The Social Function of Business

Why Should Business be Ethically Sensitive?

In 2002, all businesses worldwide produced more than US$40 trillion worth of goods and services. Businesses play a major role in keeping any economy alive. It is, therefore, necessary to ensure the proper and ethical governance of businesses. Business people—managers and employees, but above all the organizational leaders—must behave in an ethical manner in managing and operating a business. Otherwise, no one will be willing to invest in or loan money to the business. Business activities must be viewed and examined from the perspective of morality. Business without ethics threatens the survival of human society and in some cases, destroys the fiduciary relationships of people.

By beginning to study the social function of business, we begin to be introduced to fundamental concepts of what is right or wrong in our human conduct and their implications for business as an important human activity. The fundamental reason for examining the activities of business from the social and ethical perspective is for the promotion of the common good, protection of the individual’s interests, and the preservation of the human society in general. Without this ethical consideration, business will be a chaotic human activity because there will be no common understanding and agreement about what is the right and wrong human conduct.

Given the long list of prominent business scandals just around the turn of the 21st century, there is no escaping the fact that ethical reasoning is vital to the practice of business and finance. Integrity is paramount for a successful managerial career: one must grasp the norms of ethical behavior if one wants to succeed in the field of finance and business. In addition, the central role of corporate leaders in setting the ethical tone for their organization is widely accepted.

In the first few years of the 21st century, the corporate world has come under increasing pressure to behave in an ethically responsible manner. In particular, accountability failures have led to bankruptcies and restatements of financial statements that have harmed countless shareholders, employees, pensioners, and other stakeholders. These failures have created a crisis of investor confidence and caused stock markets around the world to decline by billions of dollars. Standards for what constitutes ethical behavior lie in a hazy area where clear-cut right-versus-wrong answers may not always exist.

Ethics are moral principles that guide the conduct of individuals. Unfortunately, business managers and employees sometimes behave in an unethical manner. A number of managers of companies in the last two decades engaged in accounting or business fraud. These ethical violations led to fines, firings, and lawsuits. In some cases, managers were criminally prosecuted, convicted, and sent to prison. The following are the four main reasons that may persuade a business to act ethically:

  1. legal reasons, of which there are several different sorts;
  2. public image reasons, which again, might encompass a number of different types;
  3. pragmatic reasons, acknowledging that sometimes, acting ethically might be the most direct path to business success; and
  4. moral reasons, where it is affirmed that these reasons are different from each of the other three types.

Business’ Role in Poverty Alleviation

Every morning national newspapers would report, “More than 20,000 people perished yesterday of extreme poverty.” The stories would put the stark numbers in context—up to 8,000 children dead of malaria, 5,000 mothers and fathers dead of tuberculosis, 7,500 young adults dead of AIDS, and thousands more dead of diarrhea, respiratory infection, and other killer diseases that prey on bodies weakened by chronic hunger. The poor die in hospital wards that lack drugs, in villages that lack antimalarial bed nets, in houses that lack safe drinking water. They die namelessly, without public comment. Sadly, such stories rarely get written. Most people are unaware of the daily struggles for survival, and of the vast numbers of impoverished people around the world who lose that struggle (Sachs, 2005).

Poverty is experienced and understood differently by different people in different regions and at different times. Broadly, “poverty” is conceptualized as a deficiency or shortage of some sort, typically in comparison either to the living standards of others within the same society or culture (called “relative poverty”), or to a universal measure of adequate provision (called “absolute poverty”). Historically, this shortage has been considered synonymous with lack of income, or at least insufficient income to meet a household’s daily needs. Economic definitions of poverty tend to concentrate on either income, such as the US $1.25 per day poverty line established by the World Bank, or expenditure, such as the “basket of goods” assessment. The former measures absolute poverty in terms of where a household’s income falls on the universal poverty line, whereas the latter assesses relative poverty in terms of whether a household can afford to buy the basic goods necessary for survival within their specific context (typically with the consequences for nutrition and hunger highlighted) (Lemanski, 2016). 

