann, 2001). Consider an action by a manager – lying to an employee about her

chances of promotion in order to avoid her quitting the firm. The universalist would oppose this

because a world where all firms lied about such things would mean that employees, including

this one, would not believe anything about promotions in the first place, and as such, the intent of

the action (to retain the employee) would not be realized. In other words, if everyone did what

this manager did, he would not benefit from his action.

The categorical imperative can be considered a way to test whether you are correctly applying

the “don’t treat employees as a means” principle (Hosmer, 2008). The categorical imperative

implies that unless an action is morally right for others to do, then it is not morally right for you

to do. As such, all humans are of equal value. Treating people inappropriately as a means to an

ends denies the inherent worth of the individual, and denies them fundamental rights.

Criticisms of Universalism. A strict application of the categorical imperative is considered by

many to be difficult to apply in practice (Hosmer, 2008). For example, lying is prohibited. But

probably everyone lies at least occasionally, and few of us would consider all lies to be unethical.

Supervisors are often trained to provide supportive feedback to their subordinates, and it may be

effective in some circumstances to restrain brutal honesty when discussing performance with an

employee who has difficulty grasping something. Most of us would think that the dishonesty is

justified by the outcome – protecting the employee’s feelings of self-worth. This would be a

utilitarian way to look at the issue. Another criticism relates to the first formulation of

universalism. It’s hard to avoid treating others as a means to an end. We do it all the time –

arguably, professor and student treat the other as a means to an end. The key in applying the

perspective is the term “inappropriately.” A good guide would be to ask if the treatment violates

fundamental human rights of respect and dignity, such that no amount of good can make up for

it. But drawing this line can be difficult and introspection and consistency are necessary.

Universalism also suffers from the same potential of self-serving biases that the other ethical

theories face. The categorical imperative asks the decision-maker to situationalize the problem.

That is, under similar circumstances, would I be willing to make it a “universal law” for others to

do the same? A universalist decision-maker can be tempted to justify almost any action by

situationalizing the action in restrictive fashion. For example, a manager might be tempted to

skew a performance evaluation to give an employee a very good raise, which, let us say, would

benefit the manager politically in the organization. Without situationalizing the problem, the

action would not be justifiable because if all managers biased their performance evaluation

results when it was convenient to them, performance evaluation would not represent a rational

pay policy for the firm, which is one of its key objectives. So it would not be used, and this

manager could not benefit from her action. However, she could tell herself that she will do it

only this one time. Thus, she could rationalize that if there were a world where all managers

biased their performance evaluation results only once in their careers, then the intent of her

action would still be realized. The limited occurrence of the practice would still mean that

employees and firms would trust the validity of performance evaluation. This may be so, but

most of us would consider her action unethical.

APPLYING THE THEORIES IN EVERYDAY DECISION-MAKING

The purpose of ethical training is not to learn the concepts in order to get questions right on

an exam, or to impress others by dropping the names of impressive sounding theories. It is to

affect everyday decision-making. The three theories presented above – utilitarianism, profit

maximization, and universalism, are simple enough in their basic principles that they can be

easily remembered after you finish reading this.

Perhaps the next step after reading the theories is to think about which fits best with one’s

moral/religious upbringing and education. Which of these theories makes the most sense as a

basic rule of organizational life? If one had to pick one to characterize your concept of what is

right, which would it be? This theory can be the individual’s “home base” theory. It is the first

one to turn to when assessing the ethicality of a decision. It is applied to the situation, and if what

it says to do makes sense, the decision-maker acts accordingly.

However, its application may not make sense for a variety of reasons. Many people, in

understanding the criticisms of the various theories, are reluctant to commit to using one theory

in all circumstances. The theory may not provide a clear guide to action in a given case. Or

there might be a competing ethical principle that makes more sense in a given circumstance.

So it is also fine to be willing to apply other theories in situations where the home base theory

does not make sense. Philosophers, as proponents of one or another of these theories might

object, but until the philosophers or management theorists can identify one set of ethical

principles we can all agree upon, each of us has the responsibility to develop an ethical

framework for ourselves, one that we can live with and use.

Next, each theory will be discussed in terms of how it might be used as a home base theory,

and how it might be modified in given circumstances.

Let’s use utilitarianism is the home base theory. The decision-maker believes in weighing the

consequences of a decision against all affected stakeholders to the decision. It is acceptable if

decisions cause harm to some, as long as the benefit that others receives outweighs the harm.

However, in thinking through a particular decision, a question may be asked along the lines of

universalism: “Does my decision violate an employee’s fundamental rights as a human?” The

answer may be no to this. A termination or downsizing may be justified, assuming that

employees do not have a fundamental right to continued employment in a firm.

