Corporate Codes of Ethics

Table of Contents

1 Introduction

2 Ethics and its theories

3 The market and morality

4 Why do Codes of Ethics exist? Answers

5 The global context

6 Universalism, relativism and culture

7 Ways out of the dilemma

8 Conclusion

Appendix 1 - Codes of Conduct - Caux Roundtable Principles for Business

Appendix 2 - Codes of Ethics - Sara Lee Corporation

Appendix 3 - International Codes of Ethics

List of References

1 Introduction

As long as human societies exist, the life of man has been based on norms, rules, values and practices that governed human behaviour. Individual and communal-shared ethics even make life within society possible as we know it. Part of this social life is doing business, in form of exchanging goods to fulfil basic needs and to achieve higher levels of satisfaction for oneself and for others. However, to combine moral thinking and acting with today's business activities in a free market economy seems to be counterintuitive. Somehow both notions do not really fit together.¹ Still, Corporate Codes of Ethics exist.

This essay consist of two parts. Each part reflects one question or problem that I found worthy of having more light shed on it. The first part answers the question "Why do corporate Codes of Ethics exist?" or "Why do corporations establish corporate Codes of Ethics?" under the basic assumptions, that ethics are 'costly' and therefore against the idea of maximising profit which is predominant in the market ideology. Proving these assumptions is not so easy. First the term ethics will be defined and selected theories which could be the basis for Codes of Ethics will be portrayed. Then it is important to know what kind of morality is underlying the modern market ideology as we know it. Following that a correlation is sought between the market morality and corporate ethics, ending in the insight that corporate morality is costly and, therefore, is against economic intuition. Part one finishes then with a surprisingly simple answer to the question why codes exist.

The second part brings the findings of the first part in a broader context. The considered corporation of part one now 'grows' beyond borders and begins to conduct business globally, as a multinational corporation. Its existing set of corporate Codes of Ethics are now confronted with other nations, societies and cultures and, possibly, other ethicities. Whether the company should 'do as the Romans do' or not is the major question of the second part, closely connected to the keywords relativism and universalism. The problems revealed by each approach, and possible solutions to them, will be shown in part two.

The conclusion, finally, summarises the findings of the essay briefly, but, moreover, shows further questions and problems that would be worth to explore in the overlapping areas of applied ethics and international management.

2 Ethics and its theories

Codes of Ethics² represent norms and values that are inherent in the company's objectives, that the corporation stands for and can be held accountable for.³ These standards are established in a written document and is, therefore, very transparent for the company's internal and external environment. The codes delineate the corporation’s responsibilities to this environment which is, in its entirety, the sum of its stakeholders⁴. Furthermore, codes also describe expectations towards these stakeholders, i.e. employee⁵ s or suppliers (Kaptein, 2004; Clark & Leonard, 1998; Langlois & Schlegelmilch, 1990 and see part of a Corporate Code of Ethics in appendix 2).

Based on a content-research Kaptein (2004) summarised the main responsibilities of a corporation as providing a high-quality product or service, maximising long term returns to stakeholders or achieving at least a acceptable return and contributing to the well-being and development of society. In pursuing this, the corporation considers itself complying to transparency, honesty and fairness in their activities. Besides responsibility Kaptein found that the most cited corporate values are teamwork, open communication and innovation. Regarding the internal conduct, most organisations in Kaptein's comparative study require that their employees do not commit any acts which violate human rights like discrimination, sexual intimidation, or contain forwarding of confidential information or acceptance of gifts⁶. A rather processional issue, that some of the codes contain, are the implementation of the code and its compliance.