Continuing Extreme Poverty in the Midst of Economic Growth

Even among the poor countries in Asia that experienced marked economic growth, extreme poverty often continues to afflict significant parts of the population. Economic growth is rarely uniformly distributed across a country. China’s coastal provinces, linked to world trade and investment, have grown much more rapidly than the hinterland to the west of the country. India’s southern states, also deeply integrated in world trade, have experienced much faster economic development than the northern regions in the Ganges valley. Thus, even when average economic growth is high, parts of a country may be bypassed for years or decades (Sachs, 2005).

Another reason for persistent poverty is the failure of government. Growth may enrich households linked to good market opportunities, but it may bypass the poorest of the poor even within the same community. The very poor are often disconnected from market forces because they lack the requisite human capital—good nutrition and health and adequate education. It is vital that social expenditures directed at human capital accumulation reach the poorest of the poor, yet governments often fail to make such investments. Economic growth enriches households, but they are not taxed sufficiently to enable governments to increase social spending commensurately. Or even when governments have the revenue, they may neglect the poorest of the poor if the destitute groups are part of ethnic or religious minorities (Sachs, 2005).

A third possible reason for continued poverty in the midst of growth is cultural. In many countries, women face extreme cultural discrimination, whether or not those biases are embedded in the legal and political systems. In South Asia, for example, there are an overwhelming number of case studies and media reports of young women facing extreme undernutrition within the household even when there is enough to go around. The women, often illiterate, are poorly treated by in-laws and lack the social standing and perhaps legal protections to ensure their own basic health and well-being (Sachs, 2005).

Business’ Role in Overcoming the Poverty

When countries get their foot on the ladder of development, they are generally able to continue the upward climb. All good things tend to move together at each rising rung: higher capital stock, greater specialization, more advanced technology, and, lower fertility (Sachs, 2005). Some studies show that small and medium enterprises (SMEs) – defined usually as businesses with up to 250 employees—are believed to be important contributors to economic growth and a tool to reduce poverty in developing countries. Also, microfinance is believed to be an effective tool in the arsenal of the war against poverty by many witnesses to its success in many developing regions around the world, including Africa, Southeast Asia, the Middle East, and the Americas (Piza et al., 2016).

As mentioned above, all this should move us to take action. But it is important to precede such action with study and knowledge. In the next section, we will enumerate the areas of individual action in businesses where ethics is most urgent.

Areas of Business Most in Need of Ethical Attention

Authentic and sustainable development means working at the real solutions in order to eradicate or at least alleviate poverty. In agriculture-based economies such as the Philippines, the ultimate solutions are to be found in: countryside and rural infrastructures; quality basic education for the children of the poor and in Muslim areas, especially the education of women; cash transfers to the poorest of the poor; primary health services; microcredit and microenterprise programs; technical skills training for secondary school students; and social housing such as that provided by Gawad Kalinga. Concretely, it has been found that, as far as food security in the Philippines is concerned, focus should be placed on addressing constraints on agricultural finance in order to boost food productivity. Along with this, focus should be put in investing in roads, since the unreliable and inadequate infrastructure in the Philippines has been found to be a major impediment to economic growth. Given the physical and environmental constraints on increasing land and water use for food production and other economic activities, agricultural productivity will have to substantially improve to meet the increasing demand for food. For this to happen, substantial investments must be made by both the government and the private sector.

Each role in a business, organization involves unique responsibilities (such as the obligations of an employee to an employer or the fiduciary duties of management to the shareholders) that determine what a person should do. Ethical issues arise in relationships with every corporate constituency, including: (a) employees; (b) customers; (c) suppliers; (d) shareholders; and (e) society at large.