Alternatively, the may answer yes to this question. Perhaps a firm has decided to downsize a

group of employees. This may be an ethical decision on a utilitarian basis. However, let us say

top management proposes to not notify affected employees about the downsizing until the day of

termination. This action may also be acceptable from a utilitarian standpoint, if one believes that

the benefit to the firm from this practice will outweigh the harm to employees. However, one

may decide that this action, given the situation, is inherently wrong, because it violates

fundamental rights of affected employees. In this instance, it could be recommended that ample

notice be provided to employees of the downsizing, even while the decision-maker otherwise

makes decisions on a utilitarian basis.

Let us say profit maximization is the home base theory. One believes that the objective of

business decision-making should be to maximize the long-term profitability of the organization.

It can be an easy guide to apply, and it can be argued that it is an employee’s duty to make

decisions that benefit the firm, subject of course to the assumptions of the theory. But as with

utilitarianism, the question may arise: “Are there instances where the best interests of the firm

should take second place in my decision-making?” “Are their instances where the harm caused

to employees cannot be outweighed by any amount of profit?” This issue comes up, for

example, when the ethicality of sweatshops is considered. More and more, production has

shifted to countries in which labor standards afford workers and their communities little

protection from harmful practices, such as dangerous working conditions and environmental

pollution (e.g., Varley, 1998). Should a U.S. firm operate in another country using what would

clearly be considered inhumane treatment of workers by U.S. standards? Even if so, should a

firm provide only the absolute minimum in protection to workers and their communities dictated

by the law in that country (often almost none), in order to maximize profit? Many who believe

in profit maximization as a general principle would answer no to one or both of these questions.

One might instead argue that the firm should provide treat workers as humanely as possible,

while still allowing for a reasonable profit. This would be a utilitarian solution, one that does not

conform to strict profit maximization.

At a more mundane level, managers are faced everyday with issues of employee treatment.

Though the best interests of the firm may be one’s basic orientation, there may be situations

where a more utilitarian solution is appealing, such that the shareholders of the firm (the ultimate

beneficiaries of profit maximization) are considered but one stakeholder to the decision. And,

from a universalist perspective, there may be certain actions to employees that one would not be

willing to do under any circumstances, simply because the action is inherently wrong.

Let us say universalism is the home base theory. One may have been brought up that certain

things are fundamentally wrong, and certain actions never justifiable. Do not lie. Do not break

promises. Do not steal company property. Good treatment of employees is not necessarily a

means to benefit the company or other stakeholders in this view, but fundamentally the right

thing to do. Universalism is the home base theory, but as with the others, it may not be possible

or practical to apply it in all circumstances.

To exercise universalist principles, one must either the choose to work in a firm that has

similar values, or one must be willing to constantly challenge HRM policies or actions that are

considered wrong. It may be difficult to consistently practice universalistic principles in the

workplace. We all have different value systems, and honest assessments of a business policy

even by two universalists might contradict. For example, Grossman (2001), in applying

universalistic principles, suggests that incentive pay is a basic individual right. Conversely,

Heery (1999) argues that incentive pay, and the risk it imparts to employees, can represent a

fundamental injustice.

It may be difficult for an employee to find a firm to work for that has exactly the same

universal values. One cannot quit every time the firm does something, or asks one to do

something, that is inconsistent with one’s principles. Though one’s home base theory is

universalism, it may be necessary to search for a utilitarianism or profit maximization solution in

some circumstances.

Drawing Lines

As mentioned above, universalists cannot fight every fight, every time they see something in

their firm that they consider unethical. This same argument applies to other ethical theories. We

cannot try to change things, or quit, every time our ethical principles are violated. Thus, living

up to one’s ethical principles at work is also about learning where to draw the line – how bad

things must get to speak out, or quit.

And, most importantly, it is important to think about where these lines should be drawn ahead

of time - as in an educational environment versus the real world. Otherwise, the pressure of the

situation may result in drawing a line in a place looks reasonable at the time, but later is

perceived as unethical (e.g., McCoy, 1997). The single-minded pursuit of a goal, say getting a

project accomplished, can blind individuals to the ethical consequences of some of the decisions

made along the way. Sometimes decisions must be made within a very short time frame, maybe

even a split second. Maybe financial or family pressures make it extremely difficult to do what

ethical principles dictate. In all these situations, it is helpful to have thought through ethical

principles ahead of time. Each of the three ethical theories discussed above share one common

criticism: all can easily be misapplied if the decision-maker engages in self-deception. The

pressures of a situation may cause one to apply self-serving biases that while in the short-run

appear acceptable, in the long-run result in damage to one’s firm, career, or self in terms staying

true to ethical principles.

OTHER ETHICAL PERSPECTIVES

There are numerous other ethical perspectives that can be used as conceptual tools for ethical

decision-making. Some challenge the dominant perspectives discussed above, and other

complement these perspectives. Two categories will be discussed below: justice theories and the

theories related to the duty to care.

Justice

The goal of justice theories is to analyze whether a procedure, outcome, or both, is inherently

fair (Thorne, Ferrell, & Ferrell, 2003). Note that theories of procedural and distributive justice

are frequently discussed in textbooks, and are often based on philosophical concepts of justice.

However, the use of these theories in textbooks, as well as in academic research, is mainly as a

means to the ends of employee productivity (Greenwood, 2002). Justice, as a principle worthy

of realization in its own right in decision-making, has not received significant attention in texts.

Many justice theories relate to the distribution of wealth in society. For example, John

Rawls’ theory of distributive justice asks the decision-maker, when thinking about what is right,

to wear a “veil of ignorance” with respect to personal characteristics, such as race, family

background, special talents, etc. Then, one should make a decision that reflects this impartiality

to personal circumstances. Rawls argues that if we do this, our decisions would be to distribute

economic goods and services equally, unless an unequal distribution would work to everyone’s

advantage (Beauchamp & Bowie, 1997). The focus of this perspective is often on the

disadvantaged in society, and many of its implications imply the need for a more egalitarian

distribution of wealth both in society and within firms. However, Rawls does not argue for

complete equality. For example, differential compensation practices, such as incentive systems

for entrepreneurs, would be acceptable as long as the result was improved job opportunities for

the least advantaged members of society (Beauchamp & Bowie, 1997).

Another justice theory can be termed “contributive liberty” (Hosmer, 2008). In contrast to

theories of distributive justice, such as Rawls’ theory, this theory, developed by Robert Nozick,

focuses on an individual’s right to liberty in the process of decision-making. As such, it relates

to procedural, not distributive justice. From a resource allocation perspective, this theory

emphasizes the role of free markets, which, it argues, result in the fairest allocation of resources.

This theory represents a companion of sorts to profit maximization. While profit maximization

argues that market mechanisms produce the most societal welfare, contributive liberty argues for

the inherent justice of free markets.

All the theories up till this point focus on the individual – her rights, and the duties of the

decision-maker with respect to these rights. Another justice-based theory, communitarian

theory, focuses instead on the community. Rather than discuss the rights of the individual versus

the government or the firm, communitarian theory stresses the development of communal values,

and how those communal values should affect the individual (Beauchamp & Bowie, 1997). One

aspect of this theory is that too much focus on individual rights obscures the responsibility the

individual has to the collective. As a member of a community (the firm), an employee thus has

the responsibility to be, among other things, part of establishing a workplace that is fair and just

(Barrett, 1999).

The Duty to Care

Most well-known and established ethical theories, including all the theories discussed thus

far, focus on the development of an abstract set of ethical principles upon based on rights and

justice. There is no role for sensitivity to others, emotion, and relationships for their own sake in

these theories. Even universalism, with its focus on “doing unto others” emphasizes the

development of abstract principles not specifically related to particular individuals.

The duty to care is a label for several theories developed from a feminist tradition that

emphasize character traits that are valued in close personal relationships, such as sympathy and

compassion (Beauchamp & Bowie, 1997). One aspect of this work is to address societal

inequality of women, and how laws, and even ethical theories developed by men, have

contributed to this (Grimshaw, 1986).

Another focus is to advocate a basis for ethical decision-making based on care. One

prominent example is the work of Carol Gilligan (e.g., Gilligan, 1982). She asserts a framework

of care and compassion, traits often associated with women, as underlying moral reasoning and

ethical duty. Gilligen argues that a decision based on caring and concern for others can be as

ethical, or more ethical, than a decision based on adherence to a set of abstract principles.

This relates to duties in a variety of areas in the workplace (Beauchamp & Bowie, 1997).

Managers should exhibit sensitivity to employees’ personal problems not because it may result in

a more productive employee or protect against a lawsuit, but because it is the right thing to do.

We have the duty be sensitive to the points of view of others. When there are conflicting rights,

this sensitivity can help in finding solutions where all party’s voices and perspectives are heard.

Feminist thinking and the duty to care also involve metaphors in the workplace. Metaphors more

commonly associated with men, such as sports and war, often reflect competition and conflict.

Metaphors more commonly associated with women, such as relationships and family, are often

seen as “soft” and not as important, despite the fact that these orientations may be correct

(Beauchamp & Bowie, 1997).

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