When speaking about Codes of Ethics it should also be clarified what is behind the abstract term 'ethics', what concepts, what theories and whose ethics. A good basis for this part of the essay is laid by the writing of Frankena (1973). According to whom ethics, as a branch of philosophy, deals with moral thinking, moral problems or moral judgements. It is a moral philosophy. It tries to look behind the stage of traditional rules that govern behaviour in order to confront ourselves with common assumptions about the good and the bad and to lead finally to (self-)awareness and knowledge about the distinctiveness and conflicts of general ethic terms. But ethics is not only a branch of science which generally deals "with a philosophical inquiry in a moral-type phenomenon" (Pekkola & Pekkola, 2001, p. 11). It is also commonly used in a different sense, as a synonym for morals or morality⁷. Ethics does not only address the individual, it is also a "social enterprise", or, like Frankena writes "it exits before the individual, who is inducted into it and becomes more or less a participant in it, and it goes on existing after him" (1973, p. 6). So, individuals are at first externally confronted with morals, that they consciously or unconsciously internalise over time. Morality defined this way means seeing it as an "instrument of society" (Frankena, 1973, p.

6). Instrumental, morals are guidelines, rules and learned practices which govern human behaviour (Pekkola & Pekkola, 2001). If morality applies to larger societies it is also valid for smaller groups, Frankena argues. Through a process of reflection and thinking groups and even individuals might have worked out their own, well founded ""value systems" moralities" (Frankena, 1973, p. 6). Codes of Ethics are such a value system, ideally consistent and well founded. But what kinds of foundations are available?

The development or moral philosophy has not been linear, uniform or constant. With the progression of mankind moral theories developed, reflecting knowledge and history of their time. That does not mean that older theories are displaced by newer ones. Based on different assumptions they rather coexist side by side, contradicting each other in their findings about good and bad. The concepts or theories that are most influencing for the topic of this essay deserve a closer consideration.⁸

Consequentialism or teleology is concerned with the consequences or goals of activities; the predominant form of consequentialist reasoning is called utilitarianism (Getz, 1990), which derives from the ideas of Jeremy Bentham (1748-1832) and John Stuart Mill (1806-1873). Utility is regarded as the "sole stardard of right, wrong and obligation" (Frankena, 1973, p. 34), and, therefore, to strive for the "best possible balance of good consequences over bad consequences for all the parties affected" (Beauchamp & Bowie, 2004, p. 17) is the utilitarian paradigm. In classical utilitarianism pleasure as 'happiness' or absence of pain is seen as the only 'good consequence' whereas pain or displeasure marks the 'evil' (Boatright, 2003). 'Good' and 'evil' are used here to describe outcomes, are nonmoral notions. These could be seen as material or immaterial things, like cars or personal health, which can be counted, measured and balanced against displeasing experiences like loosing a job or paying a bill. 'Good' and 'bad' incorporate moral meanings when they refer to the individual or person, or person-related traits of character, motives or intentions as the object of enquiry (Frankena, 1973). The only moral or intrinsically good intention in Mill's and Bentham's interpretation of utilitarianism is 'pleasure'.

The assumption that quantitative measurement is possible makes utilitarian reasoning appealing for its explanatory use in economy and business theory. Under the (additional) assumption that the individual seeks to maximise its own utility economists explain a wide range of phenomena like the materialisation of prices or the allocation of resources. "The ethical theory underlying classical economic theory is broadly utilitarian" (Boatright, 2003, p. 32). In the micro cosmos of the firm cost-benefit-analyses are the fundament for managerial decisions making, and efficiency serves the purpose of optimising the corporation's results. Thus, "[t]he utilitarian commitment to the principle of optimal productivity through efficiency is an essential part of the traditional business conception of society and a standard part of business practice (Beauchamp & Bowie, 2004, p. 18).

Nevertheless, Mill does not see human nature as egoistic. We should maximise the good only because we want to achieve 'the greatest happiness for the greatest number [of people]'. Therefore we should morally feel obliged to exercise sympathy and beneficence to other human beings, for their and for our pleasure. That is why goodness in a broader sense is defined by human well-being or human welfare, the balance of benefits and harms that humans do to each other and themselves determines its quantity (Beauchamp & Bowie, 2004).