In the case of the Philippines, it might be good to examine issues relating to the following:

The Social Responsibilities of Capitalist Business Practices

Milton Friedman (American economist) famously stated that the only social responsibility of business is to increase its profits. On the other hand, William Sauser, in the Journal of Business Ethics article “Ethics in Business: Answering the Call,” explained that business organizations have four levels of responsibility: (1) Earning a profit; (2) Legal responsibility; (3) Ethical responsibility; and (4) Discretionary responsibility. Responsibilities of businesses beyond profit-making have come to be called Corporate Social Responsibility or CSR. CSR, as defined by the World Business Council for Sustainable Development (WBCSD), is a “continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families, the local community, and society at large.” More and more companies are embracing CSR because of profitability, and also b,ecause more managers now believe that being a better corporate citizen is a source of competitive advantage.

The leadership of many Philippines businesses spearheading the contemporary CSR movement is generally motivated by a commitment to social or environmental goals. CSR in the Philippines has evolved over the last four decades mainly as a response to the country’s worsening socio-economic conditions. For example, in the 1970s, not-for-profit organizations dealing with the business community grew to prominence. Associafions such as the Bishops Businessmen’s Conference of the Philippines (BBCP), the Associations of Foundations (AF), and the Philippine Business for Social Progress (PBSP) were born. In the decade of the 1980s, from the assistance provided by companies emerged the movement and institutionalization of community relations or COMREL. From COMREL arose the notion of corporate citizenship: contributions to sociely’s well-being became a'”must” and not simply a public relations (PR) stunt. As a concern, CSR was raised to the highest corporate levels—management and the board itself. Thereafter, market forces generally became the major driver of CSR behavior in the Philippines.

The Morality of Advertising

Advertising presents several ethical issues, one of them being Deceptive Advertisements. Deceptive ads are those that make false statements about or misrepresent the product, for example, the picture presented in the advertisement is different from the actual product. Deceptive ads may occur not only through sentences or propositions but also through pictures, individual words, or through certain combinations of objects which can deceive the eye and the mind. A typical example of deceptive advertising is one where the pictures from the box of the product do not look the same as the contents of the product. In this case, the picture is said to be deceptive.

Article 108 of the Consumer Act of the Philippines (Republic Act No. 7394) declares that “The State shall protect the consumer from misleading advertisements and fraudulent sales promotion practices!’ Article 110 states that “It shall be unlawful for any person to disseminate or to cause the dissemination of any false, deceptive or misleading advertisement by Philippine mail or in commerce by print, radio, television, outdoor advertisement or other medium for the purpose of inducing or which is likely to induce directly or indirectly the purchase of consumer products or services. An advertisement shall be false, deceptive or misleading if it is not in conformity with the provisions of this Act or if it is misleading in a material respect. In determining whether any advertisement is false, deceptive or misleading, there shall be taken into account, among other things, not only representations made or any combination thereof, but also the extent to which the advertisement fails to reveal material facts in the light of such representations, or materials with respect to consequences which may result from the use or application of consumer products or services to which the advertisement relates under the conditions prescribed in said advertisement, or under such conditions as are customary or usual.”

Basic Employee Rights, Job Discrimination, Other Labor-Related Ethical Issues

The Labor Code of the. Philippines (or Presidential Decree No. 442) (a decree instituting a labor code thereby revising and consolidating labor and social laws to afford protection to labor, promote employment and human resources development, and ensure industrial peace based on social justice) lays down the rights of workers in relation to wages, rights to self-organization, collective bargaining, security of tenure, and just and humane conditions of work. Republic Act No. 6727 (also known as the “Wage Rationalization Act”) mandates the fixing of the minimum wages applicable to different industrial sectors. This law rationalized wage determination by establishing the mechanism and proper standards through the creation of Regional Tripartite Wages and Productivity Boards (RTWPBs) authorized to determine the daily minimum wage rates in the different regions.

Book Four of the Labor Code of the Philippines lays down the “Health, Safety, and Social Welfare Benefits” accorded to workers. Book Five, on the other hand, entitled “Labor Relations,” lays down the policies of the State with regard to labor. These policies are: (1) to promote and emphasize the primacy of free collective bargaining and negotiations, including voluntary arbitration, mediation and conciliation, as modes of settling labor or industrial disputes; (2) to promote free trade unionism as an instrument for the enhancement of democracy and the promotion of social justice and development; (3) to foster the free and voluntary organization of a strong and united labor movement; (4) to promote the enlightenment of workers concerning their rights and obligations as union members and as employees; (5) to provide adequate administrative machinery for the expeditious settlement of labor or industrial disputes; (6) to ensure a stable but dynamic and just industrial peace; and (7) to ensure the participation of workers in the decision and policy-making processes affecting their rights, duties, and welfare.

Insider Trading

Insider trading in the stock market is characterized as the buying or selling of shares of stock on the basis of information known only to the trader (an “insider,” somebody belonging to the company, as opposed to the public) or to a few persons. Insider trading, in finance, is the reverse of speculation. It is reward without risk, wealth generated—and injury done to others—by an unfair advantage in information. Is insider trading unethical? Is insider trading illegal? The answers depend on how we define insider trading and how we interpret the issue.

The growing importance of ethics in finance has been recognized by people from all disciplines. However, even among academic researchers, there is still no consensus on what kinds of conduct should be regarded as unethical. Opponents of insider trading, for example Werhane (1989) seem simply to believe that insider trading is inherently immoral. She argues that insider trading, both in its present illegal form and as a legalized market mechanism, undermines the efficient and proper functioning of a free market. Proponents, on the other hand, assert that insider trading is a viable and efficient economic means and can be used to serve the best interests of shareholders and the economy at large. For example, some say that insider trading provides a powerful incentive for creativity and is the only appropriate way to compensate entrepreneurial activity. 

Pollution and Resource Depletion

The Encyclical Laudato Si’: On Care for Our Common Home, issued by Pope Francis in 2015, is a wake-up call to help humanity understand the destruction_that _man is rendering to the environment and his fellow man. While addressing the environment directly, the document’s scope is broader in many ways as it looks at not only man’s effect on the environment, but also the many philosophical, theological, and cultural causes that threaten the relationships of man to nature and man to each other in various circumstances. Paragraph no. 20, which is on Pollution, waste and the throwaway culture, states: “Some forms of pollution are part of people’s daily experience. Exposure to atmospheric pollutants produces a broad spectrum of health hazards, especially for the poor, and causes millions of premature deaths. People take sick, for example, from breathing high levels of smoke from fuels used in cooking or heating.There is also pollution that affects everyone, caused by transport, industrial fumes, substances which contribute to the acidification of soil and water, fertilizers, insecticides, fungicides, herbicides and agrotoxins in general. Technology, which, linked to business interests, is presented as the only way of solving these problems, in fact proves incapable of seeing the mysterious network of relations between things and so sometimes solves one problem only to create others?’ Business organizations should take seriously the task of caring for the earth, by regularly embarking on projects seeking to diminish or eradicate pollution, and to renew the natural resources they tend to use up or deplete.

Whistle Blowing

Whistle-blowing is the act, for an employee (or former employee), of disclosing what he believes to be unethical or illegal behavior to higher management (internal whist(e-blowing) or to an external authority or the public (external whistle-blowing). Its status is debated: some see whistleblowers as traitorous violators of organizational loyalty norms; others see them as heroic defenders of values considered to be more important than company loyalty. Whistle-blowing is generally considered from the viewpoint of professional morality. Unfortunately, these “messengers of truth” are almost always the subject of dreadful retaliations; hence, to decide to “blow the whistle” can be quite difficult and complicated. Whistle-blowing can be taken from the perspective of duty and rights theories: does anyone have the duty to blow the whistle? If so, whose rights are being trampled upon? There is also a tendency to judge it based on the motivation of the whistleblower. In a way, whistleblowers should strive to act like saints. Yet, it is logically impossible to hold both whistle-blowing as mandatory and whistle-blowers as heroes or saintS. The ethics student should, thus, carefully weight all the factors involved and come up with a comprehensive decision criterion or framework.