Business Ethics: Kant, Virtue, and the Nexus of Duty: Foundations and Case Studies 3030859967, 9783030859961

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Springer Texts in Business and Economics

Richard M. Robinson

Business Ethics: Kant, Virtue, and the Nexus of Duty Foundations and Case Studies

Springer Texts in Business and Economics

Springer Texts in Business and Economics (STBE) delivers high-quality instructional content for undergraduates and graduates in all areas of Business/Management Science and Economics. The series is comprised of self-contained books with a broad and comprehensive coverage that are suitable for class as well as for individual self-study. All texts are authored by established experts in their fields and offer a solid methodological background, often accompanied by problems and exercises. More information about this series at http://www.springer.com/series/10099

Richard M. Robinson

Business Ethics: Kant, Virtue, and the Nexus of Duty Foundations and Case Studies

Richard M. Robinson Business Administration SUNY Fredonia Fredonia, NY, USA

ISSN 2192-4333     ISSN 2192-4341 (electronic) Springer Texts in Business and Economics ISBN 978-3-030-85996-1    ISBN 978-3-030-85997-8 (eBook) https://doi.org/10.1007/978-3-030-85997-8 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Preface

This text includes 15 chapters organized into four parts: (I) The Role of Business Norms and Their Philosophical Foundation, (II) The Nexus of Duty and Managing Moral Disengagement, (III) Some Fundamental Problems in Management Ethics, and (IV) Some Current Moral Environmental Issues for Business. A comprehensive course in business ethics should include all of “Part I,” the philosophical–ethical foundation chapters. These chapters emphasize “Kantian moral construction” as the basis for understanding our society’s duty-oriented ethical vision for business, the duties being both perfect and imperfect as explored in Kantian philosophy.1 “Part II” of this text provides the key integrative kernel for the business curriculum; that the four silos of the business curriculum—accounting, finance, marketing, and management—have their foundation built on the nexus of duties as described in this text. These include the perfect and imperfect duties of management. They form a “nexus” of interrelated managerial functions of (1) building and reinforcing relations of virtue within the management team and among other key constituents, (2) pursuing reasoned discourse with all stakeholders, and (3) pursuing a due diligence in business that includes creativity in managerial efforts. These three elements are interrelated—hence the term “nexus”—and are based upon strong philosophical foundations fully developed in this text. “Part III” and “Part IV” address particular aspects of business ethics that should be investigated: (i) the fairness in negotiation aspects of management–stakeholder relations, (ii) managerial and entrepreneurial motivation and its implication for ethical behavior, (iii) the role that boycotts play in transferring society’s sense of ethics onto the business firm, and (iv) the environmental impacts of business. “Part IV” includes three chapters that cover a considerable amount of material concerning business’ environmental obligations. This is extensive because I have committed my “Business and Ethics” course to expend approximately 4 weeks of our 15-week semester addressing these environmental issues, a commitment made to my university so as to have my course classified as “environmentally supporting.”

1  Perfect duties are narrowly defined prohibitions. Imperfect duties are broadly defined and are volitional and positive in nature such as “be civically involved.” This type of duty should be pursued, but “how to be civically involved,” and the extent of that involvement, are left to personal discretion. These sorts of duties are extensively explored in this text.

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Preface

Covering the entire 15 chapters of the material of this text in a single semester might be overly ambitious for any instructor or class of students. I am usually forced into including only one or two of the chapters in “Part III.” I always cover “chapter, Fair Stakeholder Negotiations,” but that leaves chapters “The Philosophy of Action and Authority in the Entrepreneurial and Management Ethics” and “Duty, Boycotts and the Pricing of Ethics” as an open question. Chapter “The Philosophy of Action and Authority in the Entrepreneurial and Management Ethics” concerns whether the entrepreneurial–managerial motivation is merely to accumulate significant wealth or to create a socially significant contribution. This is important for business ethics since the former motivation leads to a sort of social-class separation between owners and others and consequently produces a decreased sense of ethical obligation. Although this is an important material, as an alternative to this, chapter “Duty, Boycotts and the Pricing of Ethics” presents an analysis of the history of boycotts in bending business toward moral practice. This is also an important subject. Our time constraints therefore force me and other instructors into difficult decisions as to the topics included. I based this text on my lecture notes and handouts from my Business and Ethics course which has been offered each semester for the last 15  years. The material included is in part based upon my two scholarly books recently published by Palgrave-Macmillan and also on my articles published in The Journal of Business Ethics and other scholarly venues. The references for each of these publications can be found in the bibliographies presented at the end of one or more of the 15 enclosed chapters. These bibliographies also indicate much more substantial sources of material from the hundreds of sources cited, most notably Onora O’Neill, Christine Korsgaard, Hannah Arendt, Mark D.  White, John Rawls, Allen Wood, Roger Sullivan, and many others. This text is substantial in content, and yet students continue to enroll in relatively large numbers in this purely elective course. When instructed properly, business ethics is of substantial interest to students. By “instructed properly” I mean the course should aim to be the key integrative kernel for the business curriculum as described above. As a consequence, most students naturally “take” to the material of this course as being of considerable interest. Note that it is difficult to force this extensive body of literature and philosophy into a brief 15-week semester. That is the challenge of this course. Massaging this material into a semester is the craft I have tried to develop over the past 15 years. Perhaps this volume offers a successful effort. I have received three blind reviews solicited by the publisher from faculty who instruct business ethics courses at their universities. All three noted that the material included was not “low level,” and that it would challenge students. But all three were complimentary, so I offer this material here. At the end of each chapter, I present brief questions for students to answer as writing assignments. I also provide more in-depth essay and class discussion questions. Potential instructors who might consider adopting this text might also be interested in various supplementary materials that I also use and will make available for their possible use. (I will also furnish an extensive list of so-called objective

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multiple choice questions to instructors who enquire.) My personal web page is at www.profrichardrobinson.com. It lists some documentaries that are readily available (some freely available) and that can be used for student assignments of essays, generally concerning imperfect duties. I usually assign one or two of these documentaries—sometimes to different student groups—for class discussions. Note that I am always interested in hearing about other suggested documentaries or materials for my course. I can always be reached at [email protected]. For an appropriate dedication, I can only cite my many previous students who approached this subject with sustained enthusiasm and interest. I also cite my students to come. I am grateful to all; they sustain me. Fredonia, NY, USA May 27, 2021

Richard M. Robinson

Contents

Part I The Role of Business Norms and Their Philosophical Foundation    1 Chapter 1: Normative Ethics and Business Practice: An Introductory Review����������������������������������������������������������������������������   3 1 Introduction ������������������������������������������������������������������������������������������   3 2 The Ethical in Business������������������������������������������������������������������������   6 3 Teleological Ethics��������������������������������������������������������������������������������   7 4 An Axiomatic System of Logic������������������������������������������������������������   8 5 The Social Contract������������������������������������������������������������������������������   9 6 Business Codes of Conduct������������������������������������������������������������������  10 7 Schools of Ethical Thought������������������������������������������������������������������  11 8 The Noble Nature����������������������������������������������������������������������������������  12 9 The Profit Motive����������������������������������������������������������������������������������  12 10 The Design of the Course����������������������������������������������������������������������  14 Additional Readings������������������������������������������������������������������������������������  15    2 Chapter 2: The Applicable Western Ethical View?��������������������������������  17 1 The Key Questions��������������������������������������������������������������������������������  17 2 Ancient Greek Origin of Rational Intuition������������������������������������������  17 3 Intuition, Free Will, and Rationality: Foundations of the Enlightenment ��������������������������������������������������������������������������������������  22 4 The Enlightenment to Modern Ethical Philosophy������������������������������  26 5 The Societal Sum of Individuals’ Happiness����������������������������������������  32 6 A Western Ethical Tradition������������������������������������������������������������������  34 References����������������������������������������������������������������������������������������������������  36    3 Chapter 3: The Categorical Imperative Process and Moral Duties����������������������������������������������������������������������������������������������������������  39 1 Enlightenment Philosophy��������������������������������������������������������������������  39 2 The Categorical Imperative and Its Three Formulae����������������������������  42 3 The Bankruptcy Declaration Example��������������������������������������������������  47 4 Conclusion Concerning the Use of the Categorical Imperative������������  50 5 Maxims for Achieving the Harmonious Organization��������������������������  50 6 Imperfect and Perfect Duties����������������������������������������������������������������  55 ix

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7 Imperfect Duty and Its Practical Limitation�����������������������������������������  57 8 Some Additional Maxims and Agency Obligations������������������������������  59 References����������������������������������������������������������������������������������������������������  61    4 Chapter 4: Moral Virtues and Ethical Decisions������������������������������������  63 1 Introduction ������������������������������������������������������������������������������������������  63 1.1 A Brief Classical Philosophical Review��������������������������������������  64 1.2 A Brief Review of Some Recent Literature ��������������������������������  65 1.3 A Brief Comparison of Two Views����������������������������������������������  68 2 Virtues, Rationality, and Completeness������������������������������������������������  69 3 The Linkage Between Dispositions-Towards-Duty and Virtue ������������  70 3.1 A Set of Modern Managerial Virtues ������������������������������������������  72 3.2 The Managerial Virtues and Dispositions Towards Friendship������������������������������������������������������������������������������������  73 3.3 The Managerial Virtues and Dispositions Towards Reasoned Discourse ��������������������������������������������������������������������  75 3.4 The Managerial Virtues and Dispositions Towards Due Diligence��������������������������������������������������������������������������������������  76 4 Virtues or Dispositions?������������������������������������������������������������������������  77 References����������������������������������������������������������������������������������������������������  79    5 Chapter 5: The Abandonment of Business Codes of Ethics������������������  83 1 The Process of Evil ������������������������������������������������������������������������������  83 2 Thoughtful Reflection and Codes of Conduct��������������������������������������  86 3 The Competitive Firm and Tendencies Towards Code Abandonment����������������������������������������������������������������������������������������  89 4 Psychological Studies of Unethical Conduct����������������������������������������  91 5 The Prevention��������������������������������������������������������������������������������������  93 Appendix: Enron as an Example������������������������������������������������������������������  95 References����������������������������������������������������������������������������������������������������  97 Part II The Nexus of Duty and Managing Moral Disengagement    6 Chapter 6: The Nexus of Managerial Imperfect Duty: Relations of Virtue, Discourse, and Due Diligence���������������������������������� 101 1 Introduction ������������������������������������������������������������������������������������������ 101 1.1 The Imperfect Duties of Management as Complements to Perfect Duties�������������������������������������������������������������������������� 103 1.2 The Imperfect Duties of Character Development������������������������ 104 1.3 Development of the Argument ���������������������������������������������������� 105 2 Classic Philosophical Notions of Duty ������������������������������������������������ 106 2.1 Perfect and Imperfect Duties for Management���������������������������� 107 3 Imperfect Duty and Its Practical Limitation����������������������������������������� 109 4 Benefits of the Imperfect Managerial-Duty Model������������������������������ 112 4.1 The Tradeoffs ������������������������������������������������������������������������������ 112 4.2 Imperfect Duty and Contractual Obligations������������������������������ 113

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4.3 The Wealth Pursuit of Management�������������������������������������������� 115 4.4 Imperfect Duty and the Boundary of the Firm���������������������������� 115 4.5 Virtue, Character and the Noble Nature�������������������������������������� 117 5 Summary and Conclusion �������������������������������������������������������������������� 118 References���������������������������������������������������������������������������������������������������� 120

   7 Chapter 7: Relations of Virtue, Pursuit of the Moral Community, and the Ends of Business���������������������������������������������������� 123 1 Introduction ������������������������������������������������������������������������������������������ 123 2 Notions of Friendship, Sociability, and Moral Community������������������ 124 2.1 Friendships of Virtue�������������������������������������������������������������������� 124 2.2 Unsocial Sociability and Friendships������������������������������������������ 128 2.3 Some Recent Research in Business Friendship �������������������������� 132 3 The Pursuit of Business as a Moral Community and Friendships of Virtue���������������������������������������������������������������������� 133 4 Relations of Virtue and the Pursuit of a Moral Community����������������� 139 References���������������������������������������������������������������������������������������������������� 140    8 Chapter 8: Reasoned Managerial Discourse ������������������������������������������ 143 1 Introduction: The Imperfect Duty of Reasoned Managerial-­Discourse �������������������������������������������������������������������������� 143 2 O’Neill’s Maxims for Reasoned Discourse������������������������������������������ 143 2.1 Managerial Authority Must Be Based on Reason������������������������ 144 2.2 Managers Should Tolerate the Logical Reason of Others������������ 145 2.3 Reasoned Argument Should Not Be Restricted or Discouraged ���������������������������������������������������������������������������� 146 2.4 Management Should Reason in Common with Those Affected by its Policy Decisions�������������������������������������������������� 147 2.5 Accuracy in Managerial Discourse Should Be Pursued�������������� 147 3 Rational Discourse and Current Politically Sensitive Issues���������������� 148 3.1 Reasoned Managerial Discourse and Globalization�������������������� 149 3.2 Reasoned Managerial Discourse and Diversity �������������������������� 151 3.3 Reasoned Discourse and Control ������������������������������������������������ 152 4 The Kantian Foundation of Reasoned Discourse���������������������������������� 154 References���������������������������������������������������������������������������������������������������� 156    9 Chapter 9: Due Diligence and the Profit Motive: Perfect or Imperfect Duty?������������������������������������������������������������������������������������ 157 1 Introduction: The Profit Motive as a Perfect or Imperfect Duty ���������� 157 2 The Issue of Shareholder Wealth and its Possible Maximization �������� 158 3 Imperfect Duties Involving Capital Budgeting, Capital Structure, and Liquidity������������������������������������������������������������������������ 161 3.1 The Complexity of Capital Structure and the Imperfect Duties of Management���������������������������������������������������������������� 163 3.2 The Diversified Portfolio Effect on Risk and Duties to Stakeholders�������������������������������������������������������������������������������� 169

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4 The Ethical Basis for the Imperfect Duty of Due Diligence���������������� 170 References���������������������������������������������������������������������������������������������������� 175 Part III Some Fundamental Problems in Management Ethics  10 Chapter 10: Fair Stakeholder Negotiations�������������������������������������������� 179 1 Ethical Negotiation: An Introduction���������������������������������������������������� 179 1.1 The Negotiation �������������������������������������������������������������������������� 181 1.2 Deriving the Rules of Fair Negotiation���������������������������������������� 182 1.3 The Structure of this Exploration������������������������������������������������ 182 2 Objectives, Negotiators, and Fairness Rules ���������������������������������������� 183 2.1 Kantian Notions of Ethical Negotiators �������������������������������������� 184 2.2 Objectives of Fair Negotiation ���������������������������������������������������� 185 2.3 Seven Posed Rules of Fair Negotiations�������������������������������������� 186 3 Definitions of Fair Agreement and Extent of Negotiations������������������ 190 3.1 Negotiating the Special Case of Risk������������������������������������������ 192 4 Violations of Rules and Compensation ������������������������������������������������ 194 4.1 Negotiations with Multiple Counter Parties�������������������������������� 194 4.2 Criteria for Multi-Party Negotiations������������������������������������������ 197 5 Issue of Trust in Negotiations �������������������������������������������������������������� 198 5.1 Compensation Criteria When Violation of Rules is Unavoidable������������������������������������������������������������������������������ 199 6 Fairness in Negotiation and Management Theory�������������������������������� 200 6.1 Management Theory and Fairness? �������������������������������������������� 200 6.2 The Fair Negotiation Contribution���������������������������������������������� 201 References���������������������������������������������������������������������������������������������������� 203  11 Chapter 11: The Philosophy of Action and Authority in the Entrepreneurial and Management Ethics ���������������������������������������������� 205 1 Introduction: Philosophical Foundations���������������������������������������������� 205 2 The Philosophical Basis for Authority within the Firm������������������������ 207 3 Greek Philosophical Notions of Labor, Work and Action�������������������� 211 4 The Nature of this Social Action���������������������������������������������������������� 213 5 Cultural Principles of Entrepreneurial Authority and Action���������������� 216 6 Unethical Action and Authority������������������������������������������������������������ 217 7 The Frontier Ethos and Social Separation�������������������������������������������� 219 8 Empirical Studies of the Social-Class-Separation Effect���������������������� 220 9 Conclusion�������������������������������������������������������������������������������������������� 221 Appendix: Fred Meyer �������������������������������������������������������������������������������� 222 References���������������������������������������������������������������������������������������������������� 223  12 Chapter 12: Duty, Boycotts and the Pricing of Ethics���������������������������� 225 1 The Adam Smith Problem�������������������������������������������������������������������� 225 2 The Ideal Kantian Market �������������������������������������������������������������������� 227 3 Notions of Duty and Market Efficiency������������������������������������������������ 228 4 The Market Pricing of Ethics���������������������������������������������������������������� 230

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5 Judging the Morality of Market Participants���������������������������������������� 232 6 Boycott Classifications and Effectiveness�������������������������������������������� 233 6.1 Some Classical Boycotts�������������������������������������������������������������� 233 6.2 Some Recent Boycott Attempts �������������������������������������������������� 237 7 Conclusion�������������������������������������������������������������������������������������������� 238 References���������������������������������������������������������������������������������������������������� 240



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Part IV Some Current Moral Environmental Issues for Business  13 Chapter 13: Recognizing Environmental Duties������������������������������������ 243 1 Perfect and Imperfect Environmental Duties���������������������������������������� 243 2 Imperfect Duty and Its Practical Limitation����������������������������������������� 247 3 Some Maxims for Reasoned Environmental Discourse������������������������ 249 4 The Nature of Reasoned Environmental Discourse������������������������������ 253 4.1 The Attempted Disseminations of Information and the Obfuscations to Be Avoided�������������������������������������������� 253 4.2 Fairness or Obfuscations�������������������������������������������������������������� 254 4.3 The Logic and Predominance of the Environmental Argument ������������������������������������������������������������������������������������ 254 5 Considered Moral Environmental Judgments �������������������������������������� 255 5.1 Collective Imperfect Duty������������������������������������������������������������ 258 5.2 Considerations of Fairness���������������������������������������������������������� 258 6 Summary Conclusion���������������������������������������������������������������������������� 260 References���������������������������������������������������������������������������������������������������� 261  14 Chapter 14: The Philosophy of Community and the Environmental Ethic�������������������������������������������������������������������� 263 1 Considerations of Environmental Duty������������������������������������������������ 263 1.1 The Imperfect Collective Duties of Environmental Preservation���������������������������������������������������������������������������������� 264 2 The Equity Considerations of Future Generations and Distant People���������������������������������������������������������������������������������������������������� 267 2.1 The Intergenerational Problem���������������������������������������������������� 268 2.2 Distributional Effects on the Disadvantaged�������������������������������� 270 2.3 The Problem of Equity for Distant People���������������������������������� 272 3 Efficiency and the Coase Theorem�������������������������������������������������������� 273 4 The Search for a Just Environmental Policy������������������������������������������ 274 5 Relations of Virtue, the Moral Community, and Environmental Organizations���������������������������������������������������������������������������������������� 277 6 The Specialness of Process ������������������������������������������������������������������ 278 6.1 Problems in Our Environmental Categorical Imperative Process (CIP) ������������������������������������������������������������������������������ 279 7 Nature as Sacred������������������������������������������������������������������������������������ 281 8 The Collective and the Environment���������������������������������������������������� 286 References���������������������������������������������������������������������������������������������������� 287

xiv

Contents

 15 Chapter 15: Some Current Environmental Problems for Business������������������������������������������������������������������������������������������������ 291 1 Introduction ������������������������������������������������������������������������������������������ 291 2 Rationality in Environmental Concerns������������������������������������������������ 291 2.1 The Bias Due to Abundance�������������������������������������������������������� 293 2.2 The Bias Due to Narrow Vision �������������������������������������������������� 293 2.3 The Bias Due to “It’s Gone!”������������������������������������������������������ 294 2.4 The Bias of Not Having “broad vision”�������������������������������������� 295 3 Business Knowledge and Conflicts of Interest�������������������������������������� 295 4 The Negative Externalities of Coal and Industry Obfuscations������������ 296 4.1 Clean Coal and Acid Rain������������������������������������������������������������ 296 4.2 Coal and “reasoned” Discourse �������������������������������������������������� 299 5 The Tragedy of the Commons as a Dead Zone ������������������������������������ 300 5.1 States’ Rights, and State Pollution Responsibilities�������������������� 300 5.2 CAFOs and “Reasoned Discourse” �������������������������������������������� 302 6 North Atlantic Fisheries and the Tragedy of the Commons������������������ 302 6.1 The Grand Banks and Georges Bank������������������������������������������ 302 7 Riverkeepers: “Not Radical, but American in Disposition”������������������ 304 8 Business’ Environmental Involvement�������������������������������������������������� 306 References���������������������������������������������������������������������������������������������������� 308 References ���������������������������������������������������������������������������������������������������������� 309

Part I The Role of Business Norms and Their Philosophical Foundation

Chapter 1: Normative Ethics and Business Practice: An Introductory Review

1

Introduction

Aspirational norms give us our desired direction even when we know they will not be entirely met. The theme of this text, The Pursuit of a Moral Business Community, expresses an aspirational norm. Please note that the emphasis must be on “pursuit” since we know that in a broad social sense, achieving a completely “moral business community” is not possible. But we aspire to be as close as possible for the sake of ourselves and immediate business associates, for the businesses we are associated with tangentially, and also for our society’s overall business community. Engaging in business means much more than producing a good and generating a profit. It usually involves engaging in personal relations, and if these are not virtuous relations, then the benefits received are much less than we desire. Only by pursuing a moral business community can we hope to live in a society we would find desirable. Establishing and exploring this proposition of desirability is the aim of this text. Furthermore, this full exploration of the proposition that the pursuit of a moral business community is desirable shows that business ethics is the integrative course for the business curriculum. Business ethics is not a fringe subject; it is the central subject that links the efforts of (i) building and reinforcing a virtuous managerial team, (ii) communicating through reasoned discourse with all relevant stakeholders, and (iii) diligently pursuing other business responsibilities. It is effectively argued in this text that this linkage determines the growth and success of the business firm. But in a broader sense, these linked efforts determine the social-contributive efficiency of the firm. This is a claim fully explored by this text. The institution of market-oriented business is an expression of Western society’s sense of freedom: (i) freedom of entrepreneurial opportunity, (ii) freedom of expression, (iii) freedom of geographic and social mobility, (iv) a market-based quasi-­ democratic voting mechanism for society’s resource allocation, and (v) a similar voting mechanism for enforcing society’s sense of the ethical onto business

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_1

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Chapter 1: Normative Ethics and Business Practice: An Introductory Review

behavior. The more than two centuries of development of the Western business economy surely testifies to the desirability of these afore mentioned freedoms as demanded by society, but whether any particular business meets society’s ideal for ethical behavior is an empirical question worthy of ongoing observance and investigation. Any exploration of the morality of market-oriented business as an institution must concern the most fundamental aspects of how business is organized, the general behavior of business interaction, the very motive for business activity in general, and the basis for logically-reasoned action in business.1 This is a very broad subject of such great societal importance that business ethics might well be considered the most important subdivision of the broader category of applied ethics (which includes subjects such as medical ethics, sexual ethics, societal welfare considerations and the like). Any scholarly exploration of this broad subject must be built upon the traditional academic subjects of philosophy and economics. The title of this chapter, Normative Ethics and Business Practice, links the notion of ethical to a norm for management, i.e. a standard management aspires to meet. This is hardly a surprising linkage since of course we want business to meet, at minimum, the moral standards of society. This book argues that standard economics has generally understood that the universally offered goal for the firm, i.e. the profit motive, is a constrained goal, with the constraints being law and society’s sense of what is ethical. Unfortunately, our standard economic pedagogy of the theory-of-­the-­firm does not explore these constraints in any depth, so it is easy for the more casual economics and business student to ignore this very normative side of the subject.2 It is indeed an unfortunate fact that our microeconomic theory of the firm is generally presented as a positive theory, i.e. a theory of what actually exists rather than some norm to be pursued. The profit motive is presented as the actual existing motive force in the neoclassical economic model. In trying to earn a profit, firms provide the goods and services society wants. Following this microeconomic approach, we could explore the constraints that actually exist on this profit motive. These are essentially legal restrictions on business activity which, along with legally reached contracts, dictate much of society’s imposed constraints on this motive. Exploration of how business should ethically behave can then be avoided in this more detached observational approach.3 Such an examination would not explore ethics as a norm.

1  Market oriented business requires the institutions of defined and enforced private property rights through (i) legal codes, courts and authorities for enforcement including controls over negative externalities, (ii) limited licensing arrangements when necessary for validation of relevant expertise, (iii) a financial system that facilitates payments for transactions, credit for capital, and sale of property rights, (iv) public support systems for market locations, communications, and transportations. 2  This “standard economic pedagogy” is the neoclassical economics generally offered in university courses in introductory intermediary economics. 3  A “positive view” is of what actually exists; a “normative” approach is of what we would prefer to exist.

1 Introduction

5

Nevertheless, this scholarly text argues that normative ethics is at the heart of the economic theory-of-the-firm, and as such, its implications for management practice are profound. Since Adam Smith’s Inquiry Into the Nature and Causes of the Wealth of Nations (1776), we have recognized the strong ethical implications of the marketplace, but following Smith’s lead, we generally relegate our explorations of these implications to the domain of public policy. We explore the public welfare implications of regulating market structure, of the existence of externalities (pollution), of income and wealth redistributions, and the like. The implications of the marketplace for societal welfare are generally recognized in microeconomics and industrial organization type courses, but still we seldom explore the importance of ethically-­ based managerial decisions on the internal efficiency of the firm or of society. The economic tradition is to view the manager as ethically neutral. The neoclassical economic approach generally argues that through market competition, the firm must behave by delivering an acceptable product without deception, and do so within the law. In following this process, the personal ethical sense of management is not particularly relevant. Management need only meet society’s needs within society’s ethical constraints. In economics we generally avoid exploration of what this exogenously-­ determined societal sense of ethics might be, of how it could affect managerial decisions and firm behavior. This latter subject is, however, explored here in this scholarly text where the Western ethical tradition is reviewed, and in particular the Kantian and virtue ethics components of this tradition are especially explored. Following this, the ethical-managerial leadership and decision making, as they affect firm efficiency, are examined in some depth. The theme of this text expresses a moral motive, but this text argues that this should be the moral motive. This text, therefore, does suggest a particular norm that is different from consequentialist egoism—which is defined as the theory that the moral rightness of an act is determined solely by the goodness of the results for the individual. Very much the opposite is argued here. This book argues that our social goal of harmonious pursuit of generally-accepted moral duties (what Kant, 1785, described as our pursuit of our sense of a moral community) should be the proper motivation for ethical decision making for management. It argues that this is appropriate for the firm, and for society, and that this motivation is solidly within the Western ethical tradition. The text argues, that this is also the motivation that leads to firm and market efficiency. It provides the workable ethical constraints on the profit motive, constraints that lead to this efficiency, i.e. the competitive marketplace is likely to favor these properly motivated moral constraints. These are bold claims to be substantiated by the strength of the arguments of subsequent chapters. Nonetheless, we can offer as a partial argument here that our most fervent moral outrage at those managerial decisions we consider to be illegal or unethical occurs when we believe the generally accepted norms of our society have been violated contemptuously. When only an obscure regulation is violated without apparent contempt, the fervor of our moral outrage is so much the less. This moral fervor certainly affects stakeholder relations of all sorts (customer, supplier, and employee relations), and therefore the economic performance of the firm.

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Chapter 1: Normative Ethics and Business Practice: An Introductory Review

The argument presented in this text is not based on a narrowly defined individual egoistic pursuits, as in neoclassical microeconomics. This is so because consistent assurance of the pursuit of society’s agreed-upon moral maxims only results when we do what is right not for our own narrowly defined benefit, but because we wish to be members of a moral community. This is the appropriate and reliable motivation for moral decisions; our own personal benefit may well also result, but this is an ancillary benefit. This is a theme fully explored in subsequent chapters, but it is a theme contrary to the theory of narrowly defined utility maximization generally offered in microeconomics. This contrary argument is fully established in subsequent chapters. This text also explores various other ethical propositions in some detail, particularly the propositions concerning fairness, and it shows applications of fairness to managerial negotiation with various stakeholders of the firm. These requirements for fairness in negotiation should essentially provide the rules-of-the-game for marketplace interactions. In this sense, this book attempts to provide a normative guidance for managerial leadership and decision making.

2

The Ethical in Business

Ethics is the philosophical study of morality, our useful customary system for decision making particularly with respect to what we term “good or bad,” or “right and wrong.”4 It is not a shallow subject. It extends way beyond simple notions of right and wrong, notions such as “Do not cheat, or steal, or harm others!” This subject has ancient roots, and it has always been a subject of reason, reflective thought, and logic. It concerns both “What is right?” and “What is good?” Notions of “the right” and “the good” form the foundational axioms for what rational people derive as the moral principles that govern our decisions. We pursue this or that action as based upon what we perceive as “right,” and/or what we perceive as “good.” It is an immutable property of existence, a law of physics, that time does run backwards; that we cannot experiment so as to do our decisions over. It is better to have a set of moral principles to guide us prior to encountering these decisions, although as we shall discover, reflective reasoned-thought is always one of those necessary principles. For these reasons we study ethics and organize our thoughts as a preparation for moral decision making. The very practical subject of business ethics is no different. It is not only of extraordinary importance for society, but it is perhaps more interestingly complex than many other subjects in practical ethics. To provide some introductory examples, consider the manager interacting with employees, or even potential employees. Ethical norms must be followed, norms of honesty and fairness in negotiation and arrangement of workplace rules. It is obvious, and it is clear, that violation of these norms can have strong current and 4  Ethos is the ancient Greek term for “custom.” Webster’s dictionary defines ethics as “the distinguishing character, moral nature, or guiding beliefs of a person, group, or institution.”

3  Teleological Ethics

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subsequent consequences for the existence of the firm and the welfare of employees, owners and managers. What is not so clear is that the very motivation that managers take to these negotiations frames and often dictates the results. Clarity as to ethical motivation is necessary for achieving what is termed below as an harmonious organization, and this is necessary for achieving any reasonable interpretation of success for both the organization and the individuals involved. This is also true for interactions with customers and society in general. I argue in this book that managers with the proper ethically-based motivation are likely to achieve results generally preferable to what can be achieved from pursuit of a narrow egoistic goal. Nonetheless, following the Western philosophical tradition, I also argue that the ethically-based motivation is worthy in itself, and this worthiness is explored in detail in this book.

3

Teleological Ethics

The term “teleological” stems from the ancient Greek word “telos,” which means “complete end” or “perfected end.” It concerns the end goal of a thing, so that “teleological ethics” concerns the end goal that we seek from our ethical system. Philosophers since Plato and Aristotle have typically treated the subject of “what ends,” i.e. “what goals,” we should pursue as either “the flourishing life” or some notion of what is “intrinsically good.” The notion of pursuing the “flourishing life” was paramount in ancient Greek ethics. It meant pursuing something broader than merely physical sustenance. It included a type of “contentment,” of being in harmony with our conscience, our family, our friends and our community. We can apply the idea of the “flourishing life” to either (i) ourselves as individuals, or to (ii) our business organization, or to (iii) society. We, of course, can also link all three of these entities as interdependent. As far as the individual is concerned, we could define the flourishing life as hedonistic, that we merely pursue pleasure, particularly in the form of consumption. Generally, however, we define the flourishing life as composed of attributes well beyond consumption. Among the things philosophers have included as necessary for happiness are knowledge, friendship, freedom, beauty and harmony, and this list can be considerably extended. Indeed, many philosophers have sought the commonalities of the attributes we might include in this list so that we can better define what we mean by the “flourishing life.” If we could adequately define what we mean by “flourishing,” then we might be able to organize our notions of morality around what we perceive as the most effective pursuit of this life. If we seek to investigate “the flourishing life” of an organization or of society in general, then we might take a utilitarian approach to what is moral. This means that whatever maximizes the sum total of the happiness of the collection of all individuals within society is what we should do. Hence, our ideas of morality would be organized around the pursuit of this limited notion of the general welfare of society. This is not, however, a very satisfactory way of organizing our moral thought. It is not very practical since notions of how to measure this general societal welfare are nebulous at best. We shall need a sharper logical framework in order to form our

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Chapter 1: Normative Ethics and Business Practice: An Introductory Review

concepts of morality so that our system of moral thought is robustly functional in business and our society. We could, of course, root our moral code in some religious scripture. Even if we do not believe in the religious foundation of the scripture, for example even if we do not believe in some notion of God, we could still accept this scripture as historically based, and hence an expression of historically accumulated wisdom about how to live. This could be a powerfully persuasive argument. Of course we must also note that religious conflicts have led to a very destructive history, as these conflicts even today are extremely destructive. For this reason we hesitate to base our notion of “the right” on religious texts. Individually, we could follow a religious text for our personal lives, but not insist that others follow our personally accepted scripture just because it is our scripture. Others may have their scriptures, or personally different interpretations of the same scripture, and therefore the conflict would begin. Rather than using either of the above potential foundations for our moral decisions, we need a more acceptable method. We would likely agree that any reasoned approach to forming a moral code for society, or even for our business organization, must be built upon logic, upon the basic notions of what is right and wrong that can appeal to all, and be logically applied. This approach should be sound even for the pursuit of the flourishing life as it applies to our business and society. In the following sections and in the next three chapters we exam such an approach.

4

An Axiomatic System of Logic

The study of “what is right” must rely on establishing the principle axioms from which we can logically derive a moral code to guide our actions. This approach to moral codes places the notion of “duty” at its center.5 This is a system built upon self-evident axioms that act as first principles from which deductive logic can be used to build our moral code. That these axioms are true to begin with must be agreed upon after reflective thought. For example, consider one of the fundamental problems in ethical philosophy, the lying promise. For example, we might promise to pay in the future for a current service, all the while knowing we do not intend to pay. Why is this wrong? It should be obvious that this is an important problem in business ethics since a wide variety of contracts (both the explicitly legal obligations, and implicitly moral obligations that are not necessarily legally enforceable) are necessary to conduct modern business. Many might try to justify the lying promise as allowable under certain circumstances such as those required for business survival through a loan. One might argue, My business, and its ability to employ others, will not survive unless I obtain this loan, although I know it is unlikely that I will be able to repay it. As a result, I will deceive the lender into believing I am financially sounder than I really am. My business survival is at stake, however, and so I am justified in this deception.

5  “Deontological” ethics concerns the study of duties, both positive obligations that have practical limitations, and also those that are absolute prohibitions.

5  The Social Contract

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Why is this deception wrong? To logically analyze this problem, consider the axiom, We should not deceive others into doing what we want them to do, if by this deception, we frustrate their pursuit of their own goals!

The lying promise clearly violates this axiom. But why would this axiom be necessary, that is why would it be readily adopted as part of the foundation of a business code? A logical answer is that business cannot “flourish” in a world where this sort of deception is acceptable. If one person can morally deceive, so can others. This is not the business world we want, and in fact a business world that accepts deception of this sort will implode. (The reader might note the role of the lying promise in the financial debacle that imploded our financial market system in 2008, especially the lying promise role in the sub-prime mortgage market. This “debacle” is reviewed in the “Supplementary Reading Material” to this text.) Hence our social goal of seeking a flourishing business environment justifies this axiom as based upon reflective reasoning. In our society, we seek to express a variety of self-evident axioms as fundamental laws which we generally accept after democratic discourse. The authority for this expression lies in the sovereignty of the individual who votes for this legal code either directly or indirectly through elected representatives. Still, we must recognize that not all of our moral problems can be handled by society’s law. We also need a code to handle non-legal but still ethical problems, a code we might adopt for our business organization. Even for this code, the axiomatic approach as part of reasoned discourse is appropriate as we will explore in detail in chapters “The Categorical Imperative Process and Moral Duties” and “Moral Virtues and Ethical Decisions”. In this text, we shall find that this formal-logical approach is best exemplified by the ethical philosophy of Immanuel Kant (1721–1804), often cited as the founder of modern philosophy. This philosophy establishes some basic universal principles (those we can agree upon by consensus) from which pure reason (logic) can operate. Consequently, the derived moral principles become an ethical duty of what to do, or not do as a result of logical deduction. As Kant put it, these laws are those that we, as rational human beings, give to ourselves. They are laws for a republic of reason, one that pursues a moral community whose legislature ultimately comprises all rational beings. Through this democratic ideal, Kant makes understandable the argument that moral principles should be derived from reason. This is fully explored in the next three chapters.

5

The Social Contract

Those who argued that our moral code essentially stems from what is generally and democratically agreed upon in the form of a social contract (contractarians), were inspired by Thomas Hobbes (1588–1679), John Locke (1632–1704), and Immanuel

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Chapter 1: Normative Ethics and Business Practice: An Introductory Review

Kant (1724–1804). The philosophy of John Rawls (1921–1991) is the most influential of the modern Kantian- contractarians. Our moral principles, he argued, represent the ideal terms of social cooperation for those who regard each other as equals, and who live in fellowship, perhaps in the form of a business-partnership organization. Rawls’ vision, however, is that of an ideal agreement among such people, an agreement they would adopt if they met as an assembly of equals to decide collectively the social arrangements that govern their relations. These arrangements are envisioned as agreed upon after open debate and rational discourse. The authority for these moral principles relies upon the “fairness of the procedures” by which this agreed-upon social-code is reached. We assume that any rational individual who wants to live cooperatively with others in this society would, in view of the fairness of the procedures, assent to its results. Rawls suggests a number of requirements in order for a social-contract deliberation to be considered fair. If these procedures are followed, then the resulting agreement manifests what he termed justice as fairness. We can, and do in latter chapters, use Rawls’ notions of fair deliberation to explore requirements for fairness in negotiation, a problem that we shall see is of great importance for business ethics and stakeholder theory.

6

Business Codes of Conduct

Many professions and occupations, such as medicine, law, accounting, engineering, journalism, business, and education, have established codes of conduct that guide professional behavior. This is a subject of applied ethics. The history of applied ethics reveals methods used to develop and reform these codes, usually in response to crises. Given the rapid technological advance of our society, reform of these codes is frequently justified as new forms of communication become dominant. For example, consider our current problems with wide spread deceptions in our social media, deceptions that led to the riot and invasion of the Capital building in Washington, D.C. How might we modify our principle of “freedom of expression” so as to prevent mass deceptions of this sort? These restrictions are now being consider by our society, but the principles of “fair and reasoned” discourse are addressed in latter chapters of this text. One of the frequent questions for investigation of our codes of ethics concerns the reasons for their development, modification, and abandonment. Why do our moral codes sometimes fail to prevent unethical behavior, or even prevent the more extreme behavior we term evil? Why does this evil permeate some business organizations and cause the moral scandals we associate with cases such as Enron, or Bernard Madoff? (See the “Supplementary Reading Material” to chapter “The Abandonment of Business Codes of Ethics” of this text.) Why are these codes readily abandoned from time to time? I suspect the answer to these questions lies in either (1) a lack of clarity in understanding either the meaning of or (2) the importance of the code. Rational reflection concerning the reasons for the code may be lacking, and so belief in their

7  Schools of Ethical Thought

11

importance can be shallow. For example, consider those who keep the code only out of fear of being discovered if they do not keep it. Are they likely to be persuaded that under certain circumstances they can violate the code and not be discovered? The answer is probably “Yes!” Also consider those who believe the code is just old-­ fashioned and silly, that it has little current social importance. This person also is likely to readily abandon what might be a very important code. Prevention of both of these cases occurs if the importance of our moral code is continually examined in a reasoned way; if reasoned and reflective discourse is used to reform the code so that rational individuals have the opportunity to contribute to the debate, and to understand the importance of what is adopted. Chapter “The Abandonment of Business Codes of Ethics” examines this issue in detail.

7

Schools of Ethical Thought

Ethical thought can be divided into many schools, although these frequently overlap. Various divisions are proposed in the philosophical literature, and it appears that the number three is particularly popular for these divisions. One such threesome is (1) Kantian social-contract ethics, (2) utilitarianism, and (3) virtue ethics. This scholarly book examines the first of these schools in considerable detail, and shows its practical application to business management. This monograph also, however, examines the third school with some detail, and even the second school with a lesser degree, but still substantive detail. All three have practical applications that we can draw upon for insights into the ethical problems of business, but I argue below that the Kantian duty-oriented approach is not only the most practical, but also the most logically satisfying and robust in posing business solutions. There are, however, other ways of approaching ethical theory. One way is to pose a natural law theory of ethics; that ethics have a natural origin in the ways humans evolved, interact, and attempt to coexist. Systems that fail are historically abandoned so there is a natural selection that perhaps leads to a social optimum. Certainly there is truth to this “natural law” proposition. This is one illustration that these artificial divisions of ethics into various schools may well be useful. In fact, many of these divisions are useful, but the usefulness stems from their ability to explain and extend practical applications. Stating that ethics may have a natural basis may be stating truth, but does it give us practical insights as to how to organize our ethical reflections? Perhaps other organizational methods are more fruitful. This is posed here. I find the Kantian approach to be the most useful for business ethics. It gives us insights into practical methods of organization, of the leadership skills to be developed, and of negotiating rules and methods. We seek practical applications, but nonetheless, we still primarily seek a system of moral codes based upon ethical motivation. I argue that our ultimate motivation should be the pursuit of the moral community. We seek a moral code that exhibits clarity of understanding, and harmony in pursuit within our business organization and in overall society. This is the norm we logically explore in latter chapters as the primary ethical basis for business

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Chapter 1: Normative Ethics and Business Practice: An Introductory Review

interactions. The economic implications for economic efficiency are explored in detail in this text.

8

The Noble Nature

Reflective thought about the social morals we live by is an essential component of our moral life. It has been the basis of our Western ethical tradition since the ancient Greek philosophers: Socrates, Plato and Aristotle. But more than reflection concerning morality is required if we are to live a moral life, pursue “the good,” and actively participate in a moral society or organization. The twentieth century philosopher Hanna Arendt (1906–1975) effectively argues that we must have a “noble nature” of willingness to speak out socially about our moral judgments. We must participate in, and even stimulate, logical social discourse involving our reflective thought about our moral problems and codes. We must not merely drift with our times, refuse to think critically about our actions, and refuse to publicly object when we observe the development of “evil.” Reflective reason is essential to our understanding of our moral codes. We cannot just accept these codes as based upon some form of authority, be it religious, government, or business authority. If we do not understand the social reasons for our moral code, we will not internalize the code. We will readily abandon the code when it appears personally beneficial. An education in ethics is a start towards understanding, but this is just a start. Frequent reasoned reflection is also required, but this also is not enough. We must also be willing to engage in social discourse, to say “No! This is wrong!” or “This is the moral thing to do!” Moral courage is therefore also necessary for an organization and society to flourish. These concepts are reviewed in detail in latter chapters.

9

The Profit Motive

This book argues that the profit motive allows the public to transfer its sense of ethics onto the firm. Through product markets, capital markets, and the markets for human resources, society gets to vote on corporate practices, i.e. it decides to purchase products or financial securities, and may even decide to be employed by some particular firm or not. This is a democratic voting process, although it may be flawed by informational deficiencies, or the monopoly power of some company, or by the public just not caring about some unethical (or ethical) practice. The pursuit of profit forces business to respond to society’s sense of the ethical, i.e. it must adjust to the demands of the public when it is expressed concerning some perceived ethical lapse. It must also be kept in mind that the public gets to decide the legal constraints on the profit motive. The issues to be explored, therefore, are (1) do markets exercise this power by imposing a sense of ethical conduct onto the firm, and (2) if so, is this ethical sense in any way superior to the subjective judgments of management as might be required of other firm goals such as capital expansion and the like.

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Profit maximization for business is the goal generally cited in introductory economics courses, but it is not the goal generally cited in managerial finance courses offered by business schools. For the purpose of exploring elementary issues of efficiency and social welfare, introductory microeconomics courses create and offer a simplified model of certainty with only one future time period. The profit associated with any business decision is known with certainty. In a competitive business environment, these decisions must be to seek the maximum profit (within legal constraints) or the firm will be driven from its industry by its competitors. Note that competition assures that in equilibrium, this profit must be at the minimal acceptable level to business given the ease of entry and exit from the respective industry. In managerial finance courses, however, the competitive model is made richer by considerations of risk associated with multiple future time periods. Firms and investors must envision an expected future profit stream, and the risk associated with obtaining this stream of future profits. The expected stream is envisioned to extend into the distant future, and this stream varies with critical business decisions. Profit maximization no longer makes sense in this model of business because we have no single profit observation, but rather a lengthy stream of expected profits. It must be noted that for the publicly traded corporation, it is the shareholders who own the corporation, and hence who own the rights to this profit stream. (This ownership issue is explored in detail in the later chapters.) Shareholders either receive this profit in the form of dividends, or if the profit is retained back into the firm for the purpose of funding new projects, then shareholders receive additionally generated future dividends that are presumably large enough to warrant any sacrifice of deferred current dividends. Through financial markets, shareholders offer prices for the equity shares of the corporation that reflect the shareholders own assessment of the expected stream, and the riskiness of obtaining it. For this model of investment and firm behavior to function efficiently, the shareholders must be sufficiently aware of the prospects for this corporation, and this requires that certain communications from the company be unbiased and non-deceptive. The goal of the publicly traded corporation as described above is termed shareholder wealth maximization (SWM) rather than profit maximization. This goal is an offshoot, an extension, of the classic profit maximization of introductory microeconomics. The reasons why management is likely to pursue this goal are explored in detail in later chapters, but it is sufficient to state here that the market value of the equity of a public corporation, that is a corporation with equity shares traded on a public exchange such as NYSE, is easily measured, i.e. the price per share times the total number of shares outstanding. The SWM goal means that the publicly traded corporation should make its critical managerial decisions so as to attempt to maximize the total market value of all shares outstanding. Of course, legal and other ethical constraints still apply. The SWM goal is therefore an extension of profit maximization, the difference being that the former recognizes the uncertainty associated with obtaining future profits, and the latter treating profit as a known single-­ dimensional measure. The important thing is that financial markets determine equity value; it is the market’s assessment of the future prospects for the corporation with risk taken into account. SWM requires that the company be transparent in

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Chapter 1: Normative Ethics and Business Practice: An Introductory Review

communicating with financial markets. The SWM process is a market-oriented democratic process where the publicly traded corporation responds to the assessments and preferences of the public. Just as in profit maximization, the corporation must respond to the public’s preferences, including its demands for ethical behavior, or otherwise profits and ultimately the market value of equity, suffers. This is explored in future chapters. The complexity of the moral factors that affect shareholder wealth are extensively explored.

10

The Design of the Course

This course explores the answers to a series of important interrelated questions. The subsequent material attempts to answer the following questions: • Does the traditional business goal of profit motivate unethical greedy behavior? What ethical constraints should be imposed upon management to limit this profit motive? What are the conditions necessary for this profit motive to actually be considered ethical by society? • Where do our notions of ethics originate? Do we have a Western ethical tradition? • Are there any useful lessons from utilitarian philosophy? Can we form any practical moral maxims from utilitarian analysis? • Does the Kantian approach lead to useful moral maxims for business? Can these maxims be a foundation for leadership? • Does the study of virtue-ethics lead to practical applications in business? What are the common personal characteristics of the moral manager if any are to be found? • If management receives their compensation from owners, does this create a conflict of interest in dealing with non-owner stakeholders? If so, how can management ethically, or fairly, deal with this conflict? • Is it possible for product and capital markets to reflect society’s sense of ethics and therefore force business to conform to this societal sense? Is this “societal sense” itself worthy? • Why are moral codes of conflict established and abandoned? Why does evil permeate some business organizations but not others? • What are business’ environmental obligations? • If there is a Western ethical tradition, how is it changing especially in the context of modern globalism? Some Review Questions 1. Define and explain the difference between normative and positive ethics? 2. What role do aspirational norms play in society? 3. What is teleological ethics? 4. What is meant by the noble nature?

Additional Readings

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5. What ethical motivation is proposed by this text? 6. What is utilitarianism? Why do we find this philosophy unsatisfactory? 7. What is a lying promise? Why would we find it unsatisfactory for the lying promise to be generally acceptable? 8. The institutions of market-oriented business express what freedoms? Some More Advanced Discussion or Essay Questions 1. What role does reflective thought play in ethics? 2. What is the profit motive and what are society’s constraints on this motive? What is SWM? What is the linkage between the profit motive and SWM? How does SWM—as constrained—facilitate the transfer of society’s sense of the ethical on to business behavior? 3. What does Kant mean by a republic of reason?

Additional Readings For additional readings on the philosopher John Rawls, see: Freeman, Samuel. 2003. Introduction: John Rawls – An Overview. In The Cambridge Companion to Rawls, ed. Samuel Freeman. New York, NY: Cambridge University Press. Nagel, Thomas. 1995. Rawls, John. In The Oxford Companion to Philosophy, ed. Ted Honderich. Oxford, UK: Oxford University Press.

For a review of the political philosophy of Hannah Arendt, see: Baehr, Peter. 2000. Editor’s Introduction. In The Portable Hannah Arendt, ed. Peter Baehr. New York, NY: Penguin Books.

Chapter 2: The Applicable Western Ethical View?

1

The Key Questions

Two questions are posed to initiate this chapter: 1. With respect to market-oriented duty, is there a coherent Western ethical view that we could apply for our purpose? 2. If we can articulate the components of this coherent view, should we treat it only as a positive institution in need of documentation, or should we treat it as a norm worthy of analysis plus possibly application and improvement? In this text, the first question is answered in the affirmative; there is an applicable “Western ethical view.” But since this tradition is rather broad, this chapter shows that it needs to be analyzed and narrowed in order to generate worthy applicable norms. We certainly do not seek a documentation of a vague tradition, but rather we need to develop clarity in our ethical vision. This is the task before us. With respect to the second question, we seek to understand and articulate this coherent norm applicable for analysis of the ethical business problems of our age.

2

Ancient Greek Origin of Rational Intuition

In the context of exploring this “coherent view” of a Western ethical tradition, two other questions become apparent: 1. How do our ethical notions originate? 2. What role does motivation play in Western ethics?

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_2

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Chapter 2: The Applicable Western Ethical View?

These are the foundational questions for any serious investigation of our topic. We will establish that understanding the answers is essential to forming this “coherent view.” They are the key factors around which our brief history of this topic is composed. The Western academic subject of ethics is generally categorized as part of philosophy. It is rooted in logic, and largely originated by the ancient Greek philosophers: Socrates (467–399 BCE), Plato (427–347 BCE) and Aristotle (384–322 BCE). Their lives, and their philosophy, overlap. In each case, the younger was the student of the older. This ancient philosophy forms the foundation of much of Western ethical reasoning and tradition handed down over the past 2500 years. The basic questions they investigated still lie at the core of our ethical concerns: i. How do our moral laws originate? ii. How are they related to our personal lives? iii. How are they related to a functioning society? Warren Ashby (1997, 2005) points out the Greeks formed their philosophy on four basic ideas: (1) individual lives have a purpose, and this purpose is to pursue the good life, (2) the pursuit of this good life requires a certain harmonization of the human attributes we call virtues, (3) rational inquiry is the distinctive and primary aspect of anyone’s life, and therefore dedication to its development must be one of these virtues, and (4) the individual is interdependent with the community. The first three of these ideas can be reduced to the fundamentally linked concepts of eudaimonia (achieving a happy and content life), and arête (the personal virtues of excellence necessary to achieve a happy life). Aristotle lists these virtues as wisdom, justice, courage, moderation, piety towards the gods, and the capacity to pursue reasoned argument. The essential question explored was “How should a person live in order to achieve eudaimonia?” The answer requires reflection about what is essentially desirable and necessary to live a successful life. To Socrates and Plato, this required living a good moral life, i.e. one involving the pursuit of arete, or human traits of virtuous excellence. Aristotle adds that both the intellectual life and the moral life must be linked to pursue eudaimonia.1 This ancient Greek ethical philosophy, however, depends upon some prior notion of what it is to be human, of what it is to pursue the good life, and what is the end (telos) or purpose of life. In this sense, the Greek moral system is said to be teleological. It concerns purposeful living, but since there can be different views about human nature, there can be different views about what is necessary to live a good life. Is intellectual pursuit essential as Aristotle argues? Is a physically active life of interaction with nature essential? Is a social life involving a large family, or civic involvement essential? These are questions posed by this notion of “pursuing the good life.” 1  Eudaimonia is literally interpreted as “having a good guardian spirit.” It implies having an objectively desirable life which to the ancient Greek philosophy is “the supreme good” to be sought. See Honderich (1995, p. 252).

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Socrates, the Athenian Greek philosopher of the first half of the fifth century BC, powerfully affected the history of philosophy, particularly ethics. He discussed his ideas with admirers, one of whom was Plato. His personality and method were recorded in his Dialogues, written by his admirers after his death (see Plato 1999). Socrates’ discussions took the form of face-to-face interrogations of others, generally about the nature of some virtue such as courage or justice. The interrogations universally generated confusion about the nature of these virtues. Socrates always concluded by indicating the need to think harder and longer about the problems raised. Socrates never argued that he knew the answers to the questions posed, but he did argue that virtue requires knowledge of its nature, otherwise it cannot be pursued. How can one pursue courage without knowledge of what it is? He argued that comprehensive knowledge of virtues is essential for pursuing the good life. At the age of 70, Socrates was charged by the Athenian popular court with “impiety,” not believing in the Olympian gods, and of corrupting young men through his constant questioning of everything. He was found guilty and condemned to death. In Plato’s Apology, Socrates presents an impassioned defense of his life and philosophy. It is a classic of Western literature. In part, it explores the nature of one’s obligations to society. As stated above, our knowledge of Socrates stems from his characterization in a series of dialogues written by his student Plato (and others). These dialogues are recorded discussions (questions and responses) between Socrates and one or more other Athenian characters. In one of those dialogues, Gorgias, Socrates explores what an unjust or shameful act is, and why such an act should be avoided. Is behaving unjustly better for the agent? Socrates argued that an evil or unjust act would never be knowingly committed by a rational person because that means one would be at war with one’s conscience. As a result, the pursuit of eudaimonia would be destroyed. In Gorgias, it is also recognized that each individual has obligations to his or her civic group, associates and friends, and that these are often competing obligations. It is further recognized that the so-called rules of justice are limitations on one’s freedom to act as imposed by society. Are they merely imposed by those in power so as to further their own interests? When is self sacrifice in order to further the interest of others justified? The pursuit of eudaimonia is the key to answering this conundrum. Socrates argues that no one does wrong deliberately (knowingly), that doing the right thing is always in one’s best interest. Sufficient reflective reasoning prevents willingly doing what is wrong because such an action violates pursuit of the good life. It involves hurting oneself, not necessarily in a material sense, but in a broader sense of conscience and happiness. The problem with this approach, however, involves the notion of reason.2 Plato and Aristotle point out that not every action allows time for sufficient examination and logical analysis. The limitation to this Socratic approach lies therefore in the requirement that the agent be properly prepared to 2  The diseased mind, one that is perhaps incapable of reason, or incapable of empathy for the pain of others, is not considered here. The diseased mind is not capable of pursuing eudaimonia.

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Chapter 2: The Applicable Western Ethical View?

respond to ethical dilemmas, that sufficient reflective examination of ethical problems has occurred prior to the experience. This is itself a powerful argument in favor of a reflective study of ethics. One ought to be prepared to face the myriad of ethical dilemmas one encounters. This preparation is necessary for pursuit of eudaimonia. The rise of Greek ethics occurred perhaps because of their view of the conflict between the individual ethos and the co-operative behavior required by society. For the Greek, society would be the family and the civic organization. Man was viewed as political. Rational participation in the community was required for pursuit of eudaimonia. Mores and expectations concerning individual behavior arose because of the necessity of this involvement. As a result, the source of moral knowledge became a major exploration of the Greek philosophers. Reasoned reflection is the source of moral knowledge according to the ancient Greeks. In the Socratic dialogue Euthyphro, the essential question explored concerns whether truth is what the gods say it is because they decree (or originate) truth, or whether truth exists independently so that the gods merely repeat what they know to be independently true. Greek philosophy asserts the latter, but this poses the problem of how we are to discern this independent and objective truth, especially the moral truth.3 If the gods (or God) do not merely decree it, then can we find moral truths by other means than from religious texts? If truth has independent existence, then perhaps it can be discovered from reflective thought, i.e. logical means. In our modern scientific age, we have no difficulty envisioning a discovery process for truth. In chemistry and physics, we pose hypotheses, experimentally test them for prediction of results, and discern truthful theories from this process (the so called scientific method). Moral truths, however, have additional difficulties associated with their discovery. The experimental process is rather limited. The only experimental process we can utilize is to pose hypothetical moral maxims, and through the filter of democratic reflective discussion, discern whether there is general agreement as to their worth. This is essentially the Socratic process exhibited in the Dialogues, although Socrates is always encountering a limited number of individuals to discuss the problem at hand.4 Socrates posed the possibility of a pre-­ existing and everlasting soul as the source of what is apparently an intuition, but that provides the source for the originally posed moral maxim to be examined. This is the source of what is termed the “intuitive approach” to ethics. It is essentially the Greek approach, i.e. intuition gives us the idea, but logical examination through social discourse gives us the affirmation. The idea itself is essentially innate with which our soul has experienced prior to birth.5 (Socrates therefore posed the 3  Christians will note that in the first chapter of John’s Gospel, truth (or the Greek notion of logos, i.e. the motive force of existence) is identified with God. This is also a Greek notion. It resolves the problem of the separation of truth and God, i.e. Christians claim they are one and the same. This is one of the two Greek philosophical pillars of Christian Theology, the other being the Socratic notion of the soul. 4  We shall see later that the enlightenment philosopher Immanuel Kant poses a similar process, but with guidelines for a broader social-interactive examination of the posed moral maxim. 5  The notion of the soul also finds its way into Christian philosophy. Socrates and Plato are the origins of this Christian idea.

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p­ ossibility of reincarnation.) But the original idea and logical discourse should be a common experience to all who seek it. Hence, the moral truths are not hidden from us according to Socratic philosophy. This innate notion of truth is reiterated in Plato’s theory of forms, presented in his Republic. Here, Socrates asks, “What is X?” where “X” is interpreted as having a broad range, as being some object or characteristic of interest. This question is particularly important for concepts such as beauty, goodness and justice. What are the common characteristics of all the things we term beautiful, just or good? These commonalities are difficult to define, but this led Plato to suppose that there must be unambiguous examples of each of these concepts, perhaps not in this world, but in some other. He reasoned that we must have been previously acquainted with these unambiguous examples termed the “forms of beauty, goodness and justice.” As argued by Socrates and Plato, it is our soul which carries these vague memories of each into our current life. Plato argued that we are born into this world with dim recollections of these forms. This is why we have some dim notion of these concepts but cannot readily define them. Philosophers, Plato argued, reactivate the truth recollected from pre-birth memories. Is this account of how we discover moral truth helpful in practical life? When faced with moral conundrums, is this intuitive process helpful in-the-now? Must we intuit possible solutions, and then engage in social discourse prior to action? If this is the case, then we have obvious practical problems. Aristotle tries to pose more practical solutions to these philosophical conundrums. There is another important issue of importance to us that was explored by the ancient Greek philosophers. Plato’s Republic (380  BCE) described an ideal city-­ state run by philosopher kings. Property was held in common in this ideal society, a version of communism according to Arthur Herman (2013, pp. 364–365). Herman documents the rather strong refutations of Plato’s vision of community property as given by the eighteenth century British philosopher David Hume, and the American presidents Thomas Jefferson, and John Adams and others. The primary basis for these refutations is Plato’s avoidance of the role of private property in bringing cohesiveness to society. “Nothing can be conceived more destructive of human happiness, more infallibly contrived to transform men and women into Brutes, Yahoos, or Daemons,” than community property, wrote John Adams to Thomas Jefferson, July 16, 1814. In later centuries, the Enlightenment philosophers strongly refuted community property as a positive motive in society, but rather they expanded on Aristotle’s vision of private property as bringing cohesion to society. Aristotle Nicomachean Ethics (1984), Eudemian Ethics (1984), and Magna Moralia (1984) rejects the innate theory of intuition in favor of an experiential theory. To Aristotle, knowing how to act requires a combination of training and direct experience which together should develop the correct habits of dealing with ethical problems. He poses a doctrine of the mean which requires two steps: (1) those without sufficient experience should follow those who are considered wise and experienced, and (2) actions should always avoid excesses in either direction. For example, courage should be a balance between cowardice and confidence. Aristotle’s approach is therefore also accessible to all as is Plato’s, although for both, we envision few

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Chapter 2: The Applicable Western Ethical View?

achieving eudaimonia since few will properly apply logical reasoning to discern solutions to the problems at hand (as in Plato), and/or few will learn from experience (as in Socrates). As a result, Aristotle relied on virtue ethics, i.e. the development of virtues prior to encountering ethical problems, virtues that enable us to naturally handle these problems. Aspects of virtue ethics are explored in Chapter 4: “Moral Virtues and Ethical Decisions”. In reference to the problems posed by Plato’s Republic, Aristotle’s Politics (350 BCE) refuted community property as unworkable because of the “wickedness of human nature.”6 Aristotle saw a positive role for household accumulation of wealth provided this did not come merely from speculative exchange, but rather from household effort. The former was “necessary and honorable,” but the latter should be “justly censured, for it is dishonorable.”7 In answering the question, “How do our moral ideas originate?” the Greek philosophers answered differently. Socrates and Plato theorized an everlasting soul through which a process of reincarnation stimulates lessons from past lives. Aristotle, however, posed an experiential development process founded in what later became the virtue ethics school, upon which much is explored in Chapter 4: “Moral Virtues and Ethical Decisions”. All three philosophers indicated the central role of reasoned reflection as necessary to discover the moral principles required for the pursuit of eudaimonia.

3

I ntuition, Free Will, and Rationality: Foundations of the Enlightenment

Between the second and fifth centuries CE, Judeo-Christian scriptures were joined with Greek and Roman philosophy to develop Christian theology. In this philosophy, the goal became achievement of an other-worldly heaven, and not eudaimonia within social harmony.8 Christian Church patriarchs, however, such as the theologian Clement of Alexandria (150–215 CE), recognized that the Greek philosophers posed moral views about how to live that were consistent with Christian scriptures. Indeed, concepts such as the soul, conscience, truth (or logos as in John’s Gospel), virtues and their perfection (or at least development) were all necessary for a full formation of Christian theology and philosophy. Much of Christian philosophy is therefore Greek.9 In particular, the Church adopted the Greek tradition of logical reasoning in deciding the right way to act, particularly with respect to moral decisions. It adopted the position that everyone has the capacity for moral reasoning (almost everyone), and therefore all have free will, and have the ability to either commit sin or to achieve salvation. Note the philosophical concept that you must be  Politics, Book II, Part V.  Ibid, Book I, Part X. 8  This is the period of the initial devolution of Roman culture. 9  Chaim Potok (Wanderings, 1978) provides an historical review of Jewish attempted resistance to a similar Helenization of Hebrew philosophy. 6 7

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free to choose right or wrong in order for your choices to be judged either moral or immoral, i.e. to be considered sinful or not. This Greek philosophical tradition, however, inherently questions the necessity of the Judeo-Christian scriptures for salvation (or the necessity of any other religiously revealed scriptures) since this Greek tradition poses that people have an innate ability for making moral decisions. If people are endowed with the capacity for logical reasoning, then starting from certain premises which are not dependent upon religious revelation, they can logically deduce correct moral decisions such as not murdering, or stealing, or committing other immoral acts. This is the Greek rationalist approach. Alternatively, or coincidentally, people might be endowed with the necessary intuition for moral choices, as in the intuitionist approach. Either poses the possibility of salvation without scriptural knowledge. In response to this challenge to Christian religion, the Church offered various theories of the grace that goes before, which supposes a divine inspiration or gift from God that stimulates this logical or intuitional capacity for moral decisions. This notion of grace aimed to save the role of the Church in morality in that the moral law was viewed as stemming from God as taught through Church doctrine. The theologian St. Jerome (347–420 CE, of Rome and Antioch) argued that a spark of conscience (synderesis) allows one to discern right from wrong, or good from evil, and therefore to avoid the Christian notion of sin. According to the greatest theologian of his era, St. Augustine (354–430 CE, the Bishop of Hippo in Africa), God endows everyone with such a conscience so that each can know the correct moral action, but this knowledge is not sufficient for virtuous conduct. By Augustinian philosophy, correct conduct requires that a person’s free-will must be aimed at the good, which is only revealed to humanity through God’s goodness. Through experiencing God’s goodness, the soul turns upwards towards joining this revealed goodness, and away from worldly matters, a process Augustine termed the flight of the soul. This is a vision of God-provided grace that is required for correct moral conduct. Through St. Jerome and St. Augustine, the religious notion of godly revelation was re-established in moral philosophy, but not necessarily in deciding what was correct, but rather in stimulating individuals to pursue correct moral decisions. The spark that stimulated moral consideration shifted from lessons learned in previous lives (the Greek philosophical idea) to the individual conscience as provided by God’s grace (a theological idea). Of particular importance to the modern ethical philosophy is St. Augustine’s exploration of ethical merit as stemming from and being required for correct motivation. (This is a broad philosophical subject of considerable importance for the Kantian analysis of the next chapter.) St. Augustine argued that a love of God, and a wish to perfect oneself to get closer to God, are necessary motivations for any action to be morally correct.10 “To live well is nothing other than to love God with all one’s heart, soul and mind.” (De Moribus Ecclesiae Catholicae, I, 25, 46.) This philosophy focuses on the state of mind of the individual, not on the act itself. Some  God can conceivably be interpreted here as the spiritual embodiment of love, righteousness, and the motive force of the universe.

10

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Chapter 2: The Applicable Western Ethical View?

action can be moral if the motivation is correct, but the same action can be unethical in the absence of the correct motivation. For example, a self-righteous desire to be thought of well is not the correct motivation for charity, and fear of being discovered is not the correct motivation for not committing fraud. According to St. Augustine, only a desire to join with God (a desire to join with the good) is a proper motivation. As we explore in the next two chapters, Kantian analysis argues that only the pursuit of a final social goal of harmony, what Kant termed the kingdom of ends, is the appropriate motivation for moral action. This notion of harmony consists of society’s knowing pursuit of a set of generally recognized moral maxims. All of this is explored in detail later, but one can now perceive how this pursuit of a secular version of kingdom of ends is a redirection of the religious goal of joining with the ultimate good, be it interpreted as heaven, nirvana, paradise or some other non-­ worldly achievement. Hence this notion of motivation being important to ethical decisions has its roots in post-Greek religious philosophy, and it extends through the enlightenment to modern ethical thought. It also extended from Greek philosophy’s emphasis on eudaimonia’s requirement that we fit with our community, especially concerning our moral obligations. Dionysius, the fourth to fifth century philosopher, argued a strict theory of moral assessment: (i) the category, (ii) the motive and (iii) the outcome of some action must all be moral or the action is worthy of blame. Beneficence, for example, must be both properly motivated and have a charitable result. One should know that any charitable giving will reach the deserving, or it is without moral merit, it is not good. As with St. Augustine, Dionysius also argued that evil is just the deprivation, or destruction, of good. This notion of evil is an important consideration for later exploration. We will see later that these notions of (1) proper ethical motivation, and (2) the evil consequences of the lack of this motivation are very much at the heart of practical business ethics. We might ask, why might the outcome be moral in order for an action to have moral merit since outcomes are often uncertain prior to our actions. Isn’t motivation sufficient for moral credit? The answer is that our actions must be reasoned and have a logical basis. A poorly thought out random-type of act cannot be considered moral. This is a notion explored in later chapters. In the fifth century CE, the Western Roman Empire succumbed to the Teutonic invasions from the north. In the next century, the Eastern Roman Empire succumbed to the Islamic invasions. The Roman educational systems were destroyed. The only centers of education remaining were in isolated rural monasteries, which attempted to preserve the ancient knowledge of both ethics and natural philosophy (science). This medieval period is called the age of scholasticism, the age of this monastic preservation. The age was not so much concerned with the content or logic of moral concepts as with their categorization into which virtues should be cultivated (as in Aristotle), and the relation of morality to divine revelation (as in Socrates’ Euthyphro). Even during this period, however, there were substantive philosophical-­ ethical examinations published. For example, in the sixth century, the Roman patrician and scholastic philosopher Boethius (480–526  CE) argued that some moral principles are self-evident (axiomatic). In Cur Deus Homo, he writes that it shows

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“negligence if after we become established in the (Christian) Faith we do not strive to understand what we believe.” By this “understanding,” Boethius means to first assert the moral axioms, and then through logical analysis and reflection to reach conclusions concerning moral decisions. This is certainly an affirmation of the Socratic-Platonic rational process, although with a religious link. Thomas Aquinas (1225–1274),11 the great philosopher of the middle ages, argued that the first principle of thought about conduct is that good should be pursued, and evil avoided. He termed this the synderesis (“spark of conscience”) rule, similar to Augustine and St. Jerome’s approach. Aquinas argued that this is a self-evident principle, or axiom. He also argued that conscience provides the practical reasoning necessary for correct moral decisions. Aquinas linked Greek philosophy to religious doctrine to form a Christian philosophy, generally termed Thomastic philosophy or Thomism. In this process, however, Thomas Aquinas actually developed a natural law version of ethics that stands independent of religious doctrine. He benefitted from concurrent republishing in the West of Aristotle’s writings and explorations of science through rational exploration via his early use of the scientific method. Thomas argues that a natural law of things, even ethical laws, can be discovered through rational thought. By this natural law, Thomas refers to the general natural order of things which involves humanity and its progress towards perfection. In Summa Theologica, Thomas Aquinas (1993) showed the parallels between the Greek classical virtues and those recurrent in Christian perfectionist thought. He therefore utilized the classical virtues as a foundation of ethical philosophy. Right action (purposeful and logically based action), Thomas argued, promotes human flourishing. Hence he emphasized the “reasoning” component of the classical virtues. In Thomastic philosophy, there exists an essential human nature, and associated with it, a set of values that constitutes excellence in life. Virtues are those habits that are conducive to fulfilling a person’s life, i.e. a version of eudemonia. The natural law referred to stems from the natural human tendencies to preserve one’s life, raise children, co-operate with society, and generally to flourish happily. The law of God (Mosaic law and other extensions) is not independent of this natural law, but just another version of it according to Aquinas. The religious basis of ethics was re-inserted by Thomas through the notions of divine revelation and inspirational grace, which aid in the pursuit of virtue so that a state of blessedness (beatitudo), an eternal joining with God, can be achieved. Hence eudaimonia is replaced with beatitudo, but the classical idea of “virtues still being desirous of pursuit” remains.12 As in the Greek philosophy, these virtues have a natural basis founded on the pursuit of the good life. This good life, however, is not just a broad state of happiness (as argued by the ancients), but rather a final  Thomas of Aquino was an Italian Dominican priest of the scholastic era and educated at the University of Naples. See Wikipedia for a brief biography that indicates his considerable importance in the history of philosophy and Christian theology. 12  The author Jack Kerouac (1922–1969) pioneered the beat literary movement of the 1950s and 1960s. He coined the term beat to reflect beatitudo. His most significant literary novel, On the Road (1957), explored the notions of virtue among his friends. 11

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Chapter 2: The Applicable Western Ethical View?

joining with God. This is the core of Thomastic philosophy, and this formed the basis for subsequent Christian religious philosophy (theology). Also in Summa Theologica, Thomas proposed a theory of just price, one sufficient to just cover the costs of production including the necessities of labor. His theory was based upon the ancient prohibition against usury: the practice of earning interest on loaned money, since this was viewed as earnings without effort which was thought to be unfair. This was viewed as unfair since the receiver of interest did not appear to create anything in return, but Aquinas argued that trade should be value for value. Unfairness was epitomized when a buyer had an urgent need and a seller exploited this need by raising the price as high as could be received, i.e. price gauging. The excess price was unfair since there was no additional value being offered. This notion of unfair prices and transactions was based upon pursuit of the good according to divine law, and not upon legal constraints. As in Thomas’ natural law theory he also linked this notion of unfairness to the requirements of social stability, i.e. unfair prices cause social instability and therefore implicitly an unnatural and suboptimal general welfare. This is a clear statement and explanation of a market-related duty, a Thomastic duty. These notions of just price and economic-social stability was endemic to Europe post the decline of the Roman Empire. The barbarian threat and invasions of the empire began in the late fourth century CE. During the medieval era and into the middle ages, prices were semi-regulated via local craft guilds and royal governance (see Fischer 1996). Thomas’ notion of just price was criticized and refined by Duns Scotus (Franciscan scholastic philosopher, 1266–1308). He pointed out the mutual benefit between bargaining transactors, benefits that must exist or otherwise agreement would not be reached. By purely arranging transactions through retail efforts, Scotus argued that merchants also provide a service worthy of their compensation.

