Chapter 6 'Think Theory' answers

Shareholders and Business Ethics



Think of the duties of managers to their shareholders from the perspective of ethics of duty (Kant’s theory). Apply this theoretical lens to the three incidents described above.

In each case, management in the three incidents failed to respect the ethics of duty. Kant’s Maxim 1 is about an action being right only if everyone could follow the same underlying principle (the ‘golden rule’). For example, Olympus’ management concealed the true state of affairs from the company’s owners (and everyone else), action which they cannot have wanted to become a universal law. Maxim 2 requires human dignity to be respected, with people being treated as ends, not means. For example, management at Carillion did not consider the impact of its recklessness on its employees, shareholders and the users of the services it provided. Thus, they were used as a means of achieving short term profit, and their long-term interests and security were not considered. Maxim 3 is about universality; whether the principles of an action would be acceptable for every person. It is impossible to see GM’s obfuscation about product safety as universalizable – the market would largely collapse out of consumer fears. Similarly, as a matter of corporate governance, shareholders would never have invested in the firm if the firm demanded a special dispensation to withhold material information that would affect their returns in such a way. So the universalizability test fails there as well.


Thinking of different corporate governance practices around the world in the context of moral relativism, are these just ‘different’ (i.e. reflecting different cultural and customary practices) or would you argue that some of them are actually more or less ethical?

One could perhaps argue that some governance models are more ethical than others. For example, the continental European model focuses more on employees as key stakeholders than does the Anglo-American model. However, this focus on employees could be to the detriment of other important stakeholders. One could also argue that some models are less ethical than others; the Russian model, with its owner-manager controlled board, being an example. However, it is difficult to make a compelling case for some corporate governance systems being more or less ethical than others: each has advantages and disadvantages from a moral perspective. Moreover, making such an argument would require taking an absolutist perspective that evaluated cultures as well as governance models.


How do these four arguments correspond to the traditional ethical theories set out in chapter three?

Possible arguments against insider trading correspond to traditional ethical theories as follows:


  • This is a non-consequential argument, particularly related to a justice-based approach (notably procedural justice).

Misappropriation of property:

  • This has both consequentialist and non-consequentialist elements. Here, insider trading is a form of theft that both reduces overall welfare (utilitarianism) and goes against an ethics of duty.

Harm to investors and the market:

  • This is a consequentialist (utilitarian) argument, namely that insider trading risks undermining collective welfare.

Undermining of fiduciary relationship:

  • The consequentialist argument is that insider trading prevents shareholders from maximizing their self-interest (egoism).


Think about corporate governance codes from the perspective of the intersecting domains of law and ethics introduced in Chapter 1. Can such reforms effectively shift ethical issues from the grey area of business ethics into the black-and-white certainties of law?

This brings us back to chapter 1, where law and ethics are shown to move in concert – ethics really starts where the law ends (although respecting the law is part of ethics). The idea here is to show that this is a truly challenging dilemma. We want to encourage ethical corporate behaviour, but past experience shows this to be dangerous – so we translate what we expect to be responsible, sober business practice (for instance, ensuring that one individual does not hold too much power within an organisation, systems of checks and balances exist for example relating to executive remuneration), into black and white law. In one sense, this move is essential and successful: those expectations are now law and are clearer to organisations than they had been previously.

On another level, however, this move to law subtly undermines ethics. If corporations are so intricately and intrusively regulated, this can send the message that business ethics is less important than rule-following or not getting caught. And if a loophole is found – well then how effective is rule-following?


Think about Islamic finance from the perspective of non-consequentialist ethics. What advantages and disadvantages do religious based rules have compared to secular codes of governance?

The key elements of Islamic finance are that no interest is paid on any financial product, all products are backed by a tangible asset, and there is no link with anything incompatible with Sharia law. The advantage of such religious based rules is that due to their prescriptive nature they are clear and easy to follow, as well as being based on moral values and reasoning, therefore potentially providing more of a basis for judgements to be made in instances where rules do not prescribe a correct course of action. Furthermore, the intertwining of such principles with religious belief and doctrine may provide far greater moral impetus for these principles to be adhered to by followers of the religion. However, unlike secular codes of governance, there may be little or no legal repercussions, or enforceable means of adherence, for such religious based rules, as they may not be legally recognised by the judiciary of a particular territory.


How could the ethical theories set out in chapter 3 help an investment fund manager to determine positive and negative criteria? Take an example from Table 6.2 and make your case by using some of the normative ethical theories.

Ethical theories provide guidance to the fund manager seeking to determine positive and negative criteria for socially responsible investment. For example, through ‘Multiple-issue focus’, an investment manager might:

  • From a utilitarian perspective, consider the environmental impact of the investments that might be made, for example trade-offs between carbon emissions, water usage, and waste production of different industries, and their relative impacts on the planet and people.
  • From an ethics of duties perspective, investments in industries that promote poor employment practices are morally wrong, because they treat individual employees as means rather than ends, ignoring (or minimising) human dignity.
  • From an egoist perspective, an investment fund manager may only consider investments that would drive up their own remuneration package in the short term, or alternatively, investments that encourage more investors to put their money into the fund, as this would also drive up their remuneration package.


Think about the nature of different ownership structures in terms of their ability to achieve the triple bottom line of sustainability in comparison to ethical shareholding that we looked at earlier in the chapter (SRI and shareholder activism). Which types of structures do you feel are best positioned to tackle sustainability issues?

Broadly speaking, co-operatives are positioned to tackle economic, social, and environmental performance simultaneously – they admit multiple organizational objectives in ways that are challenging for shareholder-owned for-profit firms. That said, however, there are internal tendencies in co-operatives to focus on certain objectives over others. See the Principles of Co-Operation from the International Cooperative Alliance (figure 6.7, p. 271)

1.  Voluntary and open membership
2.  Democratic member control
3.  Economic participation of members
4.  Autonomy and independence
5.  Education, training of the membership, staff, and general public
6.  Co-operation among co-operatives
7.  Concern for community

Not all co-operatives follow these principles to the letter, but in both theory and practice most co-operatives follow most of them. We can then see that, in general, the environment is included here along with social issues. But the emphasis here is on internal stakeholders: after all, this is a worker or member cooperative. So we have special place for employees and membership here. The environment (as well as social issues of interest to external stakeholders) would only be covered under “concern for community”. Ultimately, the nature of alternative ownership matters, and owners (whoever they are) can set the agenda for the organization. So their interests can become the organization’s interests.

Likewise, small businesses that are owned by an owner-manager or a family can be well positioned to achieve the triple bottom line of sustainability. This is because owner managers of small businesses possess a large amount of power to enact change within their organisations, can use the relationships they have with others to enact change and can initiate organisational change quickly, easily and cheaply due to their small size. In addition, strong links to the local community and other businesses can afford chances for partnerships, such as resource pooling, in order to work in tandem with other parties to achieve sustainable practices.