Study guide: Business Ethics and the Firm

📋 Course Outline

1. Ethics as a Shared Foundation
2. Motivation and Ethical Management
3. The Firm and Consumer Needs
4. Coordination and Theories of the Firm
5. Stakeholder Theory and Firm Governance
6. Markets, State, and Society
7. Alternative Economics and Responsibility
8. Markets, Ethics, and Economic Thought
9. Economic Theory and Human Behaviour
10. Ethics, Morals, and Question Types
11. Business Ethics: History and Analysis
12. Dilemmas and Moral Judgement
13. Ethical Excuses and Organisational Compliance
14. Profit, Stakeholders, and Responsibility
15. Course Assessment Requirements

📖 1. Ethics as a Shared Foundation

🔑 Key Concepts & Definitions

• Ethics: Builds rational consensus about how people live together and supplies a shared foundation for economic and human relationships.

★ Must-know

• Voting cannot establish its own prior rules without an infinite regress, so voting depends on an agreement that exists before and outside the voting procedure.

• Law and penalties mainly address the minority who do not sense the boundary themselves; the system depends on most people complying willingly.

Further detail

• In the factory case, a local official offers to restore power in exchange for computers for the town hall, but the project manager cannot both comply with the rules and hand over the computers.

💡 Memory Hook

Shared ethical agreement → voting and law become workable.

📖 2. Motivation and Ethical Management

★ Must-know

• Adam Smith’s The Theory of Moral Sentiments presents fellow-feeling as a motive alongside self-interest, while The Wealth of Nations treats self-interest as an important economic driver whose unchecked pursuit can endanger the system.

📌 Business ethics evaluates the rightness of specific actions rather than primarily judging a person's moral character.

📌 Profit maximisation alone is an underspecified decision compass because it does not determine the time horizon, whose interests count, or the acceptable level of risk.

Further detail

• Smith resigned his chair of moral philosophy at Glasgow in 1764 and became a Commissioner of Customs in Scotland in 1778.

• The course treats profit as important and the market mechanism as a major institution of cooperation, while rejecting profit maximisation alone as a sufficient compass.

💡 Memory Hook

Profit matters, but profit maximisation alone is not a complete compass.

📖 3. The Firm and Consumer Needs

🔑 Key Concepts & Definitions

• Business enterprise: An independent organisation whose main purpose is to satisfy consumer needs while generating profit, and which must operate profitably over the long term to survive.
• Productivity: The new value produced per unit of resource used and the most general measure of efficiency.

★ Must-know

📌 A business enterprise is independent only when it risks its own capital and operates under real market conditions that determine its input and output prices.

• Consumer demand often seeks a solution to a broader problem rather than a particular product, and satisfying that underlying need gives the firm social legitimacy.

Further detail

• A firm is the legal framework within which the business enterprise conducts the operations needed to satisfy consumer needs and generate profit.

📌 Labour productivity measures output per worker or labour-hour, whereas total factor productivity accounts for every production factor used.

💡 Memory Hook

A nail is only a means; the picture on the wall represents the need the firm ultimately serves.

📖 4. Coordination and Theories of the Firm

🔑 Key Concepts & Definitions

• Neoclassical theory: Represents the firm as a legal entity characterised by its production possibilities, choosing rationally with complete price-mediated information to maximise profit.
• Transaction costs: The costs of obtaining and evaluating price information and of reaching and enforcing agreements, in addition to production costs.

★ Must-know

• 🔄 The economic sequence is (Adam Smith, 1776): social division of labour, specialisation, greater output, exchange, coordination mechanisms, tools, and institutions

📌 Market coordination uses the price mechanism, organisational coordination uses administrative direction, and real economies use both together.

• When restrictive assumptions of neoclassical theory fail, market failure can create opportunities for firms to diversify, adapt, make independent decisions, and sometimes define markets.

Further detail

• In neoclassical theory, ownership and management merge into one decision-maker, making the firm appear as a black box.

💡 Memory Hook

Prices coordinate markets; commands coordinate organisations.

📖 5. Stakeholder Theory and Firm Governance

★ Must-know

📌 Traditional firm theory treats the firm as serving its owner's interests, whereas stakeholder theory treats it as a means of reconciling the interests of groups in the economy and society.

• Stakeholder theory identifies these claims: the owner expects profit, the employee expects wages and fair conditions, the state expects tax, the consumer expects quality

• Freeman's 1984 Strategic Management: A Stakeholder Approach systematically presents the firm as a network of stakeholder relationships.

Further detail

• The typology distinguishes (Donaldson–Preston, 1995): descriptive theory, concerning actual firm behaviour, instrumental theory, concerning links with financial performance, normative theory, concerning moral justification

• Mitchell–Agle–Wood's 1997 stakeholder salience model ranks stakeholders by power, legitimacy, and urgency.

💡 Memory Hook

P-L-U: stakeholder salience rests on power, legitimacy, and urgency.

📖 6. Markets, State, and Society

★ Must-know

• The firm's mission broadly defines its relevant market, and decisions to enter it depend on income and risk prospects as well as acceptance by existing players and barriers to entry and exit.

• The firm has four market roles:

  • seller in goods markets
  • buyer in capital, labour, and information markets
  • competitor
  • cooperating partner through networks and strategic alliances

• The state directly influences the economy through taxes, subsidies, and regulations, and indirectly through rules governing links such as competition and environmental regulation.

Further detail

📌 An efficient market permits flexible adjustment through prices, a buyer's market has oversupply and buyer power, and a seller's market has overdemand and seller power.

• Market structure concerns the number of players and their relative size and strength, while geographic scope can range from local through regional, national, and international to global.

• Environmental groups and other civic organisations draw attention to negative corporate externalities, while society and the state use measures from internalisation to direct intervention to curb environmental harm.

📖 7. Alternative Economics and Responsibility

🔑 Key Concepts & Definitions

• Ecologisation: Means organisations becoming embedded in nature and striving to preserve the environment.
• Humanisation: Means organisations exist to serve people and support their physical and mental development.

★ Must-know

• The Limits to Growth, a 1972 report by Meadows and colleagues commissioned by the Club of Rome, used computer models to demonstrate ecological limits to unrestricted economic growth.

• Alternative economics rejects the assumptions that individuals and organisations are exclusively self-interested and that economic growth is a primary goal in itself.

📌 Social enterprises earn revenue through profit, which they reinvest rather than distribute as dividends, whereas non-profit organisations rely on donations and public funds.

Further detail

• Schumacher's Small Is Beautiful (1974) argues for human-scale, decentralised economic organisation rather than pursuing economies of scale at any cost.

• Social enterprises measure success by how much they alleviate a targeted social problem and intervene where both markets and the state fail.

💡 Memory Hook

Ecologisation embeds firms in nature; humanisation directs them toward people.

📖 8. Markets, Ethics, and Economic Thought

★ Must-know

• Heller argues that the spread of the money economy raised moral concerns about wealth accumulation and unjust enrichment through exploiting others' lack of information or distress.

• The ethical school formed a continuous counter-debate within economic thought, with Sismondi, Carlyle, and Ruskin criticising classical economics' isolated view of the economy and its neglect of social welfare and moral nature.

Further detail

• Farkas Heller's The History of Economic Theory (1945) traces the development of economic thought through the formation of problems rather than simply through schools.

• Church Fathers' economic concerns included the just price and the taking of interest.

• 🔄 The historical progression ran: mercantilism and increasing the quantity of money as a political goal, physiocracy and the idea of a natural economic order, the classical school and the separation of descriptive and normative questions

• Lord Lauderdale distinguished individual prosperity from social welfare in 1804, a proposition presented as a forerunner of externality analysis and the shareholder–stakeholder debate.

📖 9. Economic Theory and Human Behaviour

★ Must-know

• Akerlof's 1970 used-car example shows that when buyers cannot verify quality, they offer only an average-quality price, causing owners of good cars to withdraw and average supply quality to fall further.

• The self-regulation argument requires: complete information, contracts covering everything, costless enforcement, absence of externalities, absence of large differences in bargaining power

• Ferraro, Pfeffer and Sutton (2005) distinguish three ways theory shapes reality: it supplies problem language, creates norms of reasonableness, and becomes embedded in institutions such as pay systems, contracts, and performance targets.

Further detail

• Incomplete contracts leave future situations unlisted, so judgement, custom, and good faith fill the gaps.

• Externalities impose costs on people who are not parties to a bargain and therefore cannot assert their interests within it.

• Arrow (1974) and Kindler–Zsolnai (1993) describe codes of ethics as rational institutional responses that reduce the social costs of economic life.

• An organisation built on the assumption that people respond only to money can select for and cultivate people who behave accordingly, making the assumption self-fulfilling.

• Sumantra Ghoshal (2005) argues that bad management theories destroy good management practice and that business schools partly produce the economic actors they describe.

💡 Memory Hook

Language → norms → institutions: theory can shape the world it describes.

📖 10. Ethics, Morals, and Question Types

🔑 Key Concepts & Definitions

• Morals: Personal and shared convictions about right and wrong in how people treat others, acquired largely through social life without formal instruction.
• Ethics: Kvalnes, 2015 - The systematic scholarly study of right and wrong, learned through study and open to examination.

★ Must-know

• The three question types are:
  • descriptive: what actors do and believe
  • normative: what actors should do and how it is justified
  • metaethical: what kind of claim a moral judgement is

📌 Hume's dictum states that an ought cannot be derived from an is, so widespread bribery does not by itself make bribery acceptable.

Further detail

📌 Organisational ethics needs both moral philosophy and moral and social psychology because normative theories that ignore real judgement can produce advice organisations cannot follow.

💡 Memory Hook

Morals are convictions about right and wrong; ethics is their systematic study.

📖 11. Business Ethics: History and Analysis

★ Must-know

• The four levels are:
  • supra: the global order
  • macro: the national economy
  • meso: the organisation
  • micro: the individual

Further detail

• The course's field-history timeline lists Rerum Novarum (1891), Bowen as the starting point of CSR (1953), Friedman's article (1970), Freeman's stakeholder theory (1984), Donaldson–Dunfee (1994), Enron and Sarbanes–Oxley (2001–02), the financial crisis (2008), and ESG and its backlash (2010s).

• The project-manager case raises micro questions about the immediate choice, meso questions about organisational protocols, macro questions about local regulation, and supra questions about duties across different institutional settings.

📖 12. Dilemmas and Moral Judgement

🔑 Key Concepts & Definitions

• Moral dilemma: Arises when two or more moral values or duties make simultaneous demands, only one can be satisfied, and choosing necessarily violates some moral value.

★ Must-know

📌 A real dilemma pits two morally comparable claims against each other, whereas a pseudo-dilemma pits a morally required action against a tempting but non-equivalent alternative.

• Kidder's four patterns are (Rushworth Kidder, 1995, 2005):
  • truth versus loyalty
  • individual versus community
  • short term versus long term
  • justice versus mercy

📌 Kahneman (2011) distinguishes fast, automatic, intuitive System 1 thinking from slow, effortful, analytical System 2 thinking, and both contribute to moral judgement. - Daniel Kahneman

Further detail

• Moral dilemmas usually affect several stakeholders, more than one of whom has a reasonable moral claim, and involve a real moral loss whichever option is chosen.

• Intuition can carry moral information but is vulnerable to systematic bias and framing, while analysis can correct bias but takes time.

💡 Memory Hook

A real dilemma pits moral claims against each other; a pseudo-dilemma pits a moral duty against temptation.

📖 13. Ethical Excuses and Organisational Compliance

★ Must-know

📌 Neutralisation occurs before an act and lowers the threshold for it, whereas rationalisation occurs afterward and justifies an act already done.

• Training, strong character, and detailed codes are insufficient safeguards because situational incentives, organisational climate, and shared justifications strongly shape conduct, while overly detailed codes can encourage loophole ethics.

Further detail

• Sykes and Matza (1957) studied techniques of neutralisation, and Bandura (1986) described moral disengagement as ways people make conduct seem acceptable to themselves.

• Common excuses include:

  • calling conduct a grey area
  • saying everyone does it
  • claiming there was no choice
  • arguing that someone else would have done it

• Heath (2008) argues that white-collar offenders often find social environments where their excuses are accepted rather than simply failing at ethical calculation.

📌 Kvalnes argues that organisations should foster a communication climate in which questioning a colleague's justification is normal rather than hostile.

💡 Memory Hook

Neutralisation lowers the threshold before an act; rationalisation justifies it afterward.

📖 14. Profit, Stakeholders, and Responsibility

★ Must-know

• Friedman's 1970 argument treats executives as agents with fiduciary duties to owners and says they should pursue owners' wishes within society's basic rules, rooted in law and ethical custom.

📌 Stakeholder theory presents the firm as a network of relationships and management's task as joint value creation among interested groups.

• Ethical conduct may improve reputation and staff retention and lower capital costs and regulatory or litigation risk, but profitability is an unreliable foundation for ethical action when conduct does not pay off.

Further detail

• Friedman argues that executives who spend shareholders' money on unapproved social goals levy a tax and make spending decisions without democratic mandate, so social goals should be pursued through political institutions or with private individuals' own money.

• Friedman's case for shareholder primacy is itself a moral argument based on fiduciary duty, consent, property rights, and democratic legitimacy, and it presupposes ethical custom without specifying it.

💡 Memory Hook

Friedman centres owners’ wishes; stakeholder theory centres joint value creation.

📖 15. Course Assessment Requirements

📝 Essential Points

• The course assessment consists of two written tests weighted 50% each, up to 6% seminar bonus points across seminars 2–4 at 2% per session, and 106% total available.

📌 Exam eligibility requires at least 30% during the study period or at least 50% on the first written test.

📊 Synthesis Tables

Four Coordination Mechanisms

Four Levels of Ethical Analysis