As being concentrated on the moral end all "concepts of rightness and obligation, or duty, are defined in terms of goodness" (Boatright, 2003, p. 31), and therefore cause some difficulties. To subordinate some concepts of rights, and moreover, justice to the maximal outcome, i.e. abandoning the rights for assembly and strike of factory workers because costs of production

stoppage exceed the saved wages, can result in ethical dilemmas.⁹

Another deontological theory that seems to be closely connected to utilitarianism is ethical egoism (Frankena, 1973). Like the utilitarianist, the egoist tries to maximise good over evil as an intrinsically good moral end. In difference, he strives only for his greatest pleasure. Self-love and self-interest can be seen related to the ethical egoist. Ethical egoism is an ethical theory, it can but does not necessarily mean that the individual acts selfish or egoistic. Even modesty or consideration for other's needs can promote the highest personal satisfaction. Although ethical egoism causes questions about its underlying assumptions and whether it can be universalised it might explain the psychological character of human nature very well. "[T]his means that "self-love" is the only basic "principle" in human nature; in one set of contemporary terms, it means that "ego-satisfaction" is "drive" in every individual" (Frankena, 1973, p. 20). The common criticism at this point is that man is able to think rationally and able to derive logically ethical conclusion and not servant of his psychological needs. However, "it is simply unrealistic and even unreasonable to propose that we ought basically to do anything but what is for our own greatest good", that is why "the psychological argument for ethical egoism is at least reasonable" (Frankena, 1973, pp. 20-21).

To bring utilitarianism and ethical egoism together : The individual agent might have two alternative choices, one that has the highest agent utility but not the highest overall utility and another which causes the 'greatest pleasure for the greatest number' but not for the agent. Hence, the first, egoistic, and the second, utilitarian, choice cause an inconsistency. But if the latter alternative is altered this way that highest agent and highest overall utility coincide the conflict disappears. One needs to be cautious, what is known as closet utilitarian argument (Feldman, 1978) is confusing. Self-interest because of egoistic reasons ('just me') is not self- interest because of utilitarian reasons ('the others and me'), but both motivations can have, not necessarily need to have, the same outcomes. However, it is much easier for the individual to know and follow egoistic intentions than figure out what promotes the overall utility and pursue this vague and possibly counterintuitive purpose.

Deontological ethics are, in difference to teleology, an enquiry of rules and principles, grounded on a system of right, duty and obligation which is "the fundamental moral category in deontological theories" (Getz, 1990; Boatright, 2003, p. 33). The moral principles are judged by their inherent 'rightness' or 'goodness', non-moral outcomes are secondary regards (Pekkola & Pekkola, 2001). The basic ideas of deontology are often related to the German philosopher Immanuel Kant (1724-1804). Deontology is much concerned with the relations between people, duty and obligation applies to that. Kant, for instance, requires us to recognise that every person is inherent in dignity and deserves respect as facts on its own, humans are autonomous individuals, not a "conditional value" (Beauchamp & Bowie, 2004, p. 23). That is why promises, contracts or the law needs to be complied, they specify human relations. Further on "persons should be treated as ends and never purely as means to the ends of others", Beauchamp and Bowie argues, according to Kant (2004, p. 22).

Although stemming from a different background, the Golden Rule, 'do unto others as you would have them do unto you', shares some significant similarities with deontological ethics. On closer examination both Golden Rule and the 'ends'-Argument focus on the motives and intentions. To have the right reasons for an act is of highest importance. "Kant insisted that all persons must act for the sake of obligation - not merely in accordance with obligation. That is, the person's motive for action must involve a recognition of the duty to act" (Beauchamp & Bowie, 2004, p. 24), personal goals and preferences are secondary. But if the agent acts only then morally good when conforming to a 'good rule' for the sake of its own, what, then, is a 'good rule'? The categoral imperative is the fundamental law to identify moral obligations. It says, that "I ought never to act except in such a way that I can also will that my maxim should become a universal law" (Beauchamp & Bowie, 2004, p. 25 according to Kant). This, the universalisability of a rule is its crucial characteristic to be a 'good rule', otherwise it would be self-contradictory. The declaration of human rights by the United Nations is such a treaty, universally addressed to every human being and universally agreed by nearly every country worldwide.

Other approaches to deontological ethics derive from the reasoning of John Locke (1632-1704) and John Rawls (1921-2002). Locke recognized that every person "is born with and possesses certain basic rights that are natural, and are possessed equally by all" (Getz, 1990, p. 568). The rational individuals, then, agree about a social contract, that records those principles which are commonly held as 'good' principles before they become an universal law for every 'signatory'. Rawls suggested slightly different assumptions for a social contract- theory: Besides human rationality, the wish of every individual to sign a social contract about universal principles with other individuals for his own protection, he assumed that the individual knows everything about the world but nothing about himself, i.e. what abilities, what social status, what fate he might have. Being behind a 'veil of ignorance' imposes the individual to favour those universal principles that say that "each person should have an equal right to a system of basic liberties and any social and economic inequalities should be arranged that they benefit the least advantaged" (Getz, 1990, p. 568).

The third approach to moral theory is virtue ethics. Apart from a 'good end' or a 'good rule' virtue ethics are about the 'good person' and the moral character. Virtues are character traits which by possessing them enables us to lead a 'good life'. To name a few, such traits are benevolence, courtesy, honesty, toleration, wisdom, courage, temperance and justice. The last four name the classic cardinal virtues. Virtue ethics go back to the times of the ancient Greek. Aristotle (384 BC - 322 BC) fully developed a theory of virtues. According to him a virtue is a trait that "manifests itself in habitual action" (Boatright, 2003, p. 62); they are practised. Virtues also are acquired or learned through a proper education; they are not innate. To be virtuous is admired, "a virtue is an excellence of some kind that is worth having for its own sake" (Boatright, 2003, p. 62). But they not only exist for their own sake, the end of a virtuous life is success and happiness whereas virtues themselves are constituents of a happiness (Boatright, 2003). Being fraudulent, for example, could never lead to 'real' happiness, because fraud is not a virtue. According to that virtue ethic has its own ex-ante ideas about what makes a 'good life'. "Virtue ethics necessarily presupposes a view about human nature and the purpose of life. It needs some context in other words" (Boatright, 2003, p. 63).

The last in theory introduced in this essay it the theory of ethical relativism. Ethical relativism is a pluralistic approach, which generally claims that there is no universal rule, no common set of virtues and even no universal theory of what is 'good' and 'evil' in the world. Relativism says "that the basic ethical beliefs of different people and societies are different and even conflicting [...] even if people and societies agreed in their basic ethical judgements" (Frankena, 1973, p. 109). This insight can also be reconciled to the general normative principle: "what is right or good for one individual or society is not right or good for another, even if the situations involved are similar, meaning not merely that what is thought right or good by one is not thought right or good by another, but that what is really right or good in the one case is not so in another" (Frankena, 1973, p. 109).

This doctrine can be viewed as a theory called conventionalism ([=31 - Feldman 1978 Introductory Ethics...=]), which means that individual action should be according to the conventions of one's society. Only the society determines what 'right' and 'wrong' is. This raises the problem that intersocial moral comparisons are no longer possible as social rules differ. Relativism forbids intersocial moral judgements. But many activities, especially in a business environment, include the contributions of individuals of different societies.

3 The market and morality

After this presentation of how people, as individuals, groups and societies could come to a conclusion of what they regard as 'good', 'right' and 'wrong', the focus now comes back to the corporation, as a group of people or interactive system which pursues its own goals according to its own Codes of Ethics. Nevertheless, the necessary condition for the corporation to accomplish possible goals is to remain and persist its 'battlefield', the modern market economy. If that what we understand as modern market economy is limiting and partially determining the behaviour of the corporation, it deserves a closer look.

The market place is characterised as the meeting place of demand and supply. Here goods and services are exchanged for the mutual benefit. To do that, people need to have the freedom to conduct these exchanges. 'Market' is closely connected with the notions of competition and competitive rivalry. Additional features of the market system are private ownership, the voluntary nature of the exchanges and the profit motive (Boatright, 2003). The last one, profit, is also the driving force of the market economy, first described by Adam Smith (1723-1790). He recognized that the market forces produce general social welfare when every individual just acts according to his own self-interests and not because of reasons like benevolence or mercy.¹⁰

This observation, of how the individual is motivated and behaves in economic relations was further developed to the model of economic man. The economic man is characterised as being solely self-interested, not emotionally bound or related to other humans, using success-oriented rationality by maximising his expected utility under existing conditions (Düwell, Hübenthal & Werner, 2002; Thielemann, 1996); Homann & Blome- Drees, 1992). The utility, then, is positively correlated with the amount of goods obtained.

The will to achieve a higher personal level of satisfaction or pleasure by acquiring goods leads the payment in return to the supplier which produces the good for the lowest price.¹¹

This, the prospect for profit, leads, in aggregation, resources (and benefits) to those producers which produce goods in the most efficient way, causes a higher productivity, cost reduction, flexibility, innovation and competition (Fritsch, Wein & Ewers Hans-Jürgen, 2003). The market forces are dynamic and consumer interests are highly unpredictable, they act, in Smith's words, like an 'invisible hand' by leading resources in different uses and purposes. As every company wants to maximise its 'resource-inflow' and, consequently, its profits, it finds itself finally competing with other firms. Competition sets incentives for permanent improvement of 'matching the customers needs' because profits will finally be distributed according to the company's ability to do this.

This, the distribution according to performance is not just a simple characteristic of competition, it is the strongest market force. By competition institutionalised pressure is put on corporations which find themselves in a 'race' for knowledge-leadership (Homann & Blome-Drees, 1992). The company who has the competence-advantage will have it just for a short time until it diffuses to its competitors. If profits raise new competitors are attracted which intensify this 'race'. The perfect market imposes these forces on companies, which, according to its model-character, results in zero-profits at best. Nevertheless, the 'struggle for survival' produces a lot of drop outs which do not have the resources at their stake. Therefore, there is no choice to act self-interested or not, it is a must to do so and to try to be the best, even if it means to do 'harm' to one's competitors according to the market logic.

Under these assumptions the remaining question now is: How moral is the market system? It is relatively obvious that the market ideology follows merely the utilitarian approach. The moral 'good' is the highest income regarded as the best outcome or greatest pleasure. Further, it is assumed that the resulting profits and benefits are causing the highest welfare for the greatest number of people (Boatright, 2003). However, this does not seem to happen automatically. Mill, Bentham and even Smith, had an agent in mind which is guided by self-interest but also by morality. Man should fulfil his own needs, because in doing so he would do a favour to all which are affected by his economic activity including himself. The paradigm of economic man which is used in economic theory nowadays only assumes self- interested behaviour, considering other individuals as conditions if at all. If this is true, the market system is less governed by utilitarianism but by ethical egoism. Egoism, however, produces common welfare only if the closet utilitarian argument is always true, which it is not (Feldman, 1978). Egoism itself is inconsistent as soon as all agents pursue the same goal, like maximizing income. In this case stealing, if possible, would be indicated as morally obliged action, which means harm for the robbed. In regard of deontology the economic man behaves even immoral by treating others as conditions or means instead of ends. Generally, the egoistic economic man is a non moral agent, because his behaviour lacks concerns for social relationships which are an essential part of the concept of morality, like shown above.

Beside the mentioned 'good', and non-moral benefits, like technological progress, efficiency, profits or cost-reduction, the market and, on it, competition, is regarded to safeguard consumer sovereignty, freedom of will and choice and protection from economic despotism (monopoly). Moreover it generates transparency through prices which truly reflect the scarcity of resources and 'honesty as best policy' because it reduces transaction costs. It is certainly true that competition causes honesty, loyalty and reliability (Horn, 1996). But "if persons are honest only because they believe that honesty pays, their "honesty" is cheapened" (Beauchamp & Bowie, 2004, p. 23). However, if these virtue-like characteristics are not even partly adopted for their own sake, virtue ethics do not apply for the market system as well.

Concluding, it needs to be said that neither the market has morality (Fritsch, Wein & Ewers Hans-Jürgen, 2003; Homann & Blome-Drees, 1992), nor competition (Horn, 1996), nor economic man.¹²

Only two utilitarian arguments can still be put forward. Argument one: Competition distributes profits according to performance. This is one alternative, besides others, of distributive justice, according to merits, like Aristotle suggested in his Nicomachean Ethics (Boatright, 2003). However, this distribution does not necessarily lead to the greatest utilitarian overall-pleasure, when the agent's surplus profit is of less utility for him as the same sum would be for any other agent.¹³ In this case a redistribution of benefits is necessary until the highest overall pleasure is achieved.

Argument two: If neither the market systems nor the acting individuals act moral, however, the market regulation could show morality.

[...]

¹ This is my feeling, and, of course, this essay is premised on my ideas of ethics and of doing business. Even if not my own words are used directly, it is still my selection of authors and literature and that reflects my point of view.

² The term 'Codes of Ethics' and 'corporate codes' will synonymously be used for 'Corporate Codes of Ethics'.

³ Norms are expressed with normative sentences, according to which acts are placed into categories: should, allowed, not allowed. Accordingly, acts are put into the categories: responsibility, allowed or prohibited. In ethical discussion, the expressions "good" and "bad" are used. These terms are called normative. Values: are expressed by sentences of value, according to which phenomena are classified as positive and negative and sometimes indifferent. It is possible to express greater and minor value. There are several terms of value but the most important ones are "good" and "bad" (Pekkola & Pekkola, 2001).

⁴ The stakeholders of the company are commonly regarded as the parties the company has relationships with, who are somehow affected by the company's activity or who have enforceable claims on the company. In a broader sense they consist of employees and shareholders, customers and suppliers, the legal authorities and nongovernmental organisations (NGOs), competitors and partners, the local community and the global society. The stakeholders name the interest groups the company's loyalty aims at (Pekkola & Pekkola, 2001).

⁵ The term employees does not only contain the average blue-collar workers or administrative white-collar employees, the decision-making, 'employed' management of the organization is meant as well.

⁶ Especially the last requirement causes confusion and misunderstanding between different countries, based on different cultures and business customs. This, the issue of bribery, will be explored in the second part of this essay.

⁷ I use ethics interchangeably with morals and morality in this essay

⁸ Ethical concepts can describe what the morality of a certain society or individual are or determine what the ethical convictions of a society or individual should be. This essay, however, is only based on the latter, normative, use of ethical concepts.

⁹ Utilitarianism has further weaknesses and contradictions. To maximise the 'greatest happiness for the greatest number', for example, imposes the moral duty to maximise two independent variables simultaneously. But it might be that the highest utility does not have the widest distribution of happiness, and the other way round. In addition, it seems impossible to determine the amount of utility that any action causes for both, the individual and the society as a whole. For further discussion, see Feldman (1978) and Boatright (2003).

¹⁰ "[M]an has alsmost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and shew them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages" (Smith, 1901, B.I, Ch.2, paragraph I.2.2).

¹¹ This is valid under the assumption that goods are comparable with regard to their features and quality. It is also possible to say to produce the 'best' product according to customers needs, whereas one form of 'best' is 'cheapest', others are 'best image', 'best value' or 'best quality'.

¹² I want to emphasise that I do not say that market, competition and acting agent show immoral behaviour, the market system just does not function in moral dimensions.

¹³ Here it is assumed that the theory of diminishing marginal utility is valid. This theory, however, itself has contains certain inconsistencies. For further discussion see Boatright (2003).