4

The Enlightenment to Modern Ethical Philosophy

We previously reviewed that the ancient Greek philosophical thought concerned the pursuit of the highest good, i.e. a “flourishing life” that is most fully and lastingly satisfying (eudaimonia). Virtue, although central to our managing social relations, was primarily concerned with attaining this optimal life. But the change to Western Christianity imposed notions of heavenly salvation as the purpose of life (beatitudo). The Church argued that this necessitated some divine involvement. With increasing religious conflict between Christian sects, however, knowledge of the requirements for the pursuit of virtue and the pursuit of the godly became increasingly complicated for the populace to perceive Church doctrines which became complex and conflicting. The philosophy of the enlightenment period sought to clarify and simplify by founding ethics on non-religious reflective thought. The reliance on logical reasoning certainly stemmed from the Greek, but the non-reliance on perfectionist virtue was an enlightenment idea. The enlightenment placed

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humanity, and its social relations (the social contract), at the center of ethical reasoning. This represented a clear movement back towards the ancient Greek. Perhaps the basic theme of the enlightenment was declared by Kant in Answer to the Question: What is Enlightenment? (1784, 8:36 and 8:37): Enlightenment is man’s exit from his self-incurred minority. Minority is the incapacity to use one’s intelligence without the guidance of another. Such minority is self-incurred if it is not caused by lack of intelligence, but by lack of determination and courage to use one’s intelligence without being guided by another. “Have the courage to use your own intelligence!” is therefore the motto of the enlightenment. All that is required for this enlightenment is freedom; and particularly the least harmful of all that may be called freedom, namely, the freedom for man to make public use of his reason in all matters.

The development of and use of this “intelligence” became the purpose of education, particularly of higher education. The phrase “make public use of his reason in all matters” is particularly important and explored in this book. It is a critical element in business ethics where emphasis must be placed on the word “public.” This public use of reason is the foundation for what the twentieth century philosopher Hanna Arendt termed the noble nature. This is explored in considerable detail later. Ethical philosophy originated with Greek intuitionism, the idea that laws of morality, like the laws of natural science, exist independently of human preferences; that they are objectively real. Violation of these moral laws means that eudemonia is inevitably frustrated. Enlightenment philosophy, however, placed morality at the center of rational human self-governance. Here the moral content of actions depends on personal autonomy. Ultimately this philosophy was more socially oriented, centered around political notions of the social contract where humanity collectively decides what is right. The potential conflict between our social notions of morality and personal autonomy were envisioned as resolved through reasoned social discourse. In this sense, it draws back to the process of the Socratic Dialogues. Gutenberg’s printing press was invented in 1476, and the first book printed was the bible. As a result, by the sixteenth century CE, Europeans were increasingly literate and not reliant on religious authorities for guidance. Protestantism split Europe into religious wars so that Christianity became increasingly viewed as incapable of providing moral guidance. (Note that the European “thirty-years war,” 1618–1648, was largely a religious conflict which devastated Europe.) It was obvious that secular principles that were independent form religious sectarian doctrines were necessary. Although universities offered reasoned versions of morality independent of religious scripture, this scripture still provided some guidance. Christians believed that God’s law provided this individual guidance, and that it benefitted all in a social sense. It was a matter of free will whether this law was followed or not; to not follow God’s law meant committing sin, which separated oneself from God’s community, and this community was Church oriented. The seventeenth century extended this version of Thomastic natural law into the philosophy of the social contract as outlined here. Philosophers Hugo Grotius, Thomas Hobbes, and John Locke began the modern social contract theory of ethics. Hugo Grotius (1583–1645 CE) was born in Holland

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but became a French lawyer and statesman. He originated modern natural law theory (post Thomas Aquinas). He argued that individuals are entitled to determine their own objectives, but that the purpose of ethics is to pose the conditions under which these objectives can best be pursued. In Law of War and Peace (see Tuck, 1993), Grotius argued that people are sociable by nature, and that we form political societies only if we believe that our individual rights will be protected, although some rights might be traded for political security. These rights are, Grotius argued, a natural attribute of the individual (inalienable rights) and independent of any social contribution they might provide, i.e. all are entitled to these rights no matter their societal position. Note the distance this philosophy has from religious doctrines. Thomas Hobbes (1588–1679) was an English tutor to the children of the aristocracy. He became, however, a popular philosopher known throughout Europe. He is usually recognized as the founder of English moral and political philosophy. In Leviathan (1651), Hobbes argued somewhat differently than Grotius while further developing the social-contract idea. Unlike Grotius, Hobbes denied that people are naturally sociable. People, he argued, relentlessly seek power to achieve self-­ interested aims. The inherent conflict that inevitably results forces us to agree to some sort of sovereign rule capable of enforcing peace while we pursue our individual goals. The natural laws of morality are no more than the most essential steps we must take so that an orderly society can exist, one within which we can potentially flourish. The theory that political society emerges from this social contract makes man the source of these secular laws rather than any objective natural law as with Aquinas or Grotius. Any restrictions on market trade, for example, would be because individuals were perceived as sufficiently greedy so as to exploit others through deception or coercion. John Locke (1632–1704) was also an English philosopher. He was involved with the protestant conflicts that led to the English civil war. He was exiled to Holland, but after William of Orange became king in 1688, he returned to England to publish his philosophy. He argued in opposition to Hobbes. Locke argued that because some rights are inalienable, then there must be natural limits on government. Nevertheless, Locke claimed that most people do not know what morality requires; they must be instructed and controlled by the threat of punishment. Even though the natural law is meant to guide us to both individual and social wellbeing, and even though we are capable of - and should be involved in - forming our political order, we still need to have morality imposed upon us. Much of seventeenth and eighteenth century’s political philosophy essentially argued this necessity of the imposition of morality by society through a social contract, i.e. law. The institution of private property was central to Locke’s argument. Protection of private property rights, as broadly defined to include life, liberty and wealth created through individual labor, was the very motive for the social contract.13 God hath given the world to men in common…Yet every man has a property in his own person. The labor of his body and the work of his hand we may say are properly his.

13

 See Locke (1690, Chapter 9, section 124).

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Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labor with, and joined to it something that is his own, and thereby makes it his property. (Locke 1690, Chapter 5, section 26–27.)

The philosopher Earl of Shaftsbury was a student and friend of Locke. But in opposition to Locke’s rather dim view of humanity, i.e. that morality must be imposed, in Inquiry Concerning Virtue (1711), the Earl of Shaftsbury claimed that people have a moral faculty that enables them to judge their own motives. We are virtuous only when we act upon those motives we approve, and we approve only our benevolent or sociable motives. (This “we give our law to ourselves” motive is a forecast of Kantian philosophy as explored below.) In this sense, Shaftsbury argued, morality is an outgrowth of human feelings, and not intuition or logical reasoning. (This “feelings” approach is in conflict with Kant.) Shaftsbury’s argument originated the modern debate between whether morality should or could be the result of the higher faculties of moral reasoning, or merely the result of human feelings. Both sides of this debate argue that benevolence and morality benefit society. The question concerns whether morality stems from human feelings or intuition. In either case, moral rules would be accessible to all since all are capable of both this reasoned intuition and of moral feelings such as empathy for the suffering of others. Unlike Hobbes, many argued that people naturally desire the good of others, that they usually do not need the threat of penalty to behave morally. Immanuel Kant (1724–1804) and David Hume (1711–1776) began their considerable contributions to ethical philosophy at this point, i.e. post Hobes, Locke and Shaftsbury. Both challenged the notion that morality depends only upon achievement of the good result. In their philosophy, they posed the notion that motivation should be at the center of morality, as Saint Augustine and Dionysius previously argued. The philosophy of Kant and his modern extenders is left for a subsequent chapter, but both Hume and Kant are reviewed here in brief. Both rejected natural law theories of morality. David Hume was a Scottish philosopher educated at the University of Edinburgh. Hume (1739) argued that a virtue-centered theory best accounted for our moral convictions, and these virtues are rooted in our feelings towards others, emotional feelings necessary to move us to moral actions. Reason, he argued, is incapable of this motivation. We are often self-interested, but we still desire the wellbeing of others. Our actions in pursuit of the wellbeing of others constitute virtue. Motivated by a sympathetic appreciation for the feelings of others, we observe societal rules that pursue what we term justice. These rules are generally accepted practices, but they originate in human feelings or empathy for the suffering of others. Hence, according to Hume, all our ethical standards stem from personal feelings which mold our moral reasonings. Immanuel Kant (1724–1804) was educated at the University of Konigsberg and spent his entire life in that city. He is generally recognized as Europe’s greatest modern philosopher. Kant argued very differently from Hume. Kant placed reason, and not feelings, at the center of his notion of the ethical. He argued that the central point about morality is that it implies personal duties, and these duties can only arise

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from the reasoned maxims we pose on ourselves. When we know that morality requires us to do some action, we must also know that we can perform this action, otherwise we could not logically admit that we are required to do this. This “required by morality” claim can only be true if we are free to do this. This excludes requirements imposed by forces outside of ourselves; these requirements must be determined by something within our own nature, i.e. our ability to think and reason. They cannot be imposed by a god, or by some external natural law, or we are not free (or autonomous as he termed it). According to Kant (1785, 1797), the moral law must consist of maxims (principles for action) that tell us to act in ways that we would have everyone act (the property of universality). Each of us, Kant argues, can analyze whether some maxim is moral or not by asking whether we would will that everyone behave according to it. If we make a personal exception for ourselves, then it cannot be a moral maxim, and we have a duty to obey all qualifying maxims. This is not, however, a view that each of us should have our own personal moral code different from others. The democratic filter of reflective social discourse (as in the Socratic dialogues) should be used to establish our moral maxims or duties. Hence we are fully able to participate in this moral legislation, and this should give us a high degree of respect for obeying the maxims we impose. In this sense, we are fully autonomous. To guide our moral thinking and formation of our agreed moral maxims, Kant posed a set of simple rules which he termed the categorical imperative (CI). As we shall examine later, Kant posed three of these rules, which he saw as really just different versions of one another, that to assert one logically implies the assertion of the other two. Kant also argued that these CI guides for our process of social discourse reflects the common beliefs of people concerning the formation of our moral principles. The first rule of the CI, universality, is mentioned above. The second form of this rule is respect for the dignity of others, i.e. allow others to pursue their own purposes without deception, fraud or coercion. This implies that one ought not deceive someone else into pursuing our own ends while purposefully subverting their own intentions. As an example, if we hire someone then he agrees to work for us for some specified wage. His purpose is to earn income. If we knowingly intend to not pay this wage, then we frustrate his purpose, and we engage in deception. We have not respected his purpose. We can readily discern that universality implies that our moral maxims are constructed about the principle of respect for individuals, the second form of the categorical imperative. (This “equivalence argument” is fully developed in the next chapter.) The third form of Kant’s categorical imperative concerns the proper motivation for our moral maxims. He termed this motivation the pursuit of the kingdom of ends, where this kingdom is a social goal of all clearly understanding and pursuing our democratically established moral maxims, i.e. pursuing a moral community. Our motivation for being moral should be a social motivation in that we seek an harmonious society. For example, if we decide to violate a maxim against theft, we (1) violate our requirement for universality since if theft is generally acceptable, then society would breakdown. At the same time, (2) we would certainly not be

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respecting the dignity of whomever we steal from. In particular, (3) our motivation for not committing theft should not be because we fear possible discovery, but rather because we wish society to be harmonious in its pursuit of a moral community. When we examine this Kantian approach in more detail (in chapter “The Categorical Imperative Process and Moral Duties”), then we shall explore the very practical nature of this ethical philosophy for our market and business interactions. Kantianism forms one of the major schools of ethical thought, along with intuitionism, the natural law school, and utilitarianism (examined below). Each has commonalities with the others, but each emphasizes a different organization of our ethical thought. For example, Kantianism must rely upon some origination of posed moral maxims, which are to be examined for possible acceptance according to the guides of the categorical imperative, and in accordance with social-democratic discourse. We can see the very roots of this process in the Socratic dialogues, which forms the basis of the intuitionist approach. Indeed, the posed maxim can be viewed as originating in intuition or religious thought, a notion that Kant would not object to provided the maxim passes the filter of open and logical discourse as guided by the categorical imperative. It should also be noted here, and explored in detail in latter chapters, that Kant emphasized an additional guide to the social discourse, a universal principle of right, usually termed today the universal principle of justice (UPJ): Maximize the freedom of the individuals provided they do not impinge the freedom of others.

In Kantianism the UPJ, together with the categorical imperative are to be utilized by both the individual, and by society through its social discourse, to derive moral maxims and applicable duties. This has strong implications for our market interactions, particularly with respect to freedom to interact and exchange. It is shown in latter chapters that the UPJ is still being expanded and is still controversial. In particular, religious-based prohibitions on various market exchanges are still being voiced, prohibitions that at least appear to violate the UPJ. Still, Kantianism had its opponents. Thomas Reid (1710–1796) and W.D. Ross (1877–1971) argued that morality was common sense, essentially intuitive. We just know our obligations towards others, and logical systemization of these moral principles is neither needed nor possible. The text later argues the opposite view of this. We shall show the usefulness of this systemization within the Kantian framework, especially for our exploration of market and business interactions. In addition, the Humean approach of centering the origins of morality around human emotion is currently under considerable examination and resurgence.14

 See Haidt (2012), for recent examinations of this view as based upon modern psychological investigations that indicate the emotional foundation of moral reasoning.

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Chapter 2: The Applicable Western Ethical View?

The Societal Sum of Individuals’ Happiness

Jeremy Bentham (1748–1832) was an English philosopher from University College, London. He originated modern utilitarianism, a theory that moral principles should be those that most benefit overall society. This is a hedonistic-consequentialist theory where a particular notion of human good is to be served, and this human good consists of the sum of individuals happiness. Our Western society does not accept this theory in that it believes that there are fundamental individual rights, inalienable rights, which must be respected despite the overall total-sum of the happiness of society’s members. At least theoretically, no one is to be directly sacrificed in order to serve the enhancement of society’s overall happiness. This utilitarian theory is examined extensively below where it is argued that utilitarianism is not especially useful as a practical method of organizing business ethics. John Stuart Mill (1806–1873) was another British philosopher, perhaps the greatest of the nineteenth century. He argued that common-sense morality, which we learn as children, represents a lengthy historical accumulation of wisdom about desirable and undesirable consequences of actions. He also argued in Utilitarianism (1863) that basing moral principles on a desire to maximize societal satisfaction would not lead to common sense solutions to ethical problems. As an example, the wealthy miser might still derive great pleasure from an additional small amount of cash, while the poor person might not. Does it fit common sense to have the poor redistribute to the wealthy? Utilitarianism is a consequentialist branch of ethical philosophy that claims that our moral rules should be so designed as to maximize the total sum of society’s happiness. By this we mean the total sum of the happiness of all individuals in that society. This definition of utilitarianism is actually rather limited in that in its extreme form it could justify the gross violation of the rights of some in order to benefit the whole of society. As such, we would never accept this extreme form of consequentialist theory as the basis for morality. For example, the 1961 movie Judgment at Nuremberg concerns a semi-fictional post-WW II trial of German jurists who had warped the legal structure of 1930s Nazi Germany so as to allow the wrongful persecution of various political and ethnic minorities, a persecution that evolved into what we ultimately describe as the holocaust.15 (The trials of similar German jurists did take place in post-war Germany. They ended in 1949.) The two main characters in this cinema-play are Judge Ernst Janning, played by actor Burt Lancaster, who is being tried for crimes against humanity, and presiding Judge Haywood, played by Spencer Tracy. One of the critical acts that Judge Janning is accused of concerns a particular trial that occurred early in the Nazi era. Janning is accused of knowingly allowing an innocent man to be convicted, and presiding in such a way as to enable that conviction. Judge Janning is found guilty, and when Judge Haywood reads the sentence, he states, “We declare now that we stand for truth, justice and the value of a single human being!” At the end of the movie, the two judges meet in Judge Janning’s jail cell. Janning pleads he 15

 This movie was based on the 1957 Abby Mann television play of the same name.

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had not known that his undermining of the judicial system would lead to the horrors of the holocaust. Judge Haywood responds, “Judge Janning, it became that when you knowingly first convicted an innocent man!” This Judgment at Nuremberg story actually illustrates both the fault with the extreme consequentialist form of utilitarianism, and its two variations explored immediately below, each of which is more practical but not necessarily applicable and useful. In Western society, theoretically the rights of the individual are held as a sacred ideal. This philosophy is the foundation of Western democratic constitutional arrangements, i.e. there are limits to the democratic rights of the majority. The three branches of utilitarianism referred to above are: • Hedonistic utilitarianism: People seek pleasure and avoid pain so as to maximize the difference between these sensations. Whatever actions maximize the sum of these differences across society should be adopted as our moral rules. • Rules-based utilitarianism: We should adopt whatever rules we believe will maximize our expectation of societal happiness. • Social-welfare based utilitarianism: We should adopt actions and rules we believe will maximize our expectation of a societal welfare function, which considers not only societal happiness, but also by some specified extent, the rights of individuals. In this case, the specified rights of individuals can be considered as constraints on our attempts to maximize societal happiness.16 At first glance, utilitarianism can appear to be based upon common sense. It fits common slogans such as “the greatest good for the greatest number,” which some argue should be our guide for action and rule making. The problem is that in application, this sort of slogan is problematic in measurement of this “good.” Are we to try to apply utilitarianism as a norm in establishing rules and actions, or are we to use the theory as an explanation of how our rules evolved, i.e. did they evolve so as to maximize some conception of societal welfare? If it is the former, then we must answer “Who is the we who will be deciding the rules and actions?” Will this be by democratic vote? Will we sacrifice the interests of minorities to benefit the majority? Will we sacrifice the welfare of future generations to benefit the welfare of the current generation? These questions are particularly important for resolving environmental concerns as examined in a later chapter, and also in problems of current public finance. We can illustrate the problems with utilitarianism by considering the conundrum of income redistribution. To what extent is it in the interests of social welfare to redistribute income from the wealthy to the poor? There is no doubt that if we tax the income of the wealthy, they will be less happy as a class although perhaps some individual wealthy people will not be less happy. If we redistribute this income to  This third case of utilitarianism is considered in greater detail in a latter chapter. The first two utilitarian theories originated with Jeremy Bentham (1748–1832), and was extended by John Stuart Mill (1806–1873) and Henry Sidgwick (1838–1900), all three of whom were English philosophers.

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Chapter 2: The Applicable Western Ethical View?

the poor, there is little doubt that as a class, the poor will be happier, but how much happier as compared to the loss of happiness of the wealthy? How much if any redistribution should we undertake? Our society decided that some redistribution is in order since we have progressive income taxes, but should we not redistribute income so that it is equal? If the relation between income and happiness were identical for all individuals, then this sort of income equality might maximize current overall societal happiness. Is this what we want? There are, however, two problems with this income equality argument: • The relation between income and happiness may not be identical for all, and interpersonal comparisons would be faulty. As an example, some individuals might prefer less income and more leisure, while others prefer the opposite. As a result, the income transfer benefit to the leisure class would be small, but the hurt it would cause the high-income class could be relatively large. Net societal happiness could decrease. We should also consider that some high-income employment could be very necessary for society to function but stressful and unpleasant for those who perform it. Also, some low-income employment could be much less stressful and more pleasant. As a result, an income transfer could result in a large scale shift away from the stressful and less pleasant employment and therefore ultimately hurt overall economic performance and societal happiness. • Income transfers of this sort could hurt savings, capital investment and entrepreneurship. Future generations might suffer as a result. A positive claim that our current rules and actions evolved so as to maximize anticipated social welfare might be accurate, but it is hardly testable. As such, this claim is of little interest. We are always interested in exploring new actions and rule modification since this is the democratic process. We are always interested is posing new actions and norms for our democracy to consider, but shouldn’t ethical considerations such as Kantian moral-maxims and duties act as constraints on these newly posed actions?

6

A Western Ethical Tradition

What can we discern from this brief historical review of ethics? Is there a Western ethical tradition applicable to our problem of the moral implications of market interactions? If so, it manifests several fundamental principles: 1. Ethics needs no religious or authoritative basis other than general agreement reached after reflective thought and logical reasoning. There is no need for basing ethics upon divine scripture from any source. Truth can be viewed as either independent of the divine, or one with it, but in either case, divine revelation is not required to know truth. Perhaps to know truth is to know the divine.

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2. Ethics is a subject of logic even if we accept the view that intuition or emotion is the source of ethical ideas. Practical applications of ethics stem from logical analysis from which moral duties can be derived. 3. The Kantian system of social discourse in which we derive moral maxims from fundamental guides (the categorical imperative) is very much at the heart of modern Western ethical philosophy. It is inherently a democratic system that is rooted in ancient Greek philosophy. It is centered upon the individual as an autonomous, rationally reflective individual contributor to our reasoned social discourse. 4. Ethical motivation must not be based upon personal egoistic consequences, but upon the pursuit of a broader social ideal. The individual is the moral agent, but social harmony must be the ultimate motivation (Kant’s kingdom of ends). This also is deeply rooted in the Socratic tradition. Note that this social harmony is still rooted in the respect for individual dignity and freedom. This kingdom-of-­ ends goal (pursuit of a moral community) is not one of maximizing overall societal happiness at the expense of the individual, but rather the individual is sacrosanct. 5. Even today, the universal principle of justice is still being applied, refuted, and sometimes expanded. The extent of the individual’s freedom to interact in the marketplace is still being challenged, but frequently without clarity as to the basis of that challenge. The task of the next chapters is to clear the confusion over generally-accepted market practices and their ethical content or lack thereof. To do so we must first examine notions of duty and their general acceptance or rejection as they relate to business interactions. Review Questions 1. In exploring the “Western ethical tradition,” what two questions become apparent? (See section 1 above.) 2. Where and when did this “Western ethical tradition” originate, and who were its originators? What were the three questions explored during this origination? (See section 2.) 3. According to Warren Ashby, what were the 4 ideas the ancient Greeks used to form their philosophy? Briefly explain the fundamentally linked concepts of eudaimonia and arete and how they were used? Was the ancient Greek approach to ethics teleological? (See section 2.) 4. What was the fundamental issue explored in the Socratic dialogue Gorgias? Explain its importance as an ethical issue? (See section 2.) 5. What was the fundamental issue explored in the Socratic dialogue Euthyphro? Explain its importance as an ethical issue? (See section 2.) 6. Where does the intuitive approach to ethics (intuitionism) originate? What are the fundamentals of this approach? (See section 2.) 7. What is the role of “the soul” according to Socrates and Plato? (See section 2.)

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8. In the early centuries of the CE, what was the fundamental change in philosophical goal between the Greek and the Christian? What was carried over from the Greek especially with respect to “free will?” (See section 3.) 9. The Greek philosophy posed that people have an innate ability for making moral decisions. How did this challenge the early Christian church, and what was its response? Your answer must include the ancient notions of “soul” and “grace,” and also an answer to the Euthyphro issue? (See section 3.) More In-Depth Class Discussion or Essay Questions 1. Using the history explored in this chapter, explain why motivation is they key to the moral worth of some action? But also explain the defects in only using motivation as the factor that determines moral worth? 2. Review a business example of why your answer to the question above is correct? 3. The movie Judgement at Nuremberg (referred to in Sect. 5 above) reviews much more than the potential results of utilitarianism for a society. It also reviews the pressures placed on authorities in making moral decisions, pressures to pursue utilitarianism. Review these “utilitarian pressures” illustrated in this movie?

References Aquinas, Thomas. 1993. Summa Theologiae. In Aquinas: Selected Philosophical Writings, ed. Timothy McDermott. Oxford, UK: Oxford University Press. Aristotle. 1976. The Ethics of Aristotle: Nicomachean Ethics, trans. J.H.K.  Thomson. London, UK: Penguin Books. ———. 1984. The Complete Works of Aristotle, ed. Jonathan Barnes. Princeton, NJ: Princeton University Press. Ashby, Warren. 1997 and 2005. In A Comprehensive History of Western Ethics: What Do We Believe? ed. W. Allen Ashby. Amherst, NY: Prometheus Books. Fischer, David Hackett. 1996. The Great Wave: Price Revolution and the Rhythm of History. Oxford, UK: Oxford University Press. Haidt, Jonathan. 2012. The Righteous Mind. New York, NY: Pantheon Books, Random House. Herman, Arthur. 2013. The Cave and the Light: Plato Versus Aristotle and the Struggle for the Soul of Western Civilization. New York, NY: Random House. Hobbes, Thomas. 1651, 2012. Leviathan or the Matter, Forme and Power of a Common Wealth Ecclesiaticall or Civil, ed. Noel Malcolm. Oxford, UK: Oxford University Press. Honderich, Ted. 1995. The Oxford Companion to Philosophy. Oxford, UK: Oxford University Press. Hume, David. 1739. A Treatise on Human Nature. London, UK: John Noon. Kant, Immanuel. 1784. What is Enlightenment? In Basic Writings of Kant, ed. Allen W. Wood. New York, NY: The Modern Library Classics, The Modern Library. ———. 1785. Fundamental Principles of the Metaphysics of Morals. In Basic Writings of Kant, ed. Allen W. Wood. New York, NY: The Modern Library Classics, The Modern Library. ———. 1797. In The Metaphysics of Morals, ed. Mary Gregor. Cambridge, UK: Cambridge University Press. Kerouac, Jack. 1957. On the Road. New York, NY: Viking Press. Locke, John. 1690. Two Treatise on Government. London, UK: Andrew Miller Publisher.

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Mill, John Stuart. 1863. Utilitarianism. London, UK: Parker and Sons Publisher. Plato. 1989, 1999. The Collected Dialogue Including the Letters, ed. Edith Hamilton and Huntington Cairns, Bollingen Series LXXI, Princeton University Press. Potock, Chaim. 1978. Wonderings. New York, NY: Alfred A. Knopf. Tuck, Richard. 1993. Philosophy of Government 1572–1651. Cambridge, UK: Cambridge University Press.

More In-Depth Readings Ashby (1997), cited in the bibliography above, presents an excellent review of the development of Western ethics for the introductory student.

Chapter 3: The Categorical Imperative Process and Moral Duties

1

Enlightenment Philosophy

The previous chapter reviewed the Greek-philosophic foundation of intuitionism as based on the Platonic-Socratic approach, i.e. the individual uses rational inquiry to discern the transcendent moral-truths that become applicable as axiomatic guides for behavior. In the Socratic dialogues, social discourse developed these intuitions. Immanuel Kant used and extended this ancient Greek vision. He argued, however, that individuals should bring their intuitive axioms to the filter of democratic social-­ discourse where discussion can separate the appropriate from the not-so-­appropriate, the practical from the impractical. As suggested in the previous chapter, Kant posed that our society believed in a guided process for individual and social review, a process that utilized what he termed the categorical imperative for developing our duty obligations. This guide is examined here followed by an examination of duties derived from this process. The Kantian approach is best viewed as part of a culmination of an age of discovery and progress. The historical period termed the “European Enlightenment,” or as it is often called the “Age of Reason,” is a fifteenth through eighteenth century phenomenon that affected all aspects of European life. It included significant scientific discoveries: • Galileo (1564–1642) discovered some principles of gravitation, and also by applying the telescope to observations of the solar system, he discovered the moons of Jupiter and the rings of Saturn. • Copernicus (1473–1543) established that the sun is at the center of the solar system. • Newton (1642–1727), established the principles of light composition, the elliptical orbits of the planets around the sun as based upon the principles of gravitation, the principle of the conservation of energy, and principles of motion.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_3

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During this historical period the first major modern advances in philosophy also occurred, the first advances since the Scholastic Era of the Middle Ages. • René Descartes (1596–1650) not only reestablished physics with a mathematical foundation (as with some ancient Greek physicists such as Archimedes), but also articulated the methods for how we establish knowledge and judge what is real. • Thomas Hobbes (1588–1679) and John Locke (1632–1704) explored the social contract as the basis for establishing liberty and equality. • David Hume (1711–1776) exposed the possible limitations of reason for supporting the judgments we do make. He argued that emotion channeled our logical faculties into supporting sympathy-oriented moral judgments. This enlightenment period is often contrasted with the European “Middle Ages” that supposedly exhibited superstition and irrationality. The German philosopher Immanuel Kant’s (1721–1804) contribution was one of the last and the greatest of the enlightenment philosophers. It is this movement, or age, that established the foundations of modern Western philosophy, especially in ethics. Kant’s influence on this Enlightenment era of Western civilization can hardly be overestimated. As such, he is one of the major figures in history. He sought to restore ethics to a non-religious foundation as in the Greek philosophy of Plato and Aristotle. Given the religious conflicts and wars in Europe that occurred in the three centuries prior to Kant, he saw this non-religious foundation as necessary for human advancement particularly in the context of the democratic political movements of his era. It should be noted that Kant was a deeply religious man who did not seek to force his religious notions on others.1 Kant’s moral philosophy is spread among several significant works which include Groundwork for the Metaphysics of Morals (1785), The Metaphysics of Morals (1797), Religion Within the Limits of Reason Alone (1793), and several others.2 Although presented in the previous chapter, we repeat Kant’s often cited Answer to the Question: What is Enlightenment? (1784, 8:36 and 8:37) In the context used here, we might perceive a notion of duty we left unrecognized previously. Enlightenment is man’s exit from his self-incurred minority. Minority is the incapacity to use one’s intelligence without the guidance of another. Such minority is self-incurred if it is not caused by lack of intelligence, but by lack of determination and courage to use one’s intelligence without being guided by another. Have the courage to use your own intelligence! is therefore the motto of the enlightenment. All that is required for this enlightenment is freedom; and particularly the least harmful of all that may be called freedom, namely, the freedom for man to make public use of his reason in all matters. (Underline added.)

 The “30  Years War,” 1618–1648, was fought largely in Germany and involved most of the European powers. It was initiated by religious conflict (Protestant versus Catholic) and involved the destruction of entire regions. 2  These writings are rather ponderous and hence difficult, but significant selections can be found in The Basic Writings of Kant (2001), edited by Allen Wood. Kant’s writings are so often referred to in philosophy that, as in the works of Plato and Aristotle, there is a standard reference methodology, one that is used here. 1

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Kant’s passage begs certain questions concerning duty: 1. Do we have a duty to be courageous in using one’s intelligence autonomously, i.e. without the guidance of another? 2. Do we have a duty to exercise our freedom to make public use of reason, and if so, in what context? Note that above, Kant stated “in all matters.” It is argued later that both of the above questions should be answered in the affirmative, and that these duties extend to business management and free-market interactions. As stated above, the Enlightenment formed the basis of modern Western philosophy. The leading doctrines of the Enlightenment age were3: 1. Reason is mankind’s central capacity. It enables people to think and act accordingly. This places the emphasis on the individual, not the society. People are not seen as mere contributors to society. Note that various political movements of the last century, communism and fascism, viewed individuals as servants of society. This particular view is explored in detail in a latter chapter. 2. People are by nature rational and good, although notions of evil, such as those in religion, are accepted as possible. Kant argued that it must be possible for evil to be overcome by thinking people. We shall explore evil and its consequences in a latter chapter, but we should point out here that the philosopher Hanna Arendt argues that to prevent evil, people must exhibit the “noble nature” of a willingness to argue rationally, with logical reflection, and in public in order to prevent evil from permeating society. This is especially true when we consider simple bureaucratic applications of codes of conduct that are applied without rational reflection. 3. Both individuals and humanity can progress. According to enlightenment philosophy, society can progress only through the progress of individuals. This contradicts fascistic or communistic philosophy where progress only occurs when people’s political consciousness must be manipulated by an elite group of leaders. 4. All people are equal as to their rationality, and therefore must be viewed as equal before the law. This certainly contradicts any elitist approach to philosophy. It is necessary that all people be considered as rational as a pre-condition for a democratic approach to governance. 5. Other religions and ways of life must be tolerated. The “30 years war” proceeded the enlightenment period in Europe.4 This violence prone period saw religious wars sweep across the continent with almost one-third of Europeans being killed. It is not surprising that enlightenment  This review is based upon M.J. Inwood (1995, pp. 236–237).  This European war lasted from 1618 to 1648.

3 4

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p­ hilosophers would attempt to eliminate this strife by an appeal to non-religious-­ based reason. 6. Beliefs must be accepted only on the basis of reason, not on the basis of authority. The essence of this philosophy is that reasoned discourse, as argued by individuals in public life, is necessary for democracy, which is in turn necessary to prevent the violent religious conflicts that preceded this period. 7. The purpose of education is to disseminate knowledge, not to mould feelings or character. The Enlightenment exhibited an explosion of scientific, political and philosophical knowledge. It was contrary to any overly narrow religious education that is based solely upon the molding of character. Ethics, in particular, came to be based on logic, not any appeal to religious or other authority.5 Reasoned reflection about the moral problems we face is a fundamental duty in the Enlightenment vision. Reasoned reflection is the very basis of the Greek origins of Western ethical philosophy. In this sense, Kant’s philosophy builds upon the Socratic-Platonic foundation. It is argued below that Kant’s description of our categorical imperative, however, provide a focus from which reason can deduce practical maxims for which we have a duty to follow. It is important to note that all of our practical maxims and duties must be derived from these broader axiomatic principles, i.e. the categorical imperative forms the foundation from which our practical duties stem.

2

The Categorical Imperative and Its Three Formulae

Kant (1785, pp. 402–403) claimed that his categorical imperative merely reflects common reasoning concerning moral principles. His three versions of the “categorical imperative” do not stem from any abstract laws of nature. They would not exist without the imposition of the reasoning man. They do not transcend our experience as suggested in Socratic philosophy, nor are they based upon our experience.6 They are person centered and proceed from the reasonable (rational) free will.7 These imperatives appear to us as obviously true. They are therefore axiomatic, so we can derive practical maxims from them. They need no prior argument to establish them. They stand alone in forming the premises for our supporting arguments in favor of our derived practical maxims.

5  One should reflect on Galileo’s facing the Roman Catholic Church’s “Inquisition” in 1633 for arguing that the sun, rather than the earth, is at the center of the solar system of planetary orbits. He was restricted in publishing his scientific findings, and also was restricted in his movements as a penalty for his scientific claims. 6  A contemporary of Kant, David Hume (1711–1776), argued in A Treatise on Human Nature (1739) that all our moral principles stem from experience and emotions, and not rationality. Hume’s rejection of Kantian rationality is reviewed below. 7  By “rational” Kant meant logical, i.e., not self contradictory, but with logical deductions.

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Kant argued that the very notion of morality requires free will, and this requires individuals who are autonomous in their actions. Unlike the Plato-Socratic approach, or that of Aristotle or of Christian ethics (all perfectionist), Kant did not attempt to objectively establish notions of good in human characteristics, actions or results. He argued that fundamental moral principles as they apply to society must be adopted by a democratic plurality, but this plurality should only be adopted after associated rational thought and discussion. Kant argued that from rational free will, a “supreme practical principle,” called the categorical imperative, follows, namely that the moral maxims we decide to live by must be universal; they must apply to all. This rational law is often termed the formula for universal law, and is actually only one of three versions of Kant’s categorical imperative. The second version is often termed the formula for the end in itself: treat people as an end in themselves, not merely as a means to our own ends. This requires that we allow others to pursue their ends as long as they do not impinge the freedom of others to pursue their interests. Engaging others via deception, as an example, is always in violation. The third version of the categorical imperative concerns what Kant termed the pursuit of a kingdom of ends, an end result that motivates the pursuit of moral imperatives. We explore this motivation in much more detail below. Kant argued that his three categorical imperatives are really different versions of the same imperative, i.e., that each follows from the other two. The second version of the categorical imperative requires that we act so as to allow others to act in their own interests; we do not use others only as tools, but rather as agents and in such a way as to allow them to pursue their own ends. If we follow these versions of the categorical imperative in deciding the principles of morality as derived through plurality of agreement, then these principles can form a system of justice. Within this system, each person acts as a contributing legislator, and is bound by the resulting democratically agreed-upon law. In this sense, the categorical imperative presents a process (CIP) or guide for formation of practical moral maxims that must be agreed upon by a plurality.8 As already explained, Kant presents three versions of the categorical imperatives. Below, I use Sullivan’s (1994, p. 29) precise interpretations from the original language of these imperatives. We shall see that this “precision” in interpretation is necessary for obtaining a full derivation of notions of duty, notions necessary for our later examination of morality and markets. Kant envisioned these versions, presented below as three “formulae,” as entirely consistent with each other, and in fact he envisioned each as logically necessitated by the others. It is important to keep in mind that these formulas are axiomatic guides for the derivation of our applicable and practical duties:

 Especially see O’Neill (2000) and Sullivan (1994) for reviews of Kant’s ethics and his categorical imperative process.

8

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Chapter 3: The Categorical Imperative Process and Moral Duties

Formula 1—the formula of autonomy or of universal law: “I ought never to act in such a way that I could not also will that my maxim should be a universal law.” (Kant, 1785, 4:402) Formula 2—the formula for the respect for the dignity of persons: “Act so that you treat humanity, whether in your own person or in that of any other, always as an end and never as a means only.” (Kant, 1785, 4:429) Formula 3—the formula of legislation for a moral community: “All maxims that proceed from our own making of law ought to harmonize with a possible kingdom of ends.” (Kant, 1785, 4:436) The practical maxims derived from the CIP include both perfect duty (avoiding those actions which are prohibited), and imperfect duty (those volitional actions which we should consider doing, but which have practical limits such as with actions of beneficence). This CIP derives our social maxims while constraining deliberations to adhere to what Kant termed the universal principle of justice (UPJ): Behave in such a way that your choices are compatible with the greatest amount of external freedom for everyone. (Kant, 1797, 6:230.)

The categorical imperative process (CIP) therefore consists of (i) a reasoned social discourse that (ii) uses the categorical imperative as a guide, and that (iii) is constrained by the universal principle of justice. Chapter “The Applicable Western Ethical View?” briefly mentioned all three of these formulas. We complete this exploration below, however, particularly with respect to notions of “moral community” and “harmonize.” First, we briefly review how the third formula is envisioned by Kant as providing the motivation for the first two. This notion of “motivation” is very important to our ethical exploration as suggested in the previous chapter.9 Kant’s first formula, the imperative of universal law, prohibits us from behaving by personal maxims that are applicable only to us, and that are designed only for our convenience. For example, if our business temporarily suffered from financial distress, and we decided that it would be acceptable to commit some fraudulent act to ameliorate our problem, we would violate the imperative of universal law. We could never will this temporarily fraudulent behavior to be universal. That would be equivalent to willing that the foundation of trust upon which our business relations are built be universally destroyed. A maxim of “commit fraud only when we temporarily suffer from financial distress” is unacceptable in Kant’s ethic. In a similar way, Kant’s formula for the respect for the dignity of persons would also be violated by the maxim of fraud described in the above paragraph. Fraud is essentially a lie. It deceives others into serving our own ends, while not allowing others to pursue their own personal ends. This example illustrates the consistency of

9  The previous chapter reviewed the importance of motivation in the philosophy of Dionysius and Augustine.

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the first two formulas. Indeed, Kant argued that one formula logically follows from, and is necessitated by the other. The motivation for pursuit of the first two formulas lies in the third formula, the formula of legislation for a moral community. Before examining this motivation, we should explore the notions developed in the Socratic dialogue Gorgias.10 In that dialogue, Socrates develops two principles: • “No man does evil voluntarily.” • “It is better to suffer evil than to commit evil.” With respect to the first of these propositions, Socrates states that to know what is good, and to choose what is evil, is an absurdity. No person knowingly and willingly selects evil; they select evil only in spite of the fact that it is evil, not knowingly and voluntarily because it is evil. Evil is merely the necessary result of ignorance. This is true because willingly committing evil is self destructive of the reasoning individual, and no one rationally selects self destruction, at least according to Plato and Socrates. (Of course, this assumes that we are reasoning individuals.) Note that this preserves the notion of free will in that people could still select to perform evil actions, but they would do so only out of ignorance. Reasoned free will is what gives meaning to life, according to Socrates, Plato, and certainly also Kant. By selecting evil, a person therefore destroys that which gives meaning to life. Kant, however, wants to extend this Greek philosophical argument. Kant argues that we seek a kingdom of ends, what in Greek philosophy is termed the good. By kingdom (as in Kant’s third formula of the CI), Kant means “the union of different rational beings in a system by common laws” or maxims. (1785, 4:433) Through the first two formulas, duties are derived and motivated by the pursuit of this kingdom of ends. These duties are actually derived from the practical ethical maxims formed from the categorical imperative. By harmony (as in Kant’s third formula of the CI), Kant means that these rational beings pursue consistent and coordinated duties aimed ultimately at pursuing this kingdom of ends. This applies to all individuals in this ideal union. Moral actions are therefore those that are motivated by the pursuit of this ultimate good. They cannot be those that serve only the self at the expense of others in this “union of rational beings.” (1785, 4:430) Indeed, in the Metaphysics of Morals (1797), Kant argued that examination of motivation is the only basis for judging the morality of some action, and Formula 3 provides the only justifiable motivation. Other possible motivations are self-centered, and hence are inherently selfish. To illustrate this motivating notion of pursuing a kingdom of ends, consider your childhood conduct among your circle of young friends. You probably argued and persuaded your friends towards establishing fairness in the games you played, or in the division of desserts you enjoyed, or in other behavior. Your motivating thought was not directly “What advantage can I obtain from this notion of fairness?” but rather “How can we obtain harmony among our group?” You sought a kingdom of

10

 See Plato (1999).

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ends in harmonious cooperation. You tried to persuade your friends to seek the same. You did so because of your respect for your friends. This ethical motivation is the ethical motivation according to Kant, and is expressed in formula 3. To state that we “respect the dignity of others” implies that we ought to “pursue” notions of the “kingdom of ends.” One should realize the linkage between formula 1 and formula 3. The universality principle prohibits us from establishing maxims that are purely self serving. Our maxims therefore must be aimed at, or motivated by the social goal of the pursuit of the kingdom of ends. For example, consider the case of the temporary lying promise reviewed above. A maxim that allows the temporary lying promise under certain exigencies not only violates formula 1, the universality principle, and formula 2, respect for the dignity of persons, but also formula 3, the kingdom of ends. A personal maxim that allows us the self-serving temporary lying promise is hardly in pursuit of the harmonious society. We see, then, that Kant’s three formulas are consistent with each other, and actually each is required by the other two. One easily perceives the parallel between religious judgments of proper motivation and Kant’s pursuit of the kingdom of ends. Religion argues that we should pursue right and not wrong because we seek a final individual nirvana, or heaven, or paradise, or similar state after death. We see this as a selfish pursuit, but religious explanations of the alternative (hell) are so drastically horrible that we are frightened into pursuing this ultimate end. Kant changes this motivation to a current-­ world social-end, one that is not self centered. It is obvious that when one is only concerned with “after death,” then pursuit of current-world harmony is decreased in importance. Kant’s kingdom of ends refers, of course, to an harmonious overall society, one where reasoning people pursue maxims which they form democratically and therefore find acceptable, and which are derived from the other two formulae of the categorical imperative. In this sense, kingdom of ends can apply to a single business, and also to society as a whole. Management can act in pursuit of this final social end when forming and acting on its derived maxims. This is the kernel of the argument presented here concerning Kantian propositions for management and leadership, and for all interacting parties in markets as broadly conceived. Certainly one can argue that pursuit of this kingdom of ends is not practical, especially within a business. What else, however, could motivate managers: greed, gluttony, sexual addiction, …? These pursuits are also not practical in that they can never be ultimately satisfying, but only transitory in satisfaction, if even that. These unworthy pursuits cannot lead to success for any business organization. Pursuit of harmony, however, has the potential of leading to success in business, even if perfection in that pursuit is not ultimately achievable. Management acts as the legal agent of the firm’s owners. As such, they have a legal and ethical obligation to serve the interests of the goals of the owners, but always within other legal and ethical constraints. Management should seek to serve these interests because they are consistent with Kant’s categorical imperative, particularly with the formula for the respect for the dignity of persons: the owners employ management to serve the owners’ ends provided other stakeholders are

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allowed to pursue their own ends. The profit motive (or shareholder wealth maximization—SWM) is not inherently unethical when properly pursued in this way. When managers apply a consistent set of maxims, derived from Kant’s categorical imperative, they can produce a reasonably harmonious organization that satisfies the most basic interests of stakeholders. We mean this in the Socratic sense that people do not willingly seek evil. In general, people do respond positively to the “pursuit of the good,” although their egos often point them in contrary directions.11 The belief that stakeholders will respond favorably to this harmonious management ethic motivates our exploration of Kant. It is important to note, however, that although this harmonious management ethic may be a necessary condition for SWM, pursuit of this goal is not the motive for behaving according to this ethic. SWM may be the goal of the firm, but the motive for management behaving ethically should be the pursuit of the kingdom of ends. This is an essential distinction. Serving owners in an ethical way involves this pursuit. I explore below some of the practical maxims and duties suggested by Kant, and I also derive some additional maxims as examples for business decisions. We shall see that the three formulae of the categorical imperative provide very practical tools for business leadership and decisions. They also potentially form an ethical system that can be considered a productive factor-input to the firm, and as such, a necessary mechanism for the pursuit of organizational goals.

3

The Bankruptcy Declaration Example

Kant’s formulas for the categorical imperative can be guides for the manager in forming practical maxims and duties. For example, among the practical problems to which Kant applies the imperative, he explores the possibility of lying to obtain a loan. This is found to violate the imperative because it utilizes another to achieve a personal end, and in the process, deprives the loaning party of the pursuit of its own ends. A more seminal problem for hypothetical exploration of ethical dilemmas is provided bankruptcy laws existed during the eighteenth century of Kant, “When ought one to utilize a bankruptcy declaration?” The stakeholder tradeoffs implicit in the timing of the declaration, and the reorganization plan itself, make these decisions more difficult for application of Kant’s imperative. For example, under conditions of financial distress, waiting to declare bankruptcy may improve the prospects for shareholder wealth recovery, prospects that may currently be dismal, but only at a cost of deterioration of the value of the assets available for recourse to the debt holder if eventual liquidation is necessary. In addition, worker interests could also be at stake since any reorganization plan, or court established control of

 This is essentially Chambers and Lacey’s (1996) argument that pursuit of SWM serves society’s sense of ethics because capital and product markets force firms to conform to society’s ethical preferences. This argument is explored in some detail in a latter chapter.

11

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management, affects their interests. The categorical imperative does not provide any direct guide without considerable extension. To explore these problems in more detail, consider a firm with a debt payment of $100 due in one year, the debt being contracted with debt holders who are fully knowledgeable concerning the riskiness of payment. The current liquidation value of the assets is $100. If the firm continues in business, however, it faces a two-state future as described by Tables 1, 2, and 3. Income will be earned over the next period and this is capitalized into the value of assets as shown. In addition, if the firm decides to continue in operation, it must select under which scenario it will operate, A or B. (We assume a choice of marketing plan or capital investment determines the A or B scenario.) Tables 1, 2, and 3 give the values of the firm’s assets, debt payments and equity value [the value of assets—the value of liabilities] under scenarios A and B in the two-state world. If the firm does not continue its operations, employees suffer and there is no residual value for the equity holders; the debt holders receive all the value of the firm’s assets. If the firm continues under Scenario A, then the firm must be liquidated to pay the debt holders either in full ($100) or in partial default ($90) depending upon the uncertain future state of the world. The expected payoff for the debt holders is $95; debt holders would prefer liquidation now rather than having the business continue since current liquidation yields full payment of $100 with certainty. If the firm continues under Scenario B, the equity owners have a 50% chance of retaining wealth of $50 (in State 1), but also a 50% chance of having no residual equity value. They would prefer that the firm continue under B since it allows the only possibility for equity having any worth. The employees would also prefer B since the firm would be ongoing. The debt holders have only a 50% chance of receiving $100 under B, their expected payoff is only $50, i.e., Table 1  Value of firm’s assets in two state future State 1 2

Scenario A $100 $90

Scenario B $150 0

Probability ½ ½

Table 2  Value of firm’s debt payment in two state future State 1 2

Scenario A $100 $90

Scenario B $100 0

Probability ½ ½

Table 3  Value of firm’s equity in two state future State 1 2

Scenario A 0 0

Scenario B $50 0

Probability ½ ½

3  The Bankruptcy Declaration Example



49

½ ( $100 ) + ½ ( $0 ) = $50  .

Of the three possible courses of action reviewed above, the debt holders prefer current liquidation to continuing operations. The equity holders prefer continuation under Scenario B, the worst course of action for the debt holders. Provided the debt holders entered the original agreement knowing the uncertainties involved, and the terms of the debt were fully negotiated and arranged to reflect the risks, then Kant’s categorical imperative offers no direct solution, but does offer a derived solution of democratic discourse based upon rational reflection. Society’s current notion of the optimal solution to the bankruptcy declaration problem is presented by SWM as constrained by law and negotiated debt-indenture agreements.12 SWM dictates that the firm continues its operations under scenario B. Our limited liability law allows the $0 payment to debt holders under state 2, scenario B, and this is judged fair provided the debt holders were fully knowledgeable about the risks of payment when they purchase the debt.13 In a free market for the debt claims, the original terms of the debt, that is the price or interest rate agreed to, would reflect the risks of payment. Furthermore, our bankruptcy law favors this solution in that it purposely favors firm continuance whenever possible, thereby allowing continuation of employment. This is a solution reached after considerable democratic debate that is imbedded in our bankruptcy law. The law does not allow, however, what is termed “risk shifting,” it prohibits the firm from declaring (in its intended use of proceeds section of the debt prospectus it must provide to financial markets and regulators) that it will use the debt to proceed under scenario A (the scenario more favorable for debt holders) and then shift to B (a less favorable scenario for debt holders). The firm must divulge its intentions a priori. Violation of this disclosure requirement violates formula 2 of the categorical imperative in that it constitutes a case of purposeful lying. These rules of fairness built into the legal arrangements for debt and bankruptcy provide a clear notion of Kantian fairness as explored below.14 These rules are examples of practical moral maxims derived from democratic reasoned discourse.

 Debt indentures are the legal details that accompany any debt contract (or bond) that restrict the actions of the borrower, and also specify the monitoring activities that the lender is allowed to engage in. For example, debt indentures often restrict the production activities that the borrower can engage in, where approval of these activities must be granted by a legal representative (legal agent) of the lender. Violation of these debt indentures mean the lender can take immediate recourse, frequently associated with a court action. 13  Limited liability in corporate law means that debt holders cannot sue the shareholders for personal liability in order to recover their claim. The liability of shareholders is limited to the value of the firm’s assets, and does not extend to the personal assets of the shareholders. Nonetheless, debt holders with diversified portfolios of different companies’ bonds, would receive, on average, a payoff that reflects the riskiness of the portfolio of claims. 14  See Rawls (2001) for his derivation of a Kantian system of justice as fairness. 12

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 onclusion Concerning the Use C of the Categorical Imperative

At this point, it is important to realize that the crucial difference between the intuitionist approach, as previously reviewed in chapter “The Applicable Western Ethical View?”, and the Kantian approach lies in the categorization of applicable axioms. The intuitionist asserts axioms as naturally existing but manifested in personal intuition revealed through logical inquiry. These intuited principles cannot be justified by use of other axioms. (By their nature, axioms are self-evident.) Kant’s assertion that man is an end in himself, however, allows logical derivation of other maxims through democratic discourse. Kant differentiates the moral imperatives man might establish from other will-derived intuitionist maxims that might serve personal happiness. In particular, Kant asserts moral maxims must be followed because of the pursuit of the kingdom of ends, not because of any other motivations whether intuitionist or otherwise. One should not lie, not out of fear of discovery and ruination of reputation, or out of fear of the consequences in some afterlife, but because of the pursuit of social harmony. If one poses a moral maxim, one should desire that it be universally followed. If I argue that some maxim should be universal, and others pose their own versions of universal maxims, then whatever we agree upon through democratic discourse should be considered by all as universally binding. For example, consider the problem of speeding on a busy street. If I can do it, then others can, and the street would no longer be useful given problems this behavior would engender. Pursuit of the kingdom of ends, however, provides our motivation for not violating the maxim against duty. If my motivation for not speeding were merely “I might get caught, and suffer the “consequences,” I might attempt speeding if I thought getting caught was unlikely. If others believed the same, then the street would become unusable. The proper motivation should be clear.

5

Maxims for Achieving the Harmonious Organization

Kant’s categorical imperative in the form of formula 2—the formula for the respect for the dignity of persons—is the fundamental proposition concerning correct conduct, and as such, its application is necessary for achieving an harmonious organization. Harmony, or its lack, is one necessary factor that affects the economic efficiency of the organization, but economic efficiency, although very important even from a moral standpoint, should only be considered as a side benefit of this Kantian ethical behavior. An argument in support of the essential importance of harmony is presented here, but only after we review several potential maxims. Organizations, whether business or other forms, function based upon formal (written) and informal (orally communicated but generally agreed to) operating codes of conduct. These codes are generally ethical in content. Codes such as (1) capital budgeting manuals, (2) manuals of internal controls, (3) personnel management manuals, and (4) working capital management codes are all examples aimed

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at preventing fraud, and promoting the interests of the firm. Manuals of this sort articulate an ethical system for the firm, and they also specify actions of the agents involved. An harmonious organization follows these codes throughout. This word, harmony, is important in Kantian analysis. The following notion of harmony is essential to the ethical system presented here. By harmony we mean the achievement of a high degree of cooperation within an organization so that clarity in pursuit of derived moral maxims is accomplished.

This clarity can be achieved only after leadership (managerial leadership within business) fully understands that its derived moral maxims are: • worthy of pursuit, • consistent with formula 2 of the categorical imperative, and • motivated by pursuit of a moral community (Kant’s kingdom of ends). Note that management can establish and promote a moral community as its business organization without specific knowledge of Kant. Indeed, Kant described the categorical imperative as merely the way common people thought about its establishment of ethical maxims. Hence the notion of harmony presented above is, according to Kant, the way we think about establishing a moral community. This does not require a philosopher as manager. It is argued below that managerial leadership in pursuit of this harmony is in part necessary for SWM.  In addition, it is argued that achievement of harmony in an organization requires two general categories of managerial actions: i. Respect for the dignity of others as thinking individuals. Today’s business organizations seldom utilize individuals solely for their physical labor. Creative input from employees is generally sought and valued. It is efficient and productive to seek and respect the creative and thoughtful input of employees as thinking individuals. ii. Reflective thought about the ethical and other problems faced by the organization. This is a necessary requirement for any agent as manager, or even owner-­manager of a business organization. Reflective thought is required for an understanding of the nature and motivation behind any maxim. This requires mental effort, a thoughtful analysis, in seeking necessary information that is relevant to any business problem, and this includes ethical aspects of business problems. Reflective thought about its ethical codes is necessary to avoid the breakdown in the organization that is generally associated with the firm becoming overly bureaucratic in its decision making, or particularly bureaucratic in application of “codes of conduct.” This is an especially difficult modern problem, and it will be explored in

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some detail below.15 The first of the actions listed above is explored in much more detail below. In the Groundwork of the Metaphysics of Morals (1785), Immanuel Kant reviewed some maxims against particular actions, these maxims being derived from his categorical imperative. We review some of these here.16 We also pose some other maxims applicable to business situations where these maxims are consistent with the categorical imperative. The limitations of behavior posed by these maxims are certainly required for maintaining an harmonious organization. They are certainly consistent with the motive of respect for the reasoning individual as a moral agent, and they should form the basis for much reflective thought about the ethical conundrums faced by management. Previously we partially examined the first of these maxims, the maxim against the lying promise. We extend this examination here. It is important to note that in all of Kant’s ethical philosophy, it is the agent’s aim in acting on the particular maxim that forms the ethical content, i.e. the motive for action is fundamentally important.17 Maxim 1: We ought not to make lying promises. This maxim is properly illustrated by the following question: Question: “When in distress, may I make a promise with the intention of not keeping it?” The motives for the lying promise might be to avoid financial, physical, or psychological distress, or to achieve some pleasure or avoid some inconvenience. In all cases, the lying promise violates the categorical imperative. People, and business managers, who make lying promises in pursuit of personal gain or advantage violate the imperative. They lack respect for the reasoning individuals they interact with. They are trying to manipulate others into pursuit of the ends associated with the lie, but in the process, they frustrate the pursuits of those manipulated. Within the organization, harmonious relations are destroyed by the violation. Any sense of team work is violated, and the potential for future team cooperation is upset. One can never envision a society or business organization that could function efficiently if lying promises were common, and therefore the maxim prohibiting them satisfies Kant’s demand for the categorical imperative as expressed in all three of its formulas. Maxim 2: Within practical limitations, we ought to help others pursue their own ends where and when we can. This maxim is properly illustrated by the following question:

 The Brickley et al. (2007, Chapter 22) text reviews the application of these codes to business.  The material reviewed here relies on Sullivan (1994). 17  Note the consistency with, as well as the roots of, this motivational emphasis with Augustine and Dionysius as reviewed in chapter “An Applicable Western Ethical View?”. 15 16

5  Maxims for Achieving the Harmonious Organization

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Question: “My life is flourishing. I do not directly or immediately need the help of others. Shall I neither beneficently contribute to the welfare of others, nor expect their help in return?” When making decision about our social and business relations, it is obvious that we must take into account that all people are dependent and vulnerable, and most have continuous needs. When we are satisfied that our needs are met, we might avoid helping others pursue their own ends. We know, however, that this independent state cannot be permanent. We are social beings who are, by nature, not self sufficient. We all need the help of others to promote our natural welfare and happiness. We cannot totally renounce this help, and we must cultivate it. We cannot reasonably make the universal claim that everyone can remain independent of the beneficence of others. We must, therefore adopt Maxim 2 as a positive obligation that is necessary for the harmonious organization. It is certainly derivative of formulas 1 and 2 of the categorical imperative. It can also be effectively argued that it is logically derivative of, or at lease consistent with, formula 3. Maxim 3: We ought to behave as though all our actions are publicly known, even when some actions must be kept private. This maxim is properly illustrated by the following question: Question: “A company intends to close a particular branch in the near-term future, but for competitive reasons, it cannot disclose its plans. When workers enquire, should management deceive them about the future in order to protect this confidence?” To be competitive, business must frequently keep various secrets. Nonetheless, formula 2 prohibits us from deception for the purpose of motivating others to pursue our ends. When enquiries are made, simple declarations such as “I cannot divulge that information!” are sufficient to be consistent with formula 2 provided we clearly do not mislead others in any way. This situation has the potential of illustrating the claim of “I have obeyed the code” of not divulging the information. If one merely states the words “I cannot divulge,” but via facial expression or body language, one violates the spirit of the code, then this also violates the maxim. Maxim 4: Whenever we use others to promote our own welfare, we ought not to humiliate them, or fail to recognize that they have a dignity equal to our own. This maxim is properly illustrated by the following question: Question: “When we observe others underperforming, should we use humiliation to motivate them?” Nobody seeks an end of humiliation for themselves. If we humiliate somebody, we violate Kant’s categorical imperative as stated in formula 2. We disrupt harmony by breeding frustration within the humiliated individual, and also, it should be argued, we show a lack of self respect for ourselves due to our own frustration. We should, however, be able to manage that frustration. Managers should be able to

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present cogent arguments, effectively assign responsibilities, evaluate and reward employees by fair systems in order to achieve the motivation desired. Humiliating behavior is a disease that destroys the harmonious organization. Respect for the reasoning individual is always superior for motivating people. Frustration with the performance of others will always be with us. Our task is to overcome this psychological problem without giving in to humiliating behavior. Maxim 5: We must recognize the dignity of others even when we personally dislike them or feel indifferent towards them. This maxim is properly illustrated by the following question: Question: “Should we limit contact with another employee merely because of some past personal dispute?” If we are to allow others to pursue their own ends, we must not avoid them because we do not feel comfortable interacting with them. This certainly would disrupt harmony within the organization. It would show a lack of respect for the other reasoning individual. This behavior would directly violate formulas 2 and 3, but it would also violate formula 1, the universality principle. Are we to say that people should select only those we like as deserving of respect? This principle could hardly be a universal maxim. If it were, respect for the dignity of other persons would be a rare characteristic. As with maxim 4, we must strive to overcome the psychological problems that interfere with the efficient and harmonious organization. Maxim 5 requires efforts similar to those required by Maxim 4. Frustration with or repulsion from people we do not like requires effort to overcome. Maxim 6: We must recognize the dignity of others even when they are not considered longer-term members of the organization. This maxim is properly illustrated by the following question: Question: Should we apply the maxims above to someone we are about to terminate from the organization for poor performance? Respect should be shown to all, even those about to be separated from the organization. We must allow all to maintain their rightful self-respect and dignity. We expect to be treated with respect, and we should offer it in return. Management should lead the organization to establish this culture, and show that it is manifested in all its relations. This is required of all three formulations of the categorical imperative. Consider the maxims presented above, and ask “What are the characteristics of an organization that does not pursue these maxims?” The student should be able to draw the conclusion that the characteristics would be: 1. A lack of trust among stakeholders. Violation of any of the six maxims presented above would lead to this lack of trust.

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2. A lack of beneficent cooperation among management and employees. Maxim 2 particularly pertains to this conclusion. 3. A general lack of truthfulness. Maxim 1 particularly pertains to this conclusion. 4. A psychological state of inferiority among employees with associated fear of contact with superiors. Maxims 4 and 5 apply to this conclusion. It is not possible that a firm exhibiting these characteristics could adequately pursue SWM, or any other worthy goal? It is for this reason that managerial leadership in pursuit of these, and/or other maxims consistent with Kant’s categorical imperative, must enable them to pervade the organization. Indeed, this is the essence of leadership in managerial ethics. As such, leadership towards inculcating these maxims into the organization is a necessary condition for effective management. We state it is necessary, but it may not be sufficient for effective management since other characteristics such as strategic creativity and proper analysis of the risks the firm faces are also required. Nonetheless, this leadership is necessary for effective pursuit of SWM, or any other worthy goal.

6

Imperfect and Perfect Duties

Kantian analysis distinguishes between imperfect and perfect duties generated by our derived moral maxims. The following indicates the differences: • Perfect duties (often termed negative duties) are narrowly-aimed absolute prohibitions against attitudes and actions that violate a moral maxim of respecting the dignity of others. For example, there is an absolute prohibition against the lying promise, or fraud, or demonstrating contempt for the dignity of another. • Imperfect duties (often termed positive duties) stem from volitional attitudes and associated actions that pursue some wide moral purpose aimed at respecting the dignity of others and self, but that have practical limitations. Charity, for example, must have practical limitations or the individual would not be capable of functioning in the everyday real world. This imperfect category, however, is much broader than only charity. It includes beneficent duties for management as explored below.18 Whereas perfect duty essentially requires noninterference with the freedom of others, imperfect duty requires beneficent attitudes and actions towards both others and ourselves, and hence has tradeoffs and therefore practical limits. Perfect duties 18

 In this context, beneficence means “doing or producing good.”

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allow civilization to exist; imperfect duties allow the community, including the business community, to flourish. (This proposition is examined extensively in latter chapters.) In Metaphysics of Morals (1797, 6:394), Kant specified that perfect duties cannot be compromised by considerations of egoistic consequences. Kant (1797) identified imperfect duties as duties of virtue, and describes these as of wide obligation and disposition. (Ibid, 6:390) He also identified an imperfect duty to oneself, as appears evident in the second formula of the CI, and describes this as a matter of character development. Which of these natural perfections should take precedence, and in what proportion one against the other it may be a human being’s duty to himself to make these natural perfections his end, are matters left for him to choose in accordance with his own rational perfection about what sort of life he would like to lead and whether he has the powers necessary for it (e.g., whether it should be a trade, commerce, or a learned profession). … a human being has a duty to himself to be a useful member of the world, … But a human being’s duty to himself regarding his natural perfection is only a wide and imperfect duty; for while it does contain a law for the maxim of actions, it determines nothing about the kind and extent of actions themselves but allows a latitude for free choice. (Ibid, 6:446)

The impetus of Kant’s argument is that in each of the broad categories of imperfect duty, there is a maxim for action, but there is also latitude for discretion as to what the action might be, i.e., choose what contributions you will, but be of use to the world. Specific actions are not prescribed; some general broad-categories of actions are prescribed, i.e., make the ends of others our own, but not to the point of personal exhaustion and degradation. For example, a manager might decide that communications with employees must be more effective, but the means the manager might employ, and the extent of the effort are both subject to her discretion. White (2011, pp. 41–46) suggests that imperfect duties are subject to preference rankings consistent with notions of taste. Still the rationality requirement of Kantian analysis, i.e., that moral decisions are made only after rational reflection, allowed Dworkin (1977) to describe a process for decisions involving imperfect duties: (1) gather all rational facts, (2) weigh these facts, and (3) then decide what is right through a balancing of effort. This process describes a type of cost-benefit analysis as decision criteria for imperfect duty and its logical foundation. Kant states that imperfect duties exist because we are “…. united by nature in one dwelling place so we can help each other.” (Kant, 1797, 6:453) This dwelling place applies to the business organization as well as other groupings of family and community. Kant terms this “the maxim of common interest.” (Ibid, 4:453.) It applies to those united under the umbra of the business firm as “rational fellow-beings with needs.” (Ibid.) For examples of practical maxims that follow Kant, Hill (2012, p. 86) lists several “mid-level” maxims from which a broader list of duties can be derived: perfect duties against lying or servility, and imperfect duties of charity, friendship, and promoting our own happiness. In Metaphysics of Morals, Kant explored practical limits on all of these. The duties of beneficence, friendship, and promotion of our own happiness all fall under the umbra of imperfect duty. Within the firm, however,

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an imperfect duty of beneficence, for example, must have a practical limit for individual managers and employees or they might not be able to function in their other business duties. Where should the line be drawn between what is practical, what is not, and what are the tradeoffs of one dutiful performance with another? This question is not easily answered by the business person, but requires reflective thought, and is certainly unique to any situation at hand. A solution for discernment of these practical limits is posed in the next section.

7

Imperfect Duty and Its Practical Limitation

The Kantian principles, explored above, recognize that the self-worth of agents motivates them to “pursue their own morally permissible welfare and happiness, but also to promote those of others,” i.e. the mutual dependence principle (MDP). (Sullivan, 1994, p. 156.) Markets and firms are expressions of the mutual dependence of their participants, who we assume aim at fulfilling their own needs. Mutual respect requires that these agents treat each other not merely as the means to their own ends, but also by allowing others to pursue their ends, i.e. conditions specified under the second formula. For freely competitive markets, we assume that both sides of a transaction pursue their own ends, but they are also interested in enabling others to achieve their ends, and the closer the market participants are to each other, the greater this interest is. Positive (imperfect) duties are clearly necessary for promoting the interests of all, but in Kantian analysis, the closer the relationship between agents, the greater the expectation of duties of a positive sort. Transactions between agents who are closer, rather than more distant, should exhibit more relaxed practical limitations on these positive duties, more relaxed than we expect among perfect strangers. If this obligation for beneficence is stronger the closer the agents, then this closeness is largely determined by the nature of the particular market in question, whether it is the internal employee market or some impersonal market of strangers. Of course, this begs the definition of close. For example, consider the duty of charity especially in the context of the competitive firm, in particular the competitive public corporation with publicly traded shares. These firms do have charitable expenses that are usually aimed at community relations, or the seeking of positive publicity. In either case, these contributions have bottom-line impacts that justify their expenditures. There are other charitable contributions, however, those explained as being required of corporate social responsibility (CSR), that are unrelated to the bottom line, but are said to be required from a social-duty obligation. These CSR expenditures are, however, generally expected to be impersonal in that the corporation is distant from the intended beneficiaries. The counter argument of Chambers and Lacey (1996) is that distribution of these funds back to the corporate owners (in the form of dividends) allows those closer to intended beneficiaries to make the charitable decisions. Corporate shareholders legally own these revenues, and their charitable expenditures by management pose agency problems unless these expenditures positively affect the future revenue of the corporation. The duty of beneficence is greater among those closer to

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the beneficiary. Therefore we might expect a greater extent and degree of effectiveness in charitable giving if these revenues were expended by owners rather than management (assuming the owners are closer to the beneficiaries). As reviewed above, both perfect and imperfect duties stem from our respect for the dignity of persons, and are motivated by our pursuit of a moral community. This pursuit begs the question of which community do we refer to: family, business, some broad notion of stakeholders, or the entire business world? For any large business, managers are first concerned with their department or division, then the larger business, then the enveloping greater-business community that includes broader notions of stakeholders, etc. The more immediate the community, the greater the likelihood of actions aimed at the moral pursuit consistent with imperfect duties, and the more effective we would expect these actions to be. We claim this because we expect that the more immediate the relation, the more the benefactor will likely know the most effective way to provide this charity to the extent they are ready to respond to communication from the receiver. We can hypothesize that our beneficent efforts would be more effective in smaller more immediate (or intimate) groups. This immediacy might heighten our knowledge of what those to be affected desire from our efforts, and also what action would be the most effective. The cost of obtaining this information might be lower the greater the degree of immediacy (or intimacy). In fact, we could use the degree to which we have this knowledge to define the degree of immediacy we posses, i.e. those at greater physical distance could still be those whom we have the most information as to need and potential effectiveness. Those closest-to-us might still be those for whom we have little information about need or potential effectiveness. The interesting and relevant question then becomes, “What do we mean by immediate in the context above?” This definition is highly relevant to what we mean by practical limitations to our imperfect duties. Hence we pose the following hypothesis, i.e. the knowledge hypothesis: The greater the benefactor’s degree of knowledge of the requirements of the intended receiver, the more immediate the relation between the benefactor and receiver. Without reference to resource constraints, charity of the CSR sort are best delivered by those with the most immediate relation.

This hypothesis explicitly abstracts from resource considerations, and this we suspect is the essential reason many argue for the charitable CSR obligations of large corporations. If corporations distribute net income in the form of dividends to a large number of shareholders, then any single charitable interest must make a broad-­ based argument to a large number of possible contributors rather than a single pitch to a single corporate CEO. There is, however, a more democratic nature in convincing a broad society of the worthiness of a cause than a single manager who might have a conflict of interest in pursuing a personal pet cause (or charity) with funds that legally belong to shareholders. The CEO may be close to the charity she would prefer to support, and might know the most effective method of funding, but shareholders might also be the more knowledgeable group in many cases. Corporate CSR charitable contributions that are not obviously tied to corporate performance cannot

8  Some Additional Maxims and Agency Obligations

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be a priori said to be ethically superior. Such judgments would depend upon the knowledge possessed by the management versus the owners. The pursuit of a moral community contains three dimensions worth exploring: (1) leadership in this pursuit, (2) followership in this pursuit, (3) the group dynamics associated with this pursuit. Leadership requires what Hanna Arendt (1971) terms “the noble nature” of speaking out in a social context concerning what is right or wrong. This requires rational and reflective commentary aimed at stimulating others to accept this moral argument. It means arguing against the mob psychology frequently found in us-versus-them movements that vilify some subgroup, and that is found frequently in the authoritarian firm.19 For Kantian analysis of perfect duties, it is obvious there is an absolute obligation to attempt an argumentative interruption of any group-think anti-duty dynamic. For imperfect duties such as the extension of charity towards a co-worker, we might be inclined to analyze in a rational and reflective way the extent to which this beneficence should be extended, and accept some limitations. Surely this decision would depend upon the anticipated effectiveness of our efforts. Even for imperfect duties, however, the noble nature may play an important role when it is necessary for one person to speak out that avoidance of this effort might be wrong; that a mob-psychology of “let that person suffer” could be wrong. This public speaking out may be necessary to stimulate others into a reflection about the worthiness of the duty obligation, as well as the appropriate practical limit on the duty.

8

Some Additional Maxims and Agency Obligations

In The Metaphysics of Morals (1797), Kant especially emphasized duties of respect to oneself: duties to develop oneself physically, and mentally, and also to develop one’s character, i.e. the awareness of one’s obligations towards others, and commitment to pursue these obligations. According to Kant, character was the essential virtue, and this required attention and development. Along this line, I suggest two additional maxims that are particularly applicable to business. Maxim 7: We must recognize all agency obligations without obfuscation. This requires the following: a. We recognize and communicate all conflicts of interest we might have to all relevant parties, and we must do so prior to relevant decisions. b. We must recognize and pursue all of our business-functional obligations without evasion. The first of these obligations (a) appears so obvious that further elucidation should not be necessary. The second obligation (b), however, is not so obvious to many. To elucidate, consider the following question: When psychological stress is placed upon managers to grant compensation increases or promotions, should managers argue that a “happy” employee is of prime importance and hence grant the  See Robinson (2012) for a more complete exploration of this group process that results in unethical conduct.

19

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request, or should they negotiate (however fairly) as the owners’ representative? The answer to this should also be obvious. Managers represent (are agents of) the owners, and must fairly negotiate with other stakeholders including employees. (These fair negotiations are the topic of a later chapter.) Perhaps a more important issue to consider that pertains to (b) above concerns the primary financial reporting problem: Should management obscure accounting-­ financial reports so as the make management’s performance appear better? This need not necessarily be deceptive accounting, but just not the best or most revelatory. The purpose of accounting is to provide information to the owners and to financial markets (other than the tax reporting purpose of accounting). This is a primary functional obligation of management. In addition, to not present the most accurate and complete accounting information, even if it must be revealed in footnotes, would violate the conflict of interest requirement of (a) above. It is also ultimately deceptive. It violates all three formulae of the categorical imperative. Managers who argue that they are balancing the interests of stakeholders are generally violating maxim 7. They are obfuscating their agency obligations, and we suspect, they are frequently just using the stakeholder balance argument to hide their own self-serving actions. We also suggest an eighth maxim that stems directly from the three formulae, and is also central to assuring a high degree of efficiency for any business. Maxim 8: Management must provide transparent and systematic evaluation and reward methodologies that reflect the assigned responsibilities of employees. The firm’s evaluation and reward system is frequently termed its control system. If employees are to be free to pursue their own ends, they must know the linkage between performance, evaluation and reward for their performance. Transparent procedures for evaluation are therefore necessary, and are usually provided through employee manuals. In addition, these kind of control systems are necessary to stimulate firm performance, and hence they are in the interests of shareholder wealth and perhaps the interests of other stakeholders. Other firm maxims could specifically address issues in marketing, particularly vague or misleading promotions such as bait and switch, or employee promotion policies. Additional maxims might be required in order to isolate particular egregious practices, even if they appear redundant. Redundancy can aid in clarity and commitment. An important point to remember, however, is that all of these maxims must be accompanied by reflective logical thought. They must be accepted by all relevant agents. Managers and other relevant stakeholders must believe that they are important to the proper functioning of the firm. The set of maxims presented above do not directly concern two of the more common psychological problems found in business, the problem of cognitive dissonance and the problem of fight or flee. The first of these concerns the inability to accept what is obviously true as based upon objective new evidence. People often form hard opinions based upon old evidence, and become difficult with others when new contrary evidence is presented. There is no purpose in declaring a maxim that

References

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people must not suffer from this psychological problem since it is a human trait. Nonetheless, systems should be in place to help managers and employees to overcome cognitive dissonance since the very existence of this problem, along with the psychological distress suffered, can lead employees to violate ethical maxims which they would otherwise not violate. These systems can consist of frequent reviews of new data as it becomes available, so that there is little surprise when new evidence contradicts previously held beliefs. Once people become used to reexamination of evidence and the reformulation of belief, cognitive dissonance problems become more manageable. The flight or flee syndrome, particularly when associated with evaluation of performance and associated rewards, also pose difficult psychological problems. It is generally overcome by installing systems of frequent routine evaluation that the employee learns are not threatening. Nonetheless, the problem exists, and can lead to humiliating behavior, or even secretive behavior. These are human psychological problems that must be understood by management. The systems used to deal with these problems must themselves be consistent with the maxims presented above. Review Questions 1. Define and explain the CIP? What are its components? What is the meaning and role of “reasoned public discourse” in the context of the CIP? What is the role of the noble nature in the CIP? 2. Define Kant’s notion of “kingdom” and “harmony?” 3. What is the “moral motivation” according to Kant? Questions for Discussion and Essays 1. Do you agree with that the three formulae of the categorical imperative should guide our social discourse in search of moral maxims? Are there some formula you would add or eliminate? Explain in detail. 2. Explain the relevance of the third formula of the CI for accounting principles? 3. Why is “reflection” important for maintaining our moral maxims?

References Arendt, Hannah. 1971. Thinking and Moral Considerations. Harcourt, Brace and Jovanovich. Brickley, James, Clifford Smith, and Jerold Zimmerman. 2007. Managerial Economics and Organizational Architecture. McGraw-Hill, Irwin. Chambers, Donald, and Nelson Lacey. 1996. Corporate Ethics and Shareholder Wealth Maximization. In Financial Management, 93–95. Spring/Summer. Dworkin, Ronald. 1977. Taking Rights Seriously. Cambridge, MA: Harvard University Press. Hill, Thomas E. 2012. Virtue, Rules and Justice. Oxford, UK: Oxford University Press. Hume, David. 1739. A Treatise on Human Nature. London, UK: John Noon.

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Inwood, M.J. 1995. Enlightenment. In Oxford Companion to Philosophy, ed. Ted Honderich. Oxford, UK: Oxford University Press. Kant, Immanuel. 1784. What is Enlightenment? In Basic Writings of Kant, ed. Allen W. Wood. New York: The Modern Library Classics, The Modern Library. ———. 1785. Fundamental Principles of the Metaphysics of Morals. In Basic Writings of Kant, ed. Allen W. Wood. New York, NY: The Modern Library Classics, The Modern Library. ———. 1793. Religion Within the Limits of Reason Alone. In Basic Writings of Kant, ed. Allen W. Wood. New York, NY: The Modern Library Classics, The Modern Library. ———. 1797. In The Metaphysics of Morals, ed. Mary Gregor. Cambridge, UK: Cambridge University Press. O’Neill, Onora. 2000. Kantian Ethics. In Routledge Encyclopedia of Philosophy, 433. Routledge. Plato. 1999. The Collected Dialogue Including the Letters. In Bollingen Series LXXI, ed. Edith Hamilton and Huntington Cairns. Princeton University Press. Rawls, John. 2001. Justice as Fairness: A Restatement. The Belknap Press of Harvard University Press. Robinson, Richard. 2012. The Philosophy of Evil and Business Code Abandonment. BRC Journal of Business 2 (1) March: 135–156. Sullivan, Roger. 1994, 1997. An Introduction to Kant’s Ethics. Cambridge University Press. White, Mark D. 2011. Kantian Ethics and Economics. Stanford, CA: Stanford University Press. Wood, Allen. 2001. Basic Writings of Kant. New York, NY: Modern Library, Random House.

Supplementary Readings Sullivan (1994) provides a most comprehensive and easily understood review of Kant’s categorical imperative process (CIP). White (2011) also present an excellent review of Kantian concepts of duty, and Kant’s view of humanity’s unsocial nature, and therefore the necessity of the CIP.  This “unsocial nature” poses many of the interesting problems for the ethics of management.

Chapter 4: Moral Virtues and Ethical Decisions

1

Introduction

The classical philosophy of virtue ethics avoids consideration of general moral rules.1 It centers ethics on the development of personal moral traits (or virtues) aimed at an ultimate purpose of pursuing a content life. These personal psychological traits were to be developed as part of a maturing process similar to the physical development of the young. This philosophy fits well within an elite ancient-­ institution of schooling by tutors—a philosopher tutoring a young student. Modern ethical philosophy—Kantian Enlightenment deontology and after— emphasizes “dispositions to follow” the moral rules that are established through reasoned social discourse, an essentially democratic process centered on rational reflection, and that is motivated by the notion that “we give these rules to ourselves as necessary to pursue a moral community.”2 These classical and modern views are joined via the notion of “disposition to follow.” In the modern view, a “disposition to pursue duty” replaces the inner traits of developed classical virtues. Some current literature (reviewed below), however, still explores managerial virtues as though they differ from managerial dispositions to pursue duty. This chapter attempts to show that the modern view poses the more effective method for analyzing management responsibility, and that the more ancient virtue-­ ethics view is cumbersome for this purpose. The virtue ethics view, however, is shown here to pose some definite valuable insights for management development.

 This refers to the rules of modern moral-deontology.  See Slote (1995, pp.  900–901) for a review of this “dispositional” interpretation of “virtue.” Recently, White (2016, p.95) also uses this “dispositional” view. 1 2

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_4

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1.1

Chapter 4: Moral Virtues and Ethical Decisions

A Brief Classical Philosophical Review

The ancient ethical philosophy—Aristotelian, Stoic, and some other variations—concerns one’s life’s patterns, and the reflective choices that modify those patterns. It is argued here that this ancient philosophy has much to say to modern managers, at least those who envision an entire career devoted to business management. This ancient philosophy is centered on a person’s lifetime development of virtue, i.e., on a lifetime pursuit of a particular type of happiness that we might identify as “contentment,” which particularly involves a personal reflective-deliberation on life’s direction. Such an approach is often juxtaposed against a deontological, or rules and duty-based modern approach with its notion of moral demands that might be considered onerous. The ancient philosophy did not perceive morality as demanding or punitive, but as natural characteristics of “normal non-repressed development.” (Annas, 1993, p. 4.) It posed no disagreeable duties, but rather a worthy and desirable lifestyle. This differs from modern Kantian deontology (not necessarily the philosophy of Kant) which is typically perceived as anti-­egoistic, but necessary for social functioning. Given this difference in approach, virtue ethics is shown to be relevant and applicable to the life career of the individual manager, and by extension to the interactions within, and the directions of, the managerial team. Modern reinterpretations of these virtues therefore become a most relevant aspect of business.3 Modern ethics, as in Kant (1797), poses a hierarchy of axioms—the categorical imperative—from which moral maxims are drawn, i.e., a “deontology.”4 This approach is potentially complete in addressing ethical problems, a completeness not attempted by the ancient philosophy. The modern approach poses all-encompassing views of right and wrong; whereas the ancients saw these choices as posing personal directions which either reinforce the good or flourishing life, or that harm it. To the ancients, virtues were to be developed dispositions to make right choices, i.e. a developed moral character. Note that Kant also said much about developing moral character, and this is also reviewed below as partial support for the ancient view.5 It is the notion of the desirability of developing moral character, either by the individual manager in isolation, or in consort with and aided by the managerial team, that is important here. It has recently been argued that “in consort” reduces to a disposition to pursue a moral community, a kingdom of ends in the language of Kant (1797).6 In isolation, pursuit of moral character would be akin to the wanderer trying to be the moral person in an immoral community, perhaps by trying to satisfy her personal conscience.7 Being virtuous, however, must entail more; it must entail a search for others who have at least a potential for a moral disposition, to learn from these others, and to reinforce their moral good qualities. This involves Aristotle’s friendships of virtue, a community of moral friends, with each

3  See Fontrodona, Sison, and de Bruin (2013) for a symposium of articles on virtue ethics and business. 4  See Annas (1993, p. 7). 5  See Kant (1797, 6:379–413). 6  See Robinson (2016). 7  Lot in Sodom and Gomorrah comes to mind. See Genesis 18–19.

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reinforcing the other as motivated by love for the other’s good moral qualities.8 In Aristotle’s philosophy, this disposition, as developed over a manager’s career, should lead to a type of satisfaction, perhaps contentment, or tranquility, or happiness.9 When one considers the modern pursuit of wealth as a possible overriding goal of management, one recognizes the inconsistency of this pursuit with the ancient view of virtue. An examination of this inconsistency is one purpose of this chapter. Another is to examine the implications of the virtuous manager as a norm for business. One ancient branch of ethics that has possible relevance for the modern disposition towards duty approach is that of Thomas Aquinas (Summa Theologiae, 1993, 2–2, q123, a11). He explored a list of traits subject to the “unity theory” of development, and these should be considered virtues.10 These virtues include: • • • • • •

a memory that facilitates drawing on experience, a receptiveness to advice from those with more experience, an ability to perceive possibilities for actions when they are not obvious, foresight, circumspection, constancy in ability to stick to a decision.

These Thomastic virtues are similar to the duties examined by Rawls (1951) and Robinson (2017) as reviewed in Sect. 3 below, and also referred to in Sect. 4.

1.2

A Brief Review of Some Recent Literature

Some current literature concerns managerial virtues, and indicates the necessities for their development, although there is disagreement concerning their composition. Some indicate the need for virtuous development in order to manage for facilitating a fulfilling (as in “better than tolerable”) work environment.11 Some expand upon the ancient view of virtues as those personal attributes that must be exercised as a “unity” for the “good of one’s life,” and emphasizes the need to transform the work environment to facilitate personal virtuous attributes.12 Fontrodona, et al. (2013, pp. 563–564) explained three rationales for necessitating virtuousness in management: 8  See Cooper (1980, pp.  301–340) and Robinson (2016). The latter argues that this pursuit of friendships of virtue is appropriate, and perhaps necessary for business. 9  See Annas (1993). 10  See Irwin (2011, Chapter 23, pp. 588–590), for this application of the concept of “unity theory, termed by Irwin as “reciprocal virtue.” This list is briefly explored by Yuengert (2016, p. 169), and in more detail by Irwin (2011, Chapter 23, pp. 588–627). 11  See Bertland (2009). 12  See Annas (1993) for a detailed review of this “unity theory,” i.e., that all virtues must be pursued as a unified group or the eudaimonic goal would be frustrated. Also see McPherson (2013).

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1. “Human beings not only transform their environment through their work, but they also transform themselves. 2. Businesses create environments that can either favor or hinder this personal development of workers. 3. Virtue ethics provides managers and business leaders with an opportunity to ask themselves what kind of people they become through their actions, and how their decisions impact the lives of others.” These rationales do not, however, suggest any actual managerial virtues in need of “unity” development, that is development as a group requirement. De Bruin, however, did suggest a series of managerial virtues, and the business rationales for their development.13 This posed a complete categorization: i. Fairness and open mindedness leads to effective explorations of business opportunities and problems. ii. Temperance and sobriety facilitate effective solutions to these opportunities and problems. iii. Avoidance of “hubris,” i.e. an arrogance in claiming what is “right” because of some perceived superiority, the avoidance of which facilitates both (i) and (ii). (A more complete listing of possible virtues is presented in Sect. 4. Note that fairness and open mindedness are emphasized as modern virtues in Sect. 4.) Others argue for development of virtuous managerial structures that provide14: i. a teleological approach to business (pursuit of a final end-goal), ii. a deliberative approach to business analysis, and iii. a social context that provides the knowledge and reflection required for business success. These same “virtuous structures,” they argue, enable development of moral character among management. The personal moral characteristics to be developed by these “virtuous structures,” however, are not specified including the notion of “deliberative,” nor are personal traits specified for obtaining “knowledge or having reflective habits.” It should be recognized that there are business barriers to development of these “virtuous structures.” These “barriers” include15: i. the anthropology of managerial relations which inhibits virtuous relations in business, ii. the competitive nature of business which does not allow room for virtue,

 See De Bruin (2013, pp. 583–595).  See Virens et al. (2016). 15  See Dawson and Bartholomew (2003). 13 14

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iii. a modern management style that does not allow for the reflective atmosphere required to develop these structures, iv. the wider social roles of managers that conflict with virtues. With respect to these and other barriers, there can be no doubt that there are difficulties in developing virtue in business, but within the context of the pursuit of imperfect duty, Robinson (2016, 2017) refuted all of these points concerning barriers to virtuous development. (Note that the relation between virtue and the pursuit of imperfect duty is explored in detail below.) This literature posed an optimistic view that dispositions to pursue imperfect duty within the management team is both achievable and beneficial. The “barriers” may exist, but management might make these sufficiently weak so as to not prevent a virtuous development of the management team. Whether there are barriers to virtuous development or not, Whetstone (2003) presented the results of business surveys concerning managers perceptions of necessary virtues. These surveys indicate (1) the extent that business management uses the language of virtue ethics, and (2) whether within particular organizations, a set of perceived managerial virtues were usually identified by managers. The surveys indicate a wide dispersion of opinion as to the composition of these identified virtues. A consistent set of virtues was not identifiable from the surveys, nor were there any analyses provided as to whether any of the many traits identified by those surveyed should actually be classified as virtues. These surveys indicate that management might recognize that a set of virtues is important, but a lack of clarity exists as to what these might be. Cameron (2011) used a classical definition of virtue, “singular attributes that represent moral excellence.” Cameron “equates responsible leadership with virtuousness,” and argued that this leadership is established on three “core assumptions:” 1. The “eudaimonic assumption”—An inclination exists in all people towards moral goodness.16 2. The “inherent-value assumption”—Virtue is not a means to another end, but the end itself.17 3. The “amplification assumption”—Virtue is self-perpetuating as in Aristotle’s friendships of virtue approach.18 Note that these core assumptions do not specify these leadership traits. Fontrodona and Sison (2006) did, however, add specificity to leadership virtue as based on classical notions. He specified that the virtues of speech (logos), character (ethos), and emotional disposition (pathos) are necessary. These are included in the managerial nexus of imperfect duties presented later in this text especially in the categories of

 Eudaimonism is explored in more detail below, but this “inclination towards moral goodness” is similar to the philosophy-theology of St. Augustine (see Ashby 1997, Chapter 4 especially pp. 180–184, and also Thomas Aquinas see Ibid, pp. 226–244). 17  See Robinson (2016), and also Annas (1993) for a full explanation of this aspect of virtue ethics. 18  See Annas (1993) and Robinson (2016) for this dynamic view of the development of personal characteristics. 16

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speech (reasoned discourse), and character (affability and due diligence). These are reviewed in Sect. 3. Attempting to provide still greater specificity, Swanton (2016, pp.  193–194) explored what she terms “productive virtues.” She argues that modern morality should be broadened beyond benevolence to include “productivity” and “creativity,” (characteristics examined in later chapters of this text). She argues that the traits that support productivity include amiability, industriousness, and toughness. Others also explore brief lists of traits that might facilitate business.19 These traits might all be considered virtues, but the explorations of either their development or their desirability is slight in the literature. This modern “virtue literature” is best considered as playing a supporting role as compared to the “disposition towards duty” explorations reviewed in Sect. 3.

1.3

A Brief Comparison of Two Views

The classical explorations of virtues were rather specific about their natures, i.e., the ancient cardinal virtues were temperance, justice, courage and practical wisdom. This has not been the case with the current attempts to explore managerial virtues where the recent literature is vague about the nature of these desirable personal characteristics for management. The specificity exception is de Bruin (2013) who also provided a complete categorization. This recent literature did, however, attempt to expose the benefits of managerial virtue, but as argued here the recent literature also is deficient in not recognizing the links between modern explorations of dispositions-­towards-duty and virtue. In particular, the recent contributions on the nexus of imperfect managerial duties (examined in Chapter 6: “The Nexus of Managerial Imperfect Duty: Relations of Virtue, Discourse, and Due Diligence”) is not only specific about their nature, but also emphasizes the disposition to perform these duties. The term “disposition” essentially describes a virtue, and is so used in this duty oriented literature. Hence the modern notions of dispositions to perform managerial duty could be considered the modern managerial-virtue ethics. If this is the appropriate determination of the modern dispositional approach, then (i) the teleological issues for the firm and the manager, plus (ii) the possibility of duties being considered “onerous” as compared to the desirable imbedded traits we call virtues, and (iii) the “unity theory of group development” of either virtues or dispositions, should all be explored in this context.

19

 Rose (2016), Becker (2016), and Solomon, (1993) are examples.

2  Virtues, Rationality, and Completeness

2

69

Virtues, Rationality, and Completeness

In the modern managerial world, one’s career as a manger may be perceived as something that happens to the would-be-executive as external forces impose decisions; that even if generally accepted behavioral norms are followed, the results have a sufficient degree of randomness that prospects for promotion and advancement are also random. Perhaps over her career, the manager wins the game, but perhaps not. The business person’s life exists within constraints largely imposed externally as if by nature, i.e., the constraints of competition, financial resources, technological development, and actual natural forces. Within these inevitabilities, the manager must rationally manage her/his career; at least we assume rationality, although as explored below, this is itself a disposition to be developed. Zeno, the founder of the Stoic school of virtue ethics, identified intelligence, courage, temperance, and justice (understood as fairness towards others) as classical categorizations of virtues. Intelligence is the developed exercise of reason, especially as it applies towards courage, temperance, and fairness. Intelligence requires that “rationality” be applied towards the other three virtues or their effectiveness is undermined. The Stoic view was that these virtues could not be developed in isolation from one another since this would require an irrational lack of development of at least one. The intelligent-rational person would be incapable of developing one virtue without the others; faulty reasoning applied to one virtue leads to faulty reasoning in others. The Stoics sought the complete moral ideal of developing all virtues. Why? “The virtues are rational states, since virtue is a habit of acting on reason. Virtue is not acting in a vacuum, as in modern ethics.” (Annas, 1993, p. 51.) To the Stoics, developing all the virtues could potentially achieve the contentment sought, but it could not be achieved with one or more virtues undeveloped; hence the “unity theory of development” of the group of virtues. For Aristotle’s eudaimonia (literally interpreted as a life that follows our guiding spirit, but that is frequently interpreted as a flourishing life) our final “contentment” comes from worthy life choices. This cannot be achieved by materialism, although some material sufficiency is necessary for life, but achieving this eudaimonia can only occur through rationally based development of virtue. Life’s choices should be rational and made after periodic reflection on the path of one’s life-as-a-whole. The ancient schools of virtue ethics recognized an instinctive tendency to think of our lives as a whole, a unity. A developed disposition to base one’s life’s choices on this reflection provides a self-containment, or assurance, that cannot be externally upset or altered. It is not the capacity to do right, but the disposition to make right choices that is essential, and this disposition provides this “self-containment.” This means that once “the disposition to make right choices” becomes a person’s character, it will not be lost. Eudaimonism is by its nature egoistic with a goal of life’s contentment. The ancients believed that the passions of youth need to be refined and developed in such a way as to interrupt Hume’s (1739) observation that a pattern of emotional passion dictates a biased reasoning. The Stoics perceived a role for rules applied to youth, at least until a sufficient maturity allowed reflection to bring an

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understanding of the underlining principles of virtue ethics so that an adult can progress in becoming virtuous.20 This is also the foundation of virtuous management, and should also be the foundation of managerial development, i.e., an understanding of “why” the virtues are necessary enables and motivates a refinement, or development of the virtuous disposition. Without this “disposition,” a manager is not likely to consistently follow rules unless externally imposed sanctions motivate fear of the consequences of violation. When onerous consequences from violation are improbable, however, the rules would not likely be followed. This is not the case with a virtuous disposition of “self-containment.” Consider the problem of fairness in treatment of others. Simple rules can hardly apply except perhaps in a juridical application. In the managerial context, the myriad of routine interactions requires the manager to pursue fairness for its own sake as a result of her own virtuous nature, and not from some examination of a set of rules and the associated consequences of violation of gain if compliant. In this sense, fairness must become a second nature to the manager. This is the meaning of internalizing the general moral philosophy. As succinctly stated by Annas (1993, p. 101), The virtuous person who has knowledge does not use rules because these on their own are imprecise and undefined—they are too general to do justice to the particularities of the situations, and would lead to judge in a cruel manner.

In Kantian terms, this “to judge” requires development of the capacity of “judgement,” a disposition explored in detail later, but which can be described here as a developed disposition towards correct action. In the managerial context, however, the term “who has knowledge” is particularly germane since the acquisition and proper use of the relevant knowledge is required for this “judgement.” This is a point extensively developed below where modern interpretations of the ancient virtues, and the contexts of their exercise, are examined.

3

 he Linkage Between Dispositions-Towards-Duty T and Virtue

As reviewed in the previous chapter, Kant (1785, pp. 402–403) posed a process for deriving the moral maxims necessary for practical application, i.e. the categorical imperative process (CIP).21 He claimed the CIP reflects common reasoning concerning moral principles, a reasoning captured by three formulae, each consistent with and necessitated by the other two: (1) the formula of autonomy or universal law, (2) the formula for the respect for the dignity of others, (3) the formula of legislation for a moral community. With respect to formula 1, Kant (1785, 4:402) stated, “The common reason of men in its practical judgments perfectly coincides with this, and always has …” Since the three formulae are interrelated, this “common reason of men” argument applies to all three by extension. If Kant was correct,

20 21

 See Annas (1993, pp. 99–101).  See chapter “The Categorical Imperative Process and Moral Duties”.

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his description of the CIP represents our common understanding as to how our ethical maxims are formed.22 Kant’s second formula is generally interpreted as, “Act so that you treat humanity, whether in your own person or in any other, always as an end and never as a means only.” (Kant, 1785, p. 4:429.) This prescription can be interpreted as motivating a set of maxims we usually classify as duties although the interrelatedness of the three formulae implies that duty can be derived from each of the three.23 It is argued here that the deontology derived from the second formula can be viewed as based on a broad set of dispositions of character, i.e. virtues. O’Neil (1989, pp. 114–115), terms the second formula “the formula on the ends-in-itself,” and emphasizes its use as the foundation for perfect and imperfect duty. This vision of duty is particularly applicable to business which requires a set of moral rules (mostly negative rules) to function. In particular, the second formula is generally interpreted as not only establishing prohibitions against the unethical actions of theft, fraud, coercion and the like (perfect duties of prohibition), but also as recommending a degree of volitional actions (imperfect duties) that naturally involve practical limits which Kant founded in “circumstance and inclination.” (Kant, 1797, 6:454) The linkage between these “dispositions towards duties” and “virtues of character” is established here. To establish this linkage, it is necessary to examine the motivation behind development of these virtues of character. Kant’s formula for legislating a moral community is generally interpreted as, “All maxims that proceed from our own making of law ought to harmonize with a possible kingdom of ends.” (Kant, 1785, 4:436, and also see chapter “The Categorical Imperative Process and Moral Duties” of this text.) As argued in the previous chapter, this can be viewed as the motivational formula for establishing and pursuing duty since this kingdom of ends is generally interpreted as a moral community. As reviewed by Korsgaard (1996, p. 23): Since human beings together legislate the moral law, we form a moral community: a Kingdom of Ends. … Each citizen takes his own perfection and the happiness of others as an end and treats every other as an end in itself. It is a community engaged in the harmonious and cooperative pursuit of the good.24

This can be used as an expression of an ideal vision for a business firm as community.25 This implies that the pursuit of those duties that are consistent with the second formula should be motivated by a desire to pursue a moral community. This is particularly applicable to business where laws, regulations, enforceable contracts, and numerous internal-to-the-firm rules, as well as external ethical and professional codes, are common and serve this pursuit. This nexus of maxims exist to establish business as a myriad of moral agreements within an overall social/moral institution of markets. Virtues of character are essentially developed dispositions aimed at this pursuit.  See Robinson (2017) and Sullivan (1997) for full descriptions of the functioning of the CIP.  For illustration purposes, Kant (1785, 4:421–423) derived a set of four maxims from the formula of universal law: maxims against suicide, the lying promise, indolence, and for charitable benevolence with practical limitations. 24  Also see Sullivan (1997, pp. 84–87) for a review similar to Korsgarrd’s. 25  See Robinson (2016) for this argument concerning Kant’s third formula. 22 23

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Kant’s kingdom of ends formula is communal in nature, and markedly different from egoistic eudaimonism of Aristotle’s virtue ethics. If we define virtues as dispositions toward duty, then the motive for developing virtue appears to be different from the ancients. This is explored in detail below.

3.1

A Set of Modern Managerial Virtues26

To change from Kantian deontology to an examination of virtue is an exercise in logic built around the notion of “disposition.” In the classical school, virtues needed to be developed, and the same is true of the modern dispositions that extend from Kantian ethics. To explore these “modern dispositions,” the twentieth century Kantian philosopher John Rawls (1951, p. 1) posed two relevant questions applicable for our analysis: i. What are the virtues (dispositions) necessary for moral judgement? ii. For the purpose of an ex post evaluation that a particular action or judgement is moral, what are the virtues that would likely lead to these actions? Rawls’ ultimate purpose was to discern rules centered on inductive logic that if violated would lead to an ex post evaluation that some decision was unethical, but he attempted to do so by elucidating two categories: competent moral judges, and considered moral judgments.27 He used the former as one condition for the latter, and the former is an expression of virtue.28 We can apply the latter to discern the rationality of our decisions ex post, but this requires the former for what Rawls termed the “stability criteria,” as explained below. Rawls’ competent moral judges manifests four virtuous characteristics: 1. They have a requisite degree of intelligence required for analysis of the issues at hand. 2. They desire to be knowledgeable concerning the facts relevant for the analysis. 3. They have a predilection to use reason, i.e. they are open-minded, they use inductive logic, and they are knowledgeable about their own potential biases. This includes not applying a prior ideology to the analysis of the facts at hand. 4. They have the capacity and desire to consider all interests relevant to the considerations at hand. The exercise of these four characteristics constitute what Rawls terms intellectual virtue. (Ibid, p.  5) The first of these characteristics might be considered as

 The Rawlsian conditions reviewed here were also reviewed in Robinson (2017).  These criteria are also reviewed and utilized in later chapters. 28  Note that in this analysis, Rawls differentiates a virtue ethics approach (the criteria required to be a moral judge) from a deontology approach (the ex post criteria of a moral decision). 26 27

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inherited, but it might also to some degree be developed. The other three can be considered as virtues subject to development as in the ancient philosophy. To answer Rawls’ first question, we should consider the above criteria. To answer the second question, Rawls characterized considered moral judgments as manifesting four characteristics. 1. The judge is disinterested, i.e. cannot benefit or be affected by the judgment (no conflict of interest). 2. The judge is familiar with the relevant facts. 3. All those affected have opportunities to present their arguments. 4. The judgment is stable across decisions by other competent moral judges. These criteria merely express exercises in the moral dispositions of competent moral judges. They can be applied ex post to judge whether a particular decision is a reasoned one. With respect to the fourth condition, individual predilections may be counter-acted when many judgments are made in a wide variety of roughly similar cases. The reasonableness of a decision criteria can be decided by the general acceptance of those competent moral judges who have freely weighed the evidence after open discussion and criticism. This provides evidence that it can “hold its own.” These criteria can be applied to managerial decisions. For example, are these decisions made by those with conflicts of interests, or were the relevant facts rationally considered, or were decisions made on an ad-hoc basis and out-of-step with logical analysis. There is, however, one criteria for being considered a competent moral judge that might be easily overlooked in this analysis. The criteria of having a predilection to use inductive logic, especially to envision potential impacts of our decisions and the information necessary to assist in this envisioning, should be emphasized as necessary. The ability to “envision potential impacts” is an ability to exercise imagination, and this also might be subject to development through exercise. We can therefore characterize the developed dispositions of Rawls’ competent moral judges as necessary managerial virtues. As explained below, however, the categorization of the nexus of imperfect managerial duties towards friendship, discourse, and due diligence can also be used as descriptions of managerial virtues. This nexus forms most of what we typically perceive as managerial duty.

3.2

 he Managerial Virtues and Dispositions T Towards Friendship29

Kant and Aristotle both analyzed humanity’s natural friendships as requiring morality to be sustained.30 This notion of friendship incorporates managerial relations both internal and external to an immediate establishment. Kant’s three forms of friendship, (1) need, (2) taste, and (3) disposition (a disposition to recognize our

 This section draws on Robinson (2016).  See Kant (1797, 6:471) and Cooper (1980).

29 30

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neighbors as friends) all apply to these business relations. To be sustained, each of these categories: • requires that we participate in the development and enjoyment of other’s wellbeing through our morally good will, • arises from our general need to overcome our unsocial nature because of our survival need for social interaction, and • usually involves certain actions of reciprocity since friendship thrives on (but does not absolutely require) differences in capacities and personalities so that we naturally contribute to one another.31 All of these are applicable to managerial relations; dispositions towards their fulfillment describe virtues. For example, managers should develop the disposition to enjoy the wellbeing of others, and to demonstrate the type of reciprocity that friendship thrives on. To Kant, our “duty to oneself as well as to others is to not isolate oneself but to use one’s moral perfection in social intercourse.” (1797, 6:472–473) This affable intercourse includes business. The “byproducts” of these friendly actions are “to create a beautiful illusion resembling virtue that is not deceptive” since all understand the nature of these actions.32 Here Kant suggests that the illusion of the ideal is sufficient to be practical. Affability, sociability, courtesy, hospitality, and gentleness (in disagreeing without quarreling) are, indeed, only tokens; yet they promote the feeling of virtue itself by a striving to bring this illusion as near as possible to the truth. By all of these, which are merely the manners one is obliged to show in social intercourse, one binds others too; and so they still promote a virtuous disposition by at least making virtue fashionable. (Ibid, 4:474)

Fashionable business affability is necessary for generating business efficiency. This behavior is the ideal style for managers, a style that promotes commerce; a style of amicable and efficient norms both within the firm and for external dealings. This “fashion” is tangible and evolves due to what is most effective, but it is rooted in effective sociability. These “fashions” are not deceptions since it is human nature to be at least somewhat honestly social, and to adopt this “affability, courtesy, hospitality, and gentleness” for our social-business encounters as in other common encounters. They can be characteristics genuinely felt and adopted, and reinforced by business success. These characteristics, however, also have practical time and effort limitations, as with hospitality. Developing and enacting these characteristics can therefore be considered imperfect duties, but developing these characteristics fits the classic notion of developing virtues. We can term these dispositions, managerial affability virtues.

31 32

 See Kant (1797, 6:470–474).  In business, these byproducts are not an illusion, but are definitely tangible.

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3.3

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 he Managerial Virtues and Dispositions Towards T Reasoned Discourse33

Kant’s categorical imperative process (CIP) process poses maxims of imperfect duty for reasoned business discourse. The five maxims presented below were posed by O’Neill (1989, pp. 34–50) as broad principles that are particularly applicable to business management, and they are interpreted in that context, i.e. as dispositions in need of development, and therefore virtues. The first three of O’Neill’s maxims are clear specifications of imperfect duties in need of managers dispositions. The fourth specifies a perfect duty against falsehoods, but there is an imperfect duty aspect to this. For example, management has a perfect duty to try to be accurate in its business communications, although perfectly accurate might often be impossible. Hence there is an imperfect duty to be competently accurate. i. Managerial authority should be based on reason! Intolerance brings unreasoned authority to bear on communication. Wherever intolerance is practiced, whether by state or church or other bodies or individuals, those whose thinking and communicating are suppressed, are silenced not by reason, but by authorities that lack reasoned vindication. When these authorities govern us the authority of reason is diminished, and our distance from a reasoned form of life and politics grows. (O’Neill, 1989, p. 48.)

A managerial disposition towards reasoned communication rather than unexplained command is a virtue. ii. Managers should tolerate the logical reason of others! What does this disposition imply? One who adopts it, … detaches himself from the subjective personal conditions of his judgment, which cramp the minds of so many others, and reflects upon his own judgment from a universal standpoint (which he can only determine by shifting his ground to the standpoint of others). (Kant, 1793, V, p. 294)

This detachment disposition is a virtue. iii. Reasoned argument should not be restricted! Non-reasoned argument that denigrates, mocks, or bullies, or more generally fails to respect relevant constituents, may make it difficult for some to articulate their logical argument, and hence it violates the maxim to allow others to “think for themselves.” A disposition to avoid these attributes is a virtue.

33

 This section draws on Robinson (2017).

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iv. Management should be disposed to reason-in-common with those affected by its policy decisions! Management cannot expect to reason correctly unless it does so in common with those affected by its policies.34 This disposition to “reason in common” is a virtue. v. Falsehoods in managerial discourse are prohibited! Falsehoods are clearly prohibited by the formula for autonomy or universal law of the CI.35 Falsehoods should be repugnant to virtuous management, and a disposition for accuracy is a virtue. By “accuracy” we mean that for conditions of uncertainty, our communication should be unbiased in the statistical sense. By this we mean that under repeated trials, the assertion of “expectation” yields on average (is not significantly different from) the mean of ex post observations. We can term this group of developed dispositions, the managerial virtues of reasoned discourse.

3.4

 he Managerial Virtues and Dispositions Towards T Due Diligence36

The disposition towards due diligence is a virtue, and business relations of virtue deteriorate without reinforcement from the due diligent efforts of those involved. These dispositions consist of the following virtues: i. a disposition to obtain the necessary information to make properly informed decisions, including the willingness to consider new information, ii. a disposition to correctly apply the appropriate logically-based decision rule, iii. a disposition to apply the proper decision despite stressful resistance, iv. a disposition to either avoid conflicts of interest, or to acknowledge these conflicts while representing principals in fair negotiation (see chapter “The Philosophy of Action and Authority in the Entrepreneurial and Management Ethics”), v. a disposition to exercise the “noble nature” of speaking out in a business social setting concerning ethical issues. This group of five dispositions can be termed the managerial virtues of due diligence. If we compare these dispositions to Aquinas’ virtues (see Sect. 1 above), the similarities are apparent: the disposition to utilize experience, the disposition to envision alternative actions, the disposition towards circumspection, and the determination to see decisions through were all listed by Aquinas. These are similar to

 See O’Neill (1989, p. 48).  See O’Neill (1989, p. 45) and Korsgaard (1996, pp. 325–349). 36  This section draws from Robinson (2017). 34 35

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the due-diligence dispositions explored above, and also the Rawlsian virtues explored above. The modern approach therefore exemplifies the ancient approach, but with modern context and language.37

4

Virtues or Dispositions?

Ancient philosophers sought to identify a set of virtues they could proselytize as applicable to one’s whole life, and that might best enable the achievement of contentment (a higher state of happiness) with one’s life. These virtues were not considered onerous, but rather naturally developed traits that would lead to contentment. Reflection and revision along life’s path was considered necessary for this achievement. Unlike the explorations of classical virtues, the modern dispositional approach towards managerial duty is complete in its categorization of traits. It also involves greater specificity than the classical cardinal virtues, although these “dispositions” appear to apply only to the managerial life. Perhaps this is because of the specificity. The link between the dispositional view and the virtue view was established above: the dispositional view derives from those managerial duties that stem from a communal business goal; the Aristotelian and Stoic virtue view stems from the pursuit of eudaimonia, an egoistic goal. Is there much difference in these views? The disposition-to-duty view—especially towards imperfect duties—should be motivated by the Kantian pursuit of a moral community, both within a particular business, and within the broader business community. The eudaimonia goal appears to be egoistic although one might (perhaps should) argue that pursuit of the flourishing life must include pursuit of a moral community, or the pursuit of eudaimonia would be illusory.38 The lessons for modern management to be taken from virtue ethics include both its “unity philosophy,” and its teleological goal. The former argues that it would be irrational to pursue some virtues but not others. Why? The final teleological goal of life’s contentment would be frustrated by a lack of some essential virtue. A similar frustration would exist if any of the managerial dispositions—or virtues—were lacking, although the frustration would apparently be the inhibition of the business goal, and not the personal goal; although given the link between them, one should argue that both would be frustrated. (This argument is presented below in more detail.) Virtues in pursuit of the eudaimonia goal are to be developed so that they are not considered as posing onerous obligations, but natural inclinations. The dispositions towards duty should also be inculcated as natural desires, and not onerous

 See Yuengert (2016) for a brief review of these Thomastic virtues. See Irwin (2011, Chapter 23, pp. 588–627) for a detailed review of Aquinas’ exegesis of virtue. 38  See Kant (1797, 6:377–378). 37

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obligations. To illustrate, consider the four groupings of managerial dispositions reviewed above: i. the Rawlsian dispositions for competent moral judges, ii. the Kantian and Aristotelian dispositions for managerial affability, iii. Robinson’s managerial dispositions for reasoned discourse, and iv. Robinson’s managerial dispositions for due diligence. These dispositions pose a complete set of managerial virtues. These specific dispositions are subsumed within de Bruin’s (2013, pp. 583–595) broad categories of managerial virtues. For management, either as individuals or as a team, to actively avoid developing any of these virtues would be to actively not pursue business as a moral community. Nor is it conceivable that management would be pursuing the individual goal of the flourishing life while not pursuing any of the four groupings of virtue. Why? Consider the Socratic dialogue Gorgias. The question asked is. “Would an intelligent individual knowingly commit evil?” Of course the answer is “No!” To commit evil is to be at war with oneself, with one’s conscience. In a similar vein, for a manager to knowingly not pursue these virtues means to not pursue a moral community within business, and this would also place the manager at war with herself. The eudaimonia goal would be knowingly frustrated, and also the communal goal would be frustrated. The teleological and unity theories therefore work together. In addition, there is an overlapping nature to these dispositions: the dispositions of due diligence overlap with those of competent moral judges, and also the dispositions of affability and reasoned discourse clearly overlap. Since this “unity” stems from the singular goal of pursuit of a moral community, it should not be surprising to perceive the commonality of these dispositions, although for examination purposes, we categorize these dispositions as separate. This overlapping also supports the unity theory as it applies to both the dispositional and virtue views. The advantages of the disposition to duty view consists of not only its specificity of duties, but also the specificity of practical limits on these pursuits. It should be mentioned that the Aristotelian and Stoic schools also drew practical limits to virtues as based on temperance and applied reason. One of the differences between the virtue ethics view and the disposition to imperfect duty view might appear to be that the latter is volitional, but the former does not admit choice among virtues; hence its unity view. This possible difference between these views, however, is only apparent but not real since it is the degree of pursuit that is at issue, and this degree has practical limits according to both views. This exploration then brings us to the fundamental difference between these two views: the personal life’s motivation of the manager. Is it to seek the egoistic life’s contentment, or the communal goal of the business community, or could both be simultaneously pursued? This is the nub that has not been extensively explored by the managerial-virtue literature. The germane questions are:

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i. Can a manager pursue life’s virtuous contentment without pursuing a moral business community? ii. Can a manager pursue a moral business community without pursuing life’s virtuous contentment? The purely logical answer to the second question is, “Yes!” For example, one can violate Kant’s second formula by avoiding duty to oneself. A manager, for example, could sacrifice a content family life by totally pursuing business relations. The answer to the first question is, “No!” A manager who does not pursue a moral business community must also sacrifice the benefits of a virtuous life, i.e., contentment. Not pursuing a moral community would violate Kant’s third formula. The practical answer to both questions is, however, that the pursuit of both the business communal goal and the eudaimonia goal depends on the personal characteristics of virtue (dispositions), as pursued in “unity.” If a manager has these dispositions, then both these pursuits become integrated natural actions. Review Questions 1. Explore the fundamental difference between the “dispositional view” of management and the “egoistic life’s contentment” view? Are they different? What are the differences? Can these differences be reconciled? 2. In the “disposition to duty” view of management, are there practical limits? What might these limits be? Review in some detail? Class Discussion and/or Essay Questions 3. Use the Rawlsian criteria to examine the questions, “Can an ethical manager still make a less than considered decision?” Explain? 4. Is there a “unity theory” applicable to the “managerial disposition towards duty” view of management? 5. What are the fundamental differences between the “communal goal of a business” and the “egoistic manager’s goal of life’s contentment?” What are the germane questions concerning these differences? How might these views be reconciled?

References Annas, Julia. 1993. The Morality of Happiness. New York, NY: Oxford University Press. Aquinas, Thomas. 1993. Summa Theologiae. In Aquinas: Selected Philosophical Writings, ed. Timothy McDermott. Oxford, UK: Oxford University Press. Ashby, Warren. 1997. In A Comprehensive History of Western Ethics: What Do We Believe? ed. W. Allen Ashby. Amherst, NY: Prometheus Books.

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Becker, Christian U. 2016. Aristotelian Virtue Ethics and Economic Rationality. In Economics and the Virtues: Building a New Moral Foundation, ed. Jennifer A. Baker and Mark D. White. Oxford, UK: Oxford University Press. Bertland, A. 2009. Virtue Ethics in Business and the Capabilities Approach. Journal of Business Ethics: 25–32. Cameron, K. 2011. Responsible Leadership as Virtuous Leadership. Journal of Business Ethics 98: 25–35. Cooper, J.M. 1980. Aristotle on Friendship. In Essays on Aristotle’s Ethics, ed. A.O.  Rorty, 301–340. Berkeley, CA: University of California Press. Dawson, David and Craig Bartholomew. 2003. Virtues, Managers and Business People: Finding a Place for MacIntyre in a Business Context. Journal of Business Ethics 48: 127–138. De Bruin, B. 2013. Epistemic Virtues in Business. Journal of Business Ethics: 583–595. Fontrodona, Joan and Alejo Jose Sison. 2006. The Nature of the Firm, Agency Theory and Shareholder Theory: A Critique from Philosophical Anthro[pology. Journal of Business Ethics 66: 33–42. Fontrodona, Joan, Alejo Jose Sison, and Doudewijn de Bruin. 2013. Editorial Introduction: Putting Virtues Into Practice. A Challenge for Business and Organizations. Journal of Business Ethics 113: 563–565. Hume, David. 1739. A Treatise on Human Nature. London, UK: John Noon. Irwin, Terence. 2011. The Development of Ethics: A Historical and Critical Study. Vol. 1. Oxford, UK: Oxford University Press. Kant, Immanuel. 1785. Fundamental Principles of the Metaphysics of Morals. In Basic Writings of Kant, ed. Allen W. Wood. New York: The Modern Library Classics, The Modern Library. ———. 1793. Religion Within the Limits of Reason Alone. In Basic Writings of Kant, ed. Allen W. Wood. New York: The Modern Library Classics, The Modern Library. ———. 1797. In The Metaphysics of Morals, ed. Mary Gregor. Cambridge, UK: Cambridge University Press. Korsgaard, Christine M. 1996. Creating the Kingdom of Ends. New  York, NY: Cambridge University Press. McPherson, D. 2013. Vocational Virtue Ethics: Prospects for a Virtue Ethics Approach to Business. Journal of Business Ethics: 283–296. O’Neill, Onora. 1989. Constructions of Reason: Explorations of Kant’s Practical Philosophy. New York, NY: Cambridge University Press. Rawls, John. 1951. Outline Of A Decision Procedure For Ethics. Philosophical Review 60 (2): 177–197. Reprinted in Collected Papers - John Rawls, edited by Samuel Freeman, Harvard University Press, 1999. Robinson, Richard. 2016. Friendships of Virtue, Pursuit of the Moral Community, and the Ends of Business. Journal of Business Ethics. Published online, Open Access, August 3, 2016. https:// doi.org/10.1007/s100551-­016-­3277-­5. Awaiting print assignment. ———. 2017. The Management Nexus of Imperfect Duty: Kantian Views of Friendship, Discourse and Due Diligence. Journal of Business Ethics. Published online, Open Access, August 22, 2017. Awaiting print assignment. Rose, David C. 2016. Virtues as Social Capital. In Economics and the Virtues: Building a New Moral Foundation, ed. Jennifer A. Baker and Mark D. White. Oxford, UK: Oxford University Press. Slote, Michael. 1995. Virtue. In The Oxford Companion to Philosophy, ed. Ted Honderich. Oxford, UK: Oxford University Press. Solomon, Robert. 1993. Ethics and Excellence: Cooperation and Integrity in Buiness. New York, NY: Oxford University Press. Sullivan, Roger. 1994, 1997. An Introduction to Kant’s Ethics. Cambridge, UK: Cambridge University Press. Swanton, Christine. 2016. Virtues of Productivity versus Technist Rationality. In Economics and the Virtues: Building a New Moral Foundation, ed. Jennifer A.  Baker and Mark D.  White. Oxford, UK: Oxford University Press.

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Virens, D., J. Achterbergh, and L. Gulpers. 2016. Virtuous Structures. Journal of Business Ethics 150: 671–690. Whetsstone, J.T. 2003. The Language of Managerial Excellence: Virtues as Understood and Applied. Journal of Business Ethics: 343–357. White, Mark D. 2016. The Virtues of a Kantian Economics. In Economics and the Virtues: Building a New Moral Foundation, ed. Jennifer A. Baker and Mark D. White. Oxford, UK: Oxford University Press. Yuengert, Andrew M. 2016. The Space Between Choice and Our Models of It. In Economics and the Virtues: Building a New Moral Foundation, ed. Jennifer A.  Baker and Mark D.  White. Oxford, UK: Oxford University Press.

Supplementary Readings Annas (1993) presents an accessible and comprehensive review of virtue ethics, the major theme of which was to achieve a type of contentment—or happiness—through one’s personally developed virtues, and through periodic reflection concerning one’s life and direction.

Chapter 5: The Abandonment of Business Codes of Ethics

1

The Process of Evil

Ethical norms and codes are essential to what we consider to be civilization. Historically, however, they have been periodically abandoned both within cultures and sub-culture organizations such as particular businesses. In studying and explaining why these abandonments occur, philosophers offer the theory of destruction by evil. Rather than viewing this “evil” as a separate entity, such as being caused by some demon, we can more properly view it as a characteristic of a process, and/or perhaps an adjective that describes the result of this process. This is the approach taken here where the abandonment of business codes of behavior (ethical business codes) are examined. Business codes consist of the behavioral norms manifested in law, custom and various explicit and implicit contracts. A variety of documents internal-to-the-firm express portions of these codes: manuals that concern employee management, external firm communications, capital budgeting procedure-manuals, and internal auditing and control procedure manuals. All of these documents manifest ethical maxims, although some are more explicit in moral manifestation than others. Consider these examples: 1. Employee management manuals generally specify grievance procedures for those who perceive they were treated unfairly. 2. External communications are often restricted to particular executives, and even then only after approval by other managers. This in part because of the moral contents of these communications. 3. Capital budgeting procedures are generally designed to prevent firm resources from being spent on the “pet projects” of management, i.e. those that add no value to the overall company, but do serve the perquisite interests of particular managers.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_5

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4. It is obvious that internal control procedures are designed to prevent fraud. These procedures are usually explicit and written. All of these examples embody ethical codes, but there are many other written codes found in business that involve matters such as prevention of conflicts of interest, specifications of proper procedures for reviews that might lead to compensation increase, etc. Perhaps most of the social interactions in Western civilization occur through business. As a result, the study of how we establish ethical business codes, and why we ignore them, forms a considerable subject for practical philosophy and management. The study presented here, however, primarily relies on the philosophical works of Arendt (1963, 1971, 1978, 2003), Svendsen (2001), and Kant (1785) who study the broader aspects of cultural degeneration and cataclysmic resulting evil. It is shown, however, that the principles established apply well to recent business scandals where business codes of conduct were ignored. Notions of evil have been well explored in Western philosophy. In Socratic-­ Platonic philosophy evil is anything that hinders our pursuit of the good (eudaimonia). It has often been interpreted in a narrow sense as purposeful harm to others. Both of these definitions are suboptimal when we seek to explain group processes that result in severe damage to others, whether this damage results from purposeful avoidance or cavalier ignorance of ethical codes. It is the process of devolution from the ethical code that we seek to focus on, not merely an individual’s actions. Kant (1785) argues that evil is caused by an absence of reflective thought; that this absence results from “stupidity caused by a wicked heart.” This is the form of evil that Hannah Arendt describes as “banal.” In particular, I argue that although this “stupidity” may be an initial step that leads to resulting evil actions, we find that there is much more to the process. The initial stages, I argue, can be interrupted so that the devolution into evil is halted. Of course, we seek insights into the processes that led to massive evil such as the holocaust of World War II, Stalin’s and Mao’s purges and similar events, and from these insights we seek to draw parallels to the ethical-process deterioration of widespread business scandals such as Enron and Madoff. We find that it is more than only an absence of reflective thought that generates this dynamic ethical-process devolution. This devolution, whether in broader society or in business, contains common elements such as authoritarianism (or its more severe form of totalitarianism), group think, teambuilding, and humiliation of dissenters. These elements can easily be developed within the competitive business firm. All forms of evil exhibit a lack of respect for the dignity of others, but we must ask ourselves, “How can this lack of respect be developed within ourselves? What process could bring this about? More particularly, what principles of managerial leadership are necessary to prevent this process in business?” Svendsen (2001, pp. 85–87) indicates four anthropological types of evil: 1. Demonic evil: Evil committed for the sake of evil. This is a classical concept generally based upon religious notions of demonic subversion of individuals.

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2. Instrumental evil: This evil is a side result from pursuing some goal that is itself not inherently evil. The evil itself in not intended but is nonetheless a consequence. An example could be the pursuit of wealth where that pursuit causes harm to others. 3. Idealistic evil: This evil is intended, but the pursuit of some other goal that is considered good necessitates it. Social reforms might provide examples where these reforms require the coercion of some subgroups. 4. Stupid evil: This is evil that result from a lack of reflective thought. As shown in this paper, it is particularly present in business, and remedying this is the primary purpose of our proposed preventative action. Forms (2), (3), and (4) can result in abandoning the well established ethical norms of either society in general or some organization. They are the forms we focus on here. There are four overlapping inherencies to the competitive firm that make these organizations particularly subject to systematic violations of society’s ethical norms: 1. The competitive firm encourages management and employees to abstractly identify with the organization to develop an attitude of us-versus-them towards their competitors. 2. Individuals within these firms usually must participate in team building exercises and efforts so as to develop business efficiency. These team building efforts help exacerbate these us-versus-them tendencies. 3. These firms generally exhibit considerable division of labor in accomplishing important tasks. This division also often allows a division of responsibility when it comes to enforcement of ethical codes. 4. Competitive firms tend to be authoritarian where each individual’s career depends upon the authority above them. These inherencies make group-think prevalent and dissent difficult even when the question concerns some moral standard. We shall see below that these inherencies allow the elements that make it easier for individuals to accept evil results. The prevention of these results, however, always begins with and relies upon reflective thought as pointed out by Arendt, but more is required for this prevention. This required reflective thought follows Kant (1785) in that certain characteristics are necessary. In particular, these necessary characteristics include: 1. Participants must have sympathy in the sense of Hume, i.e. they must be capable of envisioning a substitution of themselves into someone potentially hurt by the violation of the ethical norm. This generates a potential for remorse in the actor who might violate the norm. But this is not sufficient. 2. The actor must also be able to apply logic to envision the potential consequences of their actions, and be willing to apply this logic consistently. This may eliminate a mere application of a-priori ideology to the potential problem at hand, an ideology that poses a bias in analysis of possible results.

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3. Finally, the actor must be willing to spend the time and effort necessary for this reflection. This last requirement might pose the most significant problem necessary to overcome the tendency to abandon normal codes of ethical behavior, i.e. the effort requirement. This reflective thought, even if fully characterized as above, need not be sufficient to overcome abandonment of ethics if there are no actors who are willing to exhibit what Arendt terms the noble nature, i.e. the willingness to speak out in a social setting that some action is wrong, that it violates the ethical code, and that this code is necessary for harmony in society or within the firm. Without this willingness to publicly defend the code, all the reflective thought, however proper, will be ineffective. Much more about this noble nature is presented below.

2

Thoughtful Reflection and Codes of Conduct

A basic premise of Greek philosophy is that people do not commit evil voluntarily, but only out of ignorance about the consequences of their actions. This is basic Socratic (the Gorgias dialogue) and Platonic philosophy. Yet history, and particularly the history of the twentieth century, illustrates how very common evil is. Late twentieth century philosopher Hanna Arendt presents us with a particularly cogent argument as to why this evil occurs, and this argument is reviewed here. It concerns people who follow what we might consider a proper code of conduct but who do so with an absence of reflective thought. The list of maxims presented previously in chapter “Moral Virtues and Ethical Decisions” could be considered, or reduced to, a code of conduct. If we follow Kant, however, it is reasoned thought that is at the core of his categorical imperative and the associated maxims. Any attempt to simply apply these maxims, as in the case of following an established code of conduct, can lead to substantial difficulties. We are not saying that carefully established codes are not a positive way to provide a framework for workplace behavior, but rather if the code is not associated with reflective reasoning, it can still allow what we would judge as misconduct and possibly even evil. For example, consider the first three moral maxims posed in chapter “Moral Virtues and Ethical Decisions”: 1. We ought not to make lying promises. 2. Within practical limitations, we ought to help others pursue their own ends where and when we can. 3. We ought to behave as though all our actions were publicly known, even when some actions must be kept private. Consider the following question concerning “1,” the prohibition against lying promises. When corporate management signs its annual reports, it is assuring the company’s owners, and the rest of the financial markets as well, that all the data is

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believed to be accurate. No manager, however, could possible know that every transaction and account is recorded accurately. Management has a positive duty to verify, but this practical limitation on authentication of accuracy could be easily considered by some managers as less than fully serious so that sloppy inaccuracies become common. The self justification would be that the requirements of accuracy and authentication are overly severe; that no one manager can know all. The more serious inaccuracies could be prevented, however, by reasoned reflection about their impacts. Without this reflection, a cavalier attitude could develop, one that is likely to lead to serious problems. The second and third moral maxims, the demands for benevolence and behavior as though all were publicly known, also have practical limitations. Without reasoned reflection, these positive duties and there practical demands can also be treated cavalierly. This attitude towards any ethical code might easily lead to what we term an evil result. Hanna Arendt (1906–1975) won Denmark’s “Sonning Prize” in 1975 for her “considerable contributions to European Civilization” which resulted from her contributions to Western philosophy. Her main philosophical subject was the explanation of the existence of evil in Western Civilization, i.e., the breakdown of that civilization as built upon both Greek philosophy and the philosophy of the enlightenment (including Kant). Her major works include Eichmann in Jerusalem: a Report on the Banality of Evil (1963), The Origins of Totalitarianism (1951), Thinking and Moral Considerations (1971), and Responsibility and Judgment (2003), the latter being a compendium of her other published works. Arendt witnessed the rise of Hitler’s Germany and left that country for the United States in 1933. She witnessed Adolf Eichmann’s trial in 1959, and wrote about her observations. World War II and its aftermath formed the basis for her contributions. I argue here, however, that she has a great deal to say about ethics especially as it applies to business decisions. Arendt perceived that the evil which occurred on such a gigantic scale during the twentieth century, such as the holocaust of WWII, did not result from the wickedness of the people involved, but rather from their extraordinary shallowness and refusal to think. She argued that a lack of reflective thought that stems from the bureaucratic behavior associated with following simple codes of conduct was the ultimate cause. Indeed, she saw that standardized codes of conduct protected people against this reflective thought, that “conscience” essentially consisted of this reflective thought, and that since the evil she witnessed occurred without this thought process, it was essentially without motive. Note that Arendt’s view is consistent with the Socratic view that people select evil only out of ignorance. Kant argued that reasoned thought provided the foundation of ethics, and that the reasoning ability of the ordinary average person was sufficient to establish an ethical society. This idea was challenged by Arendt. (See Arendt, 2003, p. 164.) Her argument begins with this statement: If the ability to tell right from wrong should have anything to do with the ability to think, then we must be able to “demand” its exercise in every sane person no matter how erudite

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Chapter 5: The Abandonment of Business Codes of Ethics or ignorant, how intelligent or stupid he may appear to be. Kant, in this respect almost alone among the philosophers, was much bothered by the common opinion that philosophy is only for the few precisely because of this opinion’s moral implications. In this vein, he once remarked, “Stupidity is caused by a wicked heart,” a statement which in this form is not true. Inability to think is not stupidity; it can be found in highly intelligent people, and wickedness is hardly its cause, if only because thoughtlessness as well as stupidity are much more frequent phenomena than wickedness. The trouble is precisely that no wicked heart, a relatively rare phenomenon, is necessary to cause great evil. Hence, in Kantian terms, one would need philosophy, the exercise of reason as a faculty of thought, to prevent evil. (Arendt, 2003, p. 164.)

The substance of Arendt’s argument proceeds as follows: i. It is true, as Kant argued, that thinking is a trait of all people. ii. When we reach conclusions as a result of our thought processes, we typically have considerable uncertainty as to their validity, especially with respect to our moral thought. As a result, we seek dialogue with others, and perhaps democratic debate that acts as a filter for our ideas before we accept the conclusions of our reflective thought. iii. By its very nature, reflective thought leads to a period of abstraction from the real world, a “paralysis” from other actions. iv. Because of ii. and iii. Above, there is a cultural bias against reflective thought. v. Because of iv. above, there is a cultural bias towards following simple rules, or codes of conduct. Because these rules have no basis in our own reflective thought, they are therefore supported by only shallow belief. vi. Because of v. above, people are willing to disregard codes of conduct. People are quick to follow others who appear to have a passion for alternative actions that violate the code. These others argue that they have given the new action careful thought. Arendt argues that “thinking is a marginal affair” in society, “except in emergencies.” (2003, p.  188) Evil is a violation of rules based on rational thought. As a result, the counter to evil lies in what Plato terms the “noble nature,” that is the desire to participate in rational thought in a social context. It is not, Arendt argues, the common reasoning person who is responsible for maintaining societal ethical conduct and thereby avoiding evil, but rather it is the person who exhibits the “noble nature” of reflective thought as voiced in the social setting who is necessary to avoid this evil. With respect to the above mentioned “emergencies,” Arendt writes: At these moments, thinking ceases to be a marginal affair in political matters. When everybody is swept away unthinkingly by what everybody else does and believes in, those who think are drawn out of hiding because their refusal to join in is conspicuous and thereby becomes a kind of action. The purging element in thinking, Socrates’ midwifery, that brings out the implications of unexamined opinions and thereby destroys them – values, doctrines, theories, and even convictions – is political by implication. For this destruction has a liberating effect on another human faculty, the faculty of judgment, which one may call, with some justification, the most political of man’s mental abilities. (2003, pp. 188–189)

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One should not perceive Arendt’s argument as applying only to the large mass political movements such as the National Socialism of Germany, or the communism of the Soviet Union. This argument applies to our business scandals as well. The bureaucracy we typically find in business, which is certainly essential for efficiency, often regulates behavior by a code of conduct that subsumes rational or reflective thought. Mob psychology sweeps through organizations just as in political societies. If people do not have clarity as to the thoughtful reasons behind the code, then these rules can be easily discarded, and unethical pursuits result. Managerial leadership must provide this clarity. In addition, we know that the clever person can always find ways around the rules through actions that violate the spirit, but not the letter of the code. Keep in mind that the Kantian ethic is based on the motive for the action. Violation of the spirit of some code is a violation of the code itself. Managerial leadership that violates this spirit will likely lead to evil results within the organization.

3

 he Competitive Firm and Tendencies Towards T Code Abandonment

As briefly reviewed above, there are inherencies that naturally lead the competitive firm towards abandoning any rationally adopted ethical code that is consistent with a Western tradition. Paramount among these inherencies is group think. Groups cannot have a conscience, only individuals do. As such, groups can feel no remorse; only individuals manifest this character. Groups can, however, spread a generally accepted ideology among their members. Problems with ethical content that are viewed through the lens of ideology probably remain unanalyzed. Where beating the competitors, or contributing to the team effort, or other ideological versions of slogans become the firm’s mantra, then no matter how devoid of unethical content the slogan might appear, when applied to ethical problems the group emotions can move the individual actors away from their better logical sense and towards unethical actions they would not adopt as individuals. For example, top managerial leaders might allow the individual to be humiliated, coerced or even deceived since they might believe that competitors do the same, and that this is therefore necessary for motivating employees. Gourevitch (1998) claims that genocide is essentially an exercise in team building, an extreme version of us-versus-them activity. Ethnic identities are a more typical method of identification, but no matter how abstract the in-common traits that link some team together, all versions of team building separate the human bonds between the groups at least to some small degree if not to a considerable degree. Competitive firms seek to also establish these common traits among employees, and to separate from those of competitors. In the more extreme cases, the other firms become evil in the view of each competitive firm. These sorts of group identities may motivate ethical code abandonment for the sake of defeating the perceived greater evil posed by the competition.

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Bonhoeffer (1997) identifies the thoughtlessness of Arendt’s lack of reflective thought as foolishness, where the fools become manipulated tools of the leader. This is essentially Arendt’s perception that someone offers an alternative to the code for which the followers have little commitment. Bonhoeffer points out that under these circumstances, new shallow slogans replace the code as guides to behavior. The noble nature is then seen as betrayal of us in favor of them. Individual thought that questions the group think is then seen as betrayal. It follows then that “our most basic moral understanding crumbles in the face of (this) ideological conviction.” (Svendsen, 2001, p. 127) In addition, perceptions of outside forces and communications become warped in which: i. The group perceives all external forces and communications as aimed at it personally. ii. The group focuses on those interpretations of circumstances that reinforce it’s a-priori notions of being threatened, and ignores aspects that contradict. iii. The group interprets even positive external statements as malicious. Facts that contradict the new warped vision are merely disbelieved. The authoritarian firm is therefore changed into a totalitarian firm, the latter exhibiting the elimination of individual thought where even the individual doubts their own conscience so that ultimately we see that individuality is eradicated. There are certain conformity characteristics manifested by this totalitarian firm, i.e. the firm that abandons a logical ethical code: 1. Dissenters, whether internal or external, are humiliated, or at least attempts at humiliation are made. 2. The group manifests contempt for weakness among its members in that any sign indicating anything less than enthusiastic support for its new adopted slogan-­ oriented code is strongly discouraged. 3. To reinforce the new code, leaders speak of what should be considered as evil as being the opposite. (Note: Hitler spoke of purifying the Aryan race as his “holiest obligation.”) Elimination of the old code and adoption of the new slogan-oriented code is just the first step in the firm’s devolution into business evil. Svendsen (2001) indicates four steps capable of resulting in members accepting evil: 1. The wrong doing must be presented in such a way as originally being only a minor first step. For example, a violation of an auditing requirement might be presented as having only a minor impact on the final result, or that it would be only temporary and rectified later. 2. The group members must be distanced from the evil decision. “People at the top decided it this way, so I am not blameworthy even thought I could speak out that this is wrong. It is not I who is committing this wrongdoing.” 3. The wrong doing is broken into a division of tasks where each member is seen as only a small cog in the wheel. Responsibility is therefore spread so that no one need feel guilty about the overall result.

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4. An escalation in acceptance of the new immoral values can then occur so that the new values are generally accepted by the firm, while each member can still rationalize themselves as decent because they had little responsibility for the result.

4

Psychological Studies of Unethical Conduct

In recent years, experimental psychology has developed theories of psychological disengagement with respect to personal devolution of moral standards. This psychological literature attempts to explain the process of first acceptance of personal immoral actions followed by rationalization and then further immoral actions. This literature powerfully reinforces the organizational evil processes of Arendt and Svendsen. Some of this relevant psychology literature is reviewed here. Aquino and Reed (2002), Bandura (1999), Bandura et al, (1975), Bandura et al. (1996) show that unethical behavior elicits self-censure, which provides the principal restraint on this behavior. When ethical beliefs conflict with actual behavior, Elliot and Devine (1994) show that psychological dissonance, a stressful form of discomfort, occurs that motivates a process of attitude change. The actors in question either modify their behavior to align with their ethical values, or they modify their values. It is the latter that has the potential for feeding evil processes. (Also see Baumeister and Heatherton 1996.) Bandura (1990), Bandura (1999), Bandura et al. (1975), Bandura et al. (1996), and Detert et  al. (2008) offer an explanation of the process of realigning ethical beliefs with actions, namely beliefs are modified through moral disengagement, thereby relieving the cognitive dissonance. This disengagement process allows the unethical conduct to become personally acceptable. The disengagement takes any of four possible forms: 1. The unethical conduct is portrayed as serving a moral purpose. 2. The unethical conduct is betrayed as being caused by external causes. 3. The consequences of the conduct are interpreted as being innocuous. 4. The victims of the unethical conduct are dehumanized. Bandura, et al. (1996, 2001) show that this moral disengagement also acts as a predictor of future immoral behavior. Aquino, et  al. (2007) and McAlister et  al. (2006) show that disengagement predicts support for military action. These studies reinforce the philosophical explanations of the devolution process. Henkel and Mather (2007) show that people are “revisionist historians” when recalling their own personal past, that they engage in “choice supportive memory distortion” that over attributes positive features to options they actually selected, and also over attributes negative features to options they rejected. We are therefore currently motivated to selectively recall those previous motivations that supported our previous actions. Associated with this evidence of selective recall is the phenomenon that individuals are found to be routinely more critical of the ethics of

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others than of their own ethics. Messick, et al. (1985, p. 497) shows, “We believe we are fairer than others because we think that we do fair things more often and unfair things less often than others.” Epley and Dunning (2000), and Epley and Caruso (2004) show that people are more suspicious of the ethical motives of others than of themselves. Miller and Ratner (1998) and Ratner and Miller (2001) show that others are generally perceived as more self-interested and motivated by monetary rewards. Alicke (1985) Baumeister et al. (1994), and Messick and Bazerman (1996), all show that people believe that they are personally more honest, and that they try harder to pursue ethical actions, than others. These moral disengagement studies show that people are more prone to justify their own immoral actions than those of others. The disengagement and cognitive dissonance frees the individual from the guilt and stress of self sanction. This explains the individual acceptance of initial unethical steps, and of paramount importance, disengagement makes it difficult for those who do speak out to persuade others of the importance of the keeping the code of moral standards. Knowing that others are disengaged would logically lead even those who have Arendt’s noble nature, to be reluctant to speak. Why make waves when one perceives little possibility for actual successful persuasion, but far greater possibility for humiliation? Some of the experimental evidence does, however, show possibilities for prevention of the dissolution. The experiments of Shu et al. (2012) show that the individual levels of disengagement depend upon the severity of the moral violation. They show that moral disengagement occurs only post personal unethical actions, and not after the actions of others. Furthermore, their research experiments support the conclusions of Gino et al. (2009a, b) and Mazar, et al. (2008) that being in a permissive environment rather than a strict environment results in greater disengagement. The “permissive environment” pertains to whether the students who were subject to possibilities of cheating were reminded of an “honor code” or not prior to the opportunity for cheating. This was interpreted as making morality more “salient” by making the improper behavior more “clear cut.” Mazar, et  al. (2008) found that a-priori drawing attention to ethical standards reduces dishonest behaviors. Shu et  al. (2012) argue that there is a difference between active and passive acceptance of moral standards; that making a voluntary decision (actually selecting among various options) versus accepting a passive result yields greater commitment to the action. Similarly, individuals may commit more strongly to moral behavior when they actively agree to ethical standards (by signing an honor code as an example) rather than just passively reading the code. Their moral disengagement would be lower for the former action than the latter passivity. Shu, Gino and Bazerman found experimental support for these hypotheses. They also unfortunately found support for selective memory after unethical behavior. Nonetheless, it appears that active reinforcement of the code may result in a greater degree of ethical commitment.

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This experimental research and literature support notions presented above that there is a dissolution process for abandonment of ethical codes in business. Individuals are easier on themselves with respect to violations, that they suffer selective memory bias with respect to rationalizing the immoral conduct, and that the degree of moral disengagement becomes more sever the further into the process individuals move. Prevention would logically rely on early and active (rather than passive) reinforcement of the code. Also, offering objective evidence that contradicts the cognitive dissonance might be a possible palliative.

5

The Prevention

Svendsen (2001) points out that any ex-post remorse for the final result of wrongdoing follows a gradient that begins with “How could I have been so stupid?” If the group dynamic is allowed to progress, then statements such as, “Why did I not resist?” follow. If the dynamic is allowed its full development, then statements such as “What have I let myself become?” follow. The task of prevention is to not allow development of the first stage, or at least to not allow the second stage to occur. This task is best facilitated by frequent and full active-review of the properly adopted ethical code such as presented above. This notion of “active review” is meant in the sense of Shu et al. (2012), i.e., an active signing or recognition of the relevant code principles. For example, internal controls and/or auditing principles ought to be reviewed regularly, but after this review, and after the agent answers questions about the review, a signature indicating acceptance of the code should be elicited. Furthermore, this review should emphasize Kant’s third formula for the categorical imperative, i.e. that the proper motivation for keeping the code of moral maxims is to pursue a broader social goal and not a narrow personal goal. The agent should accept the idea that the reason for keeping the code is not just because they will be separated (fired) if they do not, but because the agent’s actions serve a broader social goal. Group members must be persuaded to believe that the ethical maxims manifested by the codes serve either society’s interests, or at least the best interests of the firm. This would make psychological disengagement, as associated with code violations, more difficult. For example, agents should be brought to realize that without the accounting rules and accuracy, both society and the firm suffer and ultimately break down if violations become commonly accepted. For another example, consider that agents must be brought to realize that without general respect for fellow employees, the firm cannot function effectively. Each of the code’s moral maxims must therefore be frequently and actively reviewed, explained and accepted as being in the interests of the firm and society in general. This is necessary so as to limit moral disengagement. To further encourage engagement, and discourage disengagement, it is particularly important to emphasize respect for the thinking individual members of the group. Once

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the voicing of reflective thought is discouraged, once dissenters are humiliated or marginalized, then disengagement is generated, and the dynamic of code violation is not likely to stop outside of external interference via society’s laws or vigorous interference from other stakeholders. Disengagement by the involved agents facilitates Svendsen’s first stage. By the time that the “How could I be so stupid?” stage is reached, harm has occurred. Beyond this stage, prevention is particularly difficult. Note that the term “stupid” here means lack of reflective thought. It is this reflection that prevents moral disengagement, and hence it is to be encouraged and reinforced. As indicated previously, however, this reflection is not sufficient to prevent this harm. The noble nature of stating “This is wrong!” publicly within the group is necessary. This also requires the voicing of a cogent argument about why it is wrong. Hence, public dissent must be a priori encouraged and not humiliated. This discouragement of humiliation must be part of the code itself, and its importance explained frequently. The rational dissenter must be praised so that the evil devolution process is prevented. This is the key step that has the potential to prevent ethical code deterioration. As reviewed in the section above, the moral disengagement process allows the unethical conduct to become personally acceptable. The purpose of the “noble nature of speaking out that This is wrong!” is to prevent disengagement in any of its four forms: 1. Firmly voicing a contradiction that the code violation somehow serves a moral purpose. 2. Firmly voicing a contradiction that the code violation is caused externally and hence forced on the actors. 3. Firmly voicing a conviction that the consequences of the code violation are not innocuous. 4. Firmly voicing a conviction that the ultimate victims of the unethical conduct should not be dehumanized or belittled to any extent. Questions for Review 1. Where do we find business codes of ethics? How do codes of ethics interfere with reflective thought? 2. Explain how Arendt contradicts Kant about the causes of evil? Advanced Questions for Discussion and/or Essays 3. Review the inherent tendencies of competitive markets that might lead to systematic violations of society’s sense of ethics? How would you manage a company to overcome these tendencies so as to prevent these ethical violations? 4. What is the role of reflective thought in preventing evil? As a manager, how would you have stimulated “reflective thought” so as to prevent the problem of Enron reviewed above?

Appendix: Enron as an Example

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Appendix: Enron as an Example Enron presented one of the major accounting scandals of the early years of this century. Enron began as an energy company in 1985, but it largely grew to become an energy trading company, trading in futures and forward contracts.1 By 2001, Enron was the world’s largest energy trading companies through holding 25 percent of all energy contracts. It claimed $40 billion in revenue in 1998, $60 billion in 2000, and $101 billion in 2000. Its stated goal was to grow revenue by 15 percent per year. Enron’s ethical conflicts concerned five significant issues: 1. Its use of mark-to-market accounting practices, although perhaps conforming with FASB rules, were deceptive as to its real cash revenues. 2. It used numerous (about 3000 transactions) off-the-book special purpose entities (SPEs) such as limited partnerships and limited liability companies, that it ostensibly only partly owned, but in fact fully controlled, to remove liabilities off its balance sheet, although it still owed these obligations. There were almost 900 of these SPEs. 3. The SPEs were owned and controlled by officers of Enron, who personally benefitted from these subsidiaries although this involved conflicts of interest that violated Enron’s stated ethics code. 4. Enron sought to coerce its auditing company (Arthur Anderson and Co.) into not revealing its accounting manipulations. 5. When questions were raised about its accounting irregularities, and the conflicts of interests of executives with the SPEs, Enron sought to publicly humiliate its dissenters. FASB Rule 125 allowed companies to sign contracts for future delivery of some good, and at a stated price, and to book this future income as current income (mark-­ to-­market). If the price drops between the date of signing the contract and fulfillment date, the company can book this as a positive revenue even though it has yet to be actually received. According to mark-to-market, if the price increases, a loss should be booked. Enron merely entered positive revenues, and had its SPEs book its losing contracts. According to FASB 125, as long as the SPE owned at least 51 percent outside ownership, then Enron need not book this transaction on its own books. Most of these SPEs’ were registered as Cayman Island companies where the other owners were executives of Enron, either Chairman Kenneth Lay, or CEO Jeffrey Skillings or CFO Andrew Fastow. With limited liability in effect, these SPEs (881 in total by 2002) involved no personal losses for these executives. This practice, since it was so large in effect, although within the letter of the FASB code, it clearly violated the spirit of accounting practice since the 1  Forward contracts are merely signed commitments for future delivery or purchase. Futures contracts are forward contracts traded on organized exchanges. For Enron, these contracts involved energy, electric power and natural gas.

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performance and health of Enron was hidden. This practice was deceptive to its core. This allowed Enron to book deceptive positive revenues so that performance objectives could be consistently met. Executive bonuses depended upon meeting these performance objectives of 15 percent growth per year in revenues. Enron’s Code of Ethics addressed the issue of conflicts of interest in two sections. The first stated that, “An employee shall not conduct himself or herself in a manner which directly or indirectly would be detrimental to the best interests of the company or in a manner which would bring to the employee financial gain separately derived as a direct consequence of his or her employment with the company.” The code also continued to state, “….it follows that no full time officer or employee should: (c) Own an interest in or participate, directly or indirectly, in the profits of another entity which does business with or is a competitor of the company unless such ownership or participation has been previously disclosed in writing to the Chairman of the Board and Chief Executive Officer of Enron Corp., and such officer has determined that such interest or participation does not adversely affect the best interests of the Company.” The Board waived this policy for Andrew Fastow on three occasions. In 1999, Arthur Anderson, Enron’s auditor, led by the Enron Account Executive David Duncan, initially questioned these SPE arrangements, calling them “form over substance transactions.” Pressure by Enron on its auditor, however, eliminated further questions about this practice. Several analysts who questioned the accuracy of Enron’s reported accounting numbers were publicly attacked. For example, a reported for Fortune, Bethany McClean questioned Enron’s profits given its large off-balance-sheet transactions led to Ken Lay calling her editor to ask that she be removed from the story. During an analyst interview, Jeffrey Skillings called Ms. McClean an unrepeatable derogatory name. Also, when John Olson, and analyst for Merrill Lynch questioned advised his clients to avoid Enron due to their questionable earnings, he was fired. Enron was a client of Merrill Lynch. Internal employees were given the same treatment. When Sherron Watkins, was Vice President for Corporate Development questioned the off-the-books transactions, and consequential true debt load of Enron, Mr. Fastow accused her of wanting his job. She was fired. Other employees who questioned Enron executives were also fired and humiliated. Enron’s stated policy was to eliminate underperforming employees. Of course, the executives decided the criteria for this performance. Approximately 20 percent were fired each year from 1998 through 2001. The culture of conformance was no doubt strengthened as a result. In the end, Andrew Fastow stated in court, “Within the culture of corruption that Enron had, that valued financial reporting rather than economic value, I believed I was a hero.” Perhaps we can perceive Svendsen’s steps of devolution in the Enron story: 1. No doubt the off-balance-sheet transactions were minor at first, but they grew to be $25 billion out of the $38 billion in actual debt that Enron had in 2002.

References

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Violations of the spirit of accounting codes, and its own internal Code of Ethics were accepted by all including the Board, and escalated over 1999 through 2002. 2. Dissent was minor until the end when strong statements of regret were made. Dissenters were consistently humiliated until the end. 3. Leaders in this devolution saw themselves as heroic.

References Alicke, M.D. 1985. Global Self Evaluation as Determined by the Desirability and Controllability of Trait Adjectives. Journal of Personality and Social Psychology 49 (6): 1621–1630. Annas, Julia. 1993. The Morality of Happiness. New York, NY: Oxford University Press. Aquino, K., and A. Reed. 2002. The self Importance of Moral Identity. Journal of Personality and Social Psychology 83 (6): 1423–1440. Aquino, K., A.  Reed, S.  Thau, and D.  Freeman. 2007. A Grotesque and Dark Beauty: How Moral Identity and Mechanisms of Moral Disengagement Influence Cognitive and Emotional Reactions to War. Journal of Experimental Social Psychology 43: 385–392. Arendt, Hannah. 1951. The Origins of Totalitarianism. Orlando, Florida: Harcourt, Inc. ———. 1963. Eichmann in Jerusalem: A Report on the Banality of Evil. Viking Press. ———. 1971. Thinking and Moral Considerations. Harcourt, Brace and Jovanovich. ———. 1978. The Life of the Mind. Orlando, FL: Harcourt, Inc. ———. 2003. Thinking and Moral Considerations. In Responsibility and Judgment, ed. Jerome Kohn. New York, NY: Schocken Books. Bandura, A. 1990. Selective Activation and Disengagement of Moral Control. Journal of Social Issues 46: 27–46. ———. 1999. Moral Disengagement in the Preparation of Inhumanities. Personal and Social Psychology Review 3: 193–209. Bandura, A., B.  Underwood, and M.E.  Fromson. 1975. Disinhibition of Aggression Through Diffusion of Responsibility and Dehumanization of Victims. Journal of Research in Personality 9: 253–269. Bandura, A., C.  Barbaranelli, G.  Capara, and C.  Pastorelli. 1996. Mechanisms of Moral Disengagement in the Exercise of Moral Agency. Journal of Personality and Social Psychology 71: 364–374. Bandura, A., C. Barbaranelli, G. Capara, C. Pastorelli, and C. Regalia. 2001. Sociocognitive Self-­ Regulatory Mechanisms Governing Transgressive Behavior. Journal of Personality and Social Psychology 80: 125–135. Baumeister, R.F., and T.F. Heatherton. 1996. Self Regulation Failure: An Overview. Psychological Inquiry 7: 1–15. Baumeister, R.F., L.  Newman, S. 1994. Self-Regulation of Cognitive Inference and Decision Processes. Personality and Social Psychology Bulletin 20: 3–19. Bonhoeffer, Dietrich. 1997. Letters and Papers from Prison. Trans. Reginald Fuller, Frank Clark, et al. New York, NY: Simon & Shuster. Detert, J.R., L.K.  Trevino, and V.L.  Sweitzer. 2008. Moral Disengagement in Ethical Decision Making: A Study of Antecedents and Outcomes. Journal of Applied Psychology 93 (2): 374–391. Elliot, A.J., and P.G.  Devine. 1994. On the Motivational Nature of Cognitive Dissonance: Dissonance as Psychological Discomfort. Journal of Personality and Social Psychology 67: 382–394. Epley, N., and E.M. Caruso. 2004. Egocentric Ethics. Social Justice Research 17: 171–187.

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Epley, N., and D.  Dunning. 2000. Feeling “Holier than Thou”: Are Self Serving Assessments Produced by Errors in Self- or Social-Prediction. Journal of Personality and Social Psychology 71: 364–374. Gino, F., S. Ayal, and D. Ariely. 2009a. Contagion and Differentiation in Unethical Behavior: The Effect of One Bad Apple on the Barrel. Psychological Science 20 (3): 393–398. Gino, F., Ayal S., and Pierce, L. 2009b. The Abundance Effect: Unethical Behavior in the Presence of Wealth. Organizational Behavior and Human Decision Processes, 109 (2): 142–155. Gourevitch, Phillip. 1998. We Wish to Inform You that Tomorrow We Will Be Killed With Our Families: Stories from Rwanda. New York, NY: Farrar, Strauss and Giroux. Henkel, L.A., and M. Mather. 2007. Memory Attributions for Choices: How Beliefs Shape Our Memories. Journal of Memory and Language 57: 163–176. Kant, Immanuel. 1785. Fundamental Principles of the Metaphysics of Morals. In Basic Writings of Kant, ed. Allen W. Wood. New York: The Modern Library Classics, The Modern Library. Mazar, N., O. Amir, and D. Ariely. 2008. The Dishonesty of Honest People: A Theory of Self-­ Concept Maintenance. Journal of Marketing Research 45 (6). McAlister, A.L., A.  Bandura, and S.  Owen. 2006. Mechanisms of Moral Disengagement in Support of Military Force: The Impact of Sept. 11. Journal of Clinical and Social Psychology 25: 141–165. Messick, D.M., and M.H. Bazerman. 1996. Ethical Leadership and the Psychology of Decision Making. Sloan Management Review: 9–22. Messick, D.M., S.  Bloom, J.P.  Boldizar, and C.D.  Samuelson. 1985. Why We are Fairer than Others. Journal of Experimental Social Psychology 21: 480–500. Miller, D.T., and R.K. Ratner. 1998. The Disparity between the Actual and Assumed Power of Self Interest. Journal of Personality and Social Psychology 74 (1): 53–62. Ratner, R.K., and D.T. Miller. 2001. The Norm of Self Interest and its Effects on Social Action. Journal of Personality and Social Psychology 81 (1): 5–16. Shu, L. et al. 2012. Signing at the Beginning Makes Ethics Salient. Proceedings of the National Academy of Sciences 109 (38): 15197. Svendsen, Lars. 2001. A Philosophy of Evil. London: Dalkey Archive Press. First English Translation, 2010. Vollum, S., J. Buffington-Vollum, and D.R. Longmire. 2004. Moral Disengagement and Attitudes about Violence toward Nonhuman Animals. Society and Animals 12: 2009–2235.

Supplementary Readings Annas (1993) presents the most comprehensive review of virtue ethics. It is a lengthy book that is nonetheless accessible to the reader.

Part II The Nexus of Duty and Managing Moral Disengagement

Chapter 6: The Nexus of Managerial Imperfect Duty: Relations of Virtue, Discourse, and Due Diligence

1

Introduction

Imperfect duty consists of those volitional attitudes and actions with a moral purpose, but that have practical limits to their pursuit. That is the applicable definition utilized here.1 In Kantian terms, the practical limits to this duty are set by “circumstances and inclination.” (Kant, 1797, 6:452–454.) This classification of duty is usually described and illustrated through terms of beneficent charity where the practical-limit of circumstance requires that the giver not impoverish herself by the charitable action. The inclination limit is typically described as established by the giver’s character, a personal attribute subject to development as in virtue ethics.2 (Virtue ethics, the development of virtue, and its similarity to dispositions towards imperfect duty are reviewed in chapter “Moral Virtues and Ethical Decisions”.) For example, one might have an inclination towards one particular charitable action, but not another. Imperfect duties, especially of the managerial sort, are much more extensive than those of the beneficent charity category; they include all of the imperfect inclinations “to do good” involving managerial relations both internal and external to the firm. To facilitate analysis of these relations, imperfect managerial-duties are here classified into three overlapping broad categories: (i) the pursuit of affable and virtuous relations, (ii) the exercise of reasoned social discourse, and (iii) the exercise of due diligence. Although imperfect duties have limited explorations in some

 The terms positive and negative duties, the former being identified with imperfect and the latter with perfect, are not utilized here due to the confusions this terminology generates, e.g. we have a positive duty to pay our taxes, but this could be interpreted as a negative duty to avoid being a tax cheat. The Kantian distinction of perfect and imperfect, as defined above, avoids this confusion; i.e. the former is absolute, the latter is open ended. 2  Annas (1993) emphasizes this development requirement of virtue ethics throughout her treatise. 1

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_6

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previous business literature, broad notions beyond beneficent charity have not been explored.3 In addition to the perfect duties of management (largely duties referred to but not analyzed here), it is argued that the three imperfect categories listed above encompass all managerial duty. It is argued that they form a managerial nexus, i.e. a connected group that subsumes all related imperfect managerial-duties, and that is based on the following broad managerial responsibilities: 1. the establishment, maintenance, and development of a virtuous management team, 2. the provision of reasoned and moral communications with all stakeholders both internal and external to the firm, 3. the diligent performance of routine responsibilities, and perhaps extensions of diligent performance beyond those responsibilities routinely expected. These responsibilities are the subject of this chapter where they are placed in the philosophical concept of duty, its motivation, and the practical tradeoffs involved. As utilized here, due diligence incorporates routine business functions such as capital budgeting, working capital management, logistical administration, internal control, marketing strategy, and the like. These all have imperfect duty components related to managerial performance due to resource and effort constraints and tradeoffs as explored below. Reasoned moral communications with all stakeholders is the heart of effective managerial communications, and as shown below, this overlaps with other due diligence components of management. Rationally explaining corporate policy enhances stakeholder relations and business effectiveness.4 This component is also reviewed in detail in a later chapter. Establishing and developing a virtuous managerial team was recently explored by Robinson (2018). Such a pursuit establishes a structure of reinforcement of virtuous behavior characterized as imperfect duty. This is also extensively explored in a later chapter. These three overlapping categories of imperfect duty are all encompassing of management efforts, and as shown below, all are worthy of exploration. For each of these three categories, the analysis presented here poses ethical content in the form of both perfect and imperfect duty. The former duty fits the contractual model of the firm (both explicit and implicit contracts) that has extensive development since Coase (1937).5 The these imperfect duties are analyzed here as complementary to 3  For example, Ohreen and Petry (2012) explore the imperfect duty of business strictly in the context of corporate philanthropy. Mansell (2013) also explores this duty-of- beneficence in order to extend corporate moral obligations to wider stakeholder groups than only shareholders, but does not venture into the categories explored here. Buchanan (1996) also explores the imperfect duties of business benevolence, but in the context of the collective action of moral suasion. Each of these efforts does not explicitly extend the use of the notion of imperfect duty into the realm of what is typically envisioned as managerial efforts. 4  See Boatright (2002). 5  See Williamson and Winter (1993) for reviews of this “extensive development.”

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the perfect duty model. These three categories are therefore envisioned as allencompassing of managerial duty, and therefore as appropriate for facilitating analysis of the ethical content of managerial attitudes and actions. For example, in chapter “Due Diligence and the Profit Motive: Perfect or Imperfect Duty?” corporate charity and corporate social responsibility (CSR) are subsumed under due diligence with connections to virtuous relations. As used in research, the usual purpose of categorization is to facilitate analysis. Through identifying commonalities within the categories, one hopes to better apply principles to the analyses. The three classifications are shown below to particularly facilitate examinations of (i) managerial character development, (ii) the practical limitations to imperfect managerial-duties, and (iii) the tradeoffs involved of one imperfect duty for another. These categorizations are therefore useful and justified.

1.1

 he Imperfect Duties of Management as Complements T to Perfect Duties

For purposes of proper distinction and analysis, this notion of a nexus of imperfect managerial-duty should be juxtaposed with the well-established nexus-of-contracts theory of the firm since I argue that the former complements the latter. Alchian and Demsetz (1972), Jensen and Meckling (1976), and Fama (1980) described and developed this “nexus of contracts” theory of the firm where each factor of production is an owner of a respective input. These efforts described ownership of the public corporation via a broader conception than merely the ownership of equity. This conception began with Coase’s (1937) contribution that highlighted transactions costs, both internal and external to the organization, which were related to explicit and implicit contracting as key to determining the extent and design of the business firm. This nexus approach explained the resulting impacts on ownership-­ management behavior: Viewing the firm as a nexus of a set of contracting relationships among individuals also serves to make it clear that the personalization of the firm implied by asking questions such as “what should be the objective function of the firm,” or “does the firm have a social responsibility” is seriously misleading. The firm is not an individual. It is a legal fiction which serves as a focus of a complex process in which the conflicting objectives of individuals (some of whom may “represent” other organizations) are brought into equilibrium within a framework of contractual relations. In this sense, the “behavior of the firm is like the behavior of a market; i.e. the outcome of a complex equilibrium process.” (Jensen and Meckling, 1976, p. 311.)

If the purpose of viewing the firm, especially in its publicly-traded corporate form, as a nexus of implicit and explicit contracts is to help with understanding the firm’s design and behavior as a collection of individual commitments, then perhaps a complementary view of a nexus of imperfect managerial-duties would supplement the contractual view to provide a more complete descriptive-model of managerial behavior. Jeffrey Smith’s (2012) and Norman Bowie’s (1999) Kantian perspective is

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that firms are more than a nexus of contracts; they do have duties of beneficence within which corporate social responsibility (CSR) is grounded. Smith’s and Bowie’s observations concerning the CSR obligations of business, however, do not substantially generate a broader theory of the firm, nor a theory of managerial development, nor a fuller nexus-of-duty view, as provided here. The view of a nexus of managerial imperfect-duties presented here is one of business relations, but not specifically of ownership in its various forms. Managerial teams largely determine the degree of success of the firm, and therefore this imperfect duty-oriented normative model of managerial team behavior is a relevant contribution to the theory of the firm. One obvious difference in these views is that the nexus of contracts model is largely one of positive observation, while the nexus of imperfect duty view presented here is one that largely poses norms, although there is observational support for the imperfect duty view as cited below. Another difference is that the notion of a contract, even of the implicit form, has a fulfillment boundary which once reached, indicates discharge of the obligation. It is the nature of imperfect duties that they have no fulfillment boundary; they are open ended. This open-endedness is an attractive aspect since it admits theories of moral development that are difficult and awkward to envision in the contractual model. This development is emphasized throughout this text. Contracts imply dichotomous behavior, i.e. either the contract is fulfilled or not, and once fulfilled, further activity of the sort specified halts, at least until a new contractual agreement is formed. There is no required further obligation or development in a contractual relation. Fulfilling a contract is, therefore, essentially a perfect duty.6 Williamson (1985), and Hart (1993), however, did explore “incomplete contracts” that result from the large transaction costs required for complete specifications of all contractual contingencies. Perhaps envisioning imperfect duties rather than incomplete contracts provides greater analytical clarity in that it is awkward to consider a contract with incomplete fulfillment obligations.

1.2

The Imperfect Duties of Character Development

Unlike with perfect duties, the imperfect duties of management are not generally dichotomous; they have no specific boundary of fulfillment, and as suggested above and explained below, they may develop over time with more favorable and advantageous managerial interactions, a process of reinforcement That is the nature of imperfect duty. It is dependent on character and can, therefore, evolve. In this sense, managerial imperfect duties are not properly or best described as “contractual,” but 6  Some contracts may be open-ended, for which some degree of imperfect duty applies. For example, consider commodity futures (or forward contracts) where some range of grades of the good to be delivered is acceptable. The purchaser must rely on the supplier to not try and game-the-system by providing a poor grade, or by exploiting other manipulative methods for delivery. See Duffie (1989, section 2.5), and Fackler (1993) for explorations of these manipulations.

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are rather better described as open-ended relations that continuously evolve, as character evolves. Perhaps these imperfect managerial-duties could be described as open-ended implicit contracts, but this description is a bit convoluted in mixing perfect with imperfect duties, and it still begs the question, “What is the nature of these implicit duties?” This “nature” is the purpose of this exploration in a managerial context. This nexus of imperfect-duty view is shown to describe the behaviors of those business-involved individuals who “go beyond the expected effort,” or who “fall short of expectations” of some, but without any obvious consequences associated with falling short of contractual relations. It is argued here that analyzing the managerial nexus of imperfect duties, i.e. those non-obligatory volitional actions with practical limits due to individual inclinations and circumstance, helps to explain (a) the behavior of individuals within the firm, and (b) the relations that firms develop with external stakeholders. In this sense, this nexus of imperfect-duty view supplements the contractual view of the firm to provide a more complete vision of business behavior. The contractual view is perhaps better described as the nexus of perfect duties. The theory posed here emphasizes management’s implicit but limited-­inclinations to be diligent and civil, i.e., to behave according to business-cultural standards. They are “implicit” commitments because they are generally expected of management, but are not contractual. The imperfect nature of these commitments serves a purpose, one that is more fully explained below, but that can be suggested here as involving (i) the duties related to the pursuit of affable and virtuous business relations, (ii) notions of appropriate business discourse, (iii) the often observed purposely-­vague commitments found in business, and (iv) the requirements of, and limits to, routinely expected managerial efforts. If these semi-commitments were not imperfect, but always of a hard-contractual sort, then business relations would be forced to be more limited, and constantly examined for contractual violations and associated recompense. Entering into non-contractual relations that involve the flexibility of imperfect duty, with its associated practical limits, allows business relations to be more easily formed, and to develop though time and effort. Furthermore, this development may be stronger in some firms as compared to others, and this may help explain the success of some, and demise of others. In this sense, this exploration is aimed at providing a substantive complementary contribution to the theory of the firm, one that links notions of virtue ethics with Kantian character development for explaining business behavior.7

1.3

Development of the Argument

The purpose of this effort is (i) to pose a much broader view of imperfect managerial-­ duty than only beneficent charity, although beneficent charity must be a component, (ii) to explain this broad conception as complementary to the perfect-duty view of  See Kant (1797, 6: 445–449).

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contractual relations, and (iii) to categorize the nexus of managerial imperfect-­ duties so as to facilitate understanding of their nature including their practical limits and tradeoffs. These arguments are presented in the following topical developments: • The classical notions of perfect and imperfect duty are briefly reviewed. This is necessary to remind, or perhaps introduce, readers of the foundational concepts. • A theory of the practical limits of managerial imperfect-duty is presented as being based upon three propositions: (1) mutual dependence, (2) applicable knowledge for imperfect-duty, and (3) imperfect duty to acquire relevant knowledge. • The managerial nexus of affable and virtuous relations, reasoned discourse, and due diligence is developed. • The tradeoffs associated with imperfect managerial-duty are explored as advantages for the firm. The imperfect-duty nexus also suggests the benefits of character development for both the individual business person and the organization. This view helps explain the extent of the firm’s boundary of activities and personnel. In addition, the important managerial virtue of the noble nature of addressing ethical concerns in the necessary business-social setting is explored. • A summary conclusion of the advantages of the nexus of imperfect-duty model argues that this perspective provides particularly beneficial insights concerning managerial behavior.

2

Classic Philosophical Notions of Duty

As explored in a previous chapter, Immanuel Kant (1785, pp.  402–403) posed a process for deriving the moral maxims necessary for practical living, i.e. the categorical imperative process (CIP). He claimed that his categorical imperative merely reflects common reasoning concerning moral principles, a reasoning captured by three formulae, each consistent with and necessitated by the other two: (1) the formula of autonomy or universal law, (2) the formula for the respect for the dignity of others, (3) the formula of legislation for a moral community. As reviewed previously, Kant’s second formula is generally interpreted as “Act so that you treat humanity, whether in your own person or in any other, always as an end and never as a means only.” (Kant 1785, p. 429) This prescription can be interpreted as motivating a set of maxims we usually classify as duties although the interrelatedness of the three formulae implies that duty can be derived from each of the three formulae.8 O’Neill (1995, pp. 114–115), terms the second formula “the formula on the ends-in-itself,” and emphasizes its use as the foundation for perfect and imperfect duty. This vision of duty is particularly applicable to business which requires a set of moral rules (mostly prohibitions) to function. In particular, the second formula is generally interpreted as not only establishing perfect duties of 8  For illustration purposes, Kant (1785) derived a set of five maxims from the formula of universal law.

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prohibition, but also as requiring some degree of beneficent action (imperfect duty). Since the specification of this formula requires treating both oneself and others in serving each individual’s personal ends, and not deceiving or coercing them into serving only one’s own personal ends, imperfect duty naturally requires practical limits on beneficence. These practical limits Kant found in “circumstance and inclination.” (Kant 1797, 6:454.) Without such practical limits, one could impoverish oneself, or so exhaust oneself in pursuit of charity and the like, so that these actions would largely interfere with obligations to oneself or with other important efforts. If broad obligations of beneficence were applied to management, but without practical limits, then management could hardly function in rationing and utilizing resources so as to provide goods and services to the general public. In Kantian analysis, the pursuit of those duties that are consistent with the second formula should be motivated by a desire to pursue a moral community as specified in Kant’s third formula. This is particularly applicable to business where laws, regulations, enforceable contracts, and numerous internal-to-the-firm rules, as well as external ethical and professional codes, are common and serve this pursuit. This nexus of maxims exists to establish business as a myriad of moral agreements within an overall social/moral institution of markets. For our business-organizational purposes, we can utilize Kant’s explanation of his fundamental notion of applicable duty: The duty of love for one’s neighbor can, accordingly, also be expressed as the duty to make others’ ends my own (provided only that these are not immoral). The duty of respect for my neighbor is contained in the maxim not to degrade any other to a mere means to my ends (not to demand that another throw himself away in order to slave for my end). (1797, 6:450.)9

To “not degrade any other” requires more than avoiding prohibited actions, it may require positive attitudes and actions to help others avoid degradation provided paternalism is avoided. As an example, a degree of affability and civility towards employees is expected, but these attitudes and actions have practical limits and are therefore classified as imperfect duties.

2.1

Perfect and Imperfect Duties for Management

The analysis presented in this section distinguishes between perfect and imperfect duty as explored in Chapter 3: “The Categorical Imperative Process and Moral Duties”. The following indicates the differences: • Perfect duties are absolute prohibitions against attitudes and actions that violate a moral maxim of respecting the dignity of others. For example, there is an

9  This is a Kantian passage that fully expresses the second formula’s foundation for duty. For duty of virtue based upon respect, further see Kant (1797, 6:462).

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a­ bsolute prohibition against the lying promise, or fraud, or demonstrating contempt for the dignity of another. • Imperfect duties are volitional attitudes and associated actions that pursue some wide moral purpose aimed at respecting the dignity of others and self, but that have practical limitations. Charity, for example, must have practical limitations or the individual would not be capable of functioning in the everyday real world. This imperfect category, however, is much broader than only charity. It includes beneficent duties for management as explored below.10 Whereas perfect duty essentially requires noninterference with the freedom of others, imperfect duty requires beneficent attitudes and actions towards both others and ourselves, and hence has tradeoffs and therefore practical limits. Perfect duties allow civilization to exist; imperfect duties allow the community, including the business community, to flourish. In Metaphysics of Morals (1797, 6:394), Kant specified that perfect duties cannot be compromised by considerations of egoistic consequences. Kant (1797) identified imperfect duties as duties of virtue, and describes these as of wide obligation and disposition. (Ibid, 6:390) The notion of wide obligation allows individuals volition in how the obligation is fulfilled. The method and extent of beneficence is left to individual choice. Kant also identified an imperfect duty to oneself, as appears evident in the second formula of the CI, and describes this as a matter of character development. Which of these natural perfections should take precedence, and in what proportion one against the other it may be a human being’s duty to himself to make these natural perfections his end, are matters left for him to choose in accordance with his own rational perfection about what sort of life he would like to lead and whether he has the powers necessary for it (e.g., whether it should be a trade, commerce, or a learned profession). … a human being has a duty to himself to be a useful member of the world, … But a human being’s duty to himself regarding his natural perfection is only a wide and imperfect duty; for while it does contain a law for the maxim of actions, it determines nothing about the kind and extent of actions themselves but allows a latitude for free choice. (Ibid, 6:446)

The impetus of Kant’s argument is that in each of the broad categories of imperfect duty, there is a maxim for action, but there is also latitude for discretion as to what the action might be, i.e., choose what contributions you will, but be of use to the world. Specific actions are not prescribed; some general broad-categories of actions are prescribed, i.e., make the ends of others our own, but not to the point of personal exhaustion and degradation. For example, a manager might decide that communications with employees must be more effective, but the means the manager might employ, and the extent of the effort are both subject to her discretion. White (2011, pp. 41–46) suggests that imperfect duties are subject to preference rankings consistent with notions of taste. Still the rationality requirement of Kantian analysis, i.e., that moral decisions are made only after rational reflection, allowed 10

 In this context, beneficence means “doing or producing good.”

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Dworkin (1977) to describe a process for decisions involving imperfect duties: (1) gather all rational facts, (2) weigh these facts, and (3) then decide what is right through a balancing of effort. This process describes a type of cost-benefit analysis as decision criteria for imperfect duty and its logical foundation. Kant states that imperfect duties exist because we are “…. united by nature in one dwelling place so we can help each other.” (Kant 1797, 6:453) This dwelling place applies to the business organization as well as other groupings of family and community. Kant terms this “the maxim of common interest.” (Ibid, 4:453.) It applies to those united under the umbra of the business firm as “rational fellow-beings with needs.” (Ibid.) For examples of practical maxims that follow Kant, Hill (2012, p. 86) lists several “mid-level” maxims from which a broader list of duties can be derived: perfect duties against lying or servility, and imperfect duties of charity, friendship, and promoting our own happiness. In Metaphysics of Morals, Kant explored practical limits on all of these. The duties of beneficence, friendship, and promotion of our own happiness all fall under the umbra of imperfect duty. Within the firm, however, an imperfect duty of beneficence, for example, must have a practical limit for individual managers and employees or they might not be able to function in their other business duties. Where should the line be drawn between what is practical, what is not, and what are the tradeoffs of one dutiful performance with another? This question is not easily answered by the business person, but requires reflective thought, and is certainly unique to any situation at hand. A solution for discernment of these practical limits is posed in the next section.

3

Imperfect Duty and Its Practical Limitation

According to Kant, the categorical imperative and its process reflects common thinking about morality and how our moral maxims are formed. In this sense, people might follow this process without explicit knowledge of philosophical deontology, Kantian or otherwise.11 Hence management might follow what we classify as Kantian principles, either explicitly or at least implicitly, while recognizing that the self-worth of agents motivates them to “pursue their own morally permissible welfare and happiness, but also to promote those of others.” (Sullivan 1994, p. 156.) Following this view, we understand that markets and participating firms are expressions of the mutual dependence of their participants, who we assume aim at fulfilling their own needs and those of others. Mutual respect, however, requires that these agents treat each other not merely as the means to their own ends, but must also allow others to pursue their ends, i.e., conditions specified under the second formula. This Kantian notion motivates the following proposition of mutual

11

 See Kant (1785, “First Section”) and Sullivan (1997, p. 29).

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dependence, which is a version of Kant’s maxim of common interest as reviewed above, but posed as applying to business.12 1. Proposition of mutual dependence: Mutual respect requires that both sides of a business interaction not only pursue their own ends, but are also interested in enabling others to achieve their ends, i.e. “we make ourselves an end of others” and “through our will we make others our ends as well. The happiness of others is therefore an end that is also a duty.” (Kant 1797, 6:393.) Imperfect duties are necessary for promoting the interests of all, but in the analysis below, the closer the relationship between people, perhaps the greater should be their recognition of duty of an imperfect sort. If this imperfect recognition is stronger the closer people are, then this closeness is largely determined by the nature of the particular business or market interaction in question. This begs the interpretation of close upon which the practical limits to these actions of beneficence exist.13 This interpretation is examined below. As reviewed above, both perfect and imperfect duties stem from our respect for the dignity of persons, and are motivated by our pursuit of a moral community. This pursuit begs the question of which community do we refer to: family, business, some broad notion of stakeholders, or the entire business world? For any large business, managers are typically closer to their department or division than the overall business or the enveloping greater-business community that includes broad notions of stakeholders. The more immediate the community, the greater the likelihood of actions aimed at the moral pursuit consistent with imperfect duties, and perhaps the more effective we would expect these actions to be. This is a reasonable claim because we expect that perhaps the more immediate the relation, the more the benefactor will likely know the most effective way to provide this duty at least to the extent they are ready to respond to the receiver’s communicated desires. We can hypothesize that our beneficent efforts would be more effective in smaller more immediate (or intimate) groups. This immediacy might heighten our knowledge of what those-to-be-affected desire from our efforts, and also what action would be the most effective. In a cost-benefit analysis, the cost of obtaining this information might be lower the greater the degree of intimacy or closeness. In fact, we could use the degree to which we have this knowledge to define our degree of closeness, i.e. those at greater physical distance could still be those whom we have the most information as-to-need and potential effectiveness of our efforts. Those closest-to-us by distance might still be those for whom we have little information about need or potential effectiveness. The interesting and relevant question then remains, “What do we mean by close in the context above?” This definition is highly relevant to what we mean by practical limitations to our imperfect duties. Hence the following proposition 2 is posed:  See Robinson (2018) for a similar statement. The only instance of “business interaction” that would violate this norm would be a tort or similar action to seek recompense for perceived previous offense. 13  See Kant (1797, 6: 454). 12

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2. Proposition of knowledge and imperfect duty: The greater the benefactor’s degree of knowledge of the requirements of the intended receiver, the greater the recognition of imperfect duty between the benefactor and receiver, ceteris paribus. To the extent that closeness between agents generates knowledge concerning the needs of one or the other, the greater the recognition of imperfect duty of one-to-the-other without consideration of resource constraints. Here “recognition” does not denote “obligation,” but rather an attitude that leads to volitional actions of a moral sort. For example, assistance to employees with substance abuse problems may take various forms which the manager may select: direct financial assistance, channeling into treatment, separation from the company in order to prevent others from becoming abusers, etc. A managerial response may be necessary, but ultimately it may be a choice of the manager, or at least management. For another example, consider a management review of an employee evaluation system that might be considered unfair by some. The fullness of the recognition of problems depends upon the circumstances of the perceived unfairness, and the degree of closeness and knowledge of the manager, but the solution or remedy depends upon the intelligent choice of the manager. These managerial choices depend upon the recognition of imperfect duty, and the practical limits and tradeoffs involved. These recognitions, limits and tradeoffs are explored in more detail in the following three chapters. One question that is begged by the propositions above concerns (i) whether the knowledge of the requirements of the intended receiver is passively obtained by the potential benefactors, or (ii) whether the knowledge developed by the benefactors is generated through their own efforts? The former surely exists in that we might passively obtain knowledge about the needs of others, but the latter poses an imperfect duty of virtue (character) to actively seek the knowledge relevant to a potential beneficiary. (This proposition is particularly relevant for managerial duty towards due diligence.) This poses a third proposition. 3 Proposition of imperfect duty to develop knowledge: We have an imperfect duty to develop knowledge about our potential obligations to others, and while this duty has practical limits, it is stronger among those who are closer. Why should this duty be directly related to closeness? There are two possible reasons: (1) the closer the agents are, the easier the effort to obtain relevant knowledge of the needs of the other; (2) the closer the agents, the more likely it is for the action to be effective (as in actions among friends), hence the cost of obtaining the knowledge is more likely to be borne. It is the very nature of friendly intimacy to assist one another from benevolent motives, and also to express a degree of affability that also should be characterized as beneficence, i.e. “to do or facilitate good.”14 The relevance of this proposition to the examples listed above (employee substance abuse and employee evaluation) should be obvious. “Recognition” of the imperfect  Note that Blum (1980) argues that imperfect duty is generated from the emotions of sympathy for the suffering of others. This is essentially Hume’s (1739) but not Kant’s argument.

14

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duty is one thing, the solution is another. The former might depend on “closeness,” but the latter depends on “knowledge.” If we are to develop knowledge about the needs of others, and if we are to act on those needs, then virtuous relations are more likely to develop. If one person benefits by admiring the dutiful action of another, and thereby her commitment to imperfect duty is strengthened, then the dynamic of virtuous relations develops. This is the Aristotelian process of virtuous relations referred to above, and it is founded on the three propositions presented above. It follows from our analysis that since businesses are collections of agents of varying degrees of closeness, then duties of beneficence exist, and they are likely to be stronger within the firm, i.e. within its various internal stakeholders, than between the firm and external constituents, ceteris paribus. Applicable examples of the use of these propositions are presented in the next sections and chapters throughout this monograph. These propositions also, however, imply limitations to imperfect duty due to limitations of knowledge, and these limitations are also explored in the next sections and chapters. Virtuous character development may lead to greater knowledge via application of proposition 3, and as a result, widen imperfect duty via application of proposition 2.

4

Benefits of the Imperfect Managerial-Duty Model

The benefits of the nexus of imperfect-duty model of management stem from the insights it has for the development of managerial performance and relations, and also for the tradeoffs involved with these volitional duties. It presents a normative model of ethical managerial efforts not examined elsewhere. In particular, it introduces duty and their tradeoffs as a method that particularly explains the wealth pursuit of management, and also explains why shareholder wealth maximization (SWM) is a questionable concept in a world of imperfect duty.

4.1

The Tradeoffs

The above listed imperfect duties of management (pursuit of affable and virtuous relations, reasoned discourse, and exercise of due diligence) require practical limits posed by the finite resources of managerial time, effort, and finance. These practical limits for each category pose tradeoffs. Two illustrative examples are presented here. • The considerable requirements of information gathering associated with any important business decision can limit the opportunity to reason in common with various constituents. Gathering data and presenting it to these same constituents for persuasive purposes can be part of the process of communicating and reasoning in common with stakeholders, which is an imperfect duty of management. This is a sort of process of “here is the relevant data, now we want considerations and comments from constituents.” This process can be both time and effort con-

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suming in a zero-sum way, with the effort of information gathering reduced by the effort of communicating the results. • Decisions involving larger businesses usually involve assertions of authority based on reason. Can all relevant constituents be heard from? At some point, the open-minded duty of hearing from others must end in order to assert a reasoned authoritative decision. Staying with established standard procedures to resolve typically encountered business decisions cannot allow those individual constituent members who are in opposition to be continually heard. There is an efficiency associated with standard procedures, an efficiency that is destroyed by interminable debate. These tradeoffs are subjectively established by an on-the-run management who need to pursue these duties, but who continually confront their practical limits. For this reason, these imperfect duties are not amenable to contracts, but rather they supplement the contractual obligations of management, i.e. the perfect duties. This issue is explored in more detail in the next section.

4.2

Imperfect Duty and Contractual Obligations

The apparent difference between the contractual model of the firm, and its complementary imperfect-duty view is that the former is largely based on positive empirical observations, and the latter largely poses ethical norms. To some lesser extent, however, the latter also consists of empirical observations of business’ efforts towards imperfect duties, and the contractual model is based on observed ethical norms where contracts are attempts to resolve moral conundrums.15 The impetus of the effort of this text, however, is to pose imperfect managerial-duties as normative theory that complements the developed and observed perfect-duty model. Tradeoffs, such as those referred to above, are not as apparent with the conceptualization of the contractual model of the firm since because of the dichotomous nature of contracts, they are either fulfilled or not. For this reason, it is difficult for business to contract the reasoned discourse behavior of management, or the pursuit of virtuous relations, or due diligent behavior, since these behaviors have no clear expectations amenable to measurement, i.e. no clear boundaries of fulfillment. Contracts need specifications for behavior, hence they are the natural domain of perfect duty, and do not fit naturally into the domain of imperfect duty. Business relations range from the hard contractual-relations at one extreme to the imperfect commitments at the other. In between, there are some open-ended contracts that mix the two: the contracts have fulfillment boundaries plus some implied and open-ended responsibilities.16 The contractual obligation certainly has a central  Williamson (1985) presents extensive positive-observations of the contractual institutions of business, but it also explains the role of these institutions in addressing the moral-hazard problems of market interactions. 16  See Hart (1993). 15

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role in business, and exactly specifying a business contract, especially with associated collateral or recourse, is an attempt to reduce or eliminate the risk of non-­ fulfillment on both sides of the transaction. Developing interactions with implied imperfect duty, however, requires more of an assessment and reliance on the character of the business persons involved. The nebulous nature of possible standards of performance for imperfect duties, i.e. the tradeoff possibilities, poses an economic role as suggested above and explored below. There are some duties of affable friendship, managerial discourse, and due diligence that manifest reasons for relying on character-generated imperfect duty rather than relying on the specification of contractual obligations whether implicit or explicit. The reasons for this reliance are: • The transactions costs involved in forming contracts, with their tight specifications of obligations, can be high. • Developing a character-exploratory relation in business comes in stages, with initial interactions reinforced and strengthened through latter interactions. Initiating the character-based responsibilities may have low immediate benefits and costs to both parties. These transaction costs are likely to be relatively low as compared to forming a contract when both sides have little initial information of the other. • Character-generated relations have the potential for continual longer-term development once the moral character of those involved are assured. A simple contractual relation may have lower potential for revealing character (other than establishing that the contract is fulfilled or not), and therefore inhibit this character discovery and development. Information pertaining to the degree of pursuit of duty, or its avoidance, is not garnered through contracts, especially those with onerous resource provisions, but this information is germane to decisions regarding further development of relations. A character-generated relation requires judgment on both sides as to the moral worthiness of the other. These judgments pose evolving standards for both sides to meet. “Going beyond” is a continual challenge. Character and its evidence can initially develop, and from this initial development, additional business interactions can further develop. That is the advantage of these imperfect duty relations as compared to reliance on contracts. The latter poses a degree of personal distance, a distance not expected of character-generated relations. The friendship duties referred to above, i.e. the duties of developing affable reasoned discourse, as well as the duties of due diligence, are all manifested in character-generated relations. Without developing these managerial characteristics, business increases the probability of failure. The internal-labor (human resource) market provides a good example of the advantages of the imperfect-duty nexus. To a considerable extent, we can envision management as an arrangement of age-related cohorts: a spectrum of recent and young hires through long-time older and senior managers. There is no contractual (either explicit or implicit) commitment to any of these cohorts concerning

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advancement, but there is an understood imperfect duty – not an implicit contract to fairly evaluate their potential for advancement. Furthermore, as indicated by Robinson (2018), the imperfect duties of civility and diligence, as reviewed above, promote the development of longer-term relations of virtue among the management team, upon which the long-term success of the firm likely depends. These relations develop through reinforcements related to the degree of demonstrated accomplishment of imperfect duty so that the character of the agents are manifested, discovered, and developed through time.17 These indicate the character evaluation upon which advancement might depend.

4.3

The Wealth Pursuit of Management

Shareholder wealth maximization (SWM) is the often-cited goal of the publicly traded corporation.18 The model of imperfect duties for management with its tradeoffs and practical limits, questions the notion of “maximization” as an abstract goal. The tradeoffs suggest that even the expected wealth effects, after recognizing uncertainties, might have multiple solutions involving various combinations of imperfect duties. Solutions to standard financial problems such as capital budgeting and capital structure are perhaps more complex than simple models admit when the nexus of imperfect duties are considered. For example, what are the effects of communications to financial markets on the results of capital budgeting and capital structure decisions? (Chapter 9: “Due Diligence and the Profit Motive: Perfect or Imperfect Duty?” explores these issues in detail.) For the reasons cited above, perhaps SWM in the context of this exploration is not the most appropriate, so the term shareholder wealth pursuit is utilized here. What cannot be said, however, is that SWM is a contractual obligation of management. The nexus of imperfect duty is too complex, and subject to development, to be contractually committed. It is not a perfect duty, i.e. subject to contracting. Shareholder wealth is something that emerges from the nexus of imperfect duties.

4.4

Imperfect Duty and the Boundary of the Firm

Coase (1937) theorized that the transaction costs incurred from forming contractual combinations establishes the extent of the firm. For example, consider a law firm deciding which areas of law to include within the boundary of the firm, and which to exclude. If some area is so frequently used that the transactions costs associated with periodically retaining an outside attorney exceeds the salary of incorporating  This process is consistent with the Aristotelian view of virtue ethics. See Annas (1993) for a full exploration of the virtue process of development. 18  The reasons for this being the goal are cited in Chapter 9: “Due Diligence and the Profit Motive: Perfect or Imperfect Duty?”. Also see Copeland and Weston (1983, pp. 21–25) for an explanation of SWM. 17

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that legal expertise within the firm, then it is incorporated (subject of course to net benefit considerations). To do so, an implicit employment contract is formed with this legal expert in the desired area of law, although according to employment law there may be explicit contractual aspects. The actual person engaged, however, depends perhaps on the expectations of the hiring law firm with respect to the hire’s commitment to imperfect duty. There is validity to this contract theory, including the implicit-contract aspect. It is based on observations of basic business-efficiency analysis. The extent of the firm, however, is also influenced by the firm’s capability to develop the dynamic relations of virtue, where one virtuous individual reinforces and encourages the virtuous behavior of another.19 Those firms which successfully establish a culture that incubates those dynamic relations should find it extends the boundary of its expertise for five trust-related reasons as pointed out by Choi and Storr (2016, p. 218): 1. Those who establish the trusting nature of relations of virtue will more easily lend themselves to cooperative interactions including those that lend expertise to the business problems of their counterparts. These trusting relations exhibit lower transactions costs than exhibited by implicit (or explicit) contracting. The economic-driven search for trustworthiness screens for reliable partners as an alternative to relying upon overly detailed and therefore more expensive to form contracts. This also lowers the monitoring associated with enforcing detailed contracts. Here “reliable partners” refers to those who commit to high degrees of imperfect duty through demonstrating trustworthiness. 2. This trust also inspires greater flexibility than typically manifested by these contractual relations, a flexibility in managerial relations that leads to further economies generated from exploitations of mutually advantageous opportunities that only appear possible due to the flexibility. Detailed contracts inhibit this flexibility.20 3. This trust also inspires information sharing which implies further possible developments of relations of advantage. 4. This trust develops norms of fairness among the managerial team, and this feeds relations of virtue. 5. Relations of virtue are desirable because when they occur within a business, they promote longer-term partnerships. Longer-term business relations build investment in firm- specific expertise of the sort that is beneficial to the efficiency of the firm.

 See Robinson (2018).  Consider bond indentures that restrict the potential activities of the issuing firm unless approved by a legal representative of the bond holders. These indentures inhibit the firm’s flexibility to exploit new opportunities, and these indentures are often associated with the securities issued by less-credit-worthy firms. Highly rated firms do not generally face these indenture restrictions. See Smith and Warner (1979, section 2, especially 2.1.6).

19 20

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Choi and Storr (Ibid.) argue that “the market depends on and promotes trustworthiness as well as fairness and reciprocity.” These advantages of “trust” were also pointed out in Robinson (2018) as benefits generated by developing virtuous relations. In addition, Wang et  al. (2009) find that employees’ investments in firm-­ specific expertise is enhanced by the “trust building devices” of the firm, and that this firm-specific investment is essential to the success of the firm’s strategy.21 As a result of the above points, the more effective the business is in creating relations of virtue, the greater the firm-specific knowledge developed, and the greater the cooperative nature of the management team in applying this knowledge. The boundary of the firm is therefore extended because the internal transactions costs are lowered through relations of virtue that result from performance of imperfect duty. This cooperation occurs through the imperfect duties of virtuous relations, reasoned discourse, and due diligence, which because of the developed expertise, ultimately lowers the costs of solving business problems. Examples of this “cost lowering” through imperfect duty performance are presented in the next three chapters.

4.5

Virtue, Character and the Noble Nature

In The Metaphysics of Morals (1797, 6:421–447), Kant especially emphasized duties of respect to oneself, i.e. duties to develop oneself physically, mentally, and also to develop one’s character. Character is here defined as awareness of one’s obligation towards others, and commitment to pursue these obligations, and in the social context perhaps leadership in this pursuit, or even appropriate followership. According to Kant, character is the essential virtue, and this requires attention and development. Combining this commitment with propositions 1, 2, and 3 above, yields a theory of the development of practical limits to imperfect duty. On a personal level, these practical limits depend upon the individual’s developed character; in an organizational context, it depends upon the group dynamics and leadership within that group. For imperfect duties such as those referred to above, management should also be inclined to analyze in a rational and reflective way the extent to which its duty should be extended, i.e., the acceptable limitations. This should be considered as individual character development, but this can also be applied to the overall business organization. The development of relations of virtue through focusing on leadership, followership, and group dynamics as suggested above, can extend the institution’s performance of imperfect duty. This occurs through the propositions presented above (propositions of mutual dependence, and of gathering and applying relevant knowledge). Practicing these propositions potentially extends the  The principle “trust building device” explored by Wang et al. (2009) was a grant of shares to employees. Robinson (2018), however, emphasizes the development of longer-term relations of virtue for trust building as in Aristotle’s (1984) Nicomachean Ethics. Cooper (1980) reviews this Aristotelian philosophy.

21

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boundaries of the nexus under examination. Recognizing mutual dependence within a business, and gathering and applying relevant knowledge, all can widen the imperfect duty boundaries. The constraints and tradeoffs explained imply, in essence, an anticipated effectiveness boundary, i.e. we have an imperfect duty to extend these constraints through development of knowledge about the potentials. Without the relevant knowledge, the potential benefits are restricted, and boundary tightly constrained.

5

Summary and Conclusion

The three broad categories of imperfect managerial-duties analyzed above, duties of building affable and virtuous relations, exercise of reasoned discourse, and exercise of due diligence, form an all-encompassing nexus for business management. This categorization facilitates analysis of their managerial role, their practical limits, and their tradeoffs. The analysis presented in this chapter demonstrates this. This view of the nexus of norms of managerial imperfect-duty complements the contractual-observational view of firm behavior, whether the latter is described by implicit or explicit contracts. Explicit and implicit contracts are essentially dichotomous in that if either type of contract is unfulfilled, then recourse must be explored, and relations adjusted or perhaps ended. If the contracts are fulfilled, then there is no obvious and necessitated further development other than forming a new contract. Furthermore, forming contracts, even of the implicit sort, is likely to be somewhat of an expensive process in attempting to provide flexibility, and also in its formation of specific requirements with potential recourse for violations. For this reason, the relations amenable to contracts are essentially those that demand little or no flexibility; they therefore reside in the domain of perfect duties. Many relations are, however, more amenable to imperfect arrangements because of the need for flexibility, the difficulty of specification, and the desirability of continuous relational development, all of which can be facilitated by the exercise of imperfect duties as reviewed above. The pursuit of imperfect-duties within business allows the flexibility necessary to initially form relations and then develop those relations following discovery and reinforcement of the virtuous character-based actions of those so engaged. This view focuses on the degrees of constraint on these imperfect duties associated with management. These constraints are explored above by a series of three propositions: (i) mutual dependence, (ii) application of knowledge to imperfectduty obligations, and (iii) imperfect duty to develop relevant knowledge. In the proper business development setting, these constraints potentially broaden to extend the limits of imperfect duty. This broadening describes individual character evolution within the successful firm, and ultimately the institutional character evolution of the managerial team. This is the important point that lies at the foundation of a theory of the firm as based on the recognition of and development of imperfect managerial duties.

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It is explained in this chapter, and developed extensively in subsequent chapters, that shareholder wealth emerges from the nexus of imperfect duties. It is too complex to be subject to contracting; it is not therefore a perfect duty, but the result of the evolving nexus of imperfect duty. In subsequent chapters, specifications of what is meant by managerial reasoned discourse, as based on O’Neill’s (1995) broad social maxims, is presented. These maxims are used to explain the meaning of managerial reasoned discourse, but in the context of imperfect duty. Similarly, the imperfect duty of due diligence is explained via application of Rawls (1951) requirements for judicial judgment, and are reinterpreted in the managerial context. This Rawlsian exploration specifies the knowledge, logic, open mindedness, fair mindedness, and noble nature requirements of due diligence in management as defined and described above. The pursuit of relations of virtue is presented in the next chapter as dependent upon Aristotle’s theory of friendships of virtue. Furthermore, the tradeoffs involving these imperfect duties are explored above. In addition, the imperfect-duty model is shown to contribute to the explanation of the firm’s boundary for the activities and personnel included. Given all of these consideration, the imperfect duty model complements the contractual model of management. It adds insights, and is applicable to explaining the development of business relations involving constraints and tradeoffs. Review Questions 1. Briefly explain each of Aquinas’ list of virtues as they might apply to modern management? 2. What are the 3 classifications of imperfect managerial duty? Specify briefly the key aspects of each? 3. Explain why the contracts theory of the firm is incomplete? 4. Briefly explain the role of character generated relations and character exploratory relations in the imperfect managerial duty theory of the firm? 5. Briefly explain the role of “creativity” and “going beyond” in due diligence? 6. Briefly review the 5 trust-related issues of imperfect managerial duty and their overall implications? Advanced Questions for Class Discussion or Essays 7. What are the implications for the case analyses referred to in Chapter “The Abandonment of Business Codes of Ethics” (Enron, Madoff and the NFL) of failures in the Nexus of Imperfect Managerial Duty? In your answers, consider (i) the failures of the investment managers in the Madoff case, (ii) the failures of the NFL in dealing with its stakeholders, and (iii) also Enron’s failures of due diligence and in its dealings with stakeholders?

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Chapter 6: The Nexus of Managerial Imperfect Duty: Relations of Virtue…

References Alchian, Arman A., and Harold Demsetz. 1972. Production, Information Costs, and Economic Organization. American Economic Review 62 (December): 777–795. Annas, Julia. 1993. The Morality of Happiness. New York, NY: Oxford University Press. Arendt, Hannah. 2003. Thinking and Moral Considerations. In Responsibility and Judgment, ed. Jerome Kohn. New York, NY: Schocken Books. Aristotle. 1984. Nicomachean Ethics, edited by Jonathan Barnes. Princeton, NJ: Princeton University Press. Blum, Lawrence A. 1980. Friendship, Altruism and Morality. Boston, MA: Routledge & Kegan Paul publishers. Boatright, John. 2002. Contractors as Stakeholders: Reconciling Stakeholder Theory with the Nexus-of-Contracts Form. Journal of Banking and Finance 26: 1837–1852. Bowie, Norman E. 1999. Business Ethics: A Kantian Analysis. Malden, MA: Blackwell Publishers. Buchanan, Allen. 1996. Perfecting Imperfect Duties: Collective Action to Create Moral Obligations. Business Ethics Quarterly 6 (1): 27–42. Choi, Seung, and Virgil H. Storr. 2016. Can Trust, Reciprocity, and Friendship Survive Contact. In Economics and the Virtues, ed. Jennifer A. Baker and Mark D. White. Oxford, UK: Oxford University Press. Coase, Ronald H. 1937. The Nature of the Firm. Economica 4 (November): 386–405. Cooper, John M. 1980. Aristotle on Friendship. In Essays on Aristotle’s Ethics, ed. Amelie Oksenberg Rorty. Berkeley, CA: University of California Press. Copeland, Thomas E., and J. Fred Weston. 1983. Financial Theory and Corporate Policy. Reading, MA: Addison-Wesley. Duffie, Darrell. 1989. Futures Markets. Englewood Cliffs, NJ: Prentice Hall. Dworkin, Ronald. 1977. Taking Rights Seriously. Cambridge, MA: Harvard University Press. Fackler, Paul L. 1993. Delivery and Manipulation in Futures Markets. Journal of Futures Markets. https://doi.org/10.1002/fut.399013069. Fama, Eugene F. 1980. Agency Problems and the Theory of the Firm. Journal of Political Economy 88 (2): 288–307. Hart, Oliver D. 1993. Incomplete Contracts and the Theory of the Firm. In The Nature of the Firm, ed. Oliver E. Williamson and Sidney G. Winter. New York, NY: Oxford University Press. Hill, Thomas E. 2012. Virtue, Rules and Justice. Oxford, UK: Oxford University Press. Hume, David. 1739. A Treatise of Human Nature, Prometheus Books, 1992 reprint, Buffalo, NY. Jensen, Michael C., and William H. Meckling. 1976. Theory of the Firm: Managerial behavior, Agency Costs and Ownership Structure. Journal of Financial Economics 3 (October): 305–360. Kant, Immanuel. 1785. Fundamental Principles of the Metaphysics of Morals. In Basic Writings of Kant, ed. Allen W. Wood. New York, NY: The Modern Library Classics, The Modern Library. ———. 1793. Religion Within the Limits of Reason Alone. In Basic Writings of Kant, ed. Allen W. Wood. New York, NY: The Modern Library Classics, The Modern Library. ———. 1797. In The Metaphysics of Morals, ed. Mary Gregor. Cambridge, UK: Cambridge University Press. Mansell, Samuel. 2013. Shareholder Theory and Kant’s Theory of Beneficence. Journal of Business Ethics 117 (3): 583–599. O’Neill, Onora. 1995. Constructions of Reason: Explorations of Kant’s Practical Philosophy. Cambridge, UK: Cambridge University Press. Ohreen, David E., and Roger A.  Petry. 2012. Imperfect Duties and Corporate Philanthropy: A Kantian Approach. Journal of Business Ethics 106 (3): 367–381. Rawls, John. 1951. Outline Of A Decision Procedure For Ethics. Philosophical Review 60 (2): 177–197. Reprinted in Collected Papers - John Rawls, Edited by Samuel Freeman, Harvard University Press, 1999. Robinson, Richard. 2018. Friendships of Virtue, Pursuit of the Moral Community, and the Ends of Business. Journal of Business Ethics 151: 85–100.

References

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———. 2019a. Imperfect Duties of Management: The Ethical Norm of Managerial Decisions. Cham, Switzerland: Palgrave Macmillan. ———. 2019b. The Management Nexus of Imperfect Duty: Kantian Views of Virtuous Relations, Reasoned Discourse, and Due Diligence. Journal of Business Ethics 157: 119–136. Smith, Jeffrey. 2012. Corporate Duties of Virtue: Making (Kantian) Sense of Corporate Social Responsibility. In Kantian Business Ethics: Critical Perspectives, ed. Denis Arnold and Jared Harris. Northampton, MA: Edward Elgar Publishers. Smith, Clifford W., and Jerold B. Warner. 1979. On Financial Contracting: An Analysis of Bond Covenants. Journal of Financial Economics 7: 117–161. Sullivan, Roger. 1994, 1997. An Introduction to Kant’s Ethics. Cambridge, UK: Cambridge University Press. Wang, Heli C., Jinyu He, and Joseph T.  Mahoney. 2009. Firm-Specific Knowledge Resources and Competitive Advantage: The Roles of Economic and Relationship-Based Employee Governance Mechanisms. Strategic Management Journal 30: 1265–1285. https://doi. org/10.1002/smj.787. White, Mark D. 2011. Kantian Ethics and Economics. Stanford, CA: Stanford University Press. Williamson, Oliver E. 1985. The Economic Institutions of Capitalism. London, UK: The Free Press, Collier Macmillan Publishers. Williamson, Oliver D., and Sidney G. Winter. 1993. The Nature of the Firm: Origins, Evolution, and Development. New York, NY: Oxford University Press.

Supplemental Readings Robinson (2019a), (2019b) and (2018) present the complete analysis of “The Nexus of Imperfect Managerial Duty.”

Chapter 7: Relations of Virtue, Pursuit of the Moral Community, and the Ends of Business

1

Introduction

Friendships are part of any community including that of business. The intense working and lasting relationships found within business potentially facilitate the development of friendships of utility, but also friendships of virtue in the Aristotelian sense. The former category of friendship may develop into the latter among those motivated to pursue a moral community as referred to in the previous chapter. Such friendships reinforce the morality of one another, and also promote a wider set of, and commitment to, imperfect duty. They should become an essential part of any business community. In addition, business people with friendships of virtue are likely to be reluctant to alienate those relations through their own potential moral lapses. With the exception of Robinson (2018, 2019), previous explorations of business friendships left those of the virtue category barely explored. The elucidation presented here is therefore the second contribution provided by this monograph. Because of the above, the moral motivation of the pursuit of the moral community within business, together with developed friendships of virtue, are likely to interact so as to strengthen the morality of business. In effect, the development of friendships of virtue potentially and partially operationalize the pursuit of the moral community for business.1 This conclusion represents the more significant contribution of this monograph. This chapter examines the classic and current notions of the role of friendships in business, the role that relations of virtue play in enhancing the scope and commitment to imperfect duty in business, and the role of these relations in avoidance of evil in business. The last section summarizes the roles that development of virtuous relations can play in operationalizing the pursuit of a moral business community.

 Adoption and communication of duties being the additional operationalizing parts.

1

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_7

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 otions of Friendship, Sociability, N and Moral Community

Aristotelian virtue ethics is founded on individual pursuit of “eudaimonia” – literally “having a guardian spirit,” but generally interpreted as having a flourishing life. Its usual definition is “having an objectively desirable life, universally agreed by ancient philosophy to be the supreme good.” (Taylor, 1995, p. 252.) This is not the modern philosophical concept of happiness as in a subjectively satisfying life. The objectively desirable life, i.e. the pursuit of the good, is the aim of virtue ethics where Socratic-Platonic, Aristotelian, and Stoic notions of virtue are posed as possibly sufficient for this objective.2 Kant posed that our non-egoistic or consequentialist moral maxims should be independent of our search for personal wellbeing. Taylor points out, however, that a philosophy of primacy for eudaimonia does not imply egoism (since altruism may be a constituent of eudaimonia) or even narrow consequentialism (since the virtuous moral life is viewed as absolutely required for eudaimonia).3 Hence the supposed gulf between Kantian and eudaimonist theories need not be real. I argue below that properties of virtue ethics are necessary for the Kantian pursuit of a moral community. How do we envision this pursuit? Virtue ethics, I argue, plays an important role in this pursuit.

2.1

Friendships of Virtue

Should Aristotle’s notion of friendships of virtue be considered a key component of the pursuit of a moral community within business? Cooley (2002) and Sommers (1997) argue that the business community does not include such friendships. Koehn (1998), however, argues somewhat differently, i.e. that such relations might develop in business. These arguments are reviewed in this section along with a more optimistic view of their existence and possible necessity. In Aristotle’s Nicomachean Ethics (NE) (1976), business relationships are categorized under “civic” relationships, which are essential for human good (eudaimonia or flourishing life). All of these civic relations are classified under the rubric of friendships where there are three types listed (NE: 1156 a 7–1157 b 1): • friendships based on pleasure seeking, such as those involving recreation of various sorts, • friendships based on mutual advantage, • friendships based on recognition of moral goodness, also termed “perfect friendships,” or “friendship of virtue,” or “friendships of character.”4  Aristotle adds possible good fortune and external goods as necessary additional factors. (Ibid, p. 252) 3  See Taylor (2000, p. 260). 4  See Cooper (1980, Chap. 17, p. 304). 2

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We typically consider the second classification, “friendships based on mutual advantage,” as applying to business relations.5 I suggest, however, that we should consider these Aristotelian categories as overlapping, although possibly of unequal benefit between the parties. In business, an ideal is to have friendships based on “recognition of moral goodness” within management. These include friendships between lower and upper management with the latter exhibiting moral leadership, or among managers of similar levels of responsibility with each encouraging and reinforcing the moral character of the other. Whatever the hierarchical relation, the concept of relations of virtue involve an admiration of one another’s good qualities, i.e. respect for fellow employees and respect for a high level of dutiful business performance. As specified in NE, friendship involves wishing for the good of the other party provided this is at least somewhat reciprocated.6 Friendships of moral virtue may develop when two people, having spent time together to know one another’s character, use this knowledge to develop trust and love for one another because of their good human qualities.7 For our purposes, it is important to note that friendships of advantage can be based on mutual benefit which given time can also emerge into either of the other classifications, or both. This is also an argument presented in Koehn (1998).8 In particular, starting with a quote from Aristotle, Koehn observes: And virtue friendships begin in decency. The friendship of decent people is decent, and increases the more often they meet. And they seem to become still better from their activities and their mutual correction. For each molds the other in what they approve of.” (NE, 1172a 10–14) If you treat me decently in negotiations, I am more likely to reciprocate and vice versa. We will both, as the saying goes, “rise to the occasion” and make each other better as a result. So friendships of utility (advantage) play an important role in teaching basic social skills, in building community and in preparing people for more challenging friendships. (Koehn, 1998, pp. 1758).

Friendships of virtue rely on “love of the other for the other’s sake” (NE, 9.viii), and may well develop within business because of the intense and lasting cooperation and interactions required. This argument is developed below. A relevant question for our problem at hand is, “What is the value of having friends?” Aristotle’s answer is that the flourishing life involves and requires friends, and also requires service to them out of “unself-interested goodwill.” (NE 9.iv and 9.ix, and in Cooper, 1980, Chap. 17, p. 318) A man’s friend is to him a “second self” (NE: 1213 a 10–26) “to live with and share in discussion and thought with – for this is what living together would seem to mean for human beings, (as contrasted with merely) feeding in the same place as with cattle.” (NE: 1170 b 10–14, parentheses

 See Sommers (1997).  Ibid, p. 304. 7  See NE: 1156 b 25–29, and 1156 a 3–5, and 1156 b 12–17. 8  Koehn (1998) argues that friendships of virtue are rare in business, but offers no argument or evidence in support. The author, however, has observed such relations as common in business. See below for some suggested examples. 5 6

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added.) This “living with” can also be reinterpreted as “working with” since management typically involves intense, ongoing, and purposeful interaction of the sort that can exceed the tenure and intensity of non-business relations. These morality reinforcing relationships of virtue may be necessary for the pursuit of any semblance of a moral community within the civic relation of business. If these relationships are not absolutely necessary for the pursuit of the moral community then surely they would assist in such a pursuit. Any organization we could envision as pursuing a moral business community would likely exhibit at least some of these friendships, probably would exhibit widespread friendships, and would desire to encourage the development of these virtuous relations within it. It is incumbent on us, however, to explore in greater detail this concept of friendships within business. Other than intensity of interactions, are these characteristics of business friendships unique to a management team? Business effectiveness and efficiency requires (a) engaging those with sufficient background-level general knowledge necessary for a reasonable expectation of enabling the firm to prosper, (b) investing time and other resources in those so engaged so that they develop the specific knowledge required for the success of the business, and (c) encouraging those engaged and invested in to maintain long-term relations with the firm so that the business is successful.9 Because of this requirement, friendships of virtue are more valuable for the firm than friendships of advantage both because of intrinsic reasons (explored immediately below), and for the former category’s ability to encourage the long-lasting relations that are beneficial to business success. Aristotle’s idea of the development of friendships of virtue is germane to our exploration. It is one of a dynamic that reinforces and builds among moral friends. For friendship is a kind of partnership, and a man stands in the same relation to his friend as to himself, and since the consciousness of his own existence is desirable, the consciousness of his friend’s must be the same. They seem to become better men by exercising their friendship and improving each other; for the traits that they admire in each other get transferred to themselves. Hence “from good comes goodness. (NE: 9.xii.)

Another view of what Aristotle had in mind is that a “pleasant self awareness is only satisfactorily obtained through the awareness of a friend and his activities.” (Cooper, 1980, p. 319). The relation can be described as a sympathetic consciousness of the friend’s actions that makes these one’s own actions, thereby becoming aware of one self. This might all appear to describe pleasant and relaxed relations between friendly philosophers, but it also applies to the intense and active relations of business. Awareness of the moral actions of fellow managers helps to place one’s personal 9  Specific knowledge can only be transmitted from one agent to another at high cost. It is relevant for allocation of decision rights and responsibilities within the firm, and necessary for effective firm functioning. See Jensen (2000, p. 143), and also Brickly et al. (2009), for an extensive review of the roles of general and specific knowledge for firm success.

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actions in context for judgement, self reflection, and refinement. The essence of Aristotle’s analysis is that “the self sufficing man will require friendship in order to know oneself.” (Cooper, 1980, p. 320) Here, the notion of “self sufficiency” implies personal characteristics once deeply ingrained and sort of permanently present, will be exercised as a natural tendency. The development of this “self sufficiency” is the purpose of virtue ethics.10 How is this position of “requiring friends of virtue in order to know oneself” justified? Aristotle’s argument begins with notions of eudaimonia, i.e. “the flourishing life consists essentially of morally and intellectually excellent activities.” (Ibid, p. 329) “A human being cannot have a flourishing life except by having intimate friends to whom he is attached precisely on account of their good qualities of character and who are similarly attached to him: it is only with such persons that he can share the moral activities that are most central to his life.” (Ibid, p. 330) This is the reason for the “second self” mentioned above. This Aristotelian notion goes beyond the development of judgement and refinement benefits of friendship. It involves notions of enhancing contentment and joy as supported and reinforced by the moral community of similar friends of virtue. This certainly describes the ideal of a moral business, i.e. a union of intimate friends one can rely on because of their good qualities. Cooper continues, however: To know the goodness of one’s life, which he reasonably assumes to be a necessary condition of flourishing, one needs to have intimate friends whose lives are similarly good, since one is better able to reach a sound and secure estimate of the quality of life when it is not one’s own. This involves wanting the other to prosper, and to know the moral virtue of another, one must know them carefully over time. (Ibid, p.330)

Full development of friendship, even within the business community, requires knowing “the moral virtue of another” as a reinforcement of one’s own moral virtue. Only actual participants in friendships of virtue could adequately testify about any dynamic interaction with second selves that ultimately leads to virtuous growth. I have previously been asked to provide a listing of possible candidates for friendships of virtue in successful business management teams. A partial list is provided below, but candidates for such a list is overly long. Candidates are common. It would be more difficult to compose a list of non-virtuous friendships in successful business since such immoral managers generally cause business failures. Confusion might be caused by preconceived manifestations of what friendships entail: family interactions, recreation together, out-of-work engagement, etc. These manifestations of friendliness, however, are not necessary for managerial friends to admire one another’s virtuous behavior, or to reinforce one another’s morality. Nevertheless, a partial history of business friendships that might warrant the friendship of virtue classification needs to rely on biography for evidence. From these sources I offer the following possible examples without elaboration:

10

 Annas (1993) makes this point throughout her treatise.

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• Wilbur and Orville Wright.11 • Kelly Johnson and Ben Rich of Lockheed’s Skunk Works fame.12 • Edsel Ford and Charles Sorensen of the establishment of the WWII Willow Run B-24 Liberator plant.13 • Andrew Carnegie and his mentor Thomas Scott.14 • Ben Cohen and Jerry Greenfield of Ben and Jerry’s Ice Cream.15 • Bill Gates and Paul Allen of Microsoft and philanthropic efforts.16 It is also important to note that besides the friendships described above, moral communities contain some degree of beneficent action among constituents. To pursue a moral community means to pursue this beneficence among other duties. Such pursuit can enhance the classical friendships described by Aristotle whether for advantage or virtue, and friendships are surely facilitated by these actions whether because potential friends are cooperating in this beneficence, or because one of the parties benefits from it, and so is drawn into the relationship. The true pursuit of happiness (eudaimonia) in the classical sense of Aristotle and the Stoics, is to pursue such relationships of which more is explored by Kant.17 Business interactions are typically viewed as between only acquaintances which have a high degree of social distance, but they are actually based on trust. Because of this, as explored above, these acquaintances can develop into friendships of advantage, and perhaps ultimately friendships of virtue. The relevant question concerns “What factors can interrupt this development process?” An answer is provided by Kant’s anthropological analysis of human nature.

2.2

Unsocial Sociability and Friendships

Are friendships of virtue necessary to overcome what Kant termed unsocial sociability? Kant assumes that all rational action is teleological, i.e. it pursues some ends which include communally coordinated action that pursues a communal end as in the business firm.18 A firm is fundamentally a community among those who we assume rationally and voluntarily accept a system of maxims for allocating decision rights, responsibilities, and compensation rewards for an economic purpose. For example, these decision rights and responsibilities include the systems for deciding  See McCullough (2015).  See Rich and Janos (1994). 13  See Baime (2014). 14  See Josephson (1962), and Wikipedia. 15  See Lager (1994), and Wikipedia. 16  See Allen (2011), and Wikipedia. 17  The ancient philosophy, however, emphasized reflective revision and growth in virtue over one’s life, a reflection and revision that ultimately leads to a happiness of contentment. See Annas (1993, p. 332). This requires, according to Aristotle, a “complete life with complete virtue.” (NE, 1.x.) 18  See Wood (1999, p. 162). 11 12

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which long-term capital expansion projects to accept, which marketing strategies to adopt, which employee development initiatives to undertake, and other policy undertakings. By “rational acceptance” I mean that the agents involved either participate in deciding this allocation, or/and are convinced that this allocation accords with their own reflective consent. An example would be an employee who accepts her/his work-related assignment. Otherwise we must assume that constituents would not voluntarily play a role in this firm. The point is made by Bowie (1999, pp. 88–89) that in the Kantian CI process, the maxims of the firm must be publicly formed and accepted by all engaged agents. This is basic Kantian analysis in that it excludes deception and coercion. Kant’s empirical anthropology analyzes humanity’s unsocial sociability, i.e. our tendency to resist and ultimately frustrate the efforts and intended ends of others.19 This might occur among individuals within the firm, as well as competition with externals. This is a dark view of humanity’s nature, but Kant viewed this natural unsocial tendency as also having positive attributes of stimulating us to overcome our laziness by seeking honor. It also has the negative aspect of seeking domination and property status over others whom we might dislike, but still cannot leave alone due to our inherent nature. We compete for positions, engage in rent-seeking as a result of those positions, and may engage in the destruction of the creative efforts of others.20 The third formula of the CI, i.e. pursuit of a moral community, is aimed at redirecting our negative social passions (or inclinations) for gaining power over others for the purpose of using others as tools solely towards our own selfish ends, and not the ends of those so used. In particular, this unsocial power may be of a coercive nature, one that exploits the fear of others to make them pliable tools. Kant’s analysis is particularly relevant for the managerial ambition of honor, a particularly addictive ambition that seeks the good opinion of others.21 Kant claimed that this ambition is linked to the psychology of self worth associated with the desire to have others believe you are better than they. This desire for honor often manifests itself in haughtiness, or wanting others to despise themselves. An ethical self respect is not related to the opinion of others; it rests solely on a sense of dignity and absolute self worth, and not on a sense of relative superiority. If, however, this sense of dignity is rooted in the pursuit of a moral community, especially for the business organization, then these antisocial tendencies of ambition, superiority and haughtiness should be modified, and subsumed into the ethical pursuit of self worth associated with having moral goals rather than seeking superiority. When we recognize a friend of virtue, we honor the other, and through reflecting on the other’s moral character, we might overcome the tendencies of seeking superiority or haughtiness. Kant argued that failed ambition particularly leads to self degradation, and antagonism towards one’s successful competitors in the struggle for the illusory  See Kant (1784, 8:21) and Wood (1999, p. 213) and White (2011, p. 112).  “Rent seeking” in this context means seeking to receive compensation due to position rather than effort. 21  See Wood (1999, p. 262), and in the original, Kant (1797, 6:465–466). 19 20

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superiority. Since ambition is perceived as a goal with an indefinite time dimension for achievement, one is likely to continually perceive some degree of failure in that one never (or seldom) achieves sufficient relative superiority. Pursuit of a moral community, however, is always perceived as an ideal continuously sought, but a journey without end. Success along its path generates self respect rather than any sense of superiority or inferiority. Whereas ambition is likely to solicit emotions of envy, and its associated attempts to frustrate the happiness of others, the pursuit of the moral community motivates the opposite, i.e. the will to assist others in pursuing their proper ends. Envy follows from our tendency to consider ourselves as happy only when we believe ourselves better off than others.22 This includes climbing the corporate ladder perhaps by achieving the demise of others through back-stabbing strategies. Envy often involves gloating over the misfortunes of others, and can lead to cruelty and meanness. Pursuit of the moral community redirects agents away from these tendencies.23 Kant also analyzed friendship in the context of morality. He perceived friendship as the only relationship based upon our natural needs that requires morality for its sustenance. (See Kant, 1797, 6: 471.) (Note that Aristotle’s and Kant’s views on friendship are notably similar on this point.) This notion of friendship should be sufficiently broad to incorporate our business relations including business associates outside our immediate establishment. All of these relations are also based on our natural needs, and demand morality if they are to be sustained. Kant’s three forms of friendship, (1) need, (2) taste, and (3) disposition (a disposition to recognize our neighbors as friends) all apply to our business relations. To be sustained, each of these categories • requires that we participate in the development and enjoyment of other’s well being through our morally good will, • arises from our general need to overcome our unsocial nature because of our survival need for social interaction, and • usually involves certain actions of reciprocity since friendship thrives on (but does not absolutely require) differences in capacities and personalities so that we naturally contribute to one another.24 To Kant, moral friendship was not merely an ideal; it exists, although rarely. Our “duty to oneself as well as to others is to not isolate oneself but to use one’s moral perfection in social intercourse.” (1797, 6:472–473) This is also an Aristotelian concept presented in the form of a duty (imperfect duty as explained below). The “byproducts” of these friendly actions are “to create a beautiful illusion resembling

22  Aristotle (1976, 1168 b 19) also addresses the issue of moral competition among virtuous people. He indicated the benign benefits that would result provided the competing parties have an appropriate sense of moral self worth. 23  See Wood (1999, p. 264), and Kant (1797, 6:458–459). 24  See Kant (1797, 6: 470–474).

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virtue that is not deceptive” since all understand the nature of these actions.25 Here Kant suggests that the illusion of the ideal is sufficient to be practical. Affability, s ociability, courtesy, hospitality, and gentleness (in disagreeing without quarreling) are, indeed, only tokens; yet they promote the feeling of virtue itself by a striving to bring this illusion as near as possible to the truth. By all of these, which are merely the manners one is obliged to show in social intercourse, one binds others too; and so they still promote a virtuous disposition by at least making virtue fashionable. (Ibid, 4:474)

“By making virtue fashionable” we understand the role of these virtuous characteristics in business where they can literally be profitable. They are the ideal style of business, a style that promotes commerce; a style of amicable and efficient norms both within the firm and for external dealings. This “fashion” is tangible and evolves due to what is most effective, but is rooted on effective sociability. These demands of sustenance also surely describe the comparative advantage relations of the business firm. The business firm should be viewed as a union of both close and casual friends, with varying degrees of intimacy, which is formed for an economic profit-seeking purpose. The reciprocity referred to above consists of a readiness to engage in reciprocal benevolence in both effort and end goals, with the pursuit of a moral community being the ultimate reciprocal goal for each. Friendships of virtue, while envisioned in Aristotle’s analysis as existing among the experienced and longer-lasting friends, also stimulates benevolence both among those experienced friends, but also benevolence towards others outside immediate friendships. This plays a role in the pursuit of the moral community in business. Clarity among all those engaged as to the maxims required for a united (or harmonious) pursuit, are the ultimate concern of Kant’s third formula. In particular, this pursuit requires clarity as to the juridical and other broad notions of morality applicable to business, and aimed at modifying the Kantian notion of unsocial sociability. In fact, the very notion of forming a business establishment as a union of friends (close or casual) can be viewed as an attempt to overcome this unsocial nature. The formation of our notions of applicable duty is then the purpose of the CI process (see below), and their implementation relies upon relations of virtue. The above analysis partially indicates the purpose of the pursuit of a moral community and the aims of such a community within business, i.e. it incorporates friendships of both advantage and virtue, and presents an environment where the latter can be developed from the former. It also aims at developing a community of juridical duty and benevolence, both of which are fully explored below. In addition, the business friends embedded in the firm should achieve a high degree of clarity and commitment to the ethical structures of the firm—institutionalized procedures for diligently examining critical business decisions, evaluation of results with associated responses, and incentive-based rewards—and with this clarity and commitment, reinforcement of relations of virtue will occur. There is more about this dynamic development reviewed below.  The author does not endorse the idea that these by products are only illusion. In business, these by products are definitely tangible.

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2.3

Some Recent Research in Business Friendship

Although the research reviewed in this section does not directly concern what is termed relations of virtue, it does so indirectly, especially concerning how the virtue category can develop. Gibbons (2004) document the considerable volume of research on the tensions generated by business friendships, that is the tensions resulting from mixing professional and private lives (nepotism and cronyism that compromise business efficiency). Most, but not all, of this research indicates the harm caused by such friendships. Within the literature that indicates the positive benefits of business friendships, Baumeister and Leary (1995) and Fiske (2004) indicate that people seek social belonging through business friendships, and Teser (1988) indicates the benefits of “basking in reflective glory” that results in the taking on of the attributes of moral business friends, a notion germane to friendships of virtue. From survey returns, Helliwell (2005) shows that trust in business friendships has a positive impact on job satisfaction, and other measures of physical wellbeing. This body of research that indicates positive benefits reinforces the notion that business people desire relations of virtue, and benefit from their development. In addition, an array of other positive results is documented by this research. Friends imbedded in the same business demonstrate the following: • Imbedded business friends discuss sensitive issues and new ideas that would not be shared otherwise.26 • Imbedded business friends share resources during crises.27 • Imbedded business friends make better career related decisions.28 • Imbedded business friends, and their firms, benefit from discussions of work problems.29 With respect to the afore mentioned exchange of specific business-knowledge, Blau (1964) shows that exchange of task-related knowledge is facilitated by friendship. Ibarra and Andrews (1993) shows that the empathy involved in friendship promotes knowledge transfers within the same organization. Uzi (1997) shows the advantage of business-embedded relationships in that friends have better capacity to understand each other, to communicate effectively, and are most effective transferring specific knowledge. Almeida and Kogut (1999) also documents this specifically for Silicone Valley business. All of the research cited above supports the desirability notion of friendships in business, and the development of virtuous relations.

 See Sias and Cahill (1998), and Gibbons (2004).  See Krackhardt and Stern (1988). 28  See Kilduff (1992). 29  See Fischer (1982). 26 27

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 he Pursuit of Business as a Moral Community T and Friendships of Virtue

As reviewed in Chapter 3: “The Categorical Imperative Process and Moral Duties”, Kant (1785, 4:402–403) posed a process for deriving the moral maxims necessary for practical living, i.e. the categorical imperative process (CI process), and claimed that his categorical imperative merely reflects common reasoning concerning moral principles, a reasoning captured by three specifications (formulae), each consistent with and necessitated by each of the other two. From his first specification, the formula of autonomy or of universal law, Kant showed, all our notions of duty, both perfect and imperfect follow.30 His second formula, the formula of respect for the dignity of persons, however, more clearly indicates those duties both to others and to ourselves.31 The second specification most clearly motivates a set of maxims we usually classify as duties although the interrelatedness of the three formulae implies that all duty can be derived from each of the three.32 O’Neill (1995, p. 114–115), however, terms the second formula “the formula on the ends-in-itself,” and emphasizes its use as the foundation for duty, both positive and negative (explained below). This vision of duty is particularly applicable to business which requires a set of moral rules to function, both negative rules of prohibition and positive rules for diligent action. In particular, the second formula is generally interpreted as not only establishing prohibitions against the unethical actions of theft, fraud, coercion and the like, but also as promoting some degree of beneficence (imperfect duty), but also, as argued in this section, for diligence in managerial performance. Since the specification of this formula concerns treating both oneself and others as serving their own personal ends, and not merely serving as a means to another’s ends, the imperfect duty side naturally requires practical limits on beneficence and diligence, limits Kant founded in “circumstance and inclination.” (Kant, 1797, 6: 452–454.) Below I indicate how friendships of virtue potentially extend those “circumstances and inclinations.” Without such practical limits, one could impoverish oneself, or so exhaust oneself in pursuit of beneficence and diligent performance, that this duty would largely interfere with obligations to oneself. If broad obligations of beneficence or duty were absolutely applied to business as though they were all perfect duties, i.e. those without practical limits, then business could not function in its primary role of rationing and utilizing resources so as to provide goods and services to the general public since these resources would be entirely used for beneficence. This is also true for imperfect obligations of diligent performance in that one must ration personal resources (time and concentrated effort) towards its most effective use in business without destroying personal health and wellbeing. Friendships of advantage and  “I ought never to act in such a way that I could not also will that my maxim should be a universal law.” (Kant, 1785, 4:421) 31  “Act so that you treat humanity, whether in your own person or in that of any other, always as an end and never as a means only.” (Kant, 1785, 4:429) 32  See Kant (1785, 4:421, 4:429, 4:433). 30

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virtue can effectively help with this rationing. This issue is also explored in more detail below. The third specification of the CI is the formula of legislation for a moral community: “All maxims that proceed from our own making of law ought to harmonize with a possible kingdom of ends.” (Kant, 1785, 4:433) Here legislating means self-­ legislating, i.e. establishing self-imposed maxims. Legislating a moral community can be viewed as the motivational formula for establishing and pursuing duty since this “kingdom of ends” is generally interpreted as a “moral community.” (Kant 1785, 4:433.) As reviewed by Korsgaard (1996, p. 23): The human will must be seen as universally legislative. Each of us has a will that makes laws for itself as if for everyone. Since human beings together legislate the moral law, we form a moral community: a Kingdom of Ends. … Each citizen takes his own perfection and the happiness of others as an end and treats every other as an end in itself. It is a community engaged in the harmonious and cooperative pursuit of the good.33

To seek one’s own perfection and the happiness of others as an end is likely to lead to Aristotle’s friendships of virtue.34 This is an essential component of the moral community in that in order to seek the happiness of others without developing friendships would require a sort of callous isolation, which is not Kantian. To seek the happiness of others for the sake of others, and also to pursue duty for the sake of others, is to be friendly. This pursuit includes fulfilling juridical duty for sure, but it also includes more than this. For example, in Kantian analysis the pursuit of those duties that are consistent with the first and second formulae should be motivated by a desire to pursue a moral community. This is particularly applicable to business where laws, regulations, enforceable contracts, and numerous internal-to-the-firm rules, as well as external ethical and professional codes, are common. This nexus of maxims exists to establish business as a myriad of moral agreements ultimately within an overall social/ moral economy. The general purpose of this overall institutional economy is ultimately the pursuit of the public good. This pursuit can only be effective if business generally desires to be moral. The motivation for following these maxims should therefore not merely be fear that if caught in violation of law and/or other rules, the negative consequences will be personal, but rather that any violation ultimately attacks the very potential for existence of any business as a moral community, i.e. the motivation itself must be moral. As an example, consider the auditing accountant who because of a conflict of interest considers violating generally accepted rules. Such violations could lead to significant negative consequences for the firm at question, or even collapse of this firm. If the motivation for respecting these procedural rules is “I might lose my license to practice if I am discovered” (an egoistic motive), then believing that discovery has very small probability, the accountant has little incentive to not personally benefit at the expense of the other constituents of the firm. A commitment to 33 34

 Also see Sullivan (1994, p. 84–87) for a review similar to Korsgaard’s.  See Kant (1797, 6:393).

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pursue the interests of the moral community of this firm, however, requires a positive interest in the ends of other firm constituencies, of friends of virtue and of advantage. This positive empathetic-interest in others poses recognition of a risk of higher stakes than the fate of only the isolated individual, stakes that could be destroyed by moral violation. These are the high stakes at risk from moral depravation. Which motivation is therefore likely to be effective: the egoistic consequentialist motive, or the broader motive of service to society and friendships? I argue the latter, and hence the importance of the pursuit of the kingdom of ends as motivation. Note that this is a consequentialist argument, which is typically perceived as non-Kantian since Kantian moral motivation is expressed as “respect for the moral law” without regard to consequences. This is the motivational point challenged in Sect. 2 above. To repeat the elucidation presented there, “respect” provides an incomplete argument for motivation; the third formula, however, provides the motive that is non-egoistic community-consequentialist.35 This is the non-religious motivation particularly applicable to business. The ethical community of friends is one directed towards collective rational ends of which, according to Kant, there are two kinds: the ends of happiness, and the ends of morality. Happiness, however, can only be conditionally good as dependent upon morality, i.e. conditional upon the good will, and the good will pursues the moral community. A eudaimonist approach cannot aim for happiness unless it entails participation in a moral community, i.e. it must be subsumed by this moral pursuit. The communal-consequentialist motive can therefore serve the ends of morality even in Kantian terms. People in general, and business people in particular, know that to live a flourishing life, where flourishing is broadly and philosophically defined, requires participation in a flourishing community, which in turn can only exist in a moral community.36 This eudaimonist argument is developed further below, but some reflection on Kantian implications needs reference here. It has been effectively argued above that for establishing and pursuing our business duties, we must envision our ideal kingdom of ends as being the ideal moral business-community. This conclusion results from a logical analysis. This, however, might be perceived as a eudaimonist argument, one that Kant argues against (1797, 6: 377). He referred to this eudaemonist approach as the doctrine of happiness and argued that “… if eudaimonism (the principle of happiness) is set up as the basic principle of eleutheronomy (the principle of the freedom of internal law giving), the result is euthanasia (easy death) of all morals.” (Ibid, 6: 378.) Is it possible that this desire for pursuit of a moral community is not eudaimonist?

 Wood (1999, pp. 301–302) also points out that consequentialist motivation is either egoistic or communal. 36  Notions of flourishing, as used here, certainly incorporate material sustenance as well as societal coherence and support. Those economic communities that exhibit fraud, deception, coercion, and the like, inevitably implode. 35

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We can recognize that this harmonious pursuit by its community members is a necessary requirement for that community to flourish to the extent possible, but surely we recognize that it is not a sufficient condition to assure happiness for each member, or even that it maximizes the probability of happiness for our individual self. One can view duty as possibly a sacrificial obligation necessary for the community to flourish, and not perceive that our duty originates in egoistic consequentialist reasons. We cannot help but know that we might indirectly benefit by our actions since we live in that community, but that particular knowledge need not lead to our motivation. In fact, we commonly observe duty being pursued from apparently non-egoistic motives, i.e. as members of a community, people may purse duty from motives of love and respect for fellow members, and certainly for developing friends of virtue. As stated more succinctly by Kant, The duty of love for one’s neighbor can, accordingly, also be expressed as the duty to make others’ ends my own (provided only that these are not immoral). The duty of respect for my neighbor is contained in the maxim not to degrade any other to a mere means to my ends (not to demand that another throw himself away in order to slave for my end). (1797, 6: 450.)37

Does making the ends of others our own connote egoistic motivation if the process involves developing friendships of virtue? The degree of uncertainty might be large concerning the possible benefits, but developing friends constitutes a duty to oneself under the second formula of the CI. Since each of the three CI formulae imply, or are necessitated by the others, duty can be derived from each. Hill, however, establishes the notion that social duty (as different from duty-to-oneself as asserted by the second CI formula) is best expressed in the third formula: …I have sketched a reconstruction of Kant’s idea of an inclusive commonwealth (“kingdom”) united by common moral laws or principles. The members are conceived as both lawmakers and subjects. They each have their own set of ends but in legislating they abstract from personal differences. They legislate as rational and autonomous, and so they make only laws they can justify to each other. As legislators they respect humanity in each person as an end in itself, and so they are guided and constrained by all the values and precepts inherent in this fundamental ideal. As a formulation of the Categorical Imperative, the principle tells us always to act in accord with a possible kingdom of ends. Various supplementary ideas are needed to bring this abstract model down to real-world conditions where, for example, local conditions vary and people are often partisan, weak, corrupt, and divided. For the most part we should expect that only very general and defeasible principles can be justified as universal. These would need to be applied to various historical circumstances in light of more specific information. The ideal is to find well-grounded principles that all reasonable autonomous people would endorse; but because disagreements in applying principles are to be expected, as a practical matter the best we can do is to take ideas here as guide for conscientious judgement and choice rather than a sure path to moral truth. (Hill 2012, p. 81).

 This is a Kantian passage that fully expresses the second formula’s foundation for duty. For duty of virtue based upon respect, further see Kant (1797, 6:462).

37

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The well-grounded principles … endorsed by all reasonable autonomous people are the foundation of business, and they certainly include developing relations of virtue for the reasons reviewed above. These principles declare morality in business interactions, and without which economic failure is inevitable. Disagreements are surely common in business, but the well-grounded principles establish conscientious judgement as a path to moral choice. It is this conscientious judgment that is strengthened by having the second selves. This occurs because of comparisons with, and learning from one another, and this should especially occur within the necessary intense and sustained relations of business. It must be recognized that understanding, acceptance, and consistent pursuit of these duties within business requires sufficient social discourse as should be facilitated by relations of virtue.38 This should especially be so among management, between management and employees, and to a lesser extent between management and other stakeholders. This open discourse, particularly among virtuous relations, promotes collective development of agents’ rational powers, and commitment to their use. This acceptance requires an understanding of the duties’ necessity for the sustainability of the organization, an understanding that can only come from this required communication largely among friendly relations. In fact, this required communication is itself an ethical duty of managerial leadership just as friendship is a Kantian duty. We are used to thinking of business management as autocratic, but the success of the firm requires a commitment to duty from those who participate, and this ideal cannot be expected from a servile following, but can be expected from a friendly following of committed agents. The ideal requires that all constituents understand and follow the generally accepted duties that constitute pursuit of the moral community. A lack of clarity among constituents concerning this pursuit is likely to lead to egoistic motivation and possible moral failure. These are points also suggested by Bowie (1999, pp. 88–89). A fully-moral community clearly requires that all are committed to both perfect and imperfect duties, even though the latter has limits due to individual circumstances and virtuous inclination.39 It is more realistic, however, to expect that the latter classification of duty should be stronger within certain arrangements where agents are more knowledgeable about the needs of other participants, perhaps because of closer connections, perhaps because of developed friendships. This might occur among friends imbedded in the same firm rather than in the broader more impersonal relations where people are distant from each other and perhaps less knowledgeable about the needs of other participants. We could assert this principle as a duty from familiarity: The more familiar (knowledgeable) agents are about the needs of each other, and about how to contribute to those needs, the wider the degree of imperfect duty of beneficence between them.40

 See Kant (1793, 8:146–147). This is particularly emphasized by Wood (1999), and also by Chapter 9: “Due Diligence and the Profit Motive: Perfect or Imperfect Duty?” , Sect. 4). 39  See Korsgaard (1996, p. 20). 40  Kant (1797, 6:451–452) addresses the issue of benevolence as associated with “closeness,” but he does not address the issue of the connection between “knowledge” and benevolence except tangentially. See Sullivan (1994, p. 98). 38

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The above proposition is founded on the notion of effective use of the agent’s resources: time, psychological commitments, and talents; but it also recognizes the interpersonal knowledge differences. Any notion of the circumstances facing an agent with respect to an obligation of diligent effort should be based on the most effective use of these resources, and knowledge partly determines the effectiveness of this resource use. Positive duties are clearly necessary for promoting the interests of those both internal and external to the firm. In Kantian analysis, the self worth of agents motivates them to “pursue their own morally permissible welfare and happiness, but also to promote those of others.” (Sullivan, 1994, p. 156.) These “others” should certainly include our friendly business relations especially those of virtue. One suspects that self-worth, as needed to overcome our unsocial sociability, would suffer greatly if the promotion of the welfare and happiness of our friendly relations were lacking. In the context of business, we note that our relations are expressions of mutual dependence aimed at fulfilling mutual needs especially within the firm. We can assert this principle as a duty from mutual dependence: Mutual respect requires that both sides of any business interaction are not only interested in their own ends, but are also interested in enabling others to achieve their ends, i.e. “we make ourselves an end of others” and “through our will we make others our ends as well. The happiness of others is therefore an end that is also a duty.” (Kant, 1797, 6: 393.) The simple question, “What can I do to help?” offered among business friends of either advantage or virtue, expresses the principle stated above. This question could even be used as part of a description of either a friendship of advantage or of virtue. If we combine the duty from familiarity with the duty from mutual dependence, then we conclude that business transactions between agents who are more knowledgeable about each other’s needs (perhaps because they are more familiar), should have an expectation of positive duty with limitations that are wider the greater the degree of knowledge. This obligation of beneficent assistance should be stronger the more familiar (or knowledgeable) the agents are about the obligations and needs of each other, and this knowledge or familiarity is largely determined by the nature of the particular business relation in question. Those of friendship, especially virtuous friendship, must have wider limits concerning these obligations towards one another. In Kantian analysis, however, … human beings have a duty of friendship. – But it is readily seen that friendship is only an idea (although a practically necessary one) and unattainable in practice, although striving for friendship (as a maximum of good disposition toward each other) is a duty set by reason, and no ordinary duty, but an honorable one. (Kant, 1797, 6: 470.)

It appears that Kant is somewhat pessimistic concerning the moral heights that friendships of virtue might reach. Those with similar views (certainly darker than Aristotle’s) appear likely to pose philosophies that rely on juridical duty for proper behavior among fellow mangers. Those with more optimistic views of humanity (more in line with Aristotle’s) appear likely to include both juridical and broader notions of imperfect duty for managerial behavior.

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For business to properly serve society, at minimum participants must fully conform to juridical requirements. Businesses based on fraud and deception could not possibly be viewed as optimally meeting society’s needs since these organizations would interfere with the worthy ends of participants, and therefore would implode in that they would be abandoned. The more participants perceive the probability of encountering outright fraud or even partial deception concerning the product, service, or payment, the more those participants would abandon those institutions in question. Furthermore, without the commitment to pursue a moral community, we might not expect agents to fully conform to these negative duties, although fear of retribution, or ostracism if caught, might motivate a considerable degree of conformance depending upon the probability of discovery. (The auditing accountant example presented above illustrates this principle.) We must, however, ask whether purely juridical constraints would be more likely followed by a community with at least some virtuous friends as compared to a community lacking such relations? The answer is obvious. There are two reasons we answer “yes” to this question. First, relations of virtue reinforce a developed sense of duty and conscience among those touched by these friendships. Second, the disappointment over lapses, especially of the juridical sort, would result in ostracism of the violators from the community, an unwelcomed ostracism from friends. These views are expanded in the section below.

4

 elations of Virtue and the Pursuit R of a Moral Community

In an effort separate from his two major publications concerning morals (1985 and 1797), Kant (1793, 6:98–99) argued a religious basis for pursuing a moral community, that such a community could only be pursued through a visible church. I argue, however, that business organizations also aspire to being moral. We can view a secular organization as pursuing a moral community, and this is especially practical within business. It is not a visible church that should be pursued in this context, but a business community that fosters virtuous relations. Business firms potentially qualify as secular visible institutions ideally constructed to aspire to being moral communities facilitated by friendships of virtue as developed from friendships of advantage. The explicit and implicit contractual structure of a business, its standard procedures, internal controls, employee management specifications, external communication controls, contracts with suppliers, etc., all express its moral obligations. Beyond these specifications, the company’s established behaviors with constituencies, particularly its fairness in negotiations with these constituencies, define the business’ moral content. These behaviors define the company’s degree of pursuit of a moral community. These declared procedures and precedents of shared commitments to universal principles established through ongoing enlightened communication among virtuous business associates are all aimed at counteracting the tendency towards mutual corruption. Such is the potential of any business organization. This is the meaning of having a motivation of pursuit of a moral community, but such a

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pursuit is centered on internal and external relations of virtue, i.e., internal and external to the firm. Review Questions 1. Review Taylor’s argument about egoism and eudaimonia? 2. What does “NE” stand for? 3. What constitutes relations (friendships) of virtue?” How do they develop? In “NE,” what is the value of having friends? 4. What does friendship have to do with eudaimonia? What do relations of virtue have to do with the prosperity of others? What do relations of virtue have to do with trust? 5. Define Kant’s “unsocial sociability?” What does it have to do with “the pursuit of a moral community?” How is all this related to the psychology of self worth? What is the role of “failed ambition?” What does the “pursuit of a moral community” have to do with this “unsocial sociability?” 6. According to Kant, what is necessary for friendships “to be sustained?” 7. What is the role of relations of virtue in “making virtue fashionable?” How is the formation of business related to this unsocial psychology? Advanced Questions for Class Discussion and/or Essays 1. What is the meaning of “the second self?” What does it have to do with the pursuit of a moral community? Why are friendships of virtue more valuable than friendships of advantage? Review Aristotle’s “dynamic” in this friendship context? Also within this context, what is the meaning and importance of Aristotle’s “self sufficiency?” 2. Explain how “well-grounded principles” are linked to the foundations of business and the “second self?” 3. What is Kant’s proposition of mutual dependence? 4. Define relations of virtue (or friendships of virtue)? Explain why they are necessary for the pursuit of the moral community? 5. Is Kant optimistic about the development of relations of virtue? What is Prof. Robinson’s view of this?

References Allen, P. 2011. Idea Man: A Memoir of the Cofounder Microsoft. New York: Penguin. Almeida, P., and B. Kogut. 1999. Localization of Knowledge and the Mobility of Engineers in Regional Networks. Management Science 45 (7): 905–917. Annas, Julia. 1993. The Morality of Happiness. New York, NY: Oxford University Press. Aristotle. 1976. The Ethics of Aristotle: Nicomachean Ethics. (trans: J.H.K. Thomson). London, UK: Penguin Books.

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Baim, A.J. 2014. Arsenal of Democracy. New York: Houghton Mifflin Harcourt. Baumeister, R.F., and M.R. Leary. 1995. The Need to Belong: Desire for Interpersonal Attachments as a Fundamental Human Motivation. Psychological Bulletin 117: 497–529. Blau, P.M. 1964. Exchange and Power in Social Life. New York, NY: John Wiley. Bowie, Norman E. 1999. Business Ethics: A Kantian Analysis. Malden, Mass: Blackwell Publishers. Brickley, James A., Clifford W. Smith, and Jerrold L. Zimmerman. 2009. Managerial Economics and Organizational Architecture. 5th ed. Irwin, Boston, MA: McGraw-Hill. Cooley, D.R. 2002. False Friends. Journal of Business Ethics 36: 195–206. Cooper, J.M. 1980. Aristotle on Friendship. In Essays on Aristotle’s Ethics, ed. A.O.  Rorty, 301–340. Berkeley, CA: University of California Press. Fischer, C.S. 1982. What Do We Mean by “Friend”: an Inductive Study. Social Network 3: 287–306. Fiske, S.T. 2004. Social Beings: A Core Motives Approach to Social Psychology. New  York, NY: Wiley. Gibbons, D.E. 2004. Friendship and Advice Networks in the Context of Changing Professional Values. Administrative Science Quarterly 49 (2): 238–262. Helliwell, J.F. 2005. Well-Being, Social Capital and Public Policy: What’s New? In presented at Annual Meetings of the Royal Economic Society. Nottingham, UK. Hill, Thomas E. 2012. Virtue, Rules and Justice. Oxford, UK: Oxford University Press. Ibarra, H., and S.B.  Andrews. 1993. Power, Social Influence, and Sense Making: Effects of Network Centrality and Proximity on Employee Perceptions. Administrative Science Quarterly 38 (2): 277–303. Jensen, Michael C. 2000. A Theory of the Firm. Cambridge, MA: Harvard University Press. ———. 2002. Value Maximization, Stakeholder Theory, and the Corporate Objective Function. Business Ethics Quarterly 12 (2): 127–138. Josephson, M. 1962. The Robber Barons, New York: Harcourt Brace Jovanovich. Kant, Immanuel. 1784. Idea for a Universal History with Cosmopolitan Intent. In Basic Writings of Kant, Modern Library Classics (2001), ed. Allen W. Wood. New York, NY: Random House Inc. ———. 1785. Fundamental Principles of the Metaphysics of Morals. In Basic Writings of Kant, The Modern Library Classics, ed. Allen W. Wood. New York: The Modern Library. ———. 1787. Critique of Pure Reason, in Basic Writings of Kant, ed. Allen W. Wood, The Modern Library Classics, The Modern Library, New York. ———. 1793. Religion Within the Limits of Reason Alone. In Basic Writings of Kant, The Modern Library Classics, ed. Allen W. Wood. New York: The Modern Library. ———. 1797. In The Metaphysics of Morals, ed. Mary Gregor. Cambridge: Cambridge University Press. Kilduff, M. 1992. The Interpersonal Structure of Decision Making: A Social Comparison Approach to Organizational Choice. Organizational Behavior and Human Decision Processes 47 (2): 270–288. Koehn, Daryl. 1998. Can and Should Businesses Be Friends with One Another and With Their Stakeholders. Journal of Business Ethics 17 (15): 1755–1763. Korsgaard, Christine M. 1996. Creating the Kingdom of Ends. New  York: Cambridge University Press. Krackhardt, D., and R.N.  Stern. 1988. Informal Networks and Organizational Crises: An Experimental Simulation. Social Psychology Quarterly 51 (2): 113–140. Lager, F. 1994. Benn and Jerry’s: The Inside Scoop. New York: Crown Publishers. McCullough, D. 2015. The Wright Brothers. New York: Crown Publishers. O’Neill, Onora. 1989, 1995. Constructions of Reason: Explorations of Kant’s Practical Philosophy, Cambridge University Press, New York, NY. Rich, B. and L. Jones. 1994. Skunk Works. New York: Simon Schuster. Robinson, Richard. 2018. Friendships of Virtue, Pursuit of the Moral Community, and the Ends of Business. Journal of Business Ethics 151: 85–100.

142 Chapter 7: Relations of Virtue, Pursuit of the Moral Community, and the Ends of Business ———. 2019. Imperfect Duties of Management: The Ethical Norm of Managerial Decisions. Cham: Palgrave Macmillan. Sias, P.M., and D.J. Cahill. 1998. From Coworkers to Friends: The Development of Peer Friendships in the Workplace. Western Journal of Communication 62 (3): 273–299. Sommers, Mary Catherine. 1997. Useful Friendships: A Foundation for Business Ethics. Journal of Business Ethics 16 (12): 1453–1458. Sullivan, Roger. 1989. Immanuel Kant’s Moral Theory. Cambridge, UK: Cambridge University Press. ———. 1994, 1997. An Introduction to Kant’s Ethics. Cambridge, UK: Cambridge University Press. ———. 1996. Introduction. In The Metaphysics of Morals, ed. Immanuel Kant and Mary Gregor. Cambridge, UK: Cambridge University Press. Taylor, C.C.W. 1995. Eudaimonia. In The Oxford Companion to Philosophy, edited by Ted Honderich, 252. Oxford, UK: Oxford University Press. ———. 2000. Eudaimonia. In Concise Routledge Encyclopedia of Philosophy, 260. New York, NY: Routledge. Teser, A. 1988. Toward A Self Evaluation Maintenance Model of Social Behavior. In Advances in Experimental Social Psychology, ed. L. Berkowitz, vol. 21, 181–227. Uzi, B. 1997. Social Structure and Competition in Interfirm Networks. Administrative Science Quarterly 42 (2): 417–418. White, Mark D. 2011. Kantian Ethics and Economics. Stanford, CA: Stanford University Press. Wood, Allen W. 1999. Kant’s Ethical Thought. Cambridge: Cambridge University Press.

Supplemental Readings Robinson (2019, Chapter 4) and Robinson (2018) present the seminal literature in the role of relations of virtue in business.

Chapter 8: Reasoned Managerial Discourse

1

I ntroduction: The Imperfect Duty of Reasoned Managerial-Discourse

As reviewed in previous chapters, the nexus of managerial duty includes reasoned discourse. This discourse is a key component of the categorical imperative process (CIP). This process utilizes the three formulae of the CI and the universal principal of justice (UPJ) to act as guides so that reasoned discourse can form our moral duties. Reasoned discourse is therefore a necessary component of forming our notion of duty. In part, it acts as a filter for discerning the logic of the derived maxims. Discourse among managers therefore plays a key role in discovering logically consistent duties. Once policies are logically established, management has both perfect and imperfect duties to communicate these policies to relevant constituents. This is accomplished largely through written manuals and briefer documents, but also through oral explanations. Attempts to feasibly communicate the exactitudes and logic of these policies represent perfect duties, but the continuous extent of the efforts to persuade, and perhaps modify, pose imperfect duties. These are explained here. These explanations are, however, organized around principles of social discourse suggested by the Kantian scholar O’Neill (1995).

2

O’Neill’s Maxims for Reasoned Discourse

Kant’s CI process is capable of posing maxims of imperfect duty for guiding business discourse. The following five maxims and their practical limits were posed by O’Neill (1995, pp. 34–50) as broad principles for society (not specifically business), but they are particularly applicable to business management and its reasoned discourse. The first four of O’Neill’s maxims are clear specifications of imperfect

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_8

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duties. We explore here their applicability to the business nexus and associated practical limits. The fifth of O’Neill’s maxims specifies a prohibition against falsehoods (a perfect duty), but there is an imperfect duty aspect to this that must also be explored. For example, management has an imperfect duty to try to be accurate in its business communications, although perfectly accurate might often be unlikely. (Consider the accounting example of accurately measuring inventory under conditions of some degree of spoilage or obsolescence. One can estimate the inventory level at a point of time, but some degree of inaccuracy must be accepted and communicated.)

2.1

Managerial Authority Must Be Based on Reason

Intolerance brings unreasoned authority to bear on communication. Wherever intolerance is practiced, whether by state or church or other bodies or individuals, those whose thinking and communicating are suppressed, are silenced not by reason, but by authorities that lack reasoned vindication. When these authorities govern us the authority of reason is diminished, and our distance from a reasoned form of life and politics grows. (O’Neill 1995, p. 48.)

Managerial decisions should be based on properly-communicated logical criteria that supports the mission of the firm. These criteria are usually announced through well-articulated policy documents such as capital budgeting manuals, employee engagement manuals (the conditions required for continued engagement, and the requirements and procedures necessary for initial employment), plus corporate communication manuals that specify who are responsible for external communications, the company’s performance evaluation and reward procedures, and the like. These written manuals attempt to articulate not only the necessary procedures, but the reasoned argument that supports these procedures. Reasoned clarity is required to promote understanding for the purpose of promoting adherence. To illustrate this maxim of reason for business, consider a classic case study, “The Super Project,” a Harvard Business School case study.1 This case concerns a Division of General Foods Corporation, and the corporation’s capital budgeting procedures. These procedures were well communicated through manuals, and following the standard and generally accepted procedures for sizeable corporations. These manuals emphasized estimating the “incremental cash flows” for a capital project, i.e., cash flows that are incremental to the overall firm. The principal managers involved in this case – the Division Controller, the Director of Budgeting, and the Manager for Financial Analysis  - misinterpreted the term “incremental” as meaning variable as in variable costs versus fixed costs, and did so in such a way as to entirely incorporate sunken costs (costs already incurred in the past, but not to be repeated in the future) into the analysis, a significant financial error. The Manager of Financial Analysis stated, “What I learned about incremental analysis at the Business School doesn’t always work.” This mocking (see maxim #3 below)

 See Fruhan et al. (1992).

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disrespect of business education, and willful cavalier avoidance of the reasoned corporate policy, produced the breakdown in analysis of how to handle “sunken costs.” The entire applicable corporate policy was defeated by the confusion of these three divisional officers. If these division officers had contacted the corporate-­ level officers to seek clarification on appropriate procedures, then the mistakes would potentially have been avoided. In this situation, either the manuals were not sufficiently clear, or the training of the divisional officers was insufficient, or as might have been the situation, the individual goals of the divisional officers differed from that of the umbrella corporation. In any case, a breakdown of reasoned communication occurred. The imperfect duty to discover the correct policy was ignored in favor of a few back-and-forth brief and logically mistaken memos. Illogical agreement among a few should not cavalierly replace logic. Effective discourse should prevent this by acting as a filter for the unreasoned arguments. The practical limits to the imperfect duties associated with managerial discourse are based firstly on the requirement for clarity of the reasoned argument itself. As with the “Super Project” case, some constituents will choose to not accept the logic of the argument however finely presented, but always ask for more information, or simply deny the logical connections presented no matter how clear they are. It is the psychology of accepting authority, no matter how logically based, that may be the issue. The judgment of “how reasoned the argument is” should be based on the fictional “reasonable diligent judge,” and not on the conception that “all must be persuaded.” The imperfect duties of mutual dependence and applicable knowledge, both having practical limits that apply to this maxim.2 As a result, this maxim is an imperfect duty. As specified in the proposition to develop and apply relevant knowledge for the problem at hand, the managers engaged have duties to act as a reasonable diligent judge in understanding the logic of the policy, and the managers who form the policy have imperfect duties to communicate this logic effectively.3 These efforts are required to maintain relations of virtue. Failures in these efforts indicate either violations of these relations, or some degree of incompetence that might be remediated.

2.2

Managers Should Tolerate the Logical Reason of Others

What does this imperfect duty imply? One who adopts it, … detaches himself from the subjective personal conditions of his judgment, which cramp the minds of so many others, and reflects upon his own judgment from a universal standpoint (which he can only determine by shifting his ground to the standpoint of others). (Kant 1793, V, p. 294).

 See Chapter 3: “The Categorical Imperative Process and Moral Duties”.  Ibid.

2 3

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This prohibits indifference to the reasoned communication of others. The practical limit to this imperfect duty is that one cannot consider all arguments from every individual constituent, at least not without being too exhausted to perform other imperfect duties. Managers are not likely to have the time for all of these considerations, hence standardized policies are set, but managers should also be open to new evidence and new arguments that appear to be relevant and logical. Why? There are two reasons: (i) managers should respect the dignity of those who try to communicate with them, and should even encourage these communications; (ii) managers should consider evidence that is relevant to their firm’s potential performance. The rationing of managerial time, however, poses practical limits. Respect should be given to others, but attention to the firm’s performance and all its dimensions poses the primary demand on managerial time within the constraint of avoiding disrespect of “others.” One of the significant financial scandals discovered during the financial crisis of late 2008 was the Bernard Madoff ponzi scheme. Madoff managed a “hedge fund of funds,” but previously he was Chair of NASDAQ. He bribed other fund managers to invest their funds with his company. Madoff’s rates-of-return were fraudulently reported as high, but rather than investing the wealth investors entrusted with him, he used these finances for his own consumption. Three times during 2000, Harry Markopolos, an analyst with Rampart Investment Management, provided the SEC with evidence of Madoff’s fraud. In hindsight, the Markopolos evidence was incontrovertible, but the SEC ignored this evidence being persuaded by the prestige of the former NASDAQ Chair. In December, 2008, Madoff was arrested and imprisoned. He had defrauded investors of $64.8 billion. Markopolos’ evidence was reasoned and substantial. It should have been sufficient to persuade the SEC to stop Madoff in 2000. Instead, this evidence was not seriously considered. Madoff had violated numerous SEC reporting regulations.4

2.3

 easoned Argument Should Not Be Restricted R or Discouraged

Non-reasoned argument that denigrates, mocks, or bullies, or more generally fails to respect relevant constituents, may make it difficult for others to articulate their logical argument, and hence it violates a maxim to allow others to “think for themselves.” These communications foment divisions between individuals and groups. The practical limits to this imperfect duty of “non-restriction” may, however, pose the necessity for some form of censorship where its absence would lead to forms of defamation or harassment that lessens or stills the reasoned communications within the firm. This “do not restrict” maxim is consistent with Kant’s universal principle

4  See www.usatoday.com/story/money/business/2013/12/10/madoff bernard-madoff.

and

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of right.5 It is also an example of the acquisition of knowledge proposition, and its practical limit, since soliciting reasoned discourse is the objective.6

2.4

 anagement Should Reason in Common with Those M Affected by its Policy Decisions

Management cannot expect to reason correctly unless it does so in common with those affected by its policies. This “reasoning in common” requires broad social discourse within the firm, and also with various external stakeholders because it benefits the reasoning of management in that it makes it aware of the logical arguments of those so affected. This maxim provides an example of the mutual dependence and the acquisition of knowledge propositions and their potential limits.7 The practical limits to this imperfect duty consist of three sorts. (a) To discover the reasoned arguments of affected stakeholders, management should prioritize the relevant groups. For example, when considering employee safety policies, management should certainly consult with workers from a production line. It is doubtful, however, that representatives of financial security holders should be consulted on this safety issue. With respect to capital budgeting procedures, or mergers and acquisitions, however, the reasoned arguments of financial security holders should be consulted, and perhaps the opinions of representatives of affected employees. It might also be important to consult some supplier stakeholders if they are directly affected, but not those unaffected. (b) In many cases, those affected by managerial policies might be too numerous for individual consultations, but representatives might be expected to furnish the appropriate unbiased reasoned arguments related to their interests. These representative positions should be a sufficient substitute for numerous individual consultations, and pose practical limits to mutual reasoned consultations. (c) In the absence of relevant changes in circumstances, consultations with representative groups need not be repeated. The effort and time devoted can be costly, and this poses a practical limit to these consultations.

2.5

Accuracy in Managerial Discourse Should Be Pursued

Falsehoods are clearly prohibited by all three formulae of the categorical imperative (CI). Falsehoods in communication could not serve as a universal principle among a plurality of individuals. The practical limits, of course, concern situations 5  Kant’s universal principle of right (or justice) argues that the freedom of individuals should be maximized subject to non-interference with the freedom of others. See Kant (1797, 6: 231). This applies to freedom to try and persuade, an aspect of communication. 6  See Chapter 3: “The Categorical Imperative Process and Moral Duties”. 7  Ibid.

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of uncertainty, where management’s declarations should be unbiased estimates of what it expects to be accurate, and that includes qualifying statements that indicate this uncertainty. There is an expectation of effort underlying the estimates of the relevant probability distributions, and this is subject to the due diligence of management. Due diligence efforts also have practical limits, and these limits are explored in greater detail below in Chapter 9: “Due Diligence and the Profit Motive: Perfect or Imperfect Duty?”.

3

 ational Discourse and Current Politically R Sensitive Issues

Rational discourse can be difficult when it concerns sensitive issues, but it is particularly required in these instances. When communicating with stakeholders, it is often incumbent for management to address difficult and politically sensitive issues such as globalism, racism, application of the company’s control systems, and environmental degradation and restoration. These issues are reviewed in this chapter as illustrations of factors that inhibit reasoned discourse. Global trade poses issues of resource allocation, i.e. the movement of physical, human, and financial resources. For example, one method of controlling exchange rate risk is to produce where you sell thereby matching the currency denomination of expenses with that of revenues.8 To the extent that a company wishes to sell globally, it might wish to produce globally for exchange rate reasons, i.e. matching production locations to the countries of revenue generation. Shifting resources, however, may have political implications, even when the shifting is for cost minimization purposes. Reasoned discourse can frame these political implications as explored in this section. As reviewed above, O’Neill’s maxims for discourse indicate: (i) logical argument based on relevant facts, (ii) reasoning in common with affected stakeholders, and (iii) accuracy as to the basis for decisions. The same applies to communications concerning diversity and racism where maxims apply that are consistent with the categorical imperative and the universal principle of justice. These demand unprejudiced attitudes and actions as perfect duties plus additional imperfect duties that assure prejudice in discourse is avoided. Environmental discourse poses another politically sensitive issue for management.9 Business’ negative externalities caused environmental degradation as witnessed throughout the industrial and post-industrial revolutions, but business also poses a variety of solutions that necessitate reasoned discourse for explaining the importance of these solutions. The issues posed by globalism, diversity, applying a

8  Exchange rate risk includes those risks to business resulting from potential exchange rate movements. These movements can raise the costs of production, or lower the value of assets measured in terms of the home currency, or reduce sale revenue. 9  See Robinson and Shah (2019).

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corporate control system, and environmental problems are explored in more detail in this chapter. Note that in the three categorical-imperative formulae and the UPJ reviewed in Chapter 2: “The Applicable Western Ethical View?”, the words everyone, humanity, any other, and community are critically germane for our examination. In this context, these CIP processes can provide the organizational view of the philosophical foundation for addressing politically sensitive issues, whether for the individual manager, or for business organizations acting in concert. For the questions at hand, there are four relevant issues posed by the CIP: 1. With respect to Kant’s CI, who are the “others” (as in formula 2) included in the “everyone” (as in formula 1), and who is included in the “community” (as in formula 3)? Do “others, everyone, and community” refer to all members of “humanity,” including those at great distance from our business actions? 2. How does the pursuit of a moral community apply to the politically sensitive issues in the context of reasoned discourse? 3. Kantian philosophy is an expression of the enlightenment era. Morality is centered on what humanity, after reflection and open social discourse, logically decides. It is not based on scriptural or other authoritarian decrees that might be imposed as a substitute for democratic discourse.10 This poses the question, “Is nothing sacred except humanity?” How does this apply to the politically sensitive issues reviewed above? 4. What are the imperfect duties for acquiring and disseminating knowledge with respect to the issues reviewed above? These four issues are each fundamentally related to the Kantian notion of reasoned social discourse as required of the CIP. They are reviewed in this chapter.

3.1

Reasoned Managerial Discourse and Globalization

The rapid globalization that has occurred during the post WWII, and especially since the 1970s, created “multi-national” corporations as the current norm for business. Between 1980 and 2007, the value of trade in goods and services as a portion of world GDP increased from 42.1% to 62.1%.11 During this time period, foreign direct investment increased from 6.5% to 31.8% of all investment. The number of foreign workers in other countries increased from 78 million in 1965 to 191 million in 2005. Multi-nationals do not only sell products in differing countries, they also tend to (a) produce in various countries, (b) engage employees from various countries, and (c) have shareholders and other investors from numerous countries. Given this, it is unreasonable to expect that they should be held to a standard of being “loyal” to any 10 11

 See Kant (1784a, 8: 35–41), and (1788, 8: 146–147). Also see Wood (1998, pp. 305–306).  IMF Staff Report of 2008.

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particular country, perhaps the country of initial origin. Instead, multi-nationals tend to be loyal to the liberal institutions that fostered the international growth of the post WW II era: open trade, private property rights, and enforcement of contracts. Their communications tend to reflect these loyalties, i.e. loyalties to the resulting broadening of choices of personal, economic, and political life. These choices include: • greater access to modern technology, • greater access to health care, • a strengthened educational system with those programs that meet the competitive challenges of trade, • greater access to media that are independent of government, • cooperative political arrangements for immigration, environmental and other legal issues. In the political context, economist Joseph Stiglitz (a Nobel Laureate) states that globalization “has reduced the sense of isolation felt in much of the developing world and has given many people in the developing world access to knowledge well beyond the reach of even the wealthiest in any country a century ago.” The opposite of globalization is protectionism, but this generates adverse consequences. Tariffs raise the prices of imported goods and harms consumers, frequently the poor. Protectionism tends to reward organized and politically connected groups at the expense of those not so connected. Protectionism also encourages resources to flow into inefficient industries that could not meet the demands of foreign competition. Also, because of the effects of the 1990s’ globalization in the developing world, income per capita grew three and one-half times as fast as non-globalizing countries. This resulted in the income for the poor to grow in globalizing countries. The benefits of globalization have been, therefore, substantial so that arguments in favor of protectionism tend to be less than logical. They tend to identify vested interests that are “threatened and should be protected,” vested interests of some particular industry such as automobile manufacturing. Note that auto manufacturing by multi-national corporations such as Toyota and Mercedes tend to be in the countries of sale, Kentucky for Toyota, Alabama for Mercedes, while Ford manufactures in Europe, USA and Canada as examples. The arguments for automobile protection, or protection for other industries, therefore reduce to simple anti-competition in support of increased market power for domestic manufacturing interests.12 For example, a recent syndicated editorial by a leading editorialist (Eugene  “Market power” can be loosely defined as the ability to raise process above costs so that more than a competitive return is earned. It results when an industry moves from a high level of competition to oligopoly, See Ferguson (1972), Chapter 10: “Fair Stakeholder Negotiations” and Chapter 11: “The Philosophy of Action and Authority in The Entrepreneurial and Management Ethics”, and also Henderson and Quandt (1958), and Chapter 6: “The Nexus of Managerial Imperfect Duty: Relations of Virtue, Discourse, and Due Diligence”.

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Robinson of the Washington Post Writers Group, published nationally during the week of May 17) decried “real Americans” as a political slogan of less than reasoned content. The imperfect duty associated with managerial reasoned discourse concerning global issues is to be diligent in recognizing the multi-national characteristics of the company, and to argue against the vested interests of protection and nationalistic interests aimed at protection.

3.2

Reasoned Managerial Discourse and Diversity

There are two important concerns for managerial discourse related to diversity issues: • The law specifies perfect duties with respect to discrimination including duties that apply to managerial discourse. • There are imperfect managerial duties aimed at encouraging the principles of the CIP as related to diversity. Many of these principles rely on reasoned discourse such as the written policies for human resource management. This discourse extends considerably beyond meeting perfect obligations. Just as with the considerations of globalism, the concepts of “everyone,” “others,” and “community” must include all, or the CIP would be without moral foundation. Either the categorical imperative and the UPJ apply to all or it is without logic; they would simply be non-axiomatic claims from which moral maxims could not be derived. Reasoned managerial discourse must reflect an inclusive CIP and UPJ. This poses the foundational justification for positive support programs designed to encouraged diversity. For example, consider the case of an auto factory operating with a positive support program of encouraging minorities and/or women to be promoted to positions of some authority, perhaps forepersons. It might be that some have more seniority and other qualifications than those who are promoted for diversity reasons. The discourse issue concerns how this promotion and its diversity program must be explained and rationalized as perhaps necessary as a remedy for past discrimination and encouragement for others to be engaged by the company. If reasoned discourse cannot persuade concerning these programs, then management is left with two alternatives: • After examination and reflection, management concludes that the diversity program is logically unfair in at least some aspects. Remediation is therefore warranted. • After examination and reflection, management concludes that the diversity program is logically rational, but those who cannot be persuaded are merely recalcitrant and stubborn, and will not accept the fairness of the program.

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The latter conclusion places management in a difficult situation. Failing sustained efforts to persuade, the “recalcitrant and stubborn” may have to be separated from the company. As with the case of globalism, however, “positive diversity support programs” can become a version of protectionism which becomes viewed by the non-protected as inefficient and demonstrating reverse discrimination. How can management be said to encourage business efficiency if management is viewed as promoting inefficiencies through protecting privileged groups? Reasoned discourse along with the firm’s control system, must persuade towards efficiency and away from discrimination. (A company’s control system consists of (a) the assignment of decision responsibilities, (b) the evaluation system, and (c) the reward system.) This persuasion requires skill and effort from managers and is an imperfect duty. In pursuing a moral community in business, the second formula of the CI demands policies of respect for all. This includes whoever is engaged, whoever is supported in relations of virtue, and whoever is encouraged to become leaders. These are the issues concerning diversity that pose imperfect duties for reasoned discourse.

3.3

Reasoned Discourse and Control

As stated above, a company’s control system consists of (a) the assignment of decision responsibilities, (b) the evaluation system, and (c) the reward system. The assignment of decision responsibility poses the following issues concerning managerial discourse. All of these questions have implications for imperfect duty: • Are the decision assignment responsibilities effectively communicated to all affected employees? • Are these responsibility assignments maintained or are violated by others in the sense of interlopers? • Who is responsible for providing the necessary information to the decision maker? Is this informational responsibility effectively communicated? Could there be conflicts of interest between the decision maker and the information provider so that a purposeful skewing of information for the purpose of biasing the resulting decisions could result? • What are the discourse implications for resulting decisions? Could communications be inaccurate concerning what the decisions are, and why they were made? Written policies should clearly specify who is actually responsible for decisions, e.g., who decides financial decisions, production decisions, human resource decisions, etc. Confusion as to “who” can cause stress within the management team. It encourages attempts at manipulation of the decision by members of the team, which does not support relations of virtue. “Confusion” hardly leads to pursuit of the moral community when managers wonder about their authority, their career longevity, and what the final decisions are.

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Coincident with the question of who has decision responsibility is the question of what information is necessary to make decisions, and who is responsible for gathering and providing this necessary information. This also must be specified in managerial communications or the decision maker may be frustrated for lack of information, and likely judged by others as failing in meeting responsibility, although such a judgement might be unfair. The timely provision of unbiased and relevant information is necessary for an effective managerial team. Conflicts of interest, can and likely will, generate alienation and internal team conflicts. For these reasons, if the information is made available to all managerial team members, then team judgements as to the information quality can perhaps eliminate conflicts. Charges such as “the information is poor,” or “the decision is unwarranted” become less likely, Reasoned managerial discourse within the team is a necessary requirement for pursuit of the moral community, and also for reasoned discourse with external stakeholders. Hence clear communications as to managerial responsibilities are required, i.e. they help facilitate relations of virtue, and pursuit of the moral community. All of this poses imperfect duties for management to make these policies effective, clearly understood, and therefore acceptable to the management team. The performance evaluation system also poses important questions for managerial discourse: • Is the company’s performance evaluation system effectively communicated to employees? • How are the actual performance evaluations communicated? Does this communication allow “gaming” of the system? (By “gaming” is meant a manipulation that pursues some narrow metrics, but that avoids the essence of performance.) Having unclear performance evaluation policies makes for conflicts within the management team, and also among employees who are subject to these evaluations. This is the reason for having clear evaluation systems that are rationally linked to the mission of the organization. For example, if quality control is as important as meeting production targets, this must be clearly communicated to affected employees, and in such a way that gaming for incentive purposes is discouraged. This “clear communication” and evaluation pose imperfect duties for the team. The company’s actual rewards for performance also pose important issues for managerial discourse: • Do rewards match the performance evaluations? How are they communicated? Are they communicated to all employees or to only the affected employee? • Do these communications of rewards effectively provide incentives? The employee and management reward system must be communicated as consistent with responsibility assignment and evaluations of performance. The imperfect managerial duty is to assure accuracy, fairness, and transparency, and that all

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understand these rewards as meeting these criteria. This helps facilitate relations of virtue, pursuit of the moral community, and respect for the individual managers and the team.

4

The Kantian Foundation of Reasoned Discourse

It is argued above that the Kantian foundation for the problem examined is built upon the notion of a reasoned social discourse. This discourse is itself centered upon the imperfect duty to acquire relevant knowledge. For example, as reviewed in Part IV of this text, current environmental business problems largely concern the control of negative externalities associated with commerce, and also the generation of positive externalities gleaned from public-business coalitions essential for environmental restoration, and for prevention of further tragedy-of-the-commons devastations. All of these require scientific information to reach appropriate decisions, particularly with respect to our problems of intergenerational equity as well as people at distance, both of which are central moral problems for reasoned debate. Rational public discourse must generate our social agreements as to both the necessary information and the relevant decision criteria required to resolve both the intergeneration and people at a distance equity issues. In exploring the necessary information required of reasoned discourse, Part IV of this text reviews a variety of biases in information gathering and evaluation that potentially inhibit these agreements. It is pointed out that in this context, business expertise can offer unbiased information-based solutions particularly with respect to coalitions that might resolve our environmental or other broad social problems such as income and wealth distribution, regulation of communications, and many other public concerns of the day. Some of these problems stem from various biases that we might overcome. In this way, rational public discourse may resolve the problems associated with an insufficiently broad vision as to the possible solutions for our social problems. Some creative solutions are cited in the chapters of Part IV. The reasoned discourse potentially provided by business can facilitate our social solutions. One of the biases explored above results from assertions of a quasi-religious dogma with respect to nature. These dogmatic assertions likely interrupt reasoned discourse. Perhaps a moral philosophy based on a vision of nature as completely independent of human considerations is an appropriate foundation for motivating the resolution to the severe environmental crises of our age. Such a vision of nature as independently sacred, however, resembles a traditional religious approach, and as a result, it elicits problems associated with reaching a consensus. Perhaps some minority might accept a nature-based religion, but others see nature as strictly instrumental to humanity. The instrumental approach either recognizes that environmental preservation is biologically necessary for a sustained human future, or that transcendent spiritual-type interaction with nature is a necessary or paramount human experience. The benefits of nature as instrumental to humanity are likely incorporated and reflective in reasoned social debate, especially as provided by

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business, and perhaps these instrumental arguments are persuasive. A coalition consensus might be reached among these heterogeneous groups (nature as instrumental, and nature as independently sacred groups), but agreement must still be reached as to the evidence to be considered, and also the decision criteria to be used concerning environmental preservation and restoration. Kantian rational discourse, as explored above, particularly applies to these problems, and this discourse must include business’ relevant information. Perhaps the Kantian approach to reasoned discourse only poses an ideal, but this is an ideal worthy of understanding and pursuit. It provides clarity as to our social failings and their origins. This is the advantage of this analysis. The Kantian categorical imperative process for forming these maxims requires (1) duty motivated by pursuit of a moral community, and (2) a reasoned social discourse that includes considerations of both future generations and distant people within this conception of community. The second of these requirements poses a conundrum, namely since future generations and distant people cannot be included within the social discourse required for establishing our ethical maxims, then rationality requires that we represent and preserve their interests. This poses the potential problem of paternalism. The only resolution is that this “rationality” requires generally accepted ethical standards for acquiring the relevant knowledge and establishing the associated decision criteria as related to business, standards that are stable across generations. As a community, business should be required to contribute fully and truthfully to this rational discourse. Business knowledge and expertise may be necessary for reasoned social discourse concerning problems such as environmental preservation, but the conflicts-­ of-­interests inherent in business’ profit exploitation through negative environmental externalities, a common phenomenon observed since the early industrial revolution, imply a limited role for business. When participating in this discourse, business must be perceived by the public as having potential conflicts of interest. Business expertise, however, can still be an asset too valuable to ignore. In this context, business has an imperfect duty to play a role in environmental enhancement coalitions, and to provide relevant scientific-based information for public consideration of their environmental impacts. This is an imperfect duty, however, since there are practical limits to its coalition involvements. In particular, business has an imperfect duty to participate in coalitions aimed at resolving tragedy-of-the-commons phenomena, as explored in Part IV of this text. This is therefore a part of the Kantian rational foundation for business-environmental policy discourse. Review Questions 1. How so the two types of duty apply to the managerial communication of internal policies? 2. Briefly review each of O’Neill’s maxims for reasoned social discourse? Briefly review business examples of applications for each maxim? 3. List the four CIP related issues of this chapter?

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Advanced Questions for Class Discussion and/or Essays 1. Describe the discourse issues related to (i) globalization, (ii) diversity, and (iii) business control systems? 2. Discuss the equity problems associated with environmental degradation and possible restoration?

References Ferguson, C.E. 1972. Microeconomic Theory. 3rd ed. Homewood, IL: Richard D. Irwin Inc. Fruhan, William E., W. Carl Hester, Scott P. Mason, Thomas R. Piper, and Richard S. Ruback. 1992. Case Problems in Finance. 10th ed. Boston MA: Irwin Publishers. Henderson, James M., and Richard E.  Quandt. 1958. Microeconomic Theory: A Mathematical Approach. New York, NY: McGraw-Hill. Kant, Immanuel. 1784a. In What is Enlightenment? in Basic Writings of Kant, The Modern Library Classics, ed. Allen W. Wood. New York: The Modern Library. ———. 1784b. The Idea for a Universal History with Cosmopolitan Intent. In Basic Writings of Kant, Modern Library Classics (2001), ed. A.W. Wood. New York, NY: Random House. ———. 1785. Fundamental Principles of the Metaphysics of Morals. In Basic Writings of Kant, The Modern Library Classics, ed. Allen W. Wood. New York: The Modern Library. ———. 1788. Critique of Practical Reason, in Basic Writings of Kant. In Wood, The Modern Library Classics, The Modern Library (2001), ed. W. Allen. New York, NY: Random House Inc. ———. 1793. Religion Within the Limits of Reason Alone. In Basic Writings of Kant, The Modern Library Classics, ed. Allen W. Wood. New York: The Modern Library. ———. 1797. In The Metaphysics of Morals, ed. Mary Gregor. Cambridge, UK: Cambridge University Press. O’Neill, Onora. 1995. Constructions of Reason: Explorations of Kant’s Practical Philosophy, Cambridge University Press, New York, NY. Robinson, Richard. 2019a. Imperfect Duties of Management: The Ethical Norm of Managerial Decisions. Cham, Switzerland: Palgrave Macmillan. ———. 2019b. The Management Nexus of Imperfect Duty: Kantian Views of Friendship, Discourse and Due Diligence. Journal of Business Ethics 157: 119–136. Robinson, Richard, and Nina Shah. 2019. Business Environmental Obligations and Reasoned Public Discourse: A Kantian Foundation for Analysis. Journal of Business Ethics 159: 1181–1198. Wood, Allen W. 1998. Kant on Duties Regarding Non-Rational Nature. Proceedings of the Aristotelian Society Supplement 72: 189–210.

Supplemental Readings Robinson (2019, Chapter 5) presents the seminal material of reasoned discourse in business.

Chapter 9: Due Diligence and the Profit Motive: Perfect or Imperfect Duty?

1

I ntroduction: The Profit Motive as a Perfect or Imperfect Duty

Why would corporate managers be motivated to pursue profit? In restating the question in the language of modern finance, why would corporate managers be motivated to pursue the wealth interests of shareholders? The standard answer is that managers can be hired or fired by the corporate Board of Directors, who are approved by the shareholders. If the corporation’s equity value appears to financial markets to be substantially depressed, then a hostile takeover is likely, and the management will be changed. (This phenomenon is termed “the market for corporate control.”) In addition, managers are “bonded” to the interests of the shareholders through compensation arrangements—the granting of shares in the company, the granting of stock options, and the granting of other profit-sharing incentives. As a result, for the publicly traded corporation with diversified ownership, the pursuit of shareholder wealth (the number of shares outstanding times the market value per share) is an important managerial responsibility.1 How paramount this responsibility might be poses the analysis explored in this chapter. This issue of wealth pursuit reduces to two questions: • Is management’s goal for the publicly traded corporation shareholder wealth maximization as constrained by legal and otherwise ethical considerations? • Should management’s goal for the publicly traded corporation be the balancing of various stakeholders’ interests (including the interests of shareholders) while fully meeting legal and other moral requirements? 1  The non-publicly traded company does not have a well-organized market for the company’s equity, hence the value of equity is a more nebulous concept. As a result, managerial pursuit of the market value of equity is a more problematic objective.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_9

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The answers to these questions are explored in this chapter and in Chapter “Fair Stakeholder Negotiations”. Neither question is answered in the affirmative. As presented, these answers must be interrelated, and revolve around the distinctions (as developed in Chapter “The Categorical Imperative Process and Moral Duties”) between perfect and imperfect duty within the context of managerial due diligence. It is shown here that the pursuit of shareholder wealth is a complex matter for management. The factors that might be under the control of management and that influence shareholder wealth—factors such as the selection of long-term projects that determine the firm’s future, the selection of finance options, liquidity and management, and a myriad of other factors—are interrelated. Given that management operates in a world of risks, there is a wide array of combinations that could be selected that theoretically could be envisioned the as leading to an expected maximized market value of equity. Decisions concerning these factors reside in the domain of the imperfect duties of information gathering, analysis, and application. These decisions are not subject to contracting with shareholders. They do not represent perfect duties. The pursuit of shareholder wealth, therefore, is an imperfect duty, or perhaps it is better said to actually be a nexus of imperfect duties. These duties have practical limits involving tradeoffs of one with other as explored in Chapter “The Categorical Imperative Process and Moral Duties”. The exploration of these imperfect duties of due diligence, and their tradeoffs, is the subject of this chapter. Due diligence and its associated duties concern performing the collection of routine managerial efforts. The term implies a diligence of effort. It is the characteristic of management, however, that the number of these routine concerns is large. This implies practical limits and tradeoffs. These efforts, therefore, are best described as imperfect duties.

2

 he Issue of Shareholder Wealth and its T Possible Maximization

Introductory college courses in microeconomics argue that profit maximization is the goal of the firm. Introductory college courses in managerial finance, however, argue that shareholder wealth maximization (SWM) is the appropriate goal of the publicly-traded corporation with diversified ownership, i.e., the corporation with shares traded on stock exchanges.2 The reason for the difference between these visions lies in the different purposes these exegeses have. Introductory microeconomics seeks to explore notions of economic efficiency, of the differences between competitive markets and monopoly, and the implications for social welfare. To do this, the course universally assumes certainty and does not analyze the various future time effects. There is only a now, or in some instances a now and one later period. These are the assumptions of the simple neoclassical microeconomic model, and they are likely adequate for the purpose of analyzing efficiency.  Jensen (2002) addresses this SWM issue in the affirmative.

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The managerial finance course, however, is generally a more advanced course that requires intro microeconomics as a prerequisite and expands this lower-level material. This more advanced course is aimed at explaining a variety of more real-­ world business decisions such as capital budgeting, capital structure (debt versus equity), dividend decisions, working capital decisions, and more. The models examined in this more advanced course are multi-period with an indefinite future, and they incorporate risks associated with the results of managerial decisions. The assumptions utilized are necessary for explaining a variety of analyses involving shareholder wealth and other financial considerations. Typically, neither microeconomics nor managerial finance courses directly attempts to address the ethical considerations explored here. Any question concerning shareholder wealth begs the definition of this metric. Consider the total market value of the publicly traded corporation’s equity, i.e. the market value per share times the number of shares outstanding. Consider Fig. 1, where a hypothetical expected profit stream is envisioned. The question concerns, “How does this expected profit stream translate into shareholder wealth?” For a corporation, profits are entirely owned by the shareholders (stockholders). As is always argued in the managerial finance course, a company’s profit can be used by management in one of three ways: (1) it is either reinvested into capital projects so as to generate future profits, or (2) it is reinvested into working capital so as to enhance the equity value in some way, or (3) it is redistributed to shareholders as either dividends or share repurchases.3 The first purpose generates an increase in equity value, and indeed, the SWM goal requires that it not be reinvested unless it is expected to enhance the total value of equity. In general, if management decides to retain profits (or net cash-income), then to justify this retention, management should expect to sufficiently raise the future profit stream. (We can place a value on any expected stream by using elementary Expected Profit

Future Time Fig. 1  The Expected Profit Stream 3  The cash profit could be used for repurchase of shares from the open equity market which will enhance the market value of equity per share perhaps sufficiently so as to increase the total market value of shares still outstanding.

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time-value of money algebra. This is not reviewed here, but unknowledgeable readers can review this algebra in any elementary finance text. It measures the maximum value that financial investors would pay in order to purchase this expected cash-flow stream given their minimum required rate of return as adjusted for risk considerations.) The expected profit stream is capitalized by the financial markets into the firm’s total value of equity (total value of outstanding shares). There are, however, some difficulties associated with this valuation process. The first is posed by the risk consideration. In order to place a value on this expected profit stream, the riskiness of actually obtaining this stream must be assessed. In particular, the larger that the financial markets assess for this risk, the lower the assessed value. There is a substantial science behind how this risk should be assessed, particularly in a diversified portfolio sense. The conclusion of this methodology is that only market related risk, not firm specific risk, is relevant for this valuation. The latter risk is diversified away in the investor’s portfolio and thereby eliminated. Only the non-diversifiable risk (market related risk) is relevant for firm decisions. (This subject of relevant risk and its application is reviewed in every managerial finance text.) A second problem associated with risk concerns the effectiveness of communication of prospective managerial decisions to financial markets. This managerial communication occurs with both the analysts engaged by financial institutions to monitor the company and also the business media. This communication must be accomplished in such a way as to allow the financial investors to effectively assess the expected outcomes of the corporation’s actions and the risks involved. Any deception is generally discovered ex post, and as a result, future communications are discounted by financial markets as suspicious. This ex post discovery is likely since future earnings will eventually be revealed. Corporations communicate their prospects to financial analysts who are generally educated in accounting, finance and the industry’s characteristics within which the firm operates. Honest communication concerning the risk and expected return on the company’s projects is a perfect managerial duty, but gathering and disseminating the relevant best information is an imperfect duty. Both have strong ethical implications. Managerial pursuit of shareholder wealth is therefore premised on honest and effective communication with financial markets. This communication poses both perfect and imperfect managerial duties as explained below. The moral implications of this managerial communication are complex due to three underlying considerations: • accuracy while under the threat of disappointing expectations, • the competitive environment under which management operates, • the secrecy required for a small limited-number of projects. The first two of these factors frequently interact. Management largely exists under competitive pressures. As a result, communications with shareholders, and current or potential investors, plus other stakeholders such as employees, all reflect

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management’s performance. Management’s past, current, and future expectations reside in the inevitable narrative that these communications create. Accuracy, of course, should be the basis of the financial statements included in annual reports and other communications to financial markets, but top management usually seeks to be the hero of these created narratives. This generates exaggerations and sometimes deceptions. The market for managerial control is usually competitive manifesting hostile takeover threats. Management therefore has an incentive to present itself as successful, but without the disappointments due to previously exaggerated expectations. Publicity about newly developing projects might also be suppressed because of the need to not inform business competitors of what might be new technology or products. In extreme cases, some projects for the Federal Government’s defense contractors must be “secret.” These are entitled “black box” projects that cannot be divulged to financial markets, but without knowing specifics, investors usually anticipate that such projects are ongoing as consistent with known previous activities. Company’s such as Boing, General Dynamics and Lockheed offer histories of these “black box projects.” Managers have a perfect duty to meet the minimum expectations for their position, and also an imperfect duty to extend their efforts beyond that minimum. For example, a business acquisition requires (i) knowledge concerning the legalities associated with what is being purchased, legalities such as clarity of title, and also discovering if there are any hidden liabilities associated with the purchase such as hazardous waste abatement, and (ii) what the appropriate market value of the asset is. Obtaining this sort of knowledge fits the normal expectations of due diligence. They constitute perfect duties. Reasoned expectations concerning the best uses of the asset, and the cash flows to be generated, fit the realm of imperfect duties since there must be practical limits to these associated efforts. How much information concerning future cash flows must be gathered? There really is no absolute limit as to “how much,” but managerial time and resources are limited, and therefore there are practical limits. Within the realms of perfect and imperfect duties, a variety of managerial decisions are explored below. They illustrate a more in-depth analysis of the duties of due diligence.

3

I mperfect Duties Involving Capital Budgeting, Capital Structure, and Liquidity

In corporate business procedures, the expenditures on long-lived projects, such as real estate and production facilities, is categorized under “capital budgeting.” In order to decide which projects are worth the expenditures, particular projected measures of “expected cash flows” are made. These are capitalized into a measure of current worth that represents a best attempt at indicating the expected increment to the total market value of equity if the expenditure is made. The decision criteria

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should be that if the total market value of equity is expected to be enhanced, then the project is undertaken. This is consistent with the pursuit of shareholder wealth.4 This capital budgeting methodology largely depends on the imperfect duties of management, upon which the future of the company depends. This is a considerable responsibility. Consider the following steps in forming the firm’s capital expenditures: • Prospective new projects must be found as possibilities. This requires imaginative creativity, expertise, and the organizational skills in bringing together a team that is technically knowledgeable in the production area, plus considerable data-­ gathering effort. • The feasibility of the project in the sense of whether it could be constructed, managed, and products marketed, needs to be assessed. This must be done in the context of either the firm’s current resources, or the alternative possibility of obtaining new resources. • The project’s expected cash flows (the revenues minus the relevant costs that are incremental to the firm if the project is undertaken) must be projected. These efforts best fit within the category of imperfect duty. Finding, assessing, and managing those profitable long-term projects that shape the company’s future have a perfect duty base in that proper procedures should be followed, but the firm will stagnate if management performs only its contractually obliged perfect duties. The aggressive efforts that form the future of the company are imperfect duties. The wide aim of these duties is to enhance the value of the company. They have practical limits due to managerial time and stress, and they have tradeoffs in analyzing one project as an alternative to another project or with other managerial responsibilities. Management expertise, particularly with respect to the “specific knowledge” associated with the particular business, develops through time with “learning by doing,” and as more-and-more efforts are expended. What was once “beyond expectations” becomes the standard expected effort given time and learning. The imperfect duty becomes the perfect duty. Technology plays a role in this development in that as it has developed, the boundary of perfect duty has widened. For example, consider the “big data revolution” where once it was expensive to obtain sufficient data to generate reasonably reliable statistical results, today it is not a matter of gathering sufficient data, but rather of analyzing the vast quantities of information available. In addition, every project undertaken should have an associated ex-post audit. Future cash flows are always risky to estimate, but ex post, projects can be examined to discover any bias with respect to persistent over-evaluation of revenues, or under-­ evaluation of costs. This systematic examination of past decisions might lead to improved and unbiased current evaluations. That is the importance of these ex-post audits, i.e. to discover systematic mistakes and correct them.  See Copeland and Weston (1983).

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 he Complexity of Capital Structure and the Imperfect T Duties of Management

Capital structure decisions also have imperfect duty components. Capital structure consists of the corporation’s mix of finance: equity or debt. This includes the debt maturities, its collateralization, and its associated indenture agreements. This is a classic subject in finance.5 The basic theory is that debt should be extended to the point that the shareholders’ desires for leveraging their equity investment (using debt) are offset by the risks of financial distress. Financial distress means the inability to pay due obligations, and the probability of this occurring increases with more debt. Managing the factors that determine this probability is a complex task that incorporates both perfect and imperfect duty components. These are explored here. Debt finance (the sale of various types of bonds) consists of fixed payment obligations of (i) various maturities (payment dates), (ii) various collateralizations (the pledges of assets that can be claimed by the bond holders in case of default on cash payments), and (iii) various legal indenture agreements that restrict the activities of the issuer. These indenture agreements generally “bond” the company in three ways: 1. The composition of assets: The company’s liquid assets (cash and marketable securities) are required to be maintained at levels that assure timely payments on the bonds. There are opportunity costs associated with having to keep this minimum level of liquid assets, costs that stem from the alternative opportunities of investing these funds in more productive long-term assets that would provide higher returns. 2. The allowed activities of the company: Bond investors (those who own the securities) want assurance that their funds will not be used in new unanticipated ventures that are riskier than they invested in, i.e. risk shifting as explained below. As a result, any new ventures undertaken by the issuing company must be approved by the legal representatives of the bond’s owners (generally lawyers of the investment bank that arranged the sale of the company’s bonds to the public). 3. The priorities of claim in case of default: Corporations usually issue several types of bonds, but the priorities of claims must be specified in case of default, i.e., which liabilities must be paid first in case the company needs to be liquidated. The bonds we refer to are legal contracts to pay that are sold to investors. To explore these problems in more detail, consider a firm with a debt payment of $100 due in 1 year, the debt being sold to investors who are fully knowledgeable concerning the riskiness of payment. Allow the current liquidation value of the assets to also be $100. If the firm continues in business, however, allow it to face a two-state future as described by Tables 1, 2, and 3. Income will be earned over the next period and this is capitalized into the value of assets as shown in Table 1. In addition, if the firm decides to continue in operation, it must select under which scenario it will operate, A or B. (We assume the choice of marketing plan or  See Copeland and Weston (1983).

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Table 1  Future value of firm’s assets in two state future State 1 2

Scenario A $100 $ 90

Scenario B $150 0

Probability ½ ½

Table 2  Future value of firm’s debt payment in two state future State 1 2

Scenario A $100 $ 90

Scenario B $100 0

Probability ½ ½

Table 3  Future value of firm’s equity in two state future State 1 2

Scenario A 0 0

Scenario B $50 0

Probability ½ ½

capital investment determines the A or B scenario.) Tables 1, 2, and 3 give the values of the firm’s assets, debt payments and equity value under scenarios A and B in the two-state world. If the firm does not continue its operations, employees suffer and there is no residual value for the equity holders; the debt holders, however, receive all the value of the firm’s assets and are fully paid their $100. If the firm continues, however, by selecting Scenario A, then the firm must be liquidated to pay the debt holders either in full ($100) or in partial default ($90) depending upon the uncertain future state of the world. The expected payoff for the debt holders under “scenario A” is $95, i.e. ½($100) + ½($90) = $95, but the debt holders would prefer liquidation now rather than having the business continue by selecting either scenario A or B, Why? Because current liquidation yields full payment with certainty. The employees, however, would lose their positions if the company were liquidated. If the firm does continue by selecting Scenario B, the equity owners have a 50% chance of retaining wealth of $50 (in State 1), but also a 50% chance of having no residual value to the equity. They would prefer that the firm continue by selecting B since it allows the only possibility for equity having any worth. We presume that the employees would also prefer B since the firm would be ongoing. The debt holders have only a 50% chance of receiving $100 under B, their expected payoff is only $50, i.e. [½($100) + ½($0)] = $50. Of the three possible courses of action, the debt holders prefer current liquidation to continuing operations. The equity holders prefer continuation under Scenario B, the worst course of action for the debt holders. Provided the debt holders entered the agreement knowing the uncertainties involved, and the terms of the debt were fully negotiated and arranged to reflect these risks, then a derived solution of democratic discourse based upon rational reflection, the CIP, does offer a solution explained here.

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Society’s notion of the optimal solution is presented by the pursuit of employee and shareholder interests as constrained by law and negotiated debt indenture agreements. For the sake of employees, these interests dictate that the firm continues its operations under scenario B. Our limited liability law allows the $0 payment to debt holders under state 2, scenario B, and this is judged as fair provided the debt holders were fully knowledgeable about the risks of payment when the debt was issued by the company and purchased by the investors.6 In a free market for the debt claims, the original terms of the debt, that is the price of the bond, or interest rate agreed to, would reflect the risks of payment. Furthermore, our bankruptcy law favors this solution in that it purposely favors firm continuance whenever possible, thereby allowing continuation of employment. This is a solution reached after considerable democratic debate and consideration as imbedded in our bankruptcy law. The law does not allow, however, what is termed “risk shifting.” It prohibits the firm from using the funds for any purpose other than it declared in its intended use of proceeds section of its registrations prospectus filed with the SEC. Violation of this declaration violates its perfect duty obligations. It would constitute a “lying promise.” The imperfect duty of management, however, is to attempt to assure that the information provided to potential debt holders is aimed at yielding an unbiased assessment of the risks. The riskiness of the firm’s operations must be disclosed without bias. This phenomenon of risk shifting leads bondholders to insist upon the various protective covenants reviewed above (bond indentures), and the monitoring devices such as independent audits to be reviewed by the investment bank lawyers who represent the bondholders, and who watch the company to ensure that the various covenants are kept. These bond indenture agreements can be broadly divided into four categories: 1. Covenants that restrict the issuance of new debt. 2. Covenants that restrict dividend payments to only net-cash income after bond obligations are paid, and all other bond indentures are met. 3. Covenants that restrict both merger activity and the business activities that the firm can engage in unless approved by the investment bank’s lawyers who represent the bond holders. 4. Covenants that restrict various asset categories such as minimum limitations on the amounts of cash the firm must hold until the debt is paid.7 The most common indentures restrict the subsequent financing, particularly the issuance of new debt with a higher priority of payment than the old debt. If the firm did issue new debt with a superior claim on the firm’s assets or cash flows, then the existing debt would become riskier. Also, even if the new debt has the same priority 6  Limited liability in corporate law means that debt holders cannot sue the shareholders for personal liability in order to recover their claim. The liability of shareholders is limited to the value of the firm’s assets, and does not extend to their personal assets. 7  See Smith and Warner (1979) for a review of bond covenants.

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as the old debt, this older debt would still become riskier since in the case of insufficient net-operating income, both old and new bonds would receive a lower payment. For these reasons, any new debt issuance is commonly prohibited unless the firm maintains various financial ratios that supports the claim it is sufficiently healthy to pay all the debt outstanding. Bond covenants also restrict dividend payments. These are necessary since it is certainly possible that in the case of financial distress, shareholders could vote themselves a liquidating dividend that would leave the debt holders with no payments at all. Once the cash dividends are paid, bondholders have no recourse in the case of bankruptcy liquidation. Also, dividend payments could weaken the firm’s liquidity position, and thereby hurt the debt holders. Similar restrictions exist for equity share repurchases since these can be merely another method of distributing net-operating income to equity holders. The reasons for restrictions on mergers or other expansion activities should be obvious, i.e. these could result in a riskier firm, and hence lower the value of the bonds. In addition, the reasons for requiring the firm to maintain liquidity positions should be equally obvious. Debt payments must be made in cash. In fact, many bond issuances of riskier company’s require that a “sinking fund” be established to assure that the company has the cash available to pay the maturity value. All these covenants pose perfect duties for management. The associated imperfect duties are that the company should be managed so that overly restrictive bond indentures need not be placed on the company. As stated above, there is also an informational imperfect duty that management must be concerned with, as reviewed above, one that involves the practical limits of tradeoffs with other imperfect duties. Consider a company that has decided on a doubling of its capacity with an investment of $100 million. Allow it to have two financing possibilities: (1) sell new equity shares of $100, or (2) the sale of $100 million in bonds (debt). The bonds have an annualized interest rate of 10 percent, i.e., $10 million per year in interest. The doubling of the company’s capacity is expected to earn an additional $50 million in net cash operating profit. If the company finances the expansion with the new $100 million in equity, then assuming this doubled the amount of shares outstanding, the existing old owners would receive $25 million in dividends, and the new equity owners also get $25 million in dividends. If the expansion is financed with $100 million in debt, the existing shareholders receive $50 million  - $10 million  =  $40 million in dividends. This is preferred to the $25 million they would receive with new equity finance. This illustrates the possible advantages of debt finance (leverage). This hypothetical illustrates that there are two advantages to financing a firm’s expansion through debt, i.e. leveraging the investment by using debt. The first reason is that bond finance has fixed payments. If the expansion is successful, then after the fixed bond payments are made, the remaining net revenue (net after the bond payment) belongs to the existing shareholders. No further payments go to debt holders. This can be paid back to the shareholders in the form of dividends, or retained back in the firm to generate greater future dividends. If the expansion is particularly successful, the rate of return becomes even larger. If, however, the expansion is

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financed by the sale of new shares, then all of the additional net revenue must be shared with the new shareholders. The fixed payment on debt is limited; the sharing of higher net revenues with new shareholders is not. If the expansion is financed by doubling the number of shares, then the pre-expansion equity owners only receive half of the dividends, i.e. $25 million rather than the $40 million received through debt finance. The second reason is that the equity holders might wish to finance with debt concerns tax law. The interest paid on debt is a tax deductible expense. Dividends, even the new dividends paid to new shareholders, are not an expense under the US tax law; dividends are a distribution to the owners and therefore dividends are not tax deductible. Financing with new bond sales allows this tax deduction which enhances the rate of return to the existing pre-expansion equity owners. For both the leverage reason and the tax reason, financing the expansion with the sale of bonds may therefore increase the total market value of equity, i.e., be in the interests of the pursuit of shareholder wealth. There are, however, some adverse aspects associated with debt finance that could negatively affect this shareholder wealth. Debt levels are directly (positively) related to the probability of financial distress. Financial distress consists of the inability to pay due liabilities. It might result in bankruptcy which is a legal process that might temporarily relieve the company from its creditors’ demands, and perhaps ultimately result in a reorganization, or write-down of the company’s liabilities.8 It can also result in a liquidation of the company. The greater the company’s debt level, the greater the probability of insolvency. When this probability becomes overly high, then there are two negative effects. • The first negative effect is that trade credit from venders becomes difficult to obtain.9 Many companies rely on trade credit as a crucial source of short-term finance. Without it, they do not stay in business. • The second negative result is that when debt levels become overly high, the firm may not be able to stand behind any warranty obligations it has for its product. Sales of goods that are typically warranted therefore decline. If a company becomes insolvent (unable to pay its due liabilities), it may have to enter legal bankruptcy which places the management of the company at the discretion of the court. The primary goal of the firm then becomes to pay its creditors, and not to pursue the shareholder’s wealth interests, i.e., the equity interests become much lower in priority. Shareholders therefore fear a high probability of insolvency that leads to bankruptcy.

 Payments become proportionally less by a factor that the court believes that the company can pay.  Trade credit is the obtaining of current inventory while payment to the vender is delayed for some specified time period. This allows the inventory to be made into a product, them sold, and then the inventory is paid for. It is a typical and valuable form of short-term finance. 8 9

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Because of the potential consequences reviewed above, when the probability of financial distress becomes overly onerous due to high debt levels, financial markets bid the total value of equity down. Equity holders fear this probability becoming too high. Equity holders desire the benefits of leverage, and the tax break on debt since both enhance the rate of return on equity if there is no financial distress, but beyond some point debt levels become onerous due to its effect on the probability of financial distress. Managing the probability of financial distress, therefore, becomes a complex imperfect duty of management. What are the factors that affect the probabilities of insolvency and bankruptcy, and that therefore need managerial efforts in the form of imperfect duty? There are four: • • • •

the amounts of the company’s due liabilities, the expected level and variance of net cash revenues, the level of cash and liquid securities on hand, the ability of the company to raise funds quickly by borrowing from financial markets (“commercial paper” markets that are available to very high credit-­ worthy firms) and/or commercial type banks.

A company’s liquid assets consist of cash and marketable securities.10 They are held for the purpose of lowering the probability of insolvency (the inability to pay due liabilities), and ultimately therefore the probability of bankruptcy. Large amounts of liquid securities, however, come at the expense of long-term assets from which the company is likely to earn higher rates of return. There is, therefore, a potential tradeoff of (1) probability of financial distress for (b) rate of return on assets. The greater the level of cash and liquid securities the greater the debt level the company can have outstanding while still keeping the probability of financial distress relatively low. But a high level of liquid securities may decrease the total market value of equity if these liquid securities are accumulated at the expense of having a lower level of what are typically higher-earning long term assets. Consider the informational demands for affecting the four “factors” listed above. They clearly generate imperfect duties for information gathering and analysis. Besides these imperfect duties, do these factors have other ethical implications than those impacting the pursuit of shareholder wealth? The answer is, “They do!” Consider the following relevant questions: • What are the effects of the probability of financial distress on creditors, and what are the moral duties implied for the management of these probabilities? • Do the probabilities of financial distress affect stakeholders other than the debt and equity holders? If so, what are the ethical duty implications for management?  Liquid marketable securities are short-term US Treasury Bonds. They have active markets on which very large amounts can be sold quickly and at a stable price. They are held for liquidity purposes (ability to pay due liabilities in case of an emergency decline in net revenue), and because they earn some low-level of interest.

10

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• What are the effects of the probabilities of financial distress on the growth of the company and therefore on various affected stakeholders? What are the managerial duty implications for managing these probabilities? Consider the management of information concerning the probability of financial distress. Assume that the information being disseminated by management is unbiased in yielding objective expectations of the probability of default, that is information not skewed towards favoring the company. We could still ask the question, “Is it the best information concerning the probabilities of distress? Can the efforts of management help the debt holders to yield a better estimate by, as an example, indicating impending changes in industry-wide technology that will affect the company?” These informational duties have both perfect components (it should yield unbiased estimates of the probability of financial stress), and an imperfect component (it should present the best available information). Seeking to disseminate the “best” information likely has opportunity costs in terms of time and effort expended on other imperfect duties. This “best” information is, however, important for the debt holders. All of these obligations and efforts are within the category of due diligence, and all have tradeoffs.

3.2

 he Diversified Portfolio Effect on Risk and Duties T to Stakeholders

As reviewed above, shareholders fear high probabilities of financial distress. Shareholders do, however, desire the leverage effects of debt because if projects meet expectation, the rate of return to the shareholders’ investment is higher. Within some lower range of debt, increasing the debt level increases the probability of a higher rate of return. But increases in debt levels also increase the probability of financial distress. Shareholders can diversify away much of the risk of financial distress. They typically hold a diversified portfolio of equities. By pure chance, some companies in their portfolio of investments will suffer financial distress and its consequences, but others in their portfolio will move in the opposite direction. In net, the probability of shareholders’ being substantially hurt by a specific company’s financial distress is low for a properly diversified portfolio. This is not the case for other stakeholders of the company: managers, other employees, suppliers and community interests. These stakeholders in effect cannot diversify away the firm specific risk of financial distress. The income stream of managers, employees, and suppliers are heavily dependent on the financial health of the company. These effects on employees, suppliers, and community interests are addressed here. The income stream of employees (including managers) and suppliers are heavily dependent on the success of the company that engages them, i.e. their income stream cannot be easily diversified in the way an investor’s portfolio can. For this reason, managerial and other employee and supplier stakeholders prefer that the company

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keep a lower probability of financial distress than the typical equity investor would prefer. (Remember that equity investors desire some debt leverage as explained above.) This means that management, other employees and suppliers prefer a lower level of debt than financial markets would prefer, a lower level than shareholder wealth maximization warrants. If management is overly conservative in keeping low debt levels, the market for corporate control will often lead to a hostile takeover where more aggressive investors purchase enough of the company’s equity to enable them to fire the management and replace it with one that is willing to increase the company’s debt leverage. These are the interests that management must try to balance in order to keep its position. They represent imperfect duties, and are explored in some detail in Chapter “Fair Stakeholder Negotiations”.

4

 he Ethical Basis for the Imperfect Duty T of Due Diligence11

The above sections examined the aspects and managerial duties associated with pursuit of shareholder wealth. There are, however, a myriad of other managerial duties that also require knowledge seeking, effort expenditures, and other ethical aspects with respect to due diligence. The generalities of these are reviewed here. As explained in this chapter, the managerial obligations of due diligence are related to those required of relations of virtue. A personal inclination towards due diligence is a virtue, and these business relations of virtue might deteriorate without reinforcement from the due diligence efforts of others. All of these imperfect obligations require the following: (i) the knowledge required necessary for making properly informed decisions, (ii) the requirement to apply the appropriate logically-­ based decision rules, (iii) the open-minded requirement especially in the face of stressful resistance, (iv) the fair negotiations requirements explored in Chapter 10: “Fair Stakeholder Negotiations”, and (v) the “noble nature” requirement of speaking out in business discourse concerning ethical issues. The first three of these duties are examples of combinations of the propositions of mutual dependence, gathering of knowledge, and application of knowledge. The fourth and fifth, i.e. the “fair minded” and “noble nature” requirements, need more in-depth exploration as provided below. Rawls (1951) presents versions of the first four of these requirements in the context of the virtue characteristics required of competent moral judges versus the deontology requirements for considered moral judgements. (These are also utilized for the fair negotiation duties examined in Chapter 10: “Fair Stakeholder Negotiations”.) Although Rawls did not apply this to management, this applies well for our purpose as presented and utilized here.

11

 The material of this section roughly follows Robinson (2018).

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(i) The knowledge requirement of due diligence: Management should demonstrate a willingness to acquire the requisite knowledge concerning the consequences of its prospective decisions. This requirement of willingness to acquire relevant factual knowledge, and also of the likely consequences of managerial actions, goes beyond the narrowly defined logic requirement presented below (requirement “ii”). The moral manager must never “shoot from the hip.” This duty essentially requires a willingness to put forth the effort to acquire the necessary factual knowledge, but it also requires a willingness to analyze it. (See the propositions presented in Chapter 3: “The Categorical Imperative Process and Moral Duties”.) The efforts required for the acquisition of the relevant knowledge of the facts, and to reflect upon those facts, and also to reflect upon the consequences of potential various actions, even those actions that have no obvious ethical implication, are themselves ethical obligations. They concern all business problems. Laziness in fulfilling one’s business obligations certainly is unethical.12 Moreover, laziness in obtaining knowledge concerning a moral conundrum, or in reflection concerning that conundrum, is particularly unethical. Acquisition of information is always costly in time, effort, and frequently financial resources. These costs pose the practical limits to this positive duty. In particular, time, plus the energy required of effort, and financial resources are limited and expending these on data acquisition involves opportunity costs. (ii) The logic requirement: A desire to use inductive logic is required of the business manager, as well as a desire to explore all options for decisions. This attribute is logically linked with “i.” Logical explorations of decision-­ options are required for modern business. How else can the consequences of managerial actions be explored? Furthermore, managers have a pro-active obligation to not bring their prejudices or preconceived notions to their analyses. The pro-active obligation of managers is to logically explore options, to find new ones if possible, and to use imagination and creativity in this exploration. This is frequently the essence of the mental activities obliged for managerial decisions. Utilizing and listening to those who offer particularly creative analyses, perhaps from those below in the managerial hierarchy, follows from this requirement. This information must be considered, and it follows from the reasoning in common maxim explored in the section above. As explored under the reasoning in common requirement of the categorical imperative process, this imperfect duty of logical application poses practical limits. Management cannot constantly apply new logical analyses to the myriad of decisions they might face daily. Continually rethinking the logic of business 12  As an example of a managerial problem with perhaps no apparent ethical implication, consider the obligation for managers to economize on costs. This is an obligation that managers have towards owners, and perhaps other stakeholders. This surely requires effort to explore options, and to apply costs savings procedures. This is an ethical obligation of management.

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decision-­making is overly daunting. For this reason, decision rules are usually expressed in standardized procedure manuals (capital budgeting manuals, humanresource management manuals, and the like). This allows business to extend the practical limits in applying these rules. Explorations of all options, especially for “non-standard problems” that do not neatly fit the procedure manuals, also have limits in that managerial time and effort are finite. (iii) The open-minded requirement: The business manager must have a demonstrated willingness to reconsider judgments in light of new evidence. In addition, a knowledge of his or her own predilections, and a desire to consider all conflicting interests, is required. Ultimately, however, once management has reached the appropriate decision, it has the duty to implement it. Ideology, prejudice and bias, should have no role in effective managerial decisions. Knowledge of self, and any biases one might have, is a necessary first step for overcoming those predilections. New evidence pertaining to managerial problems is frequently encountered, and we must utilize it in reexamination, and possibly in reformation of our decisions. This attribute is really an extension of “ii” above. Consideration of all conflicting stakeholder interests, however, does not automatically imply managerial discretion in balancing these interests. Knowledge of the conflicting interests of stakeholders may be required, but the manager represents the owners of the firm (and perhaps are owners themselves), and within this context, must fulfill all legal and contractual obligations to other stakeholders whether explicit or implicit. Ultimately, management’s obligation is to implement logically-­ correct properly-supported decisions despite any psychological stress imposed by various constituents. Since management is generally compensated via some linkage to the firm’s financial performance, it has an inherent conflict of interest in any attempt by it to impose their intuited ethical solutions to various stakeholder problems (as in management’s imposition of subjectively balancing various interests). Because of these conflicts of interest, stakeholders would not likely accept any paternalistic management decree as being ethical. Consequently, management must negotiate fairly with various stakeholder groups. (Chapter “Fair Stakeholder Negotiations more fully explores this issue.) Hence, the criteria listed below. (iv) The fair-minded requirement: The managerial decision maker is likely affected by the foreseeable consequences of the decision at hand. Since these conflicts of interest are often present in negotiations with various stakeholders, managers should make it clear that they are the legal agents of the owners (the ­essential conflict of interest), and should negotiate by objective rules of fairness as indicated below. Fairness in negotiation requirements: Rather than authoritatively decreeing policies to various stakeholders, mangers should fairly negotiate these policies with stakeholder groups according to the criteria below.

(a) Given its legal-agency relation with owners, management should openly represent owners without deception.

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(b) Subject to the conditions indicated below, management should not deceive, or coerce, or even impose strategic transactions costs aimed at biasing the negotiated results. (c) In cases where critical information cannot be divulged in stakeholder negotiations, managers should attempt to bias negotiated results towards those reasonably expected if the information were known.

The idea behind the fair-minded requirement is to allow both parties to benefit from the negotiated outcome. This is a consequence of the mutual dependency proposition of Kant as recognition of this proposition directs all parties of a business interaction to at least attempt to have everyone involved benefit. (This is reviewed in Chapters 3 and 10.) The power potentially exercised by management should not be used to bias the negotiated results in a coercive way.13 This fair-minded requirement is generally assumed of moral managers, but it is difficult to realize since almost all decisions have some consequent effect on the manager involved. This attribute requires, however, that the manager has a disposition to try to openly acknowledge any inherent conflicts of interest, and to do all-­ that-­is-possible to avoid them. For example, the manager of company X who signs contracts committing company X to do business with company Y, a company she also owns, cannot be said to be trying to avoid this conflict of interest. Since almost all possible managerial decisions affect the financial condition of the firm, and the previously established “incentive arrangements” also affect managerial compensation, then managers are usually in violation of the “no conflict-of-­ interest requirement” in making any decision that affects non-owner stakeholders.14 Fair negotiations with non-owner stakeholders appear applicable, but finite managerial resources must limit these efforts to significant cases. Note that fair negotiation with stakeholders as a managerial obligation is extensively addressed in Chapter 10. (v) The noble nature requirement: The moral manager should be willing to exercise the Socratic noble nature of “speaking out” in a social context about the results of his or her reflective thought concerning ethical problems. The other duties listed above may be of little value if the manager is unwilling to exhibit leadership in speaking publicly to others in the organization about his or her analysis of ethical problems. Conformity is a desire to not “make waves” within the organization. It is the opponent of the “noble nature.” (Arendt, 1971, p.180.) This noble attribute is necessary to resist the mob psychology that can sweep through organizations while attempting to justify even the most unethical actions. This noble attribute, however, is also necessary to prevent bureaucratic behavior where non-­ reflective application of “codes of conduct” are gamed to violate the spirit of the

 As used here, power refers to the ability to determine or influence outcomes.  Fama (1980) initiates the “ex post settlement” term and explains its meaning. It essentially involves managerial compensation as linked to firm performance. It should also be kept in mind that management is typically at least a part owner of the firm managed.

13 14

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code but not the letter of the code. The logical rationale for the code must be emphasized. In addition to characterizing the criteria for competent moral judges, Rawls also characterizes considered moral judgments as manifesting four characteristics. These characteristics can be utilized in the context of forming an ex post judgement as to whether management performed with due diligence: 1. The judge is disinterested, i.e. cannot benefit or be affected by the judgment (no conflict of interest). 2. The judge is familiar with the relevant facts. 3. All those affected have opportunities to present their arguments. 4. The judgment is stable across decisions by other competent moral judges. As explained in Sect. 2, managers might violate the first of the above criteria. They might not be “disinterested” in the decisions they make, i.e. they might have conflicts-of-interest. Due diligence therefore requires that managers reveal these conflicts in negotiations with stakeholders, and that they fairly negotiate as reviewed in detail in Chapter 10: “Fair Stakeholder Negotiations”. With respect to this fourth condition above, individual predilections may be counteracted when many judgments are made in a wide variety of roughly similar cases. The reasonableness of a decision can be decided by the acceptance of those competent moral judges (or decision makers) who have freely weighed the evidence after open discussion and criticism. This provides evidence that it can “hold its own.” For example, conflicts of interests, and a prior ideology that interferes with either information gathering, or evaluation of data, both bias the objectivity of those decisions. In addition, it is apparent that being a moral judge does not necessarily result in a moral judgment in that violations of the criteria above might not pass the stability test. The second and third of Rawls’ criteria are applications of the information and effort propositions of Chapter 3: “The Categorical Imperative Process and Moral Duties”. Note that the fair negotiations material of Chapter 10: “Fair Stakeholder Negotiations” addresses the question of whether managers should balance the interests of stakeholders. Review Questions 1. Explain how managers are “bonded” to the interests of shareholders? 2. What are the three legal things management can do with “net after tax income”? 3. What is the relation between shareholder wealth and expected profit? What does risk have to do with this relation? 4. What are the three types of bond indentures? What are the four categories of restrictions that bond indentures address? 5. Give a specific example of trade credit from venders that are affected by the probability of financial distress? Give a specific example of a warranted good that customers might be concerned about if the company has a high probability of financial distress?

References

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More Advanced Questions for Class Discussion and/or Essays 1. Explain why due diligence is an imperfect duty? Give examples? Is the managerial obligation to pursue the wealth interests of shareholders a perfect or imperfect duty? Explain? 2. Does the probability of financial distress affect non-owner stakeholders? Explain? If so, then what are the ethical implications for management? 3. Can employees and suppliers of a publicly traded corporation diversify their income stream in the same way that shareholders can? What are the ethical implications of this for management?

References Arendt, Hannah. 1971. Thinking and moral considerations. San Diego: Harcourt, Brace and Jovanovich. Copeland, Thomas and J, Fred Western. 1983. Financial Theory and Corporate Policy. Reading, MA: Addison and Wesley Publishing. Fama, Eugene F. 1980. Agency problems and the theory of the firm. Journal of Political Economy 88 (21): 288–307. and reprinted in The Modern Theory of Corporate Finance, pp. 134-145, edited by Michael C. Jensen and Clifford W. Smith, Jr., McGraw-Hill Book Co., New York, NY. Jensen, Michael C. 2002. Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly 12 (2): 127–138. Rawls, John. 1951. Outline of a decision procedure for ethics. Philosophical Review 60 (2): 177–197. Reprinted in Collected Papers - John Rawls, edited by Samuel Freeman, Harvard University Press, 1999. Robinson, Richard. 2018. Friendships of virtue, pursuit of the moral community, and the ends of business. Journal of Business Ethics 151: 85–100. ———. 2019. Imperfect duties of management: The ethical norm of managerial decisions. Cham, Switzerland: Palgrave Macmillan. Smith, Clifford W., and Jerold B.  Warner. 1979. On financial contracting: An analysis of bond covenants. Journal of Financial Economics 7: 117–161.

Supplemental Readings Robinson (2019, Chapter 6) presents the seminal material on due diligence in business.

Part III Some Fundamental Problems in Management Ethics

Chapter 10: Fair Stakeholder Negotiations

1

Ethical Negotiation: An Introduction

This chapter poses an ethical norm for fair negotiations. It also applies this norm for an analysis of management-stakeholder relations, an essential problem for managerial imperfect duty. This application also enables clarity for understanding empirical observations of managerial and stakeholder behavior. It facilitates an understanding of the ethical defects of other paternalistic management behavior and theories. Stakeholder-balance theory (SBT) requires managers to distribute value to all stakeholders, and to do so according to a vague notion of a “fair return.”1 This theory also requires input from all affected stakeholders to all relevant managerial decisions.2 In this theory, management is envisioned as the agent representing each and all of these groups: financiers, employees, suppliers, community interests and customers.3 This “equal agency” notion describes the stakeholder balance approach where shareholders have no priority claim on the judgement and efforts of management, i.e., shareholders have no particular priority over other stakeholders such as employees or suppliers.4 In SBT, the goal of the firm is therefore not shareholder wealth pursuit as often argued in the financial management literature, but rather the achievement of a balance of stakeholder interests where management becomes the arbiter of these interests. Management, however, is bonded to the interests of shareholders through its compensation: the shareholders granting of some of the company’s equity to 1  See the Clarkson Principles at Clarkson (1995), and at www.stakeholdersmao.com/principles-­ stakeholder-­management.html. 2  See Phillips et al. (2003, p. 487). Also see Donaldson and Preston (1995), Freeman (1984, 2010), Evan and Freeman (1988), Greenwood (2007), and more recently Hasnas (2013) for reviews. 3  See Freeman (2002, p. 39). 4  See the Clarkson Principles cited in footnote 1.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_10

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management, or the similar granting of stock options, and/or profit-sharing arrangements. The purpose of this “bonding” is to assure a linkage between the interests of shareholders and management. But this creates a conflict-of-interest for managerial decrees concerning non-owner stakeholders, the very decrees supposedly aimed at stakeholder balancing. Any paternalistic management decree of balancing these interests must therefore be viewed as suspect by these very non-owner stakeholders.5 In stakeholder negotiations, management must recognize, and be transparent concerning these conflicts-of-interest.6 This essentially demands an ethical alternative to paternalistic management. This alternative places stakeholder theory in the domain of fairness in negotiation where management does not decree policies of balancing the interests of stakeholders, but rather must negotiate fairly with each of these interests, even when these negotiations are implicit and indirect market-­ oriented arrangements. The theoretical normative objective of these negotiations is (i) to recognize the autonomy of stakeholders as in Kantian philosophy, (ii) to solicit their input to managerial decisions as required of the stakeholder theory reviewed above, and (iii) to achieve an harmonious stable agreement where all constituents expect to benefit equitably. This, of course, begs the definition of what is meant by fair negotiations in the stakeholder context. This “fairness” notion is the subject of this chapter. Note that any notion of fair negotiation must (i) allow stakeholders the opportunity to express input into the management process, and (ii) result in what would be considered a “fair distribution of value to all stakeholders” as supposedly required by the stakeholder-­balance theory.7 Note also that “expressing input” does not assure that stakeholder interests are dealt with fairly, but after this input is expressed, the remaining aspects of fair negotiations (explored below) should assure this. Both of the above conditions should be perceived as likely enabled by the posed fairness principles of these negotiations. Decreeing intuited-fair solutions may directly conflict with Kant’s proscription against paternalism (1797, 6: 454, and also O’Neill, 1995, pp. 120–124). We cannot claim management is allowing others the freedom to pursue their own interests, as required by the second formula of Kant’s categorical imperative, if management merely decrees its notion of what is “fair” for stakeholders. For this reason, harmony and stability (defined below) are particularly difficult to achieve through reliance on managerial imposed solutions. The Kantian notion of harmony requires that all pursue relevant moral maxims where these maxims are consistent with Kant’s categorical imperative. As stated above, this harmony requires that management fairly negotiate settlements with non-owner stakeholders where all parties are expected to benefit. This notion of fairness in this context of negotiations is the primary exploration of this chapter.

5  Even if these compensation arrangements do not particularly bond management to shareholder primacy, they still create conflicts-of-interest for applying paternalism towards stakeholders. 6  See the Clarkson Principles cited in footnote 1. 7  Phillips, et al. (2003, p. 487) specifies these conditions for the stakeholder theory.

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1.1

181

The Negotiation

The negotiations referred to above may occur quickly, or they may occur during a lengthy dance where the currently engaged stakeholders adjust their demands. They may be either implicit or explicit. A good example of the former type would be the hiring process where it is typical for an advertisement to be published, one that states most of the requirements of the position. Applicants are solicited who have a general understanding about the employment requirements. Perhaps some similar work experience is specified as required so that training costs are lowered. The wage is communicated, and from the pool of applicants, an offer of employment is made to whoever is considered the best applicant. In this process, it does not appear that the applicants are making any demands in the employment considerations, but implicitly they are when they apply. At this point, the applicants declare that the generally understood requirements are acceptable. If, however, an insufficient pool of applicants is solicited by the advertisement, then the offers and the advertisement must be changed. The offer must be made more attractive, perhaps through the offered wage, or through some other change in job characteristics. In this way, the employer is implicitly negotiating with the labor market even though potential employees are not given the opportunity to sit down with the employer and haggle over terms. Even after the employee is engaged, further demands may occur that are related to continued engagement, i.e., a continued negotiation. The fairness requirement with respect to this negotiation concerns the Kantian issues of deception, or divulgence of sufficient information, or adherence to employment law in that the employer must not violate society’s legal norms in the offered employment.8 If our notions of fairness and legalities are not violated, then we presume that the hired employee is autonomously pursuing their own ends, and the categorical imperative (CI) is not violated. Situations of coercion or deception would violate fairness requirements and therefore violate the CI.9 Examples of explicit negotiation are more obvious. They include the face-to-face employment negotiation where the potential employee and employer do explicitly haggle over all details of the employment contract. All notions of Kantian fairness must, of course, apply as well to these negotiations. It should be obvious that all implicit, and many explicit negotiations are actually market negotiations (hereafter referred to as “market-based negotiations”). In fact, it is difficult to envision any market transaction that does not involve either implicit or explicit negotiation. For example, when we walk into a store and see some potential good for purchase, even if it is not a very familiar good purchased many times previously, we still assume certain properties concerning its quality assurance. Indeed, these qualities are often communicated through displays or vender attitudes

8  An example would be some sort of tie-in agreement such as demanding illegal kickback payments, or other illegal actions. 9  Coercion or deception are clear violations of the second formula of respect for the dignity of persons. See the next section.

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of familiarity. These are all part of the implicit negotiations where the seller implicitly states, “Keep buying from me and I will assure the quality!”

1.2

Deriving the Rules of Fair Negotiation

It is established below that the rules of fair negotiations are more explicit and extensive than perhaps previously envisioned by the reader. The work of the late twentieth century American philosopher John Rawls (1921–2002) centered on justice as derived from fairness. Rawls’ major works include Outline for a Decision Procedure for Ethics (1951), Justice as Fairness (1958), Kantian Constructivism in Moral Theory (1980), and Justice as Fairness: A Restatement (2001). His philosophy is Kantian. This article uses Rawlsian notions of fairness, plus the Rawlsian characteristics of a virtuous manager (a reinterpretation of competent moral judge as reviewed in previous chapters) to derive the rules of fair negotiation (in part a reinterpretation of the previously reviewed considered moral judgement).10 We can delimit the so-­ called initial characteristics required of those who seek to fairly negotiate, and also the rules to be followed in that negotiation, so that the negotiation itself can be judged as ethical. Thereupon we can judge the resulting agreement as fair or unfair according to its consistency with our “fairness criteria.” This is a bifurcated process, i.e., the initial characteristics of the negotiators pose one set of criteria, and the characteristics of the actual negotiations pose another. Both sets must be applied (as previously reviewed). The material presented here poses an ethical norm for management-stakeholder relations; it offers a contribution to the stakeholder literature concerning ethical norms. This norm of fairness in negotiation presents a theoretical mechanism for indicating various violations of the above mentioned justice. For example, reciprocity is an important issue concerning fairness in negotiation.11 Such reciprocity might affect the long-term performance of the firm so that clarity as to violations of this aspect of fairness is important. The fairness in negotiation material provided in this chapter should assist in achieving this clarity concerning all potential violations.

1.3

The Structure of this Exploration

The arrangement of the remaining material of this chapter proceeds through three subsequent sections. As with Rawls (1951, 1958, 2001), fairness in negotiation is envisioned as resulting from a Kantian categorical imperative process (CIP), previously reviewed in Chapter “The Categorical Imperative Process and Moral Duties”, and from which the duties of this fairness follow.  Rawls 1951.  Hahn (2004) focuses on this “reciprocity” issue in an exploration of the issue of fairness with respect to stakeholders. Also see Hayibor (2017).

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In “Sect. 2,” the requirements for the negotiators, and the posed rules are presented. Note that this combination of (i) requirements for negotiators, and (ii) rules for negotiations, follows the organizational style of Rawls (Ibid). Various special situations of negotiations over risk are also analyzed. In “Sect. 3,” compensation considerations for situations when violations of the rules of fair negotiation must occur are analyzed. In “Sect. 3,” the contributions of this fairness theory to the existing management literature are also reviewed.

2

Objectives, Negotiators, and Fairness Rules

It is important to realize that the rules of fairness presented below pose practical norms usable for comparison with actual negotiations in order to perceive degrees of unfairness. For this purpose, we note that in Kantian theory, practical moral maxims are derived from the categorical imperative process (CIP). This process should derive maxims, or rules for action, that apply to business negotiations. These practical rules must generally be consistent with the CIP, as posed in the following criteria12: • The required characteristics of the negotiators, and the rules of the negotiations must apply to all participating parties (a universality requirement). • All parties must be autonomously allowed to pursue their own ends in that they do not submit to paternalistic decree; there is no coercion; and all affected parties are equally free to participate (a requirement of respect for the dignity of those affected). • All negotiators pursue a final harmonious stable settlement as defined here. This means that all affected by the agreement believe they have benefitted by a fair, moral process (a requirement of pursuit of a moral community). • All negotiators have a factual basis for fully intending to fulfill their agreements (a requirement of trust). When we apply the notion of harmony to an organization, we mean a state of all the organization’s members cooperating in pursuing the moral maxims established. In this context, harmony in negotiation requires that each negotiating party respects the other’s pursuit of their own ends. This requirement applies even when negotiations occur among management and external stakeholders such as customers and community interests. Each party pursues Kant’s proposition of mutual dependence as presented previously in Chapters “The Moral Construction Process and Duties” and “Moral Virtues and Ethical Decisions”. This requires, as an example, that every non-owner stakeholder respects the interests of the share owners, who in turn respect the interests of the other stakeholders.

12

 See Chapters 3 and 4 for a full description of the CIP.

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Kantian Notions of Ethical Negotiators

If in these negotiations all maxims consistent with the categorical imperative and derived from the CIP are met, then we can claim that the resulting agreement can be said to be “fair and ethical.” To reach this classification, both the negotiators, and the methods of negotiation, must meet certain requirements. In particular, the negotiators themselves must meet the traits listed below.13 This list expresses the (1) capabilities, (2) inclinations, and (3) determination we expect of a negotiator. The first four traits are those that we as individuals would require of anybody representing us in some negotiation, the fourth and fifth express our demands for their moral character. 1. Innate ability characteristics: The negotiators must have at least average intelligence and must also have a predisposition to apply inductive logic to reach an agreement. If someone is to represent us or others in negotiation, we would certainly require that they have the intelligence and logical skills to negotiate effectively. That is all we are trying to assure by this characteristic. 2. Knowledge characteristics: The negotiators must have a requisite knowledge of the issues to be negotiated. Effective negotiation is hardly possible without knowledge of the issues at hand. 3. Conflict of interest characteristic: The negotiators acting as agents must either be free of conflicts-of-interests that would inhibit their ability to represent the interests of the principals, or openly acknowledge these conflicts to all affected parties. We would not want a negotiator who represents us to have a conflict of interest that would bias the settlement against us. By the universality requirement above, we should not want a negotiator with an undisclosed conflict. 4. Objectivity characteristic: The negotiator must have a predisposition to consider all relevant information, including any new information, without any prior bias. Negotiations can be lengthy and complex, with new data brought to the table at any point. Negotiators must be sufficiently open-minded and flexible to adapt and to analyze any new information objectively. The latter two traits are those required to assure the pursuit of a moral community.

13

 See Rawls (1951).

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5. Noble nature: The negotiators must have the noble nature of voicing their reflective ethical reasoning among interested and affected parties. The negotiators must not be willing to negotiate for an unethical result. For example, the guidelines of the categorical imperative must not be violated. Without the noble nature being a characteristic of at least one of the negotiators, it is very possible to reach an agreement that violates the categorical imperative. This “nature” is therefore essential for the moral character of a negotiator. 6. Sympathy characteristic: The negotiators must have sympathy for the pain and misery of others. This trait of “sympathy” really goes along with #5. It might motivate the noble nature referred to above. It is, however, more Hume than Kant.14 Habermas (1999) argues that the Rawlsian requirements are deficient in that an additional requirement restricting the form of the deliberations must exist, namely all parties must be capable of and exhibit empathy for each other’s situation. This position, however, appears to possibly be so strong as to eliminate any circumstance when fair rules would apply. The author is not this pessimistic in that managers and stakeholders might still be able to haggle towards sufficient fairness under the first five posed rules while exhibiting empathy. Nevertheless, this sixth rule is listed here as possibly useful or perhaps necessary. In addition to these prior characteristics, managers must initiate the negotiations with the pursuit of objectives that are ethically appropriate for shareholders and all other stakeholders. These objectives of fair negotiations are explored next.

2.2

Objectives of Fair Negotiation

The objective of fair negotiations should be to reach a stable agreement (defined here) from which all affected parties expect to benefit. Definition of Stable Agreement: A stable agreement is one that all parties accept and that exhibits Pareto optimality. It persists until the relevant information and/or circumstances change.

A Pareto optimal solution is one for which any further bargained movements leave at least one party worse off. To assure this, the negotiators should have the characteristics reviewed above. They must also follow certain procedures that facilitate an unbiased result as reviewed below. They must also have all affected parties represented in the negotiations. The idea is to ultimately reach a Pareto optimal solution that leaves all affected satisfied that they benefitted by negotiating.  The Scottish philosopher David Hume (1711–1776) emphasized the effects of emotion (sympathy for the suffering of others) on ethical behavior. This is not a Kantian position where only reason should prevail, not emotion as a manipulator of reason. See Broaskes (1995, pp. 377–381).

14

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Generally, there is a myriad of negotiated solutions that fit Pareto optimality where all parties benefit as compared to their initial positions.15 Therefore, it is a matter of “who benefits the most” that is of concern.16 The exact final result is achieved through the relative bargaining abilities of the parties involved. This is an important concept since in this sense, the rules listed below could be followed and there still could be a relative winner and loser with one party getting more of the division than the other, but as compared to their original position from where bargaining began, both negotiating parties must benefit. To achieve any Pareto optimal position that is acceptable to the parties, three necessary conditions must be met: • there is no informational access disadvantage for any of the parties, • there is no clear deception on the part of any negotiators, • none of the negotiators exercise coercive power over the others. These necessary, but not sufficient, conditions are contained in the suggested rules presented in the next section. Their relevance and applicability for stakeholder negotiations, particularly market-based negotiations, is of paramount importance for stakeholder theory.

2.3

Seven Posed Rules of Fair Negotiations

To establish rules of fair negotiations we can borrow some concepts from Rawls (1958, 2001). A system for these negotiations should involve. • competent moral judges (defined above) who deliberate from freedom, equality, and rationality, • reasonableness in that the negotiations would lead to similar results under similar circumstances involving other competent moral judges, • negotiators who engage in sufficiently sociable conduct to reach a “reasonable” result. (A definition of “reasonable” as used here is presented below.) These rules ultimately require institutionalization in that they become standards for the various market-based negotiations and the face-to-face manager-to-­ stakeholder negotiations. The objective is to reach “stable agreements” that are expected to benefit all the involved constituents. This expresses the notion of “reasonable” as it is used here. This section suggests seven rules of fair negotiation as derived from the three points presented immediately above. Their applicability to stakeholder negotiations,  See the Edgeworth Box utility-maximization analysis in Henderson and Quandt (1958, p. 204), Ferguson (1972, pp. 467–473), and Maurice and Owen 1982, pp. 548–555). See also www.policonomics.com/edgworth-box/ and also www.digitaleconomist.org/ex_4010.html 16  This is illustrated by the Edgeworth analysis referred to in footnote 15. 15

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especially market-based negotiations, are reviewed where the complexities resulting from factors such as the “power to negotiate,” and the “inclusion of all affected parties” are addressed. 1. There is no deception involved in the negotiation. It is clear that the rule prohibiting “deception” is required of Kant’s formula 2 of the categorical imperative.17 Deception is essentially a lying promise which is one of the five maxims Kant offered (1785, 4: 421–423) as examples. Deception may be a “bait and switch scheme,” or a purposeful reneging on the agreement to trade. In any case, it certainly violates Kantian moral maxims. It therefore must form one of the rules of fairness. It poses a perfect duty. 2. The counter parties are not disadvantaged due to any inequality of information access. Rawls (1958, 2001) terms this rule “the publicity requirement.” The rule for equality of information access is theoretically essential for fair negotiations, but this rule is often especially difficult to meet in practice. Even if all negotiating parties have equal access to the same information, some might still interpret the information in a biased manner. The rule, if followed, can only assure equal access, not equal use. We can say, however, that this rule is necessitated by the universality requirement of the categorical imperative. No individual would willingly accept an information disadvantage in negotiation. They therefore must accept a moral maxim that all be equal in access to relevant information. This rule is obviously also required by the formula for the respect for the dignity of others. We cannot keep to this formula while knowingly having important information that our negotiating counterparty does not have access to. Also, those who are serious in their motivation of pursuit of the moral community will reason that this pursuit is not facilitated by negotiations that begin with an unlevel informational access playing field. A stable Pareto optimal equilibrium is not likely to be reached without this rule since the party without access is likely to believe they are cheated by the result. This rule appears at first to be a perfect duty, but situations might require limits when denial of information access is required for other ethical reasons. There may be situations when imperfect duty is required to offset these unavoidable consequences. These situations are addressed in the section below titled, “Compensation Criteria When Violations of Rules are Unavoidable.” 3. The counter parties are equal in power to negotiate so that no coercion is possible. Power is the ability to control outcomes. With respect to negotiation, the only ethical outcome worthy of managerial power is fairness. Coercion in negotiation must be avoided given our fairness concept. 17

 See Chapter 3: “The Categorical Imperative Process and Moral Duties”.

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There is a perfect duty to avoid coercion, but some perceptions of coercive possibilities may be present for which negotiators have an imperfect duty to dispel. For example, consider negotiations between parties 1 and 2, and allow them to negotiate over the distributions of good A.  Party 2, however, perceives that party 1 could deprive him of another good B depending upon the results of the negotiation, yet good B is not explicitly being negotiated, and party 1 would not use good B in this way. These two parties are therefore not equal to negotiate assuming good B is valued by party 2. Party 1 has an imperfect duty to dispel party 2’s misperceptions. This is an imperfect duty because there are practical limits to party 1’s efforts. For another more precise example, consider the case of the employee who has considerable years of employment some company. Allow the employee to have one more year until retirement. If the employee is fired before retirement, however, then all retirement benefits are lost. Can that employee negotiate effectively over his/her work schedule? Not unless the employee is assured of no undue threat (above the norm for this work) of being fired. To be equal in negotiation, management would need to assure the employee that there is, and there will continue to be, no coercion used. The employee must be assured that within any constraints established (constraints such as “you must work 40 hours per week, and as with all other employees, some hours must be worked at night, or on weekends, etc.”), they will be treated fairly in comparison with other workers within a clearly established seniority system. In stakeholder negotiations, sensitivity to not using coercive power is a requirement of management. Managers might actually have coercive power, or just be perceived as having this power. In either case, a fair outcome may not result. To be fair, all negotiating parties who do have coercive power must assure their counter parties that this power will not be used. This is an imperfect duty. More will be expressed about this below where issues of countervailing power are addressed. 4. The counter parties are free to negotiate; there are no legal or other encumbrances on their authority to bargain and reach an agreement. All parties must be aware of any legal restrictions on other negotiators. The negotiator cannot negotiate away property rights or compensations that are not fully owned or controlled. It might be argued that such a situation could be subsumed under requirements 1 and 2. This appears to pose a perfect duty, but in some complex situations of legalities, a “prudent person” rule might apply involving an imperfect duty “to explore” if there actually are any encumbrances. 5. Every party that is affected by the negotiation is equally represented in the negotiation. There are no externalities resulting from the agreement. This fifth rule should stand alone although it is related to the fourth rule. It is certainly not fair that two parties negotiate a negative externality imposed on a third party such as “Let you and I agree to dump our garbage on the property of our neighbor.” At least, we cannot negotiate this without the neighbor fully participating in the negotiation and be compensated accordingly. All parties affected must have

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the opportunity to participate equally in the negotiation. Without this rule, we could hardly state that any of the three formulae of the categorical imperative would be followed. This might be a difficult requirement to meet with market-based negotiations since the negotiating parties might not have a reasonable basis to know of the existence of some affected third party. The notion of “reasonable basis” is an important concept here. When the requirement is inadvertently violated, perhaps ex post compensation is warranted, and this would itself be subject to additional negotiation. Such a situation is addressed below. Other than the situations of assuring the “reasonable basis” (an imperfect duty), this requirement poses a perfect duty. 6. The counter parties communicate and explore various options for negotiations. Negotiators need to communicate possible Pareto movements (bargained outcomes that move towards Pareto optimality) in order to actually reach an agreement. Rawls (1958, 2001) requires this under the umbrella of being “reasonable and rational.” This actually follows, however, from the logic requirement for negotiations. Logic dictates that the negotiators communicate various possible solutions. This requirement, however, also eliminates laziness on the part of negotiators, i.e., they could be logical but lazy, and as a result of this laziness, no Pareto movement occurs although some are possible, but not discovered because of the lazy efforts of the negotiators. This requirement poses an imperfect duty since it is one of “how much effort to expend” to discover Pareto movements. It is important to realize that these six rules of fairness do not assure that Pareto movements occur. A typical problem occurs when one or both of the counter parties stick to preconceived notions of a fair-terms of trade (the price of one good or service in terms of the other), but the preconceived notion would not yield a Pareto movement. Consider a man walking through a farmers’ market looking to purchase an apple. This shopper might have preconceived notions as to a fair price for the apple, and this price is based upon previous purchases over previous days. Either the demand or the supply, or both, however, have changed, and the market-clearing price has risen. If the shopper has sufficient time to explore among the various dealers, he may be able to reform his notion of what a fair price is, and perhaps be able to make a deal with one of the merchants, but this involves time and effort, or using different phraseology, transaction costs in terms of time. These costs can prevent a Pareto movement in that without the preconceived notion of the mistaken price, the shopper may be willing to purchase at the higher market-clearing price, and still consider himself better off.18 Consider, however, another sort of negotiation, one involving a union agent and a management agent representing the firm’s owners. Both begin with mistaken ideas about other wage settlements that are widely divergent. Given time and effort, they could explore previous and recent wage settlements, and perhaps reach some notion  This can be considered a violation of rule #2, but it is important to fully consider the consequences of this problem in terms of the transactions costs involved as in rule #7.

18

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as to an agreeable wage. Fairness demands that these agents explore this information even though transactions costs involving the time spent and perhaps other resources, could be involved. Transaction costs can inhibit a wide variety of useful bargaining. For this reason, we should consider a seventh rule of fairness.  7. The negotiating parties must not impose unnecessary transactions costs as a bargaining tool for the purpose of obtaining coercive power. One can argue that this rule is redundant in that the combination of the first six rules implicitly contains the seventh. It is important, however, to indicate the importance of transactions costs for inhibiting Pareto movements, and so it is perhaps worthwhile to isolate this rule. A negotiator can try for advantage by delaying the negotiations, or in various ways make the negotiations uncomfortable. The belief is that by perpetrating these delays and inconveniences, the counter party is worn down, and is willing to accept less advantageous terms. Fair negotiations, however, require that all counter parties attempt to limit and reduce the transactions costs associated with the negotiations, and do so for all parties. This rule poses a perfect duty. In fact, negotiations can be very complex and occur in lengthy stages. The first stage is often over the conditions utilized for latter stages. It is at this initial stage that negotiators are required to help facilitate a low transactions cost Pareto movement. An example of transactions costs being exploited to obtain unfair advantage are frequently observed in legal tort suits. Lawyers often demand very lengthy depositions that are cumbersome and expensive in time and legal fees, and that are primarily just expensive delaying tactics. These tactics are really adversarial in nature, and are not aimed at having both parties better off, but rather at having one party win while the other loses. For these legal cases, transactions costs are used as a weapon, and violate the rules of fair negotiations except we should realize that these rules of fairness are not meant to apply to adversarial proceedings. We might, however, explore applying some rules of fairness to the system of legal adversarial proceedings, but that is not examined here.

3

 efinitions of Fair Agreement and Extent D of Negotiations

There are two important and useful concepts for this analysis addressed here. Consider two these questions: 1. Once negotiations have begun, if the rules of fairness are maintained, must any bargaining agreement result in a Pareto move? 2. If negotiations continue under the rules of fairness, will a Pareto optimal position eventually be reached?

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It has been argued so far that the answer to both these questions is “yes!” This is one of the purposes of this exploration of the fairness issue: fairness facilitates both the continuance of negotiations and the ultimate achievement of a Pareto optimal position. Such a position, where all parties are better off and no additional bargaining would be beneficial to each, promotes a continuance of harmony and stability (defined above). As a result, the following definition is useful: Definition of fair agreement: A fair agreement is one agreed to by all affected parties, and that has been reached according to the rules of fair negotiations.

It might be argued that the negotiating parties could start with some initial position, meet all rules of fair negotiations, and move to some position that is not strictly a Pareto move, one that leaves only one person better off, but the other no worse off. One must ask the question, however, “Why would the person who is not better off agree to the move?” Was coercion involved, or some other violation of fairness? Perhaps some other side agreement was reached that left the apparent no-better-off negotiator actually better off? This is a particular problem that involves what is termed the extent of the negotiation, and is explored here. The answer to both questions, however, must be “It is not possible!” If the rules of fairness are followed, then all parties will inevitably be better off, and therefore harmony must be facilitated assuming all understand what exactly is being settled. We mean by this that if stakeholders, internal and external, have an a priori disposition to pursue Kantian harmony, then following the rules of fairness, they should inevitably be left better off as a result of the negotiations. They will therefore not be left frustrated. Their disposition to pursue harmony should result in a stable agreement. The following definition concerning the extent of the negotiation is therefore relevant and applicable. As indicated above, negotiations are often multi-dimensional. Rather than simple negotiations over goods A and B, they may also be over C, D, and E, all simultaneously to be settled. For the purpose of avoiding misunderstanding and consequent frustration, it is therefore useful for us to define the range of goods subject to the negotiations. Definition of extent: The extent of the negotiations consists of both the positive and negative goods to be distributed by the negotiated agreement. (A “negative good” is one that is undesirable; a “positive good” is one that the negotiators desire.)

A principle problem occurs if there is no clear understanding as to this extent of the negotiations prior to reaching the agreement. This is a problem that frequently occurs; one that can lead to considerable frustration and anger, and therefore an unstable agreement. The problem has considerable potential to disrupt the organization’s harmony. To clearly understand this problem, we use the employment negotiation example referred to above. In this example, a manager negotiates with an employee over the hours of employment. The manager understands the negotiation to be narrow in that it only concerns the hours of employment. The employee mistakenly believes,

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however, that a willingness to accept difficult hours improves his possibilities for promotion. The manager does not make it clear that the hours negotiated will have no impact on the employee’s potential for promotion. The negotiations continue for some years until the employee erupts in anger due to frustration over not being promoted, all because the manager did not make the extent of the negotiations clear. Any sort of harmonious cooperation from the employee is now difficult to achieve, or to even expect. The employee feels cheated, and is not likely to subsequently concern himself with the moral maxims management preaches. He sees management as hypocritical. Market-based negotiations, such as with employees seeking initial hiring, or suppliers seeking initial contracts, are typical examples. One side of the implicit negotiations expect more favorable arrangements once the initial contract is reached (future advancement opportunities, or additional contracts after the original). Explicitness in the initial negotiation contacts can, perhaps, avoid stakeholder frustration.

3.1

Negotiating the Special Case of Risk

One of the special and important situations we should consider for fair negotiations concerns the question of who bears certain types of risk. These risk negotiations are sufficiently important to warrant separate indication and consideration as examined here. They indicate the importance and complexities of stakeholder negotiations. By this, we mean negotiation between shareholders, as represented by their management agents, and other stakeholders. Each group desires a guaranteed result, i.e. guaranteed employment, guaranteed long-term supplier contracts, fully warranted customer products without expiration, etc. In fact, all non-owner stakeholders in one way or another negotiate with owners over risk. Some of these negotiations consist of the following: 1. Consumers negotiate product safety and reliability issues. This is usually an implicit market-based negotiation. For example, consider the purchase of an automobile, either new or used. The consumer often negotiates over price and add-on amenities such as rust-proof coating, electronic equipment, paint color, etc. Warranty and service reliability issues are also subject to the negotiated package. The consumer’s objective is to negotiate a reduced risk of his or her expenditures on future service. The owner’s agent negotiates over the same issue. The price (income or wealth transfers) and associated terms are the negotiated instruments. 2. Debt holders negotiate indenture and default terms. Borrowing funds is usually associated with complex legal agreements (the bond’s “indenture agreements”) that specify the recourse provisions in case of

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default (the “priority of claims”), and also various provisions that the bond holders require in order to limit the probability of default. (These bond indentures were reviewed in Chapter “Due Diligence and the Profit Motive: Perfect or Imperfect Duty?”.) The more restrictive these terms, the higher the price the market will pay for the bonds, i.e. the lower the interest rate the borrower must pledge to pay. These “bond indentures,” however, restrict the actions of management so that it is more difficult to pursue various opportunities. There is uncertainty associated with both the possible future opportunities that the firm may have to leave unexplored in order to maintain the indenture provisions, and also with the possibilities of financial distress (default). The negotiation is therefore over the division of risk-of-default between the borrower and the lender. These negotiations are especially important with respect to the default risk of subsidiaries who are legal creations designed to bear risks independent of the parent. These risks may differ in nature (the potential cause of a default), and/or the probability distribution for default born by the parent entity. The parent typically “expresses an interest” in assuring that the subsidiary pays in full and on time, but makes no explicit legal pledge to bear this liability. To be fair and transparent, this limited obligation must be explicitly declared.19 3. Community interests negotiate employment externality issues. Local governments often seek potential employers to move to their area. They negotiate by offering tax-break incentives for the promise of a certain level of employment. The amount of employment is often not entirely contractual in that there is some range of employment specified. Also, along with the tax breaks, the community often demands restrictions on externalities such as noise or perhaps the water pollution allowed. There is, however, always uncertainty as to the final outcome for employment and pollution, and hence there is risk for both sides. A guaranteed minimum employment-level in case the product market declines results in an income or wealth loss for the owners. Granting tax breaks when employment is not as high as expected, or pollution is higher than expected, means a wealth and welfare loss for the community. In a manner similar to negotiations over default risks and recourse provisions with debt indentures, the risk provisions for community agreements are seldom tight. Both community stakeholders and shareholders therefore bear risk. 4. Employees negotiate employment guarantees. As with the case above, union negotiations often concern guarantees for employment versus the wage rate. The commitments for employment are often conditional in that they specify who is to be laid-off first in case of distress. Both parties bear uncertainty. If the product market declines, the owners must uphold their 19

 See Robinson et al. (1991).

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commitments and therefore they suffer wealth losses that are greater than if no commitment is made. The employees try to lower the risk of layoffs, but in return, they must make wage concessions, i.e. they give up income for greater certainty of employment. The owners have similar opposite tradeoffs. It is natural for owners to want others to bear their business risk, while other stakeholders want the owners to bear the risk. Wealth and income transfers are generally the negotiating instrument in that the shareholders communicating through its management negotiators that then are often willing to give up some wealth or income in return for the other stakeholders bearing more risk. The income transfers might be in the form of higher salaries for employees, higher tax payments for community interests, higher rates of return for debt holders, etc., but these stakeholders must then bear some of the business-related risk. In negotiated agreements concerning who bears the risks, the ex post results will appear to indicate that someone losses and someone wins, but like insurance contracts, these agreements can a priori benefit all in an ongoing sense. If the disaster occurs, the insurance appears to benefit the one insured, but elimination of ongoing risk is beneficial even when disaster does not occur. If it were otherwise, then one would not enter the insurance contract. All can benefit from stable freely-negotiated agreements that settle the bearing of risk in exchange for some version of compensation.

4

Violations of Rules and Compensation

As reviewed in detail above, fairness requires an attempt to leave both parties better off as a result of the negotiations as compared to no negotiations. Conducting fair negotiations with multiple counter parties, however, can be problematic when interests within one of the negotiating groups are divergent. How can one assure that a minority will not be hurt while the majority is better off?

4.1

Negotiations with Multiple Counter Parties

For example, consider the case of a manager negotiating with a union of employees. The negotiations might be over the wage versus benefits package. It is easy to claim that the problem is eliminated through an “a la carte” package-offer where employees select their optimal package, but benefit packages seldom are sufficiently flexible to benefit all. Often only two or perhaps three packages can be offered. The union employees may be segmented in interests due to age, gender, or other characteristics, while each segment has different preferences. It is certainly possible that one segment could actually be hurt by the new settlement that is agreed to by majority vote. For a possible example, consider the situation of childless older or single employees appearing to subsidize the insurance premiums for those employees with children.

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With group negotiations, we can revert to Rawlsian analysis to explore issues of representation within the group, i.e. are group members being coerced by other group members? Is information equally assessable to all? Are decision and voting rights equal within the group? To the extent that management has any influence over these, or other fairness issues involving the group dynamics of the counterparty, management should attempt to ameliorate these fairness issues, not by forceful decree, but by negotiation. It is often the case, however, that management has no such influence. It is important to remember that Kantian harmony within the counterparty group is likely to be in the long-term interests of the shareholders. It can be short-sighted indeed to try to exploit counter-party group dynamics in such a way as to prevent each group member from being better off. Why would this be the case? The answer is that conflict is likely to lead to disharmony and inefficiencies within the organization. Hahn (2004) and Bosse et al., (2008a, 2008b) indicate reciprocal attacks on the efficiency of the firm when unfairness is perceived. Such settlements are therefore not stable. These issues often involve the development of what we term countervailing power. Power abhors a vacuum, and this is especially true when negotiating power positions. Counter parties who perceive themselves as weak will certainly be dissatisfied with the outcome of any negotiations. Disharmony results when stakeholders are less likely to contribute to firm performance, but rather they might attempt to frustrate firm efficiency as a psychological reaction to believing they are weak. Even if the counter party does negotiate a position that leaves them better off, the belief that they are weak is likely to solicit a response that they could have done better. This frustration manifests a desire to seek some sort of “power leverage,” either by banding with other counter parties, or by seeking some strong position prior to negotiation that management must respect. To obtain a team-like atmosphere where counter parties believe they have an interest in seeing the success of the negotiation and the firm, counter parties need a sense of power and ownership in the firm. To the extent that this power and ownership facilitates cooperation and therefore the interests of the shareholders, then it is obvious that management should not resist this development of countervailing power. As an example of this, consider negotiation with a community over possible tax breaks, transportation roads, or other amenities beneficial to the firm. Perhaps the firm has considerable leverage over this community in that if the firm withdraws its facilities, the community would be severely hurt. Management negotiators, however, must keep in mind the political power the community might have in the future. Using its current political power in current negotiations could lead to a disgruntled community that manifests disharmony, and attempts to build a political consensus in the community - a countervailing power - to hurt the firm in the future. A management team that attempts to intuit and decree a solution of what it perceives as fairness need not ameliorate this disgruntlement. Allowing the community to at least act as though they have power in negotiation, or perhaps allowing the community to develop countervailing power so they can more properly represent their

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longer-term interests, is more likely to lead to an harmonious and therefore stable agreement. It is easy to perceive that this could be in the interests of the shareholders as well as other stakeholders. Another example considers the pre-packaged bankruptcy problem. Modern bankruptcy is frequently pre-packaged in that lawyers negotiate with debt holders prior to a legal filing in bankruptcy court. The negotiations are over debt reductions, changes in indentures, changes in the debt to equity ratios, and the like. (Debt ratios were addressed in Chapter 9: “Due Diligence and the Profit Motive: Perfect or Imperfect Duty?”.) The firm’s legal representation generally argues that a pre-­ packaged agreement is in the wealth interests of all parties in that a lengthy court proceeding would erode the value of the firm’s assets, and therefore the value debt holders would eventually receive. Given these negotiating tactics, an agreement is often reached before the legal bankruptcy filing; bankruptcy is then legally filed; the agreement is court approved; and the legal proceeding is quick. Frequently, all (or at least almost all) negotiating parties do benefit as compared to enduring a lengthy court proceeding. The prepackaged negotiating does allow a degree of power over otherwise holdouts who try to achieve a free rider benefit. A debt holder might decide that by being the last holdout to the agreement, or one of the last holdouts, she can achieve a better settlement than others who have already agreed. The pre-packaged negotiations, however, generally achieve agreement amongst almost all parties. The court, then seeing that few disagree, approves, and all must accept the agreement as negotiated. The problem, of course, is that if the legal representation is overly vigorous in their power to negotiate the debt write-down, then the firm will suffer in the future when it reissues securities for sale. Investors will be wary about the firm’s securities in that investors fear the firm might again vigorously negotiate for a “prepackaged relief” from the original pre-bankruptcy stated terms. The firm should recognize the countervailing power of debt investors, that is that they may be coerced into a weak position now, but they may refuse to purchase the firm’s future issued securities. This recognition may well reflect the future shareholders’ and other stakeholders’ interests. One could easily develop other examples, perhaps union negotiation examples, or supplier negotiation examples, to further illustrate the dangers of management exercising temporary coercive power in these activities. Conducting all negotiations by following the rules of fairness can clearly assist management in multi-party negotiations. In this sense, Kant’s notion of achieving harmony, although we use this notion in the context of stakeholder relations rather than society overall, may be in the interests of all stakeholders including shareholders. There are, however, certain criteria for multi-party negotiations which can be used as aids for assuring that harmonious results are achieved. These criteria are borrowed from the theory of welfare economics.20 They are presented and explored next.

20

 See Henderson and Quandt (1958, p. 219) and www.policonomics.com/compensation-criteria/

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4.2

197

Criteria for Multi-Party Negotiations

Consider management negotiating with a multi-party group. Assume that a potential negotiated movement would apply to all in the multi-member group within which there are both winners and losers, and that there are no significant income or wealth disparities within this group. Under these circumstances, there are three criteria offered in the welfare economics literature that we can use for issues concerning the compensation of losers: 1. Kaldor criteria: If within the multi-member group, winners compensate losers sufficiently to make them better off so that as a consequence all within the group are better off, then this settlement is a Pareto move. 2. Hicks criteria: If within the multi-member group, the losers are willing to compensate the winners sufficiently to prevent the move, and as a consequence the losers would still be better off, then the settlement is not a Pareto move. 3. Scitovsky criteria: If winners must compensate losers sufficiently to leave them better off, but losers cannot compensate winners sufficiently to prevent the move, then both winners and losers are better off, and the settlement is therefore a Pareto move. To illustrate these criteria, consider management negotiating with an employee union. An agreement is proposed, but some union members would be worse off as a result of this proposed agreement while the majority would be better off. The union, however, is willing to shift a sufficient amount of dues to the losers so as to compensate them and leave them better off, and the amount of redistribution still leaves the majority better off with the proposed agreement. This illustrates Kaldor’s criterion. The proposed agreement represents a Pareto move. By Hick’s criterion, we must allow consideration of the losers in the union compensating the winners to prevent them from accepting the agreement. If the losers can compensate sufficiently (recall from above that there are no income or wealth disparities by assumption), then we cannot claim that the agreement serves the general interest of the union. By Scitovsky’s criterion, however, if the winners can compensate the losers sufficiently, and the losers cannot compensate the winners sufficiently to prevent the move, then the agreement is contracted, the winners compensate the losers (losers need not compensate the winners), and we are assured that all are better off. We can categorize the proposed agreement as a Pareto move. Whether or not compensation must actually be paid is a controversial issue in welfare economics. It is generally claimed that compensation need not actually be paid, but only that if it could be paid and be sufficient to leave all better off, then social welfare is enhanced. For our case of examination of fair negotiation, however, it should be apparent that compensation be paid in order to leave all parties better off. (This is a Kantian-type notion of “fairness” rather than a utilitarian notion.) This motivates a compensation rule of fair negotiations, one that applies only for multi-member group negotiations:

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 8. Compensation rule: Fair multi-member negotiations require that the Scitovsky criteria applies, and that winners compensate all losers sufficiently to have all members better off. If the rules of fair negotiation and compensation are maintained, then any negotiated move must be a Pareto move. Under the Scitovsky criteria, continuing negotiations should eventually lead to a Pareto optimal position.

5

Issue of Trust in Negotiations

Van Buren III (2001, p. 487) argues that the existence of power differentials necessitates stakeholder theory as we know it. Low-power stakeholders are those with limited ability to affect the firm. High-powered stakeholders can affect the firm in such a way that the firm would strongly desire to fulfill any agreement reached with them less it would suffer substantial consequences.21 The latter group of stakeholders need not worry about trusting the firm’s intentions. The former group needs to worry. Low-power stakeholders have a lack of choice and are more likely to be coerced into an agreement because of this lack of choice. Their consent is not entirely given freely due to this lack of choice.22 Low-power stakeholders must rely on “organizational trust.” Organizations have three characteristics that determine this trust23: • The organization must be perceived as having the ability to fulfill its agreements. • The organization must be perceived as having the intentions to fulfill its agreements. • The organization must be perceived as having a record of integrity in fulfilling their agreements so that its intentions are considered probable. These trust factors, therefore, affect the ability of the negotiating parties to reach fairly negotiated agreements. Because of the coercion issue, compensation criteria may apply to low-power stakeholders as reviewed below. Trust in negotiations is the basis for fair settlements. For example, parties are not likely to reasonably negotiate if they perceive that the rules of fairness are being violated. Agreements can only be Pareto and stable if based on trust. The rules can facilitate these agreements, but trust is the basis.

 See Mitchell, et al. (1997).  See Van Buren III (2001). 23  See Mayer, et al. (1995), and Bailey (2002), and Evan and Freeman (1988). 21 22

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5.1

199

 ompensation Criteria When Violation of Rules C is Unavoidable

Consider cases when some of the rules of fair negotiations are unavoidably violated. As an example, these situations might apply to rules #2 or #6, as repeated below: The counter parties are not disadvantaged due to any inequality of information access. The counter parties communicate and explore various options for negotiations.

These two rules, listed above, might be unavoidably violated. For example, consider the example of a company that desires an expansion in productive plant, but this expansion requires purchase of real estate as required for the new plant. The firm’s management is constrained from announcing this expansion because of competitive reasons, i.e., because it does not want its competitor firms to yet know of this planned expansion. An additional reason for temporary secrecy would be that if the firm is to purchase the necessary real estate parcels without a radical increase in price, it must do this quietly, one adjacent parcel at a time. To make this problem more realistic and interesting, also allow the real estate where the planned expansion is located to be depressed so that prices are very low. The real estate market does not realize that a change in usage from residential to industrial is likely. We note that this situation violates the equality of information rule, and also the rule concerning exploration and communication of various options. These rules are violated due to the rational economic need for secrecy. Knowing that the negotiations cannot be entirely fair, what can the management negotiators do? We argue that the answer lies in the Scitovsky criteria. For any agreement where the two rules of negotiations indicated above must be violated, the management negotiators must have a prior expectation that the following compensation rule will be met: Compensation rule for violation of rules of fairness: When the rules indicated above must be unavoidably violated, the fair agreement requires an expectation that ex post, compensation will be paid by those who benefit to those who lose. Only if both negotiating parties are expected to be better off after the compensation can the negotiation be deemed fair.

For the plant expansion example explored above, this compensation rule requires that management must form an expectation of the real estate prices if the expansion plan was known by all. Management must expect that it can and will be able to further compensate the real estate sellers once the expansion is completed, although this might only partly compensate as compared to what the price might be if the plant expansion were known. Of course, the expansion project must be judged as worthy even after the compensation is paid in order for the firm to proceed. With the necessary compensation, the real estate sellers will not believe they are cheated. The community interests will not feel frustrated, and a Kantian harmony can perhaps continue. Given that the purpose of the norm posed by the rules of fair negotiation is to discern unfairness and to suggest its consequences, this real estate example illustrates this objective.

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As effectively argued above, managerial pursuit of Kantian harmony through fair negotiations with stakeholders is clearly preferable to a subjectively established managerial decree aimed at stakeholder balance. A lack of harmony leads to the sort of frustration that disrupts cooperation among stakeholders, and this disruption is not likely to enhance any measure of firm performance. We must recognize, however, that there are instances when this pursuit is not possible. For example, there may be proprietary information relevant to the negotiations that management cannot share with counter parties. Also, management may be in an authoritative position over the counter party, and this is unavoidable. When these aberrations of the rules occur, management cannot act strictly in the interests of shareholders even though they are the agents of the shareholders. The obligation of management under these circumstances is to attempt to assure a Pareto movement, and perhaps achieve what they envision as a Pareto optimal solution, as though the rules were able to be followed. This final solution may be judged as unfair by some or all of the counter parties, but there is no other possible ethical action on the part of management but to try to reach this solution. Management can only hope that through time the solution will be eventually judged as fair after all the information is discovered. The compensation rule reviewed above may be necessary to assure these Pareto moves. There is also the situation when low-power stakeholders believe they have no choice but to accept an agreement. They might believe they are coerced into accepting the terms. To establish a stable equilibrium and to achieve a Pareto move, it might be necessary to offer terms that management would anticipate would be established under a more competitive circumstance, i.e. if there were more competitors for the services of the low-power stakeholders. This perhaps offsets the possible coercion. The compensation criteria applicable to this low-power stakeholder problem would be fair, and be sufficient to provide a Pareto move given management’s search for a stable agreement with constituents fully performing their obligations.

6

Fairness in Negotiation and Management Theory

In order to fully perceive the contribution of this theory of fair negotiations, we might ask, “Where does the concept of fairness in negotiation fit within the body of management theory?” The history of the last century’s various academic schools of management shows that prior to the stakeholder approach, each strain (or school) of thought primarily focused on matters of efficiency, but secondarily each school concerned either distributional or procedural fairness. These held an implicit assumption that the former (efficiency) might follow from the latter (procedural fairness).

6.1

Management Theory and Fairness?

With respect to the above question, Van Buren III (2008) reviews five mainstream approaches to management as they evolved over the last century: (i) scientific

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management, (ii) administrative management, (iii) bureaucratic theory, (iv) human relations theory, and (v) human resource theory. Each of these schools offers insights into aspects of fairness that are relevant for the negotiation issues of concern here. Each is briefly reviewed below for this relevance. Scientific management focused on increases in efficiency. The benefits of increased efficiency were envisioned to be partly used as incentives for factor inputs to become more efficient. This concerned distributional fairness, but not procedural fairness in that the distribution was theorized as left entirely to management’s paternalistic discretion. Scientific management did not address stakeholder input to the management process, nor the stakeholder concerns of suppliers, customers, or community interests.24 Administration theory proposes that employees need and want to be managed. The theory is essentially paternalistic. Bureaucratic theory, however, emphasized procedural fairness through impersonal rules.25 Distributional fairness is assumed to follow from these impersonal procedures, but employee input to management is also not addressed in this theory. Human relations theory emphasizes that employees organize into informal groups to influence the firm’s structures and task assignments. This theory’s view is that paternalistic management of these groups is necessary, but it does not provide an input process from employees to managerial decisions. Human resource theory emphasizes management of the individual with institutionalized compensation structures. Neither human resource nor human relations theories provides structures for employee input to the management process.26

6.2

The Fair Negotiation Contribution

Each of these five schools of management thought has a missing element – a lack of attention to customers, suppliers, and community interests. This is addressed through stakeholder theory.27 The theory of fair negotiations provided above, however, provides procedural justice to stakeholder relations; it addresses the issue of distributive justice through a fair-market process with remedies for violations of this process; it solicits stakeholder input on the non-management side of the negotiations; and it allows for discretion on management’s side of the negotiations. It recognizes and demands autonomy for all stakeholders. It is based on the ethical maxims derived from the categorical imperative process. It therefore provides clarity to the flaws contained in the management theories reviewed in this section. Rawls (1951, 1980) used Kant’s categorical imperative process to derive the conditions under which a negotiated social contract could be said to be fair and therefore just. This demonstrated that the Kantian categorical imperative process theoretically provides fairness with respect to social processes. It facilitates an  See Van Buren III (2008, pp. 634–635).  See Blau (1955 and 1956), and Crozier (1964), Merton, et al. (1952), and Weber (1947). 26  Van Buren III (2008, pp. 635–639). 27  Ibid (pp. 639–642), and Phillips (2003) 24 25

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understanding of where and when violations of fairness occur with respect to this processe. This is how the proposed set of Kantian rules of fair negotiation is used in the context of stakeholder theory. Because management is usually bonded to the interests of shareholders, it bears a conflict-of-interest. Therefore, management cannot paternalistically decree its notion of a stakeholder balance solution for the distribution of the firm’s proceeds or other concerns, and still have stakeholders in general consider this decree as fair or ethical. Even without a conflict of interest, a management decree without an open process of input would be considered paternalistic and unfair. The fair and moral solution is for management to negotiate with stakeholders in an open, non-coercive, non-deceptive way. The set of rules of fair negotiations reviewed in this article is designed to pose a clear norm that facilitates an understanding of what an ethical stakeholder-balance solution might be. Fair negotiation avoids the paternalism of managerial decrees however moral management’s intentions might be. The suggested rules for fair negotiation also provide clarity as to when unfairness occurs. When violations of the rules must occur due to the ethical requirements for secrecy, or in negotiations with low-power stakeholders, or other problems, the rules suggest the possibility for fair solutions involving either compensation, or when absolutely necessary, managerial decreed solutions governed by the expectations of what would have occurred if the rules did not otherwise need to be violated. This chapter therefore poses a potential ethical solution to the “stakeholder balance conundrum,” i.e. where management paternalistically decrees a distribution of proceeds, opportunities, or other benefits. It is Kantian in that it envisions preservation of the negotiating autonomy of the various stakeholder constituents. It envisions management and stakeholders as negotiating even in the context of market-based processes. It furthermore provides clarity as to what unfair negotiations might be. It therefore poses a needed contribution to the stakeholder theoretical and ethical-normative literature. Review Questions 1. What are the aims of fairness in negotiations? 2. What is a “Pareto agreement,” and what is a “Pareto optimal agreement?” Will the seven rules result in the latter? 3. What are the problems associated with “the extent of the agreement?” What might the consequences of “extent problems” be for stability? Advanced Questions for Class Discussion and/or Essays 1. Why might stability and harmony be important to management? 2. Fully explain two of the “special cases of risky negotiations” as reviewed in this chapter? 3. What is the fundamental ethical problem with stakeholder balance theory? (Your answer should focus on “paternalism” and its Kantian problems.)

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4. Fainaru-Wada and Fainaru (2013) document the NFL’s deceptions concerning brain injuries among NFL players. What violations of fairness in negotiations are documented in this book, or alternatively in the 2013 Frontline documentary “League of Denial?” (Note that this documentary can be found on the internet.)

References Bailey, T. 2002. On Trust and Philosophy. In Philosophy of Trust, ed. B.B.  Ci. London: Open University. Blau, P.M. 1955. The dynamics of bureaucracy: a study of interpersonal relations in two government agencies. Chicago: University of Chicago Press. ———. 1956. Bureaucracy in Modern Society. New York: Random House. Bosse, D.A., R.A.  Phillips, and J.S.  Harrison. 2008a. Creating Value by Giving it Away: The Influence of Reciprocation on Firm Performance. In Proceedings of the Annual Meeting of the Academy of Management, 1–6. ———. 2008b. Stakeholders, Reciprocity, and Firm Performance. Strategic Management Journal 30: 447–456. Broakes, Justin, 1995. “David Hume.” In The Oxford Companion to Philosophy. edited by Ted Honderich. New York: Oxford University Press. Crozier, M. 1964. The Bureaucratic Phenomenon. Chicago: University of Chicago Press. Clarkson, M. 1995. A Stakeholder Framework for Analyzing and Evaluating Corporate Social Performance. Academy of Management Review 20: 92–117. Donaldson, T., and L.  Preston. 1995. The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications. Academy of Management Review 20 (1): 65–91. Evan, W., and R.E. Freeman. 1988. 1993. Stakeholder theory of the modern corporation: Kantian capitalism. In Ethical Theory and Business, ed. T. Beauchamp and N. Bowie, 75–93. Englewood Cliffs: Prentice Hall. Fainaru-Wada, Mark, and Steve Fainaru. 2013. League of Denial. New York: Crown Archtype. Ferguson, C.E. 1972. In Microeconomic Theory, ed. D. Richard, 3rd ed. Homewood: Irwin. Freeman, R.E. 1984. Strategic Management: A Stakeholder Approach. Boston: Pitman. ———. 2002. Stakeholder theory of the modern corporation. In Ethical Issues in Business, ed. T. Donaldson et al., 7th ed., 44. Upper Saddle River: Prentice Hall. ———. 2010. Stakeholder Theory: The State of the Art. Cambridge: Cambridge University Press. Greenwood, M. 2007. Stakeholder engagement beyond the Myth of corporate responsibility. Journal of Business Ethics 74 (4): 315–327. Hahn, T. 2004. why and when companies contribute to societal goals: the effect of reciprocal stakeholder behavior. In Proceedings of the Annual Meetings of the Academy of Management, D1–D6. Hasnas, John. 2013. Whither Stakeholder Theory? A Guide for the Perplexed Revisited. Journal of Business Ethics 112: 47–57. Hayibor, Sefa. 2017. Is Fair Treatment Enough? Augmenting the Fairness-Based Perspective on Stakeholder Behavior. Journal of Business Ethics 140: 43–64. Henderson, James M., and Richard E.  Quandt. 1958. Microeconomic Theory: A Mathematical Approach. New York: McGraw-Hill. Kant, Immanuel. 1784b. Idea for a Universal History with Cosmopolitan Intent, in Basic Writings of Kant, edited by Allen W. In Wood, Modern Library Classics (2001). New York: Random House Inc. ———. 1785. In Fundamental Principles of the Metaphysics of Morals, in Basic Writings of Kant, ed. Allen W. Wood. New York: The Modern Library Classics, The Modern Library. ———. 1797. In The Metaphysics of Morals, ed. Mary Gregor. Cambridge: Cambridge University Press.

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Maurice, S. Charles, Owen R. Phillips, and C.E. Ferguson. 1982. In Economic Analysis: Theory and Application, ed. D. Richard, 3rd ed. Homewood: Irwin. Mayer, R.C., J.H.  Davis, and F.D.  Schoorman. 1995. An Integration Model of Organizational Trust. Academy of Management Review 20 (3): 709–734. Merton, R.K., et al. 1952. Reader in Bureaucracy. Glencoe: Free Press. Mitchell, R.K., B.R. Agle, and D.J. Wood. 1997. Towards a theory of stakeholder identification and salience: defining the principle of who and what really counts. Academy of Management Review 22 (4): 853–886. O’Neill, Onora. 1995. Constructions of reason: explorations of Kant’s practical philosophy. New York: Cambridge University Press. Phillips, R. 2003. Stakeholder Theory and Organizational Ethics. San Francisco: Berrett-Koehler. Phillips, R.A., R.E.  Freeman, and A.C.  Wicks. 2003. What Stakeholder theory is not. Business Ethics Quarterly 13 (4): 479–502. Rawls, John. 1951. Outline of A Decision Procedure for Ethics. Philosophical Review 60 (2): 177–197. Reprinted in Collected Papers - John Rawls, edited by Samuel Freeman, Harvard University Press, 1999. ———. 1958. Justice as Fairness. Philosophical Review 64 (1, January): 3–32. Reprinted in Collected Papers - John Rawls, edited by Samuel Freeman, Harvard University Press, 1999. ———. 1980. Kantian Constructivism in Moral Theory. Journal of Philosophy 77 (September): 515–572. Reprinted in Collected Papers - John Rawls, edited by Samuel Freeman, Harvard University Press, 1999. ———. 2001. Justice as Fairness: A Restatement. London: The Belknap Press of Harvard University Press. Robinson, R., R.  Shelor, and P.  Medury. 1991. Can publishing Consolidated Only Statements Obscure Debt Responsibility? A study of Financial Reporting Changes. Journal of Financial and Strategic Decisions 4 (3). Sullivan, Roger. 1997. An introduction to Kant’s ethics. Cambridge: Cambridge University Press. Van Buren, H.J., III. 2001. If Fairness Is The Problem, Is Consent the Solution? Integrating ISCT and Stakeholder Theory. Business Ethics Quarterly 11 (3): 481–499. ———. 2008. Fairness and the Main Management Theories of the Twentieth Century: A Historical Review, 1900-1965. Journal of Business Ethics 82: 633–644. Weber, M. 1947. The Theory of Social and Economic Organization. Glencoe: Free Press.

Advanced Reading in “Fair Negotiations” Fainaru-Wada and Fainaru (2013) provides an in-depth case analysis of the National Football Leagues’ (NFL’s) negotiations with its players’ union concerning their players’ brain injuries and their lasting effects. The problems of deception are well documented. The material of this chapter, and also Chapter “Due Diligence and the Profit Motive: Perfect or Imperfect Duty?”, can be used for reviewing this case history.

Chapter 11: The Philosophy of Action and Authority in the Entrepreneurial and Management Ethics

1

Introduction: Philosophical Foundations

The philosophical foundations for public action, political freedom, and the exercise of public authority, are all relevant for explaining the proper role of the entrepreneur and the manager in Western society. It is argued here that entrepreneurship and business management are key components of modern public action, components that have commonalities but also important conceptual differences. Both are political conceptions that have some exploration in political philosophy as reviewed here. In particular, the 20th century philosopher Hanna Arendt especially explored these political concepts in The Human Condition (1958), Labor, Work, Action (1964), and Between Past and Future (1960). Although Arendt’s exploration does not explore these problems within the context of modern business, it is shown here that her explorations provide insights into modern entrepreneurial and management motivations.1 To initiate this examination, we should first briefly explore the basic notions of power and authority as reviewed by Weber (1947) and Arendt (1958, 1960 and 1964). In this context, authority is a sort of attained position of public recognition that is capable of expressing an expertise because of this attainment. This expertise concept is captured when we say, “He speaks with authority!” For example, it is the expertise of a medical authority, or of a recognized university professor who speaks on her subject. Power, however, means the ability to affect outcomes; it may be necessary for the exercise of effective authority. It is possible, but not always the case, that the recognized expert may have the power to affect the world through her authoritative expertise. But to achieve a popular consensus that this authority-­power  In addition, Arendt’s explorations are relevant for explaining how evil can penetrate this motivation, as particularly explored in Eichman in Jerusalem (Arendt 1963), and in Responsibility and Judgment (Arendt 2003). See Robinson (2012) for a review of Arendt’s, and other contributions into the development of evil in organizations. 1

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_11

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combination is socially acceptable, it must be legitimized by a social-­philosophical foundation that justifies its source of this power, and then be established by properly established rules that meet with popular approval. The point is that without a popular acceptance of this philosophical foundation, this exercise of authoritative expertise becomes socially unstable, and eventually fails. For example, consider the source of the authority and power of modern police officers. They clearly have a social-philosophical foundation justified by the rules necessary for the maintenance of a civilized society, and also by the necessity for having law enforcement officers who meet society’s recruitment standards and training for the purpose of enforcing these rules. As a result, police officers have recognized expertise, and are justified in their power with the associated rules constraining it. All of this provides a simple example of authority and power, but in an examination of entrepreneurship and/or management, we must penetrate to a deeper and more complex philosophical foundation. We pursue this examination in some detail in sections presented below where it is argued that entrepreneurship is a modern version of an ancient social activity that once had strong social justification for its foundation. The difference between the routine management of maintaining a business and the entrepreneurial function is the difference between mere repetition and creativity. To examine this difference, it is also necessary that we first examine the broad philosophical concept of freedom as it might apply it to the entrepreneur’s motivation. We must do so because we recognize that a tension always exists within the business organization concerning the conflicts between freedom and automatism. In “What is freedom?” Arendt (1960) uses the ancient notion of freedom, defined as the ability to act, i.e., to begin something anew, or to consciously decide to continue something traditional. This is in contradiction with the action of an automaton. This is not the “free will” notion of freedom, but it is a notion based on creative action, not just thought or routine repetition. Certainly entrepreneurs’ primary motivation would be the pursuit of this action-related freedom to initiate something new. Perhaps others, as a form of their own free action, resist this tide of newness so as to preserve what they perceive as tradition. What is essential is to recognize that the acts of the entrepreneurial manager are expressions of personal freedom, of a refusal to accept the role of an automaton, and to do so in the context of starting something new, something creative. Within the domain of free actions, whether through a new creation, or even resistance to the new in order to preserve tradition, there can be either a bias towards creative destruction, or a bias against reform. The mere renewal of previous action, even if it is combined with a rethinking of the rationale for this action, is not typically as attractive as what might be perceived as the more heroic action to create something anew as with entrepreneurship. It is possible that power can always shift to the charismatic social leader within the organization (perhaps the entrepreneurial leader), who by strength of persuasion can overcome any bias against action. But charisma can also lead away from what is perceived as traditional expertise. At such times, even those who stand for the latter, those who Arendt (1963, 2003) claims exhibit the noble nature of speaking out in a social setting against any charismatic

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destructive leadership, may be perceived as illegitimate. Still, there is a special position, that is, a special heroic category for the entrepreneur who is capable of combining expertise with charisma and creative leadership in order to establish a successful organization. This charismatic demonstration of entrepreneurial and creative action manifests the modern version of the ancient notions of the heroic; it can be akin to the actions of the Homeric heroes of The Iliad and The Odyssey. This action is examined below in the public and heroic leadership context. The important point here is that for this action to be effective, it must be backed by a legitimate and philosophically recognized authority, and this needs to be backed by appropriate philosophically justified power. This philosophical basis for entrepreneurial action, and the ethical implications that follow from this basis, is the subject of this chapter.

2

The Philosophical Basis for Authority within the Firm

In “What is authority?” Arendt (1959) points out that the ancient notion of authority stands in contradiction to coercion. She argues that the linkage of religion with tradition and expertise was the basis for ancient Roman authority. This linkage lasted until the dawn of the modern age, and it defined authoritative expertise as “more than advice, and less than command, an advice which one may not safely ignore.” “Religion” is used in a broad sense here, as a “binding back” with a traditional philosophy. Therefore this notion of religion need not strictly conform to our Western notions of Judeo-Christian theological religion, but it does conform to notions of a philosophical foundation. The philosophical foundation that provides authoritative expertise to entrepreneurship also needs this “binding back” to strong cultural roots. People need to perceive some “authoritative expertise” as embodied in the would-be entrepreneur.2 The seeds of the ultimate demise of this ancient Roman linkage were actually sown by Plato in his follow-up to the “allegory of the cave.” Plato used the concept of “hell” as necessary to control or coerce the common masses who can only respond to the “enlightened” (those who leave the dark cave in search of the light, and who come back within the cave to try to bring others to the light), with a hostile resistance  - a hostile anti-intellectualism.3 The concept of “hell in the afterlife” persuaded the common masses to behave in a civilized fashion as defined by “authority.” But once the absurdity of the concept of “hell” was understood at the start of the enlightenment age, and therefore the ancient Roman-Greek linkage was broken, then the philosophical foundation for this authoritative expertise was destroyed. Since this philosophical-traditional basis for the role of expertise was never reestablished, arguments about the decline of the West eventually emerged. (Oswald Spengler’s Decline of the West (1918), being one manifestation.) Note that the Kantian notion of the categorical imperative process manifests this break in the

 Steve Jobs’ expertise being a modern example.  See Plato (1961), The Republic.

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linkage.4 Rather than relying upon religious based moral prohibitions, it seeks to develop practical moral maxims that are consistent with the commonly accepted categorical imperative and are developed through democratic discourse. The second formula for the categorical imperative (reviewed in Chapter 3: “The Categorical Imperative Process and Moral Duties”) seeks to clearly prohibit the coercion of individuals into serving one’s ends while preventing them from pursuing their own ends.5 Such prohibitions also applied against manipulation of the common masses. It originated during the enlightenment age, that is at the start of the modern age. These democratically established “prohibitions” manifest a reaction against this Roman religious-based authority. They manifest an attempt to reestablish a new democratic philosophy built upon individual reason and public discourse. The Roman religion-tradition-authoritative expertise linkage had a promise of permanence that engaged individuals in cultural institutions such as churches, the civic organizations of government, military organizations, and craft guilds, all of which are designed to last beyond the individual lifespan. The modern business organization can be viewed as the continuation of these ancient institutions. Hence the potential capacity for building, preserving, and continuing our efforts beyond our lives so as to benefit those who come after continues with the modern business firm, i.e. a replacement for among other institutions, the traditionally organized religious church. Note that although the modern business continues the philosophy-­ based social authority, it does not do this in the tyrannical sense associated with the ancient cultural institutions, at least “tyrannical” for the common masses.6 The social authority manifested by modern institutions assures that certain freedoms are maintained, freedoms that were not present in ancient commerce due to restrictions by institutions such as craft guilds, city-state controls, and royal charters. The freedoms referred to are those of modern commerce. Arendt (1959, p. 501–502) suggests, however, that there must be something different with the American foundation of power and authority versus the European foundation. In fact, Arendt argues that confusion about the very nature of authority, and its foundation, has existed since the fall of the Roman foundation: …. The one political experience which brought authority as word, concept, and reality into our history – the Roman experience of foundation – seems to have been entirely lost and forgotten. And this to such an extent that the moment we begin to talk and think about authority, after all one of the central concepts of political thought, it is as though we were caught in a maze of abstractions, metaphors, and figures of speech in which everything can be taken and mistaken for something else, because we have no reality, either in history or in everyday experience, to which we can unanimously appeal. (Arendt 1959, p. 498.)

 Sullivan (1994) reviews Kant and the Categorical Imperative in detail.  Ibid. 6  By totalitarian, as differentiated from tyrannical, Arendt meant “dominating” even the thoughts of the subjects. Hence the use of tyrannical here means domination by force, but not domination of thought. 4 5

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In this context, the “power and authority” Arendt refers to is that once manifested by the Christian Church, i.e. an authoritarian expertise overthrown by the enlightenment, especially by Kant.7 In an attempt to relieve this “confusion,” and to follow up on Arendt’s hypothesis, the author of this text suggests that there is an American foundation of authority which is built upon the following strong and generally recognized cultural principles: 1. The individual is hero of his/her own story. This principle has obvious Greek roots, but is was also expanded by our notions of the exploration and development of the American frontier, and also by other heroic American images such as Steinbeck’s “Tom Joad” of Grapes of Wrath, i.e. the 1930s presentation of the common man who crusades heroically for the rights of all common men. 2. All have the right to participate in governance. This is the notion that, “We need not fear the rabble.” It harkens back to the Jeffersonian age, the Age of Jackson, and the political movements of the 1930s. Note that Kant’s “average intelligence” requirement for democratic participation has strong implications for this principle.8 3. All have freedom of geographic movement, employment, property ownership, and even entrepreneurship, so that social mobility is possible. This implies a certain freedom in markets in the progressive sense of a lack of any monopoly domination of markets, or of restrictions on entry into markets or employment that are solely due to the protection of the privileged obtained through their use of political power. Free and generally competitive markets are viewed as essentially democratic with the price mechanism being the voting method used for society’s allocation of resources, and for deciding what society wants. 4. Religion is not the basis of law, but fair democratic debate is. Religion may, however, be the motivation for the various intuitions brought to the democratic interaction that establishes law, but only the filter of democratic discourse can decide which intuitions are worthy of popular endorsement. The decrees of religious institutions cannot have the weight of law. Buell (2006, “Introduction”) points out that the American Transcendentalists of the mid-­ nineteenth century, such as Emerson, especially emphasized resistance to religious authority particularly that of established churches. These transcendentalists, of course, developed the Unitarian religion which particularly emphasized the  See Kant (1793, 6:134, and 6:175–80 and 163–8).  For Kant, only average intelligence is needed for this participation in democratic debate.

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authority of the inspiration of the individual rather than of revealed scripture as interpreted by a clerical elite. Does our American view of business engagement in free and competitive markets stem from our Western-heritage roots, or has it evolved from something newer? Economic history indicates that the American view must be from newer roots. Free markets, free geographic movement, and capitalism in general, are together all relatively new concepts born roughly with the American republic. One suspects that the image of the common man as hero, fighting for fair rules of the game, forms the very philosophical foundation for the American view of authority, and that freedom to conduct business is at the very foundation of American freedom, especially in this current age of non-industrial repetitive work.9 Americans do not wish to see themselves as mere draft animals, but prefer to perceive themselves as heroes struggling for something idealistic in their business roles. This is the mythic model of pioneers penetrating and developing the frontier. This is the archetype of heroic individual action, the roots of which we can trace back to the Homeric legend of The Iliad and the Odyssey. This archetype forms the very philosophical foundation of American notions of authority within the business realm. It is natural for us to use the hierarchy of Plato’s Republic with its philosopher king-ruler of the common masses as an ancient model for the authoritative-­ hierarchical firm. But this is not the mythic model of the American pioneer frontierhero. In commerce, from the ancient age through the enlightenment, markets were certainly not free, even in myth. Governments and guilds regulated trade and commerce up through the age of mercantilism, i.e. up to the nineteenth century.10 Hofstadter (1963) explored the role of the American frontier religions, with their decentralized structure, and informally educated clergy, as a cause of the rise of the non-elitist authority on the American frontier. These breaks from the European authoritarian structure allowed the development of the four pillars of a new American authority: (1) the individual American frontiersman as hero of business development, (2) local governance, and even national governance such as during the Age of Jackson, as dominated by the non-elitist common man, (3) the freedom of geographic movement, especially to obtain and develop property, and (4) a non-­religious institutional basis for authority. The American frontier also provided an additional brick to the building of the free-market myth, i.e. on the frontier, by necessity trade was largely unregulated. The markets for agricultural goods, and of the services of craftsman, were unregulated. Even the infrastructure for this trade was seen as largely created by the frontiersmen or individual entrepreneurs. This private profit-making infrastructure 9  See Friedman (1966), and Chapter 1: “Normative Ethics and Business Practice: An Introductory Review”) for an extensive argument concerning the linkage between free markets and freedom in general due to the dispersal of power from government to the private sector that occurs under freemarket capitalism. 10  See Fischer (1996), and Latouche (1961), for reviews of the birth of the Western, market oriented economy, and especially the price revolution for allocation of resources through trade. Of course, Smith (1776) provided the classic impetus that rationalized and initiated the classical economic revolution.

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included the commercial railroad and canal networks that essentially opened the American Midwest and West to development, while shipping its goods back to Eastern seaboard ports to facilitate exports to Europe. All of this rugged frontier development strengthened the foundational myths.11 This model of rugged individualism has, however, a corresponding reaction in American politics. The progressive age, with its emphasis on a populist politic that proposed government regulation of business, along with the development of union activity, does not fit with the foundational principles of American authority as reviewed above.9 The resistance to this movement, i.e. a counter reaction of the Taft-­ McKinley-­Coolidge era, actually originated in the gilded age of big business and its associated increased income and wealth inequality, but it is also rooted in the mythic foundational principles.12 The current myths surrounding the benefits of free-market capitalism are also founded in the four principles reviewed above.13

3

Greek Philosophical Notions of Labor, Work and Action

In “Labor, Work, Action,” (1964), Arendt carefully differentiated the concepts essential for our analysis. She states, I shall assume that the age-old distinction between two ways of life, between a vita contemplativa and a vita activa, which we encounter in our tradition of philosophical and religious thought up to the threshold of the modern age, is valid, and that when we speak of contemplation and action we speak not only of certain human faculties but of two distinct ways of life. (Arendt 1964, p. 167)

Surely this distinction is of relevance for modern management. The vita contemplativa, is hardly a prized lifestyle within the American cultural myth. The motivation for the active life, particularly as specified in its ancient Greek origins, is of substantial relevance within entrepreneurial and managerial motivation. It plays a central role within the American myth. Arendt points out (Arendt 1964, p. 167) that to the ancient Greek, “labor” means the mundane, repetitive physical effort necessary for life’s maintenance. “Work,” in the ancient Greek, denotes a distinct difference with “labor” in that it means a more creative craftsman-like approach to the fabrication of things beyond the merest necessities, but still a fabrication of things that add to life’s maintenance. “Work” of this sort can go hand-in-hand with “action,” which the ancient Greeks use to describe the organization of people so that living peacefully together is possible, and the conditions for the quiet of contemplation are 11  See Cain (2010) for a review of entrepreneurial developments on the American frontier, and especially the governmental contributions to this entrepreneurial development. 12  Union collective bargaining, with the possibility of strikes, was not recognized until the Wagner Act of 1935. 13  Note that the neoclassical economic model that indicates the benefits of free markets, and their associated problems for economic welfare, was also developed in this era of post 1890. See Marshall (1890), and Pigou (1920) for the early development of this model.

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assured. “Action” combines both “words and deeds” so as to achieve the organizational conditions necessary for the vita contemplativa. The active life in the polis was not the highest aspiration, but rather the life of the philosopher, the contemplative life of pursuing truth was the highest aspiration. Hofstadter (1963) documents and explains the American reversal of the rankings of these aspirations. American entrepreneurship certainly manifests the combination of these notions of fabrication work and public activity, but not particularly for the purpose of achieving the contemplative life, but rather for the development of considerable wealth. Arendt (1964, p.169) argues that the prestige associated with work and action reversed in the modern age, i.e. post Smith, Locke and Marx. Productive craftsman-­ type labor, the work of fabrication such as that envisioned as performed by Jefferson’s yeoman farmer, became the ideal. American anti-intellectualism especially favored the non-elite undereducated yeomen-masses of the frontier, while the menial repetitive work of the industrial factory held the lowest prestige.14 The entrepreneurial action in this modern age is most easily viewed as a combination of work (fabrication) and action (a social organizational activity), and it stands in contradiction to the repetitive-industrial work of lowest prestige. Combined with these notions of the prestige-rankings of human activities is the notion of eudaimonia, the pursuit of the good or flourishing life. Greek philosophy links this pursuit to the social interaction with the family and polis. Through both words and deeds, the individual interacts with his social group, and only through this interaction could the flourishing life be established. Modern business management also entails these social interactions to a high extent. But business management can be of the routine bureaucratic form with it repetition and lack of opportunity for creative actions. This sort of management position, if not including active creation, is not prestigious. It does not have the potential for heroic words and deeds. The prestige of modern bureaucratic repetitive management does not have the potential for prestige as compared to the actions of the creative entrepreneur. This in part explains the motivation for entrepreneurship, and the avoidance of the bureaucratic repetition however much this is necessary for business efficiency. Of particular interest to the business entrepreneurial manager, however, is that “wrong doing” that would separate the individual from her society would destroy this life, as explored in the Socratic Dialogue Gorgias (see Plato, 1961). “Wrong doing” destroys the prestige of work, and also destroys the pursuit of the modern flourishing managerial life in the same way that it destroyed the flourishing ancient life. Therefore, in order to be prestigious, actions and fabrications, must be within society’s ethical constraints. Entrepreneurial activity can reach the philosophical height of prestige this social interaction when the entrepreneur is motivated by joining with the social group that is the business firm, recognizing it as necessary for eudaimonia. Entrepreneurial activity can also be motivated, however, by seeking to achieve a separation from the entrepreneur’s social group, even within the firm, a separation that can be achieved by substantial wealth creation. Modern business has  See Richard Hofstadter (1963) for an extensive and classical review of this American cultural trait.

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the potential for the prestige of leadership actions through “joining with the social group that is the business firm,” or the separation from this group by creation of a large wealth gap that facilitates a separate lifestyle. If a manager cannot create the prestige of the former, then perhaps the latter lifestyle can compensate. This latter motivation is explored below after we examine the entrepreneurial motivation in more detail. Joseph Schumpeter (1911, p. 93) described three entrepreneurial and managerial motives: “First of all, there is the dream and will to found a private kingdom, usually, though not necessarily, also a dynasty. The modern world really does not know any such positions, but what may be attained by industrial and commercial success is still the nearest approach to medieval lordship possible to modern man …. (Italics added.)

Then there is the will to conquer; the impulse to fight, to prove oneself superior to others, to succeed for the sake, not for the fruits of success, but of success itself. From this aspect, economic action becomes akin to sport …. Finally, there is the joy of creating, of getting things done, or simply exercising one’s energy and ingenuity.” We might consider the first of these motives as belonging to the entrepreneur, but it is today at least partly achievable through becoming a top bureaucrat, the classic “paper pusher” who rises through the bureaucracy. In a sense, rising in such a world exhibits “proving oneself superior to others,” although the superiority demonstrated is not easily analyzed. The third motive, the “joy of creating,” appears more entrepreneurial. If it is the pursuit of the flourishing life through the “joy of creating,” especially in the social sense, then this provides a natural motive for avoiding any moral wrongdoing that might result from playing the leadership role among those organized. If, however, the paramount motive is to achieve a social separation that is akin to a “lordship,” then the motive for avoiding wrongdoing is so much weakened. A “lordship” does not fear the disapproval of his subjects. By “lordship” we mean a separation due to extreme wealth differences. Of course, the Schumpeterian motive of “creating,” and/or proving “oneself superior,” need not lead to the desire for this wealth separation. If one can demonstrate achievement through creativity, then this has a demonstrated prestige of its own. This is not the case for the bureaucrat engaged in repetitive activities. The prestige of rising to be the top bureaucrat is all there is, and wealth stratification may be its only compensation.

4

The Nature of this Social Action

It is argued in this section that entrepreneurial activity is a paramount version of social action. Because of the complexity of human relations and inherent conflicts, all social action has difficulty achieving its purpose. The resulting chaos, Arendt (1964, p. 180) argues, intentionally or unintentionally produces stories “as naturally as fabrication produces tangible things.” These stories are designed to make sense

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of the chaos of civilization, to offer a logical-causation that connects events for the purpose of explaining actions. These stories are woven into various documents and materials; they express the words and deeds (actions) of some heroes. In the classical ancient age, Homeric Achilles is the archetype of “the speaker of great words, and the doer of great deeds.”15 The story of the Iliad expresses the polis’ ideal responsibility of both speaking at public meetings, and following up these words with heroic deeds. (Robinson, 2015, also makes this point between “words and deeds” in the business context.) The essential parts of these story-documents are the promises made to overcome chaos. The communication that is an essential social duty of all, that establishes a way-of-life within the social community, is comprised of promises and narrative stories. The modern firm is an expression of this communication in that it is essentially a nexus of implicit and explicit contracts (promises) and imperfect duties where people are driven together apparently by economic need, but also possibly by the need for social interactions.16 In this context, the arrangement we call “the firm” expresses a freedom to contract and promise, and it can be a complete expression of modern social action, i.e. a modern version of the ancient Greek action in the polis. The hero of the story of the modern firm is usually the organizer-entrepreneur who persuades others to join their fabrication efforts with his or her own to start, or continue, a social organization. But the hero might also not be the founder of the company, but a top manager who facilitated the company’s growth and/or survival, i.e. a “Henry Ford Jr,” rather than a “Henry Ford.” In either case, this persuasion of others through both words and deeds that appear to narrate an heroic attempt to make logical sense of the chaotic world is for an ultimate economic purpose. The Western-American culture contains many of these heroic stories of entrepreneurship. They correspond to Homeric or other classical tales of overcoming chaos through actions posed as courageous similar to the sort we find in the characters of Achilles, Odysseus, or Jason.17 Coincident with this heroic freedom of action, or combination of heroic words and deeds, are the natural demands for conformity in society. Arendt (1964) argues that this conformity results from a replacement of heroic actions by repetitive behavior as the foremost mode of human interaction. This is a conforming behavior that does not reflect distinguishment, nor individuality, nor courage. The daily greetings, acquiescence to norms, repetition of mundane participation in consumption, all represent much of this conformity. But bureaucratic repetitive work can also compose this conformity. This occurs because both the polis and entrepreneurial social group, with its focus on the words and deeds of action that earn individual prestige, can only survive through certain restrictions on this very freedom of action. Not everybody can play this leadership role. Excesses would destroy the heroic 15  From Phoenix’ speech in Iliad ix. 443. Robinson (2015) also reviews the linkage between “words and deeds. 16  See Robinson (2019) for an exploration of the concepts of “imperfect duty.” 17  Consider the mythical story of Steve Jobs who overcame his era’s business-cultural prejudice against both his youth and the original technology of the personal computer.

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nature of the action. For example, the firm can only have a limited number of leading organizers, and the market can only accommodate a limited number of firms. As a result, repetitive behavior and conformity must be a resulting characteristic of much of business activity, i.e. a certain degree of authoritarianism must characterize the modern firm. In addition, this forced conformity results in “an almost irresistible inclination towards despotism.” (Arendt 1964, p. 194) Authoritarianism is not tolerant of nonconformity. This tendency towards despotism, I argue, is so much the stronger when the motive of the entrepreneur is to separate from the social group he/ she leads, rather than fully joining in this modern corporate version of the polis. It stems from the lack of communication that inevitably results from this separation in that without two-way communication, it is easier to rule by decree, even when the rules are suboptimal for efficiency. Optimal rules could only follow from a full communication between management and other firm participants. Consider again that a motive for the entrepreneur may be the creation of a substantial personal wealth, which in turn may naturally lead to a social separation, a sort of unapproachable “lordship.” In our age of considerable income and wealth inequality, this appears to be a prime motive within the modern firm. It is similar to, and perhaps a reflection of, the American frontiersman’s motive to separate from society. The American society, formed for the upraising of the common masses, has ingrained in it a strong motive for separation from these very masses, a desire to journey to an upper-stratified social elite. Perhaps this best describes the industrial and post-industrial American society.18 In describing modernism, Arendt points out, “Neither education nor ingenuity nor talent can replace the constituent elements of the public realm, which make it the proper place for human excellence.” (Arendt 1964, p.199)

By “human excellence,” she might have substituted “heroism.” We then ask, “What does provide this modern location for expression of great words and deeds, that is the action of the social sphere of the ancient Greeks?” Of course the answer substantially lies in the action of the business world, the entrepreneurial creation of the new firm, or the extension of the existing firm. Hofstadter (1963) documents and argues that the anti-intellectualism of the American culture eliminates certain types of intellectual expression, such as academic achievement, as being particularly prestigious. For the common person, the modern impulse to create in the business world possesses all of the ancient prestige of action in the public realm, a prestige that is not present in other intellectual excellence, or even accomplishment in the fine arts.

18

 See Graham (2010) for a review of post-industrial American entrepreneurship.

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 ultural Principles of Entrepreneurial Authority C and Action

The four principles at the philosophical foundation of American authority (reviewed above) also form the philosophical foundation for the most important social action in American culture, i.e. the actions associated with business formation, retrenchment and extension. It was argued above that managerial action in business is, or at least could be, a modern version of involvement in the ancient polis. The words and deeds that formed the paramount action in the polis in ancient Greece can now be interpreted as having a modern common-man’s corresponding action that results from the economic impetus to form organizations for the fabrication of goods and services. Management and skilled labor compose both the leaders and the fabricators who act through explicit and implicit contractual agreements, and the collective imperfect duties to benefit both those organized and the general public. This modern version of words and deeds provides the motive force, i.e. the logos for firm activity. The economic-seeking of profits is the result of this fundamental social interaction that we describe as firm activity. The economic model may be accepted as a description of either the result or the path (profit seeking path) business firms take, but not necessarily the most fundamental urge for social interaction that expresses itself in entrepreneurial activity. The entrepreneurial motive to form a business, a motive that usually requires exhaustive managerial hours and emotional commitment, often generates a low financial return. This model of entrepreneurial action within the social group, with its cultural principles as reviewed above, provides a viable explanation for this considerable investment, i.e. the benefits of apparent social interaction that extends beyond monetary profit. These benefits may be personally valued as stemming from the individual’s demonstration of heroism, or charisma, or simply social contact. In any case they also capture the essence of freedom of activity. The ninteenth century’s American Transcendentalists emphasized these benefits. As stated by Emerson (2006, p.33.), “There are new lands, new men, new thoughts. Let us demand our own works, laws and worship. To create, - to create,- is the prize of divine presence.”

All of this supports the application of the four American-cultural principles, reviewed above, as therefore being relevant for entrepreneurial motivation: 1. The entrepreneurship motive can clearly be explained by the desire of individuals to be heroes of their own story. 2. The widespread desire for involvement in business management and entrepreneurship is an expression of the American individuals’ desire for involvement in community governance. 3. Entrepreneurship expresses the desire for freedom to own property, social mobility, and geographic movement.

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4. The rules established for the firm, as constrained by society’s laws and sense of ethics, are largely determined by the entrepreneurial engagement, and do not directly result from any scriptural or external oligarchic decree. This also manifests a certain freedom of intellectual involvement and expression. These four points describe the appeal of entrepreneurial involvement within American culture. They all particularly appeal to the American original immigrant-­ pilgrim’s desire for new beginnings, and for forming new subcultures. We certainly observe many entrepreneurial firms, such as Microsoft and Apple, as very much the expressions of new business subcultures. They developed the new campus-type business location facilities, with unrestricted hours, dress, and interactions that better reflect academia than was manifested in previous business models. To create anew is the theme of American entrepreneurship.

6

Unethical Action and Authority

The four principles reviewed above have obvious implications for ethical motivation in entrepreneurship. In Western philosophy, there are two ancient-Greek foundational reasons for why agents avoid the unethical: 1. There is the Socratic motivation (the Gorgias dialogue of Plato 1961) that “to do wrong is misery; to suffer wrongdoing is nothing in comparison.” This is the Socratic argument that nobody will do wrong willingly, but only out of ignorance because one’s conscience will be guilty. 2. There is the “separation from the polis” in that wrongdoing results in separation from the very society that enables the flourishing life (eudaimonia) possible. Arendt (1971) also argues that the Socratic motivation to avoid wrongdoing essentially stems from the “inner dialogue” we have with ourselves, what is often called “conscience.” To violate our self-recognized moral rules would “contradict our conscience,” and make living with oneself intolerable.19 The separation from society argument stems from the Socratic Dialogue The Apology (Plato, 1961) in which Socrates suffers death rather than be exiled from Athens, his society. It is further rooted in “the great words, and great deeds” of other ancient Greeks who defended their society rather than be separated from it. Consider Hamilton’s review of Iphigenia’s refusal to kill Orestes: “It is not love of his friend alone that constrains him but also fear of what people would say, and he knows it and speaks it straight: “Men will whisper how I left my friend to die. Nay – I love you and I dread men’s scorn.” (Hamilton 1993, p.82)

 This is also a version of the Kantian argument that wrongdoing would violate the universality formula for the Categorical Imperative. See Sullivan (1994), and Chapter 3: “The Categorical Imperative Process and Moral Duties”).

19

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Also consider that when Oedipus appears for the last time before his exile, he speaks his misery, and expresses his wish that he had died in infancy. His friend answers, “I also would have had it thus.”20 Such was the misery of being separated from society, either through scorn or exile. Besides the “inner dialogue,” the fear of community separation also formed the ethical motive for the ancient Greeks. In the context of the social-separation motive against wrongdoing, we can now apply the four foundational principles of authority in American business culture: 1. An entrepreneur cannot be the hero of his/her own story when wrongdoing is involved. Why is this so? It is so because the story must be accepted by those organized into the firm, and they will reject a wrongdoer as their hero. 2. The entrepreneurial desire for involvement in the business community is destroyed by wrongdoing. The implicit trust that is necessary for the business community to thrive is irredeemably destroyed by wrongdoing. 3. Wrongdoing in the business community usually involves violating the property rights of others, which further generates community hostility for the wrongdoer. 4. Entrepreneurial managers who have the opportunity to form the rules of the business community commit especially egregious violations, as viewed by the firm’s internal constituents, when and if they violate these rules. The first of these principle motives, the desire to be the hero of the entrepreneur’s personal story, does not strictly stem from the fear of social ostracism, but it is associated with it. The tag of being the firm’s heroic leader is jeopardized if society views the entrepreneur as a wrongdoer. The second and third motives, however, are directly community based, where fear of ostracism due to violation of some foundational principle of American culture provides the ethical motive. Furthermore, this fear of ostracism as motive is strengthened by the fourth principle since a morally wrongdoing entrepreneur who established the very code that is violated would be viewed as placing herself/himself above the rules, as insisting that others must conform, but not the manager, and this solely because of her or his special position. What other action could be perceived as so violating the very democratic foundation of American culture? This would be a declaration that the manager envisions herself/himself as elite. An associated question that is essential in business ethics concerns the issue of collective responsibility. This is a natural question since business organizations are, of course, social groups capable of collective wrongdoing. For a member of a group to be guilty not by action but only by association, he or she must have been capable of dissolving this membership, have prior knowledge of the wrongdoing, and still have not dissolved their relation with the firm. This prior knowledge requirement, combined with the requirement that the individual can dissolve membership, also requires that the individual not be powerless in preventing this wrongdoing.

20

 From Hamilton (1993, p. 82).

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Arendt (2003) argues that this “powerlessness” essentially presupposes that the individual be isolated from decision making or influence. The four principles derived above therefore form a foundational basis not only for individual guilt in wrongdoing, but also for collective responsibility for prevention. Entrepreneurs may organize others, but those organized may suffer any of the four results presented above through associated moral violations. Knowing this, those moved by the entrepreneurs to join the organization must persistently examine the firm’s actions to consider dissolving their association. This poses a particular sort of extra cost associated with entrepreneurial organization that might not be perceived as present in established firms that appear to exhibit well-established rules, and with a track record of apparent ethical conduct. The argument here is that when the entrepreneurial manager is part of the social group organized into the firm, this very social group has the ability to pressure managers to avoid wrongdoing. This fear of social disapproval or ostracism is an ethical motive force but this requires that the entrepreneur not be separated from the social group into a sort of “lordship.”

7

The Frontier Ethos and Social Separation

The essence of the American frontiersman myth is that by strength of heroic individual character, the individual farmer and rancher pushed back the wilderness to bring goods to market. By their nature and locale, these markets were small and free. The local townships were geographically dispersed with low population density. In this society, fear of social ostracism, if it existed at all, was likely a weak motive for avoiding wrongdoing. This is in contradiction with the social motive of the Greek polis. Separation from the frontier society that might result from perceived wrongdoing, would likely form only a slight motive for ethical behavior. On the frontier, the good conscience, and living with oneself would likely form the only strong motive for moral conduct. The historical and mythical roots of struggle on the frontier, without the advent of unions, but with emphasis on the individual work ethic and cleverness, remain with us as the model of individual business character. The emphasis is not on the group, the organization that corresponds to the Greek polis with its activities of heroic words and deeds, but rather on the individual and lonely accomplishment. A de-emphasis on heroic words would appear natural on the frontier, especially the words that might organize others. Of course, a de-emphasis on words in current business organizations is hardly optimal. Hence there is an inherent conflict between the American cultural myth and the ancient philosophical model of ethical motivation. In the American-frontier mythology, the gilded age is typically used as an example of an era of individual accomplishment rather than a time of original business formation. Unfortunately it has been used as a model for misbehaving robber barons who separate themselves from their social-cultural group. In fact, the wealthy of

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this age formed their own sub-culture in Eastern financial centers.21 Actions against this wealthy class, not against the common humanity, would have provided these entrepreneurs with the model of behavior that might have prevented unethical conduct. For the robber barons, separation from the common masses was the goal, not the fear. These models of heroic American action were formed around the stories of clever creations of great wealth, and not formed around the failures in the cultural polis of the day. The great wealth creation of that era, and also of today, provides an a priori separation from the contemporary cultural polis. Ostracism from the employees of the modern firm for wrongdoing has hardly been feared. Today, it is not unethical action that separates management from the common masses, rather it is the rewards of successful entrepreneurship because these rewards move the entrepreneur to a higher social stratification. (See the Appendix for a contrary example, i.e. a brief biography of a very successful entrepreneur who exemplified the opposite of being motivated by the achievement of social separation.) De Tocqueville (2003, Volume 2, p.645.) also addresses this problem of an emerging wealthy class due to the industrialism of the early nineteenth-century. He observed that the wealthy industrialists of his era (1830s) did not share a common spirit and set of goals with their workers; that these workers were brutalized by their employment, and they had no social bond with the industrialists. The relevant question therefore concerns whether the current entrepreneurial motive for generating great wealth so as to reach an extremely stratified upper-class, conflicts with traditional Western culture. Does the fear of social ostracism still provide any motive for ethical business behavior? This question may well be answered in the negative.

8

Empirical Studies of the Social-Class-Separation Effect

One theory, presented and explored by Gino and Pierce (2009), Adler et al. (2000), and Kraus et al. (2010), is that lower-class individuals live in environments defined by fewer resources, greater threat, and greater uncertainty. As a result, lower-class individuals might be more inclined to commit unethical behavior to compensate and garner more resources. An alternative theory, argued by Piff et al. (2012), is that the greater resources enjoyed by the wealthy upper-class furnishes greater independence and freedom that results in a self-focused social tendency. This class is less cognizant of others, and less able to recognize the suffering of others.22 Also Kraus et  al. (2009) indicates that the upper-class are more disengaged during social interactions. Behavioral economic studies show that upper-class wealthy individuals are less generous and altruistic. These behavioral studies and analyses of nationwide survey data are reviewed by Piff et  al. (2010). They show that upper-class households donate a smaller portion of their incomes to charity than do lower-class households, 21 22

 See Lamoreaux (2010) for a review of this cultural establishment.  This is confirmed by Kraus et al. (2011), and also Kraus and Keltner (2009).

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As a result of these studies, Piff et al. (2012), theorize that “increased resources and independence from others cause people to prioritize their self-interest over the welfare of others, and perceive greed as positive and beneficial, which in turn gives rise to unethical behavior.” (Piff et al. 2012, p. 1) To explore this theory, they conducted seven empirical studies of observations in natural settings, and also in controlled laboratory experiments. Those who identify themselves as upper-class, or in some experimental observations those who meet certain objective criteria, such as riding a more expensive automobile, demonstrate more unethical decisions and behavior than those of the lower class. All this empirical and experimental evidence indicates that the upper-class adopts more unethical behavior than the lower class because of the following: • The upper-class has greater independence and hence privacy from others. It therefore has reduced concern for the evaluations of others with respect to judgments of unethical behavior. • The upper-class demonstrates lower risk aversion with respect to the consequences of unethical behavior because this class has more resources to deal with the potential consequential “downstream costs.” • The upper-class has feelings of entitlements that are fulfilled by unethical behavior. • The upper-class focuses on greed. In studying the lower-wealth class, however, the experiments of Piff et al. (2010) showed that the lower class acts in a more pro-social fashion because of a greater commitment to egalitarian values and feelings of compassion. Because the lower-­ class must rely upon greater cross-sectional dependence (on each other), individuals in this class are more likely to conform to its ethical norms. This adds the missing piece in the class-related ethical story. Motivation to leave the lower class in order to reach the upper-class is essential to achieve the independence that furnishes lower social pressure towards ethical behavior. In general, the empirical psychological studies reinforce the philosophical argument that the wealth separation of social classes enables unethical behavior by the upper class. The primary motive for ethical behavior provided by social pressure is weakened by this wealth separation desire.

9

Conclusion

The four principles that form the justification for entrepreneurial and managerial “authority and action” in American culture, have been shown to actually stem from Western philosophical foundations. They include: 1. The entrepreneurship motive generally stems from the desire of individuals to be heroes of their own story.

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2. Entrepreneurship expresses the American desire for involvement in community governance. 3. Entrepreneurship expresses the desire for freedom to own property, social mobility, and geographic movement. 4. The rules established for the firm, as constrained by society’s laws and sense of ethics, are largely determined by the entrepreneurial engagement. This manifests a certain freedom of intellectual involvement and expression. The Shumpeterian motive to build a sort of “medieval lordship” through developing a business empire to achieve an upper-class wealth-stratification, however, eliminates (or at least severely modifies) one of the two classic reasons for ethical behavior, namely the fear of social ostracism that occurs as a result of wrongdoing. This leaves the inner dialog of conscience as the only motive for ethical behavior. Empirical studies from psychological experimentation support this wealth-­ stratification effect on ethical motivation. Furthermore, this wealth stratification is well engrained in the American entrepreneurial ethic, a phenomenon that leads to a modern crisis in business ethics. Review Questions 1. What is the difference between vita contemplativa and vita activa? What is the importance of this difference for management and entrepreneurship? 2. What are the motives for entrepreneurship according to Schumpeter? 3. What is meant by great words and deeds in the context of the entrepreneur ship ethic? Advanced Questions for Class Discussion and/or Essays 1. Concerning Robinson’s suggested four American cultural principles, what are their relevance to entrepreneurial motivation? What are their relevance for the consequences of unethical conduct of entrepreneurs and management? 2. What is wealth stratification and what might its consequences be for entrepreneurial motivation and ethical conduct?

Appendix: Fred Meyer As an example of one of many successful entrepreneurs who created business empires, but who was strictly motivated by action within their business and community, and not social separation from it, I offer Fred Meyer, the inventor of the modern hypermarket. Having migrated from Brooklyn to Portland Oregon in 1909, Fred Myer began with a small coffee and tea business. He expanded to invent the hypermarket in 1922, and eventually expanded his empire to 63 stores in the Pacific

References

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Northwest by 1975. His annual total sales exceeded $1 billion. Throughout his career, Fred Meyer demonstrated two particular characteristics: 1. He maintained the same living standard (same apartment dwelling, and the same personal shopping habits even in his own store where he walked the isles almost daily, and paid full price), and he continually and personally interacted with his employees and customers, treating them as friends who offered valuable advice. 2. He reinvested almost all of his wealth into expanding his hypermarket empire because, having successfully lived through the great depression of the 1930s, his primary stated concern was expanding and maintaining employment. He also was extremely charitable during his life, and at the end, he left his wealth to charities of various sorts in the Portland area. (See the Oregonian, September 3, 1978 and Wikipedia under Fred G. Meyer.) Fred Meyer was so involved with the employees of his firm, as well as with members of his original social community, that the idea of social ostracism would have been a considerable motivation to avoid wrongdoing. In life, he was never publicly accused of any wrongdoing, and in death, he was considerably praised and eulogized by the significant leaders of his community, including Oregon Governor Robert Straub.

References Adler, N.E., E.S. Epel, G. Castellazzo, and J.R. Ickovics. 2000. Relationship of Subjective and Objective Social Status with Psychological and Physiological Functioning. Health Psychology 19: 586–592. Arendt, Hannah. 1958. The Human Condition. Chicago, IL: The University of Chicago Press. ———. 1959, 1960. What Is Authority? in Between Past and Future, Harvard University Press, Cambridge, MA. ———. 1963. Eichmann in Jerusalem: a Report on the Banality of Evil. London: Viking Press. ———. 1964. Labor, work, action. In The Portable Hanna Arendt, ed. Peter Baehr. New York: Penguin Classics. 2000. ———. 1971. 1972. Thinking and Moral Considerations. Social Research 38 (3) (Autumn), reprinted in Responsibility and Judgment, edited by Jerome Kohn, Schoken Books, New York. ———. 2003. In Responsibility and Judgment, ed. Jerome Kohn. New York: Schoken Books. Buell, Lawrence. 2006. Introduction. In The American Transcendentalists: Essential Writings, ed. Lawrence Buell. New York: Random House Inc. Cain, Lois P. 2010. Entrepreneurship in the Antebellum United States. In The Invention of Enterprise, ed. David S. Landes, Joel Mokyr, and William J. Baumol. Princeton, N.J: Princeton University Press. De Tocqueville, Alexis 2003. Democracy in America. (trans: Gerald, B., & Isaac, K.). New York, NY: Penguin Classics. Emerson, Ralph Waldo. 2006. Nature. In The American Transcendentalists, ed. Lawrence Buell. New York, NY: The Modern Library Classics. Fischer, David Hackett. 1996. The Great Wave: Price Revolutions and the Rhythm of History. Oxford, UK: Oxford University Press. Friedman, Milton. 1966. Capitalism and Freedom. Chicago, IL: University of Chicago Press.

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Gino, F., and L.  Pierce. 2009. The Abundance Effect: Unethical Behavior in the Presence of Wealth. Organizational Behavior and Human Decision Processes 109: 142–155. Graham, Margaret B.W. 2010. Entrepreneurship in the United States, 1920-2000. In The Invention of Enterprise, ed. David S.  Landes, Joel Mokyr, and William J.  Baumol. Princeton, N.J: Princeton University Press. Hamilton, Edith. 1993. The Greek Way. London: W.W. Norton. Hofstadter, Richard. 1963. Anti-Intellectualism in American Life. New York, NY: Knopf. Kant, Immanuel. 1793. In Religion Within the Limits of Reason Alone, in Basic Writings of Kant, ed. Allen W. Wood. New York: The Modern Library Classics, The Modern Library. Kraus, M.W., S. Cote, and D. Keltner. 2010. Social Class, Contextualism, and Emphatic Accuracy. Psychological Science 21: 1716–1723. Kraus, M.W., and D.  Keltner. 2009. Signs of Socioeconomic Status: A This Slicing Approach. Psychological Science 20: 99–106. Kraus, M.W., P.K. Piff, and D. Keltner. 2009. Social Class, Sense of Control and Social Explanation. Journal of Personality and Social Psychology 97: 992–1004. ———. 2011. Social Class as Culture: The Convergence of Resources and Rank in the Social Realm. Current Directions in Psychological Sciences 20: 246–250. Lamoreaux, Naomi R. 2010. Entrepreneurship in the United States, 1865-1920. In The Invention of Enterprise, ed. David S. Landes, Joel Mokyr, and William J. Baumol. Princeton, N.J: Princeton University Press. Latouche, Robert. 1961. The Birth of Western Economy: Economic Aspects of the Dark Ages. New York, NY: Harper Torchbooks, Harper and Row Publishers. Marshall, Alfred. 1890. Principles of Economics. London: MacMillan. Piff, P.K., M.W. Kaus, S. Cote, B. Cheng, and D. Keltner. 2010. Having Less, Giving More: The Influence of Social Class on Pro-Social Behavior. Journal of personality and social psychology 99 (5): 771–784. Piff, P.K., D.M. Stancato, S. Cote, R. Mendoza-Denton, and D. Keltner. 2012. Higher Social Class Predicts Increased Unethical Behavior. Proceedings of the National Academy of Sciences 26 (p): 1–6. Pigou, A.C. 1920. The Economics of Welfare. London: Macmillan. Plato. 1961. In The Collected Dialogue Including the Letters, Bollingen Series LXXI, ed. Edith Hamilton and Huntington Cairns. Princeton, NY: Princeton University Press. Robinson, Richard. 2012. Philosophy of Evil and the Abandonment of Business Codes of Ethics. BRC Journal of Business 2 (1): 134–156. ———. 2015. The Entrepreneurial Ethics, Economic Behavior, and Motivation. In Economic Behavior, Economic Freedom, and Entrepreneurship, ed. Richard Cebula, Joshua Hall, Franklin Mixon, and James Payne. Cheltenham, UK: Edward Elgar Publishers. ———. 2019. The Imperfect Duties of Management: The Ethical Norm of Managerial Decisions. Cham, Switzerland: Palgrave Macmillan. Schumpeter, Joseph. 1911. The Theory of Economic Development. Cambridge, MA: reprinted by Harvard University Press. 1934. Smith, Adam. 1776. An Inquiry into The Nature and Causes of the Wealth of Nations, reprinted by Clarendon Press, 1996. Spengler, Oswald. 1918, 1926. Decline of the West. London: George Allen & Uneven. Sullivan, Roger. 1994, 1997. An Introduction to Kant’s Ethics. Cambridge: Cambridge University Press. Weber, Max. 1947. The Theory of Social and Economic Organization. translated by Henderson and Parsons, New York.

Chapter 12: Duty, Boycotts and the Pricing of Ethics

1

The Adam Smith Problem

Market philosophers have long argued about “the Adam Smith problem,” i.e. the apparent contradiction between Adam Smith’s ethical philosophy as expressed in The Theory of Moral Sentiments (1759), and the egoistical agent of the invisible-­ hand as expressed in Wealth of Nations (1776). In attempting to resolve this apparent conflict, Samuel Fleischacker (2004, p.  91) argued that “human beings can pursue even their individual interests together, that even society without benevolence need not be a hostile society, that economic exchange, even among entirely self-interested people is not a zero-sum game.” More recently, Mark White (2008) argued that in the Wealth of Nations, Smith did not make an argument in favor of egoism, although he did show that pursuit of self-interest might be sufficient for a hypothetical type of economic flourishing. Smith only argued that because agents knew their own self-interests, the economic philosophy of mercantilism was inefficient by its nature, i.e., that markets can operate based on self-interest, not that they strictly should operate in this way. The moral behavior of participants still determines whether markets are hostile to society’s interests, and also the extent of this hostility. Chambers and Lacey (1996) point out that markets are capable of “pricing” participants’ sense of ethics in that through product- and capital-market boycotts, people can negatively affect the demand for a company’s products and financial securities thereby attempting to impose their ethical will on producers. We have a considerable history of product- and capital-market boycotts of those producers who appear to violate society’s sense of propriety. Generally these boycotts have been effective in changing some business practices especially in areas such as child labor, negative environmental impacts, consumer fraud, and the like. A few of these Based on Robinson (2018). © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_12

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boycotts are reviewed below, but even the threat of boycott might be sufficient to change behavior. In general, economists would argue that boycotting those practices that are generally perceived as unethical is potentially an effective method for people to force a more efficient allocation of resources; that if boycotts of this sort are effective, then in general, public welfare may potentially be enhanced.1 Assuming society wishes to discourage what it considers as immoral practices, then the market can certainly play a role in expressing society’s preferences. This is the invisible hand argument in support of potentially imposing ethical practices through competitive markets. Perhaps we live in a highly ethical society; perhaps we live in an amoral society. Whatever society’s ethical sense, it is potentially reflected through its markets. In this light, it is worthy to examine: 1. a hypothetical society where markets meet certain generally accepted philosophical standards of duty, 2. to what extent our duty criteria helps to understand the market forces that voice ethical considerations through different classifications of boycotts, and 3. whether boycotts contribute to welfare efficiency. Shleifer (2004) argues that competition weakens the ethical behavior of firms. He argues that ethics evolved from the needs of social cooperation; that some ethical standards are antiquated in that they developed from outdated political indoctrination; that they are therefore subject to cultural relativism; and they are capable of economic tradeoffs. As an example of such a tradeoff, Shleifer argues that demands for cheaper shoes overcame society’s objections to child labor. This is a particularly simplistic and dark view of the relation between morality and markets, a view I attempt to refute here. I show that the evidence supports the argument that through boycotts, markets do force various changes in some business practice that society judges as unethical. I organize this empirical evidence around certain boycott characteristics, a categorization that I hope allows some understanding of the forces that lead to success or failure. Any organized analysis of society’s view of ethics should be based upon more substantive philosophy than cultural relativism or political indoctrination. For this reason, I organize the following analysis around the generally utilized Kantian notions of duty, both perfect (full obligations), and imperfect (partial obligations that have practical limits). I argue that the pricing of society’s sense of ethics is essentially the pricing of certain categories of Kantian duties, all of which can conceivably be fairly priced by the market. I also show that the Kantian criteria, and the associated duties required of market-participants, have strong implications for welfare efficiency.

1  Notions of “efficient allocation of resources” and “public welfare” as used here stem from the extensive subject of welfare economics. See Henderson and Quandt (1958) for a review of its historical development.

2  The Ideal Kantian Market

2

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The Ideal Kantian Market

As reviewed in chapter “The Moral Construction Process and Duties”, Kant’s categorical imperative (CI) describes a guide for a process for deriving both personal and social-political moral maxims from which practical notions of duty emerge.2 Kant argued that the CI process reflects common understanding of how moral maxims should be formed. These maxims conform to the requirements of the CI as expressed in Kant’s three interrelated formulae: (i) universality, (ii) respect for individuals, both self and others, and (iii) the pursuit of the kingdom of ends.3 Broad notions of duty, including those duties that would apply to market interaction, stem from the second and third formulae. (Chapter “The Moral Construction Process and Duties” reviews these formulae.) Given an acceptance of the CI as process for deriving more specific maxims, which in turn imply various duties, our ideal Kantian market requires two broadly generalized conditions: 1. Kantian markets are ruled by a complete set of practical moral maxims that are consistent with the categorical imperative. 2. Kantian markets are motivated by the “pursuit of a moral community,” i.e. Kant’s “kingdom of ends.” Concerning the first condition, by a complete set of moral maxims we should mean a set that is sufficient to operationalize the first two formulae of the categorical imperative. For example, this set of maxims would include those aimed at allowing no personal exceptions to their conformance, i.e., all must comply because all must be allowed to pursue their own ends provided they do not impinge on the freedom of others to pursue their own ends.4 In addition, the formula for respect for individuals requires that deception, outright fraud, and coercion are declared in violation, and this would apply to all contracts whether explicit or implicit, i.e., those contracts reached by both formal (legal) and informal agreement.5 Market interactions provide obvious applications for these contractual agreements. The second condition for Kantian markets is clearly the most abstract. It is formula (iii), the pursuit of the kingdom of ends that is the most difficult to envision as applicable to markets. We cannot envision legally requiring proper motivation, but we still must specify this requirement to describe our abstract notion of Kantian markets. In this abstract-idealistic model, all our market interactions are constrained to be within this motivation. Of course, the two market conditions are not 2  See Sullivan (1996, “Introduction,”) and also (1997) and Chapter 2: “An Applicable Western Ethical View?” Also see Rawls (2000, pp. 162–177) for reviews of the CI as process for deriving both personal and societal moral maxims. 3  Sullivan’s (1996, p. 29) interpretations from the German are used here. 4  In Kant’s analysis, this non-impingement of the freedom of others to pursue their own ends is termed the universal principle of justice. See Chapter 2. 5  Coercion is defined as an application of some type of force that prevents someone from making a decision or acting upon some decision.

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independent. The second condition requires the first in that the pursuit of a moral community implies approval and pursuit of the duties referred to in the first condition. It must be explained, however, how the pursuit of a moral community as motivation could conceivably operate in a market system of largely self-interested transactions. I state largely “self interested” since there are market transactions among more intimately connected agents such as those within families, within firms, and even within friendly communities. We can all envision the motivation of pursuing a moral community to be accepted and active in these latter groups, but we ponder how such motivation could flourish in markets with more disinterested agents and transactions. Is there an apparent conundrum in applying the third formula to these impersonal markets? The answer to this conundrum is explained by Sullivan (1989, p. 214–216). In Kantian analysis, there are two levels of moral community to be pursued: 1. a civic moral-community of justice in the sense of pursuing all the moral maxims needed for juridically meeting the second formula, i.e., an impersonal community of juridical duty, 2. a community that meets the required juridical duty conditions, but that also is fully motivated by the pursuit of a moral community, i.e. a community of full moral duty. This bifurcated categorization implies that duty is dependent upon the degree of personalization of the particular market. This allows us to envision our kingdom of ends motivation to be always present even in distant and impersonal interactions such as those in the secondary-market for equity shares, or impersonal super-market transactions. In these impersonal markets, our duty obligations are of a juridical sort. Markets that exhibit more personal contacts, however, require a broader set of duties as reviewed in the next section. In particular, we can envision sub-communities within an overall community of juridical duty that also meet the conditions required for being a community of full moral duty. Whereas an overall market economy should certainly meet the conditions for a community of juridical duty, perhaps markets such as the labor market that is internal-to-the-firm could be envisioned as meeting the conditions for a broader community of full moral duty. The differences between these sets of duty are explored below.

3

Notions of Duty and Market Efficiency

In Kantian analysis, there are two types of duties: perfect (also called duties of right by Kant) and imperfect duties (also called duties of virtue by Kant).6 All duties stem from the moral law, or in our analysis, they stem from the moral maxims specified 6  Sullivan (1994) extensively reviews Kant’s notions of duty throughout this small but comprehensive tract. Also see White (2011) for an excellent brief review, and in the original, see Kant (1785, p. 4:421 – 431).

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as necessary for a community of full moral duty. Perfect duties are absolute prohibitions of narrow aim, and against actions that violate the second formula, actions involving deception, fraud, coercion and the like. But the second formula also requires imperfect duties that stem from obligatory actions of wide aim that allow individual discretion, and that have practical limitations, actions such as those associated with beneficence as reviewed in Chapter 3: “The Categorical Imperative Process and Moral Duties”. These obligations are “volitional” and of “wide aim” in that it is up to personal discretion as to how these wide obligations are to be met. These wide obligations encompass categories such as “be civil,” or “be charitable,” or “be civically involved,” or “be of use to the world.” It is then left to personal discretion as to how these broad categories should be met. There are, for examples, many ways “to be of use to the world,” or of being “civically involved.” For these duties, we are obliged to perform some actions such as various forms of charity as an example, but for practical survivability reasons, we cannot give all to the poor, or devote all of our time and resources to civic involvement. Although we are obliged to be charitable, there must be practical limitations to this charity; we are not obliged to make ourselves poor because of these activities, i.e. the second formula also specifies duty to oneself. To be “of use to the world” requires a degree of effort towards personal health and development. A community of full moral duty clearly requires that all are committed to the second formula (respect for the dignity of others), and its associated perfect and imperfect duties. It is more realistic, however, to expect that the latter classification of duty should be performed within certain markets where agents are more closely connected, such as the internal labor markets of firms, rather than in the broader more impersonal markets where agents are distant from each other. In Kantian analysis, the self-worth of agents motivates them to “pursue their own morally permissible welfare and happiness, but also to promote those of others.” (Sullivan 1997, p.  156). Markets are an expression of the mutual dependence of their participants which poses the following proposition.7 Mutual dependence proposition: For freely competitive markets, mutual respect requires that both sides of a transaction not only pursue their own ends, but are also interested in enabling others to achieve their ends, and the closer the market participants, the greater this interest.

Imperfect duties are clearly necessary for promoting the interests of all, but in Kantian analysis, the closer the relationship between agents, the greater the expectation of duties of a imperfect sort. Market transactions between agents who are closer, rather than more distant, should exhibit these duties with practical limitations that would themselves be more relaxed the closer the relationship is, i.e. the obligation for beneficence is stronger the closer the agents, and this closeness is largely determined by the nature of the particular market in question.

 See Kant (1797, 6: 393) and Robinson (2019, pp. 49–50).

7

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For an example of this closeness and beneficence relation, consider the duty of charity as briefly reviewed above, especially in the context of the competitive firm, in particular the competitive corporation with publicly traded shares. These firms do have charitable expenses that are usually aimed at community relations, or the seeking of positive publicity. In either case, these contributions have bottom line impacts that justify expenditures in support. There are other charitable contributions, however, those explained as being required of corporate social responsibility (CSR), that are unrelated to the bottom line, but are said to be required from a social-duty obligation. These CSR expenditures are, however, expected to be impersonal in that the corporation is distant from the intended beneficiaries. The counter argument of Chambers and Lacey (1996) is that distribution of these funds back to the corporate owners (in the form of dividends) might allow those closer to the intended beneficiaries to make the charitable decisions. Corporate shareholders legally own these revenues, and their charitable expenditures by management pose agency problems unless these expenditures positively affect future revenue. The duty of beneficence is greater among those closer to the beneficiary. We might expect, therefore, a greater extent and degree of effectiveness in charitable giving if these revenues were expended by shareholders rather than management. As stated in the above section, market efficiency clearly requires a community of judicial duty. Markets based on fraud and deception could not possibly be viewed as efficiently pursuing the public interests since these markets would interfere with the worthy ends of participants, and therefore would implode in that they would be abandoned. The more participants perceive the probability of encountering outright fraud or even partial deception concerning the product, service, or payment, the more participants would leave the market. Furthermore, without the moral motivation of the pursuit of the moral community, we could not expect agents to fully conform to these perfect duties, although fear of retribution, or ostracism if caught, might motivate a considerable degree of conformance. For this reason, the motivation of the third formula is also necessary for many market transactions, but perhaps not all.

4

The Market Pricing of Ethics

As reviewed above, Chambers and Lacey (1996) pointed out that markets are capable of pricing ethics through boycotts of either product or capital markets, or both. Boycotts are expressions of moral disapproval and outrage by multiple agents who refuse to either purchase a product, or participate in its production. (A “labor strike” is a sort of boycott.) With widespread participation, boycotts are expressions of society’s moral disapproval. We must also point out that labor mobility, and certainly participation in internal labor markets, also are capable of pricing ethical behavior. People change firms if they believe that the internal responsibility assignments, and/or evaluation and reward practices of their firms are unethical, or that abusive or humiliating behavior is practiced. Certainly a firm’s employment reputation influences its ability to

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engage talented employees, and therefore the firm’s performance. These are examples of a type of boycott that need not be formally organized. All of these market forces are essentially transfer mechanisms for imposing society’s sense of ethics onto the firm. With respect to these market forces, the relevant question is “What do we mean by society’s sense of ethics?” Our notion of Kantian markets assists in answering this question. Violations of generally accepted obligations of duty may solicit boycotts of one source or another. Assuming these boycotts are broadly supported, they express society’s sense of ethics. In particular, violations of obligations of a community of juridical duty (prohibitions against fraud, deception and the like) should solicit either formally or informally organized boycotts to the extent that society is outraged by the violations, i.e., the greater the contempt for society’s sense of juridical-duty obligation, the greater society’s outrage. To proceed further in our analysis, however, we need the definitions below: • Formally organized boycotts are defined as having leaders; they manifest reasoned argumentative-communications (propaganda) from these leaders to possible participants; and they tend to have a variety of public expressions from participants concerning the moral violations they perceived as justifying the boycott. • Unorganized informal boycotts do not have leaders, but do have a variety of communications (letters to the editor, blogs, etc.) that express outrage. As illustrated below, informal boycotts are often so quickly successful that formal organization does not have time to be arranged. Sometimes the perceived immoral behavior is altered quickly before the boycott can be further organized. In analyzing boycotts, we must consider the difference between violations of perfect versus imperfect duty. The former involves violation of law or otherwise generally recognized social norms. These violations are frequently more easily recognized than violations of imperfect duty since imperfect duties have practical limits, and therefore pose a grey area as to whether they are violated. Given the closeness of internal-employee arrangements, as an example, we expect that imperfect duty violations might still solicit boycott reactions. Why? Because beneficence is expected among close agents within firms; but beneficence being a imperfect duty, it has practical limitations. The extent of its practice is theoretically subject to a marginalist-maximization solution, since certainly there is the potential that beneficence will impact the firm’s returns. The relevant question is therefore, “Does the perceived violation of imperfect duty solicit sufficiently strong and widespread emotional-reaction so as to motivate a successful boycott?” The conditions for Kantian markets provided above, with associated perfect and imperfect duty, are not unrealistic unless the operational specifications of the duties themselves are overly extreme, but it is unlikely that the public would form unrealistic-­impractical notions of duty. Markets would likely only react to violations of those duties that society judges as ethically necessary, realistically founded, and generally accepted.

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Chambers and Lacey (1996) pointed out the democratic nature of the firm’s pursuit of profit. As envisioned by Smith (1776), the marketplace is essentially a voting place where the invisible hand moves participants to respond to meet society’s needs. Under conditions of sufficient knowledge about the workings of the firm (especially about any externalities generated), the product market will democratically voice the concerns of the populace about perceived ethical lapses. Firms that pursue profits as a goal must respond to society’s sense of moral rightness. As evidence of this, I examine and classify several successful boycotts in section 6 below. By “successful” I mean that they ultimately lead to changes in firm behavior, and/or social policy.

5

Judging the Morality of Market Participants

White (2008) points out that a market in which agents follow only imperfect duties would be the impersonal marketplace of Smith’s Wealth of Nations; it would be minimally ethical. In Smith’s The Theory of Moral Sentiments, however, it is the sympathy for the suffering of others that motivates moral behavior. Indifference to the suffering of others essentially violates Kant’s second formula of respect for the dignity of others, of treating others as an “ends,” and this is true of all those we encounter be they strangers or friends, provided we do encounter them. Markets are, however, mostly impersonal, and some are very impersonal where we do not even encounter the corresponding “other party.” For example, consider online transactions. Feeling sympathy for the suffering of another agent during such an impersonal transaction is not generally expected. For some transactions we might term semi-impersonal, and certainly for those of a more personal interaction, Kant’s analysis of respectful beneficence is relevant, “Since our duty is to behave as if our help is either merely what is due him, or but a slight service of love, to spare him humiliation and maintain his respect for himself.” (1797, 4: 448–9) It is clear then that some semi-impersonal market transactions might require more than mere performance of juridical duties if these transactions can be said to be ethical, i.e., we might need more than a minimally ethical marketplace even in impersonal transactions when the beneficiary of our effort is a stranger. Our motivation for such duty may well be the combination of sympathy and pursuit of the moral community. Both motives are relevant for our boycott analysis. Among the two motivations of sympathy and pursuit of the moral community, the latter is capable of stirring emotions of outrage over violations of established maxims of perfect duty, and perhaps even violations of established maxims of imperfect duty. The sympathy motivation, however, might also lead agents to form boycotts aimed at establishing new maxims to alleviate perceived suffering. In essence, the boycott mechanism can stem from either motivation: sympathy, or outrage. If successful, the former motivation is likely to lead to new developments of, or variations in, required duties (perfect duties), and the latter motivation is likely to lead to enforcement of the already established duties. In the context of forming boycotts, sympathy stems from witnessing the suffering of others due to some market

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practice, a suffering that might be addressed by some new norm. As a result, we form a hypothetical alleviation for the problem. If others wish to alleviate this suffering by similar means, a boycott of that market practice might be organized. It is the suffering of others that ultimately motivates the boycott and possibly a new norm. In other situations that involve the flaunting of existing norms, however, outrage over this flaunting might also lead to a boycott. The argument here is that when active in markets, the boycott mechanism transfers these emotions of sympathy and outrage into imposing society’s sense of ethics onto firm behavior. We must realize that boycotts are essentially expressions of reasoned reflection about acceptable and enforceable moral duties. They are formed through public-democratic interaction and discourse, and hence they meet the Kantian requirements for forming or enforcing moral maxims as we would expect of the CIP.8 Gauthier (1989) and Chapter 8: “Reasoned Managerial Discourse”, p.  84–5) argues that markets are the ideal model for an ethical society. He argues that “in understanding the perfect market as a morally free zone we shall be led back to its underlying, antecedent morality” of mutually agreed upon constraints on behavior. This is a peculiar use of the term “morally free zone.” It appears to perpetuate the notion that perfect markets in the economic sense are essentially amoral, and that only violation of the neoclassical-economics perfect-market definitional-conditions (price fixing or negative externalities being examples) should be interpreted as unethical. Given our boycott analysis, however, a preferable term in this context would be that competitive markets have the potential of manifesting a fully-moral zone, where society’s sense of ethics can be fully operationalized through the pricing mechanism of competitive markets. The less competitive the marketplace, the less the boycott effect could impose society’s ethical sense on the firm. A perfect monopoly would have a decreased motive to respond to society’s outrage since it would be at least partly insulated from society’s preferences. Boycotting a monopoly would be less likely to succeed as compared to boycotting a competitive firm.

6

Boycott Classifications and Effectiveness

6.1

Some Classical Boycotts

Today’s social media facilitates the organization of boycotts. For example, Facebook offers a boycott communication page. As a result of instant mass-communication, attempts to organize boycotts have lower transactions costs than in the pre-social-­ media era, and as a result, are more numerous. Not only are complaints against business practices more easily mass-communicated, but similar complainers are more easily found. A casual review clearly indicates that most of these boycott attempts fail in having any substantial effect on the business in question. In this 8  “Chapter 3: The Categorical Imperative Process and Moral Duties” presents a full description of the CIP.

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section, however, I wish to review several of the more classically successful boycotts for the purpose of a possible classification-system which might enable a judgment of those conditions that are more likely to lead to success. I also review some less-­than-­successful boycotts for comparison purposes. The successful product-market boycotts examined here include the (i) California grape boycott in support of the Migrant Farm Workers’ Union during the 1960s and 1970s; (ii) the tuna boycott of Bumblebee, Starkist, and Chicken of the Sea in the late 1980s; and (iii) the Calvin Klein clothing boycott in 1995. A (iv) successful capital-market boycott of South African investments is also examined. The (v) ongoing Swiss company Nestle Foods boycott (due to problems associated with its powdered baby-formula exports to Africa), and (vi) the boycott of the French company Danone in 2001 (due to its employee relations) are two less-than-successful attempts reviewed for comparison purposes. As reviewed above, there are two categories of market interactions: (1) the impersonal transactions of strangers, and (2) the more intimate contacts of those familiar with each other during ongoing transactions. The example we previously reviewed of the former category is the supermarket purchase, and the example we previously reviewed for the latter category of more intimate contacts is the internal-­ labor market. In addition, I suggested that although both categories require a complete juridical conformance of perfect duties, and both require some degree of imperfect duty, it is the latter category of transactions that is more likely to require a higher degree of imperfect duty given the greater personal contact. There are more extensive personal obligations of beneficence in the internal-labor market. I also suggested that there are two motives for organizing or joining boycotts: (1) Smithian sympathy, and (2) Kantian outrage. When current social norms are not perceived as alleviating some problem, it is sympathy for the suffering-of-others that motivates individuals to attempt to organize new social norms. This sort of sympathy may motivate some boycotts. Kantian outrage, however, stems from concerns for the flaunting of the perceived current social norms or laws, and we hypothesize that the more blatant the flaunting, the greater the outrage, and therefore the more likely a boycott will be organized and successful. Table 1 presents a two-by-two matrix that categorizes boycotts into whether the perceived violation is between close or distant relations, and also whether the boycotts appear to be motivated by Smithian sympathy (a desire to develop new norms), or Kantian outrage (a desire to see current norms enforced whether these norms are actual law or generally accepted, but not legal, social standards). We classify six boycotts according to this matrix, four classic and successful boycotts, and two Table 1  Classic Boycott Classifications by Type of Market

Smithian Sympathy (Establishes new norms.) Kantian Outrage (Enforces existing norms.)

Distant relations (Negative duties?) Tuna Nestle Calvin Klein South African

Close relations (Negative or positive duties?) Danone California Grape

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more recent, but unsuccessful boycotts. Note that in Table  1, it is questionable whether boycotts involving distant relations are purely due to perceived violations of perfect duties. (Hence the “?” signs in Table 1.) They might involve some degree of flaunting of some societal perception of imperfect duty. In a similar way, violations involving those with close relations could involve violations of perfect duties as well as imperfect duties, as is indicated in the table. Both the French company Danone Foods and the California Grape Boycotts involved labor relations. As such, both involved potential violations of close relations involving employees. The Danone boycott resulted from a response to the announcement that the company would layoff approximately 200 employees in March, of 2001. The announcement came as a surprise to those separated from the company. In this sense, perhaps a perception of a imperfect duty towards employees was violated. In response, some local mayors ordered their hospitals and schools to boycott purchases from Danone, and they also attempted to organized a more general public boycott. The impact on Danone’s revenues and security prices was modest, and the boycott was eventually abandoned. Since Danone previously had very good employee relations, however, and these relations deteriorated, perhaps the boycott had some impact. (See www.paristempo.com/danone1.html for a complete story about these events.) The California Grape Boycott began in 1966 with the organization of the United Farm Workers as led by Cesar Chavez. Grape growers refused to bargain with the Union, and this led to an organized boycott. The boycott was aimed at consumers of table grapes with the objective being the establishment of collective-bargaining agreements with the grape growers. The farm workers argued that the grape growers had a perfect duty to negotiate fairly. The boycott was nationwide, and by 1970, a majority of growers had signed collective agreements. The boycott was generally judged as successful. (See the Wikipedia report titled “Delano Grape Boycott.”) The Calvin Klein boycott, the tuna boycott, the South African disinvestment boycott, and the Nestle Foods boycott all involved the more distant relations of impersonal market transactions. Although not formerly an organized boycott, a rapid reduction in demand for Calvin Klein’s products occurred as a result of the public’s negative outrage concerning the company’s use of pubescent children in sexually provocative advertisements during 1995. These billboard and magazine advertisements were withdrawn quickly. This can be categorized as an informal boycott since that company’s policies changed too rapidly for a fully organized boycott to be formed. (See www.icmrindia.org/casestudies/catalogue/Marketing/MKTG084. html for a complete story of these events.) The Nestle boycott concerns its marketing of baby formula in less-than-­developed countries, especially Africa. The baby formula, as compared to breast feeding, is criticized for preventing a full development of the infants’ immune system. Although the boycott was formally organized in 1978, publicity concerning the problem began in 1973. Various agreements with the company were reached over the years, but these were judged as quickly violated, and the boycott reorganized. It is currently ongoing. These agreements clearly were attempts at establishing new norms for marketing baby formula, and as such, they clearly involved Smithian sympathy

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to develop new socially acceptable norms. (See the Wikipedia story on the Nestle boycott.) The tuna boycott involved the methods for catching tuna, which are frequently found with dolphin. Netting methods catch both, and in the past, both have been canned as one fish. In 1986 the International Marine Mammal Project and the Earth Island Institute began the boycott. In 1990, Starkist, Chicken of the Sea, and Bumblebee signed agreements to stop purchasing, processing or selling tuna caught in the offending way, and the U.S. Legal Standard for the Dolphin Safe Tuna label was established. This boycott clearly exhibited Smithian sympathy for development of new norms, and also clearly involved offenses of perfect duties (perceived broad environmental degradation) of distant transactions. (See the Wikipedia story on the history of the tuna boycott.) Racial segregation policies formally began in South Africa in 1948. Boycotts of those companies doing business in South Africa began in the 1960s, along with boycotts of sports teams in international competition, university exchanges, and globally traded products. Capital market boycotts also voice society’s demand for moral reform of business behavior, and these were initiated against companies doing business in South Africa in the late 1960s by university and other foundations. The boycotts succeeded, multi-racial elections were held in 1994, and the apartheid policies were entirely ended. These boycotts were clearly initiated from outrage that the generally accepted norms against racial prejudice, as then existed in the Western Europe and North America (in the post WW II era), were violated. (See the Wikipedia story concerning the history of the South African boycotts.) Three of the six boycotts reviewed above - tuna, Nestle and Danone - were motivated by Smithian sympathy. Two of these three failed perhaps because the newly suggested norms were murky, or just unacceptable. It was not entirely clear that the layoffs at Danone (small in magnitude as compared to the size of the company) should have been prevented, nor that the baby formula problem at Nestle was sufficiently widespread to warrant prohibition. One of the successful boycotts, the tuna boycott, was also motivated by Smithian sympathy for establishing new norms, i.e. new standards for fishing and canning, and for consumers having a pure product. Clear and well-defined new agreements were ultimately formed. The California grape boycott, the South African investment boycott, and the Calvin Klein clothing boycott were all motivated by Kantian outrage over violation of clearly existing norms. The first of these involved the grape growers refusal to recognize the migrants’ union, a violation of clear expectations for U.S. employee relations. The South African boycott was motivated by outrage over clear norms against racial prejudice. The Calvin Klein boycott involved a company’s exploitation of children in violation of social-sexual norms. In each of these cases, the norms violated were clear and generally accepted by society. It appears that boycotts of the sympathy sort are less likely to succeed than those motivated by outrage. New norms are difficult to form, and success can only occur when society widely perceives a need for a clearly understood new norm. Boycotts involving outrage over the flaunting of well-established norms seems the most likely to succeed. In all cases, however, it is most important to recognize that it is

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the profit motive that allows boycotts to be particularly effective. In essence, profit seeking allows the market-voting mechanism to function. The invisible hand of the market works to eliminate practices society judges as ethically unacceptable.

6.2

Some Recent Boycott Attempts

Wikipedia maintains a list of ongoing boycotts. Starting in 2009, the Lesbian, Gay, Bisexual and Transgender Community (LGBT) initiated a boycott against The Salvation Army for its opposition to homosexuality. The boycott was organized by the Human Rights Campaign, an LGBT organization. It appears that it is motivated by sympathy, and is an attempt to change societal norms. Following this initial Salvation Army boycott, the LGBT community also organized boycotts against Target in 2010, Best Buy in 2010, and Chick-fil-A in 2011. The stated reason for each of these boycotts was that these three companies were contributing to the campaigns of politicians opposed to same sex marriage. Each of these boycotts were motivated by sympathy for the pain of the community, and each aimed at establishing new norms such as allowing same-sex marriage. In 2013, the LGBT community also organized boycotts against Stolichnaya Vodka, and also of Russia holding the Winter Olympics. The stated reason for these boycotts was Russia’s treatment of gays. Again, the intention was to change existing norms. In 2015, the Human Rights Campaign organized a boycott against the State of Indiana, Governor Mike Pence, and the Indiana State Legislature for passing its Religious Freedom and Rights Act (RFRA), which created a religious exception to the State’s anti-discrimination law. This “exception” would allow discrimination against gays by those with religious objections to homosexuality. This religious-­ based exception was passed and signed by Governor Pence on March 26, 2015. Within one week, on April 2, the Governor signed a repeal to the religious exception. During the intervening week, the following boycott related events occurred: • Angie’s List cancelled a $40 million expansion of its Corporate Headquarters in Indianapolis. • Some States (Connecticut, Washington, and New York) established funding bans for travel to Indiana by state employees. • The organizers of Gen Con, the largest gaming convention in the US, withdrew its 2016 convention in Indianapolis. • AFSCM, the largest public employee union, withdrew its 2016 convention. • Salesforce, and several other large corporations, withdrew from the Indy Big Data Conference. • The National Forensic Association withdrew its 2016 National Competition from Ball State in Muncie, Indiana. Other large employers, such as Wal-Mart, also placed pressure on Indiana State politicians. On April 2, the State Legislature voted 76-17 to repeal the RFRA, and the Governor signed the new legislation that day.

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Table 2  Recent LGBT-Led Boycotts

Smithian sympathy (Establishes new norms.) Kantian outrage (Enforces existing norms.)

Distant relations (Negative duties?) HRCa campaign against (i) Russian companies, (ii) Best Buy, (iii) Target, (iv) and Chick-fil-A

Close relations (Negative or Positive duties?) HRCa against Salvation Army

HRCa campaign against the State of Indiana

Human Rights Campaign, an LGBT oriented organization

a

Table 2 classifies the more recent LGBT-led boycotts according to their motives. As indicated, the Indiana boycott was motivated by outrage over the perception that Indiana attempted to violate the generally accepted norms against discrimination. The boycott was intensive, quick and effective. These LGBT organized boycotts can be described as attempted applications of Kant’s Universal Principle of Justice (UPJ): maximize the freedom of the individual provided this freedom does not impinge on the freedom of others.9 Pursuit of this principle could be viewed as a combination of both a negative duty (do not impinge the freedom of individuals if they are not hurting others), and positive duty (an individual should pursue the UPJ in dealing with others). The Indiana boycott, with its quick reactions from numerous corporate and other organizational reactions, particularly manifested outrage over the perception that the State sought to modify a law so as to make discrimination possible, a backtracking on the previous UPJ-oriented well-established law.

7

Conclusion

It is argued above that formal and informal boycotts are an efficient mechanism for transferring society’s sense of ethics through the marketplace and onto the competitive firm. For this mechanism to work, society needs clarity concerning the duties demanded of market participants. The Kantian analysis of perfect and imperfect duties helps us to organize perceptions of these obligations. When we envision product markets, capital markets, and internal labor markets as essentially mechanisms for voting, then we also envision that the expectations of ethical duty that society demands of the participating agents are voiced. Boycotts are attempts to express society’s moral sense, and those boycotts that are successful do express society’s general preferences.

9  Kant called the UPJ the “universal principle of right,” but because today’s interpretation of “right” connotes a different meaning than Kant’s, the term “justice” is commonly used as a more accurate substitute. See Sullivan (1997, p.  11–13); White (2011, p.  122-123); and in the original, Kant (1797, p. 230).

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In addition, the presented definition of Kantian markets voices two separate levels of what is meant by moral communities: a community of juridical duty, and a community of full moral duty. The former notion is applicable for the more impersonal product and capital markets. The latter notion is applicable for markets exhibiting closer relations such as the internal-labor market. Boycotts work to enforce the ethical notions of both types of communities (juridical or full moral) depending upon the type of market (exhibiting personal or distant relations). It is also argued that the motivations for these boycotts are either Smithian sympathy or Kantian outrage. The former is organized to lead to the development of new market duties, and the latter leads to enforcement of existing norms. The evidence supports the usefulness of this bifurcation of motivation. Those boycotts motivated by sympathy for the suffering of others, do attempt to establish new social norms, but apparently are not as successful. Those boycotts motivated by outrage are attempts to enforce existing norms, and tend to be more successful than those motivated by sympathy. Review Questions 1. Define and explain the “Adam Smith problem?” Begin by briefly reviewing who Adam Smith was, and why his work was important? 2. Explain what is meant for society to “price ethics?” What is “the invisible hand of the market” and what role does it play in this “pricing?” 3. Briefly review the types of markets that might lead to our analyses of boycotts? Explain why these types are relevant? 4. What is meant by a formal boycott, and what is meant by an informal boycott? 5. Explain Prof. Robinson’s classification system for boycotts? What implications does it have for possible predictions for the success of various types of boycotts? 6. Find a current boycott that is not mentioned in this reading, and classify it according to Robinson’s classification system? Advanced Class Discussion and/or Essay Questions 7. Briefly review the relevance of the “proposition” posed by Robinson for boycotts in this reading? 8. With respect to the Adam Smith problem referred to in question 1, how does your answer fit with the business goal of profit maximization (or shareholder wealth maximization)? What are the implications of boycotts for public welfare? 9. With respect to the “pricing of ethics,” can we assume that markets do reflect society’s sense of what is ethical? What problem might your answer have for a Professor of Philosophy who instructs courses on ethics? Is there an example of a boycott that failed that you believe should have succeeded? 10. Does competition destroy ethics?

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References Chambers, Donald, and Nelson Lacey. 1996. Corporate Ethics and Shareholder Wealth maximization. Financial Management 6 (1): 93–95. Fleischacker, Samuel. 2004. On Adam Smith’s Wealth of Nations. Princeton, NJ: Princeton University Press. Gauthier, David. 1989. Morals by Agreement. Oxford, UK: Oxford University Press. Henderson, J.M. and R. Quandt. 1958. Miccroeconomic Theory. New York: Mcraw-Hill. Kant, Immanuel. 1785. Fundamental Principles of the Metaphysics of Morals. In Basic Writings of Kant (2001), ed. Allen W.  Wood. New  York: The Modern Library Classics, The Modern Library. ———. 1797. The Metaphysics of Morals (edited by Mary Gregor). Cambridge, UK: Cambridge University Press. Reprinted in 2012. Otteson, James R. 2002. Adam Smith’s Marketplace of Life. New  York, NY: Cambridge University Press. ———. 2011. Adam Smith. New York, NY: Bloomsbury Publishing. Rawls, John. 2000. Lectures in the History of Moral Philosophy (edited by Barbara Herman). Cambridge, MA: Harvard University Press. Robinson, Richard. 2018. Duty and Boycotts: A Kantian analysis. Journal of Business Ethics 149: 117–126. ———. 2019. Imperfect Duties of Management. Palgrave Macmillan, Cham, Switzerland. Shleifer, Andrei. 2004. Does Competition Destroy Ethical Behavior? American Economic Review 94 (2): 414–418. Smith, Adam. 1759. The Theory of Moral Sentiments. Edited by D.D. Raphael and A.L.Macfie. Indianapolis: Liberty Fund. ———. 1776. An Inquiry Into the Nature and Causes of the Wealth Of Nations. Reprinted by Clarendon Press, London, 1996. Sullivan, Roger. 1989. Immanuel Kant’s Moral Theory. Cambridge, UK: Cambridge University Press. ———. 1996. The Metaphysics of Morals, by Immanuel Kant, edited by Mary Gregor. Cambridge, UK: Cambridge University Press. ——— 1994, 1997. An Introduction to Kant’s Ethics. Cambridge: Cambridge University Press. White, Mark D. 2008. Adam Smith and Immanuel Kant: On Markets, Duties, and Moral Sentiments. http:// ssrn.com/abstract=1318605. ———. 2011. Kantian Ethics and Economics. Stanford, CA: Stanford University Press.

Advanced Readings in the “Adam Smith Problem” and the Linkage Between Morality and “The Invisible Hand” James Otteson (2011, 2002) – see the bibliography above – presents an in-depth exploration of “the Adam Smith problem” and also the linkage between “the invisible hand theory” of The Wealth of Nations and Smith’s Theory of Moral Sentiments.

Part IV Some Current Moral Environmental Issues for Business

Chapter 13: Recognizing Environmental Duties

1

Perfect and Imperfect Environmental Duties1

Some people appear to live their lives in a cocoon separate from our natural world and in structures and areas of only manmade materials. For them flowing water is only out of a faucet, or perhaps over some concrete wall as in an architectural waterfall. The highpoint of their year might be a vacation in a “resort” of natural settings with enhanced natural interactions. Some others spend close to all of their lives in a dense suburbia, perhaps traveling daily by a small park, perhaps in sight of a significant river, or mountain range, or seacoast, but having little direct contact with these natural settings. Perhaps people need not often reflect on the natural amenities that exist about them, or on the fragility of nature’s existence. A relative of mine spent her last days in a nursing home unable to move much, but still able to gaze upon a small bird house that hung from a pine-tree limb just outside her window. It was placed there by a relative who knew her life-long habit of watching birds in simple settings. Watching a lone bird might constitute an amenity of great purpose and pleasure. That experience can motivate one to a dedicated duty of natural preservation. The environmental amenity need not be a grand setting, but it could be, and if so, then perhaps it will motivate a grand dedication to help preserve a great river, or mountain area, or section of high desert, or the world’s oceans? Must a grand dedication come from a transcendental experience? What motivates us to join the great crusade of our time, the environmental movement? This motivation is the subject of this chapter. It will form the future of business for generations to come. It is essential that business understands and participates in this “movement” and its governing implications. The previous material of this course presented the philosophy of moral construction as descriptive of our aspirational ideal norms for forming our society’s ethical  This material is largely taken from various sections of Robinson (2021).

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© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_13

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principles. If Kant’s observations are correct, then we commonly aspire to construct these principles via a process he termed the categorical imperative process (CIP). This CIP reflects our common understanding of how our moral principles should be formed. This process is guided by the categorical imperative (CI) with its three interdependent specifications (formulae) of (i) universality, (ii) respect for the dignity of persons, and (iii) pursuit of the moral community as motivation (See Chapter 3: The Categorical Imperative Process and Moral Duties) Using these three specifications as guides for reasoned and reflective social discourse, society can and will derive the moral maxims that pose our practical duties, both those of narrow prohibition, and those that pursue wide positive aims but that allow discretion as to their methods of fulfillment. The former categories of duties are best described as perfect duty. The latter category is best termed imperfect duty and has particularly interesting applications for environmental concerns. To understand the environmental movement that we should aspire to aid and be part of, we should clearly distinguish between imperfect and perfect duties. These duties are properly derived, or generated, by the CIP process as described above. By “properly derived” it is meant from the CIP with its (i) reasoned discourse, (ii) its inclusivity of all, (iii) its respect for all, and (iv) its motivation of pursuit of a moral community. Although previously presented in Chapter 3: The Categorical Imperative Process and Moral Duties the following repeats the differences in these categories of duty: • Perfect duties (often termed negative duties) are absolute prohibitions against attitudes and actions that violate a narrowly defined prohibition aimed at respecting the dignity of others. For example, there is an absolute prohibition against destroying some environmentally related community asset without explicit direction. • Imperfect duties (often termed positive duties) stem from volitional attitudes and associated actions that pursue some wide moral purpose aimed at respecting the dignity of others and self, but that have practical limitations. Examples of these include “being civil,” being “civically involved,” being “of use to the world,” etc. Therefore, as explored below this imperfect duty category includes beneficent duties for individuals and the community’s organizations to facilitate its environmental flourishment.2 Perfect duties essentially require noninterference with the freedom of others. They do, however, pose restrictions on the freedom of self. For example, one cannot pollute a neighbor’s property (at least not without prior agreement for compensation), and therefore one’s own freedom is restricted in order to avoid infringing the neighbor’s freedom. Perfect duties are most often encased in criminal and civil law or regulation as absolute prohibitions. They are posed as having no apparent tradeoffs with other duties. Prohibitions against fraud or murder, for example, are posed as absolute, and so should prohibitions against environmental destruction. (An example of an environmental prohibition would be the Refuse Act of 1899 which  In this context, beneficence means “doing or producing good.”

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prohibits the dumping of wastes into any of our Nation’s navigable waters. This Act is reviewed in Chapter 15: “Some Current Environmental Problems for Business”) Our society’s formation and respect for perfect duties allows our civilization to exist, but imperfect duties allow our communities to flourish. These duties particularly apply to the preservation of the community’s environmental assets, but also to their potential restoration and preservation. Kant pointed out that perfect duties should not be compromised for any egoistic reason.3 There are, however, tradeoffs involving imperfect duties. For example, there are many environmental assets that should warrant our attention, and we must ration our time and resources among competing environmental demands. Whereas perfect duty essentially requires noninterference with the freedom of others, imperfect duty requires beneficent attitudes and actions towards both others and self, and therefore they have tradeoffs with resulting practical limits. These tradeoffs and limits result from resource constraints on our time, our financial limits and other limiting factors. For example, in environmental concerns we pose below an imperfect duty of being aware of one’s environmental impact, but this must be an imperfect duty. One has other duty constraints and therefore can only offer so much time or other resources to this effort “to be aware.” Tradeoffs concerning imperfect duties are essentially imposed on us by the physical world we live in. There is only so much time to allocate to one or another duty, and expending more on one means expending less on others. These imperfect duties express individual virtues that are subject to one’s character development. They are of wide obligation and disposition. Kant also identified an imperfect duty to oneself as subject to development for the purpose of becoming “useful to the world,” a process he also described as character development. Which of these natural perfections should take precedence, and in what proportion one against the other, it may be a human being’s duty to himself to make these natural perfections his end, but are matters left for him to choose in accordance with his own rational perfection about what sort of life he would like to lead and whether he has the powers necessary for it (e.g., whether it should be a trade, commerce, or a learned profession). … a human being has a duty to himself to be a useful member of the world, … But a human being’s duty to himself regarding his natural perfection is only a wide and imperfect duty; for while it does contain a law for the maxim of actions, it determines nothing about the kind and extent of actions themselves but allows a latitude for free choice. (Ibid, 6: 446)

The impetus of Kant’s argument is that in each of the broad categories of imperfect duty – categories such as “be civil, be civically involved, be charitable, be diligent, … , and generally be of use to the world” – there is a maxim for action. But there is also latitude for discretion as to what the action might be, i.e. choose what contributions you will, but “be of use to the others.” Specific actions are not prescribed; some general broad-categories of actions are prescribed, i.e., make the ends of others our own, but not to the point of personal exhaustion or degradation. For example, community involvement in environmental preservation or restoration  Kant (1797, 6: 394).

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allows the individual discretion with respect to the specifics, i.e. the means and extents of one’s efforts. In particular, our methods and extents of pursuit of any wide moral purpose is subject to what we recognize as best for our efforts and given capabilities. It is argued here that this “capabilities argument” applies to our environmental duties in particular ways that concern our unique expertise, and perhaps ascetic preferences. Kant states that imperfect duties exist because we are “…. united by nature in one dwelling place so we can help each other.” (Kant, 1797, 6:453) This dwelling place applies to the organizations we belong to as well as our groupings of family and community. Kant terms this “the maxim of common interest.” (Ibid, 4: 453.) It applies to those united under the umbra of the community as “rational fellow-beings with needs.” (Ibid.) This “rational interest” determines our organizational involvement and effectiveness. It is just a restatement of the “personal capabilities analysis” asserted above. Avoidance of servility is one characteristic that is particularly germane to why people join environmental organizations, and therefore become involved in the environmental movement. Kant (1797) has much criticism of the characteristic of servility, i.e. a “false humility.” “Those who are servile throw away their character. … they make it one’s basic principle to have no basic principle and hence no character, …” (Ibid, 6: 420) But belittling one’s own moral worth merely as a means to acquiring the favor of another, whoever it may be is false (lying) humility, which is contrary to one’s duty to oneself since it degrades one’s personality. (ibid, 6: 436) True humility follows unavoidably from our sincere and exact comparison of ourselves with the moral law (its holiness and strictness). But from our capacity for internal lawgiving and from the natural human being’s feeling himself compelled to revere the moral human being within his own person, at the same time there comes exaltation and the highest self-­ esteem, the feeling of his inner worth (valor) in term of which he is above any price and possesses an inalienable dignity, which instills in him respect for himself. (Ibid, 6: 436)

Observing environmental degradation, suffering the consequences, and doing nothing in opposition demonstrates servility, a type of lying. Chapter 15: “Some Current Environmental Problems for Business” describes several instances of individuals not behaving in a “servile manner,” but organizing an environmental movement in opposition to this degradation. This recognition and assertion of “moral self-worth” is the essence of environmental organizations. They are not organized for purposes of recreation or comradeship. They are assertions of character. As illustrated and documented in Chapter  15, these organizations are organized to oppose environmental degradation, and to do so with an emotional intensity best described as “outrage.” This describes the individuals’ immediate motivation for joining, but the real underlying motivation is clearly an outraged pursuit of a moral community because they believe that the environmental degradation is a violation of that pursuit.

2  Imperfect Duty and Its Practical Limitation

2

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Imperfect Duty and Its Practical Limitation

The Kantian principles, explored above, recognize that the self-worth of agents motivates them to “pursue their own morally permissible welfare and happiness, but also to promote those of others.” (Sullivan, 1994, p. 156.) Communities are expressions of the mutual dependence of their participants, who we assume aim at fulfilling their own needs and those of other community members. Mutual respect requires that people treat each other not merely as the means to their own ends, but also allow others to pursue their ends, i.e. conditions specified under the second formula of the CI. From these considerations, the following proposition is posed: Proposition of mutual dependence: Mutual respect requires that we not only pursue our own ends, but that “we make ourselves an end of others” and “through our will we make others our ends as well, The happiness of others is therefore an end that is also a duty.” (Kant, 1797, 6: 393)

Imperfect duties are clearly necessary for promoting the interests of all, but in Kantian analysis, the closer the relationship between people, the greater the expectation of duties of an imperfect sort. This may be of importance for environmental organizations in that interactions between agents who are closer, rather than more distant, might exhibit more relaxed practical limitations on these imperfect duties, more relaxed than we expect among perfect strangers. If this obligation for beneficent action is in fact stronger the closer the agents, then this closeness is largely determined by the nature of the particular interaction in question, whether it is that among those who are close or of some more distant interaction of strangers. Of course, this begs the definition of close. This analysis of “closeness,” however, is impacted by environmental considerations where we are not considering only one person impacting another single person. Today we recognize that our environmental impacts affect many others including those at considerable distance. In addition, we know how these impacts occur, and we frequently know the remedy. For example, consider the problem of plastic wastes finding their way into our waterways and oceans. All who use plastics and dispose of these cavalierly should know they affect those at distance, they should know how these effects occur, and they should know the alternative to these plastics and their proper disposal. Those who do not have this knowledge have the imperfect duty to find out. As reviewed above, both perfect and imperfect duties stem from our respect for the dignity of persons, and are motivated by our pursuit of a moral community. This pursuit begs the question of which community do we refer to: family, business, immediate civic community, or something broader? The more immediate the community, the greater the likelihood of actions aimed at the moral pursuit consistent with imperfect duties, and the more effective we would expect these actions to be. We claim this because we expect that the more immediate the community the more we will likely know the duties needed and the most effective way to fulfill them. For environmental considerations, however, the “immediate community” is now most

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often the whole world rather than a smaller neighborhood. This is because our environmental effects are increasingly global. We might hypothesize that our beneficent efforts would be more effective in serving a smaller community. This immediacy might heighten our knowledge of what is needed from our efforts, and also what action would be the most effective. The cost of obtaining this information might be lower the greater the degree of immediacy. In fact, we could use the degree to which we have this knowledge to define the degree of immediacy we posses since the community physically close to us might still be one we have little information concerning need or potential effectiveness. The interesting and relevant question then becomes, “What do we mean by immediate in the context above?” This definition is highly relevant to what we mean by practical limitations to our imperfect duties. Hence we pose the following hypothesis, i.e. the knowledge hypothesis: The greater our knowledge of the needs of fulfilling some wide moral purpose, the greater the extent of our duty towards that end.

Environmental preservation and restoration are wide moral pursuits as referred to above. Success depends on our knowledge of the scientific facts of the case, and of how to effectively meet these needs. As reviewed above, however, our knowledge of our environmental impacts extends most often far beyond our immediate community and into our global impacts. Today, when we act environmentally with knowledge, we act most often with global effects. Our environmental duty is therefore conceptually broader than other imperfect duties. We therefore pose the following two propositions, both of which are utilized in our following examinations. Proposition of environmental knowledge: (i) We have an imperfect duty to obtain knowledge concerning our environmental impacts. (ii) We have an imperfect duty to apply our environmental knowledge to preserve, enhance, or restore the natural environment.

Both parts (i) and (ii) of this proposition of environmental knowledge are very much supported by the arguments and case analyses of Chapter 15: “Some Current Environmental Problems for Business”. To further our analysis, however, we must tackle the notion of “community” referred to in several places above. Our argument here will be that our imperfect environmental duties are essentially expressions of community that address one of the broader issues of today. Proposition of environmental community: Since our knowledge concerning our environmental impacts often has global implications even for apparently local problems, our environmental community is now essentially global.

This proposition of environmental community is supported as a logical conclusion from the remaining chapters of this text. For example, local air and water pollutions often touch other countries through our global air and ocean currents. But any notion that we could live in an isolated garden untouched by the global

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degradation is illusory. Our duties must therefore stem from both local and global perspectives. There is one additional special aspect of environmental duty that should be recognized. To do so, we must note that the pursuit of a moral community contains three dimensions worth exploring: (1) leadership in this pursuit, (2) followership in this pursuit, (3) the group dynamics associated with this pursuit. Leadership requires what Hanna Arendt (1971) terms “the noble nature” of “speaking out” in a social context concerning what is right or wrong. This requires rational and reflective commentary aimed at stimulating others to accept this or that moral argument. It means arguing against the mob psychology frequently found in us-versus-them movements that vilify some subgroup.4 It is immoral to be servile to the crowd. For Kantian analysis of perfect duties, it is obvious there is an absolute obligation to attempt an argumentative interruption of any group-think that involves an anti-duty dynamic. For imperfect duties such as our environmental pursuits, we might be inclined to analyze in a rational and reflective way the extent to which these actions should be extended, and accept some limitations. Surely this decision would depend upon the anticipated effectiveness of our efforts. Even for imperfect duties, however, the noble nature may play an important role when it is necessary for us to speak out that avoidance of this effort might be wrong. This speaking out in public may be necessary to stimulate others into a reflection about the worthiness of our moral pursuit, as well as the appropriate practical limit. This would be an assertion of moral character of particular importance in environmental matters.

3

Some Maxims for Reasoned Environmental Discourse

Reasoned discourse is the glue that shapes and holds our imperfect environmental duties together and that creates community efforts. What can we claim about this discourse? Should it have constraints; if so, what should they be? The Kantian scholar Onora O’Neill (1995) suggests some principles for this social discourse. They were initially reviewed in chapter “Reasoned Managerial Discourse”, but their relevance for our environmental considerations requires that they be reexamined here. They are reviewed and explained here as relevant for our environmental debates. As reviewed extensively in Chapter 3: “The Categorical Imperative Process and Moral Duties”, Kant’s CIP is capable of posing maxims of imperfect duty for guiding our environmental discourse. The following five maxims and their practical limits were posed by O’Neill (1995, pp.  34–50) as broad principles for our social discourse, although not in the specific context of environmental concerns. (See Chapter 8.) They are, however, particularly applicable to reasoned environmental discourse. The first four of O’Neill’s maxims are clear specifications of imperfect duties. We explore here their applicability to associated practical limits. The fifth of 4  See Robinson (2012) for a more complete exploration of this group process that results in unethical conduct.

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O’Neill’s maxims specifies a prohibition against falsehoods (a perfect duty), but there is an imperfect duty aspect to this that must also be explored. For example, we have an imperfect duty to try to be accurate in all our communications, although perfect accuracy might often be an unlikely attainment. Consider, for example, the problem of just measuring various environmental assets such as the amount of forest lands or wetlands still existing. One can estimate the inventory level at a point of time, but some degree of inaccuracy due to continued logging, or dredging, or other development incursions and deterioration due to disease, must also be recognized. O’Neill’s principles of reasoned communication are presented here. 1. Assertions of authority must be based on reason. Intolerance brings unreasoned authority to bear on communication. Wherever intolerance is practiced, whether by state or church or other bodies or individuals, those whose thinking and communicating are suppressed, are silenced not by reason, but by authorities that lack reasoned vindication. When these authorities govern us the authority of reason is diminished, and our distance from a reasoned form of life and politics grows. (O’Neill, 1995, p. 48.)

Consider our civic institutions that ultimately carry out our environmental policies, institutions such as the Army Corps of Engineers that have great power over our nation’s water resources, our Environmental Protection Agency (EPA), or the federal Bureau of Land Management, and also the various similar state agencies. Their civic decisions should be based on properly communicated logical criteria that supports the broad interests of the community. These criteria should be communicated through well-articulated and reasoned policy documents that indicate in order: (a) the environmental problems at hand, (b) the data considered that exposes these problems and subjects them to analysis, (c) the methods of analysis, (d) the results of analysis, and (e) the proposed logical remedies to the problems at hand. All of this should be “grist for the mill” of community debate, but these written analyses and policy documents attempt to articulate not only the necessary procedures, but the reasoned argument that supports these procedures. This reasoned clarity is required to promote civic understanding for the purpose of promoting adherence. We cannot achieve stable environmental resolutions and agreements if our government institutions merely assert authoritarian decrees unsupported by reason and considerations of “fairness” (as considered previously in Chapter 10: “Fair Stakeholder Negotiations,” and to be also examined below). In these situations, the communicated policy documents must be sufficiently clear, and the training and expertise of those engaged in these analyses must be sufficient so that the individual biases of those analyzing will not end up d­ominating those of the community. A breakdown in the reasoned ­communication could occur, and the imperfect duty to discover the correct

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policy end up being ignored in favor of an obfuscating and logically mistaken document. Illogical obfuscations of a few should not cavalierly replace logic. But effective discourse should prevent this by acting as a filter for the unreasoned argument. The practical limits to the imperfect duties associated with our social discourse are based firstly on the requirement for clarity in the reasoning of the argument itself. Some constituents might choose to not accept the logic of the argument however coherently presented, but always ask for more information, or simply deny the logical connections presented no matter how clear they are. It is the psychology of accepting authority, no matter how logically based, that may be the issue. The judgment of “how reasoned the argument is” should be based on the fictional “reasonable diligent judge,” and not on the conception that “all must be persuaded.” The imperfect duties of mutual dependence and applicable environmental knowledge (see above), both have practical limits that apply to this maxim. As a result, this maxim is an imperfect duty. As specified in the proposition of environmental knowledge (see above), the decision makers engaged have duties to act as reasonably diligent judges in understanding the logic of the policy, and those who form the policy have imperfect duties to communicate this logic effectively. These efforts are required to maintain a sense of moral community. Failures in these efforts indicate either willful violation of moral community relations, or some degree of incompetence. Both might be remediated. 2. Community actors and decision makers should tolerate the logical reason of others. What does this imperfect duty imply? One who adopts it, … detaches himself from the subjective personal conditions of his judgment, which cramp the minds of so many others, and reflects upon his own judgment from a universal standpoint (which he can only determine by shifting his ground to the standpoint of others). (Kant, 1793, V, p. 294)

This prohibits indifference to the reasoned communication of others. The practical limit to this imperfect duty is that one cannot consider all arguments from every individual constituent, at least not without being too exhausted to perform other imperfect duties. Decision makers are not likely to have the time for all of these considerations, hence standardized policies are set. But decision makers should also be open to new evidence and new arguments that appear to be relevant and logical. Why? There are two reasons: (i) all should respect the dignity of those who try to communicate with them, and should even encourage these communications; (ii) all should consider evidence that is relevant to their community’s potential performance. The rationing of decision makers’ time, however, poses practical limits. Respect should be given to others, but attention to the community’s performance and all of its dimensions poses the primary demand on the decision makers’ time within the constraint of avoiding disrespect of “others.”

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3. Reasoned argument should not be restricted or discouraged. Non-reasoned argument that denigrates, mocks, or bullies, or more generally fails to respect relevant constituents, may make it difficult for others to articulate their logical argument, and hence it violates a maxim to allow others to “think for themselves.” These communications create divisions between individuals and groups. The practical limits to this imperfect duty of “non-restriction” may, however, pose the necessity for some form of censorship where its absence would lead to forms of defamation or harassment that lessens or stills the reasoned communications within the community. This “do not restrict” maxim is consistent with Kant’s universal principle of right.5 It is also an example of the proposition of environmental knowledge presented above, and its practical limit, since soliciting reasoned discourse is the objective. 4. Community, stakeholders and decision makers should reason in common with those affected by its policy decisions. Community interests cannot expect to reason correctly unless it does so in common with those affected by its policies.6 This “reasoning in common” requires broad social discourse within the community, and also with various external stakeholders because this benefits the reasoning of decision makers in that it makes them aware of the logical arguments of those affected. This maxim provides an example of the mutual dependence and the acquisition of environmental knowledge propositions explored above, and their potential limits. 5. Accuracy in community discourse should be pursued. Falsehoods are clearly prohibited by all three formulae of the CI.7 Falsehoods in communication could not serve as a universal principle among a plurality of individuals. The practical limits, of course, concern situations of uncertainty, where our declarations should be unbiased estimates of what we expect to be accurate, and that also include qualifying statements that indicate this uncertainty.8 There is an expectation of effort underlying the estimates of the relevant probability distributions, and this is subject to our due diligent efforts. Due diligence efforts also have practical limits, and these limits are explored in greater detail in later chapters. 6. Community stakeholders should not act in a servile manner. Servility means we do not act as an autonomous agent, one who reasons both independently and in common with other community members. (The “problem of servility” was also addressed in Sect. 1 above.) Acting in a servile manner underlies our own dignity, and violates Kant’s formula of respect for the dignity of persons and self. It deprives the community of our reasoned input. We have 5  Kant’s universal principle of right (or justice) argues that the freedom of individuals should be maximized subject to non-interference with the freedom of others. (See Kant, 1797, 6: 231.) This applies to freedom to try and persuade, an aspect of communication. 6  See O’Neill (1995, p. 48). 7  See O’Neill (1995, p. 45), and Korsgaard (1986, pp. 325–349). 8  By unbiased we mean we expect to be accurate over numerous repetitive trials in that across these hypothetical trials, the sum of the positive and negative errors would be zero.

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imperfect duties to act in the ways indicated by the maxims presented above. Universality cannot allow us to act as a free rider in environmental or other considerations particularly since it is virtually impossible for us to avoid our own environmental impacts. It is immoral for us to be servile to the crowd. Both the propositions of environmental knowledge and the environmental community (see Sect. 2 above) require us to participate in our community’s reasoned environmental discourse. These propositions concern our imperfect environmental duties. They cannot be avoided by attitudes of servility. Examples of this servility and non-servility are reviewed in Chapter 15: “Some Current Environmental Problems for Business”.

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4.1

 he Attempted Disseminations of Information T and the Obfuscations to Be Avoided

Environmental discourse has dimensions of both perfect and imperfect duty. The perfect duty is to not deceive or obfuscate the severity of the problem. We might state, “Do not purposely deceive!” But currently there is such an abundance of environmental knowledge readily available through reputable online sources such as government agencies, university research laboratories, and NGOs of various sorts, that any deceptions or obfuscations concerning the problems must appear to be willful. This information usually has passed scientific review, is readily available from internet sources, and is scientifically authenticated, and can be compared to biased and non-scientific information foisted on the public by self-interested organizations for the very purpose of obfuscation. Given that accurate information is so available at low or no cost to the public reviewer, our duty to obtain it for the purpose of being a well-informed citizen appears to be a perfect duty, but there are still imperfect duty aspects. When the information is more stylized to fit narrow but legitimate interests, our pursuit should be to find it and apply it, and that is an imperfect duty as stated in the proposition of environmental knowledge. Our pursuit of applying this information, as differentiated from obtaining it, is founded in the proposition of mutual dependence; it is an obligation posed as a wide or imperfect duty. There is discretion concerning how it is to be applied, but an absolute perfect duty to apply it in environmentally respectful ways (as stated in the above proposition, of environmental knowledge, part (ii)). The scientific information (reviewed more extensively in latter chapters) indicates that our environmental needs are currently substantial and real, and our reasoned social discourse should reflect this as part of our imperfect duty. Current environmental concerns have both scientific and socio-economic aspects. Our environmental condition is analyzed through large volumes of scientific data and analyses. Latter chapters explore some of this information, and explores the roles of both public and industry coalitions in gathering and analyzing this volume. While the science pertains to how nature is affected, the socio-economic effects

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concern who is affected. The resulting examinations compose much of the public’s current discourse, and so these sources are highlighted in our latter examinations where accuracy and/or obfuscations are the issues.

4.2

Fairness or Obfuscations

Our reasoned environmental discourse should concern issues of fairness (explained below). To be consistent with our Kantian CIP, fairness in discourse (as explored in Chapters  8 and 10: “Reasoned Managerial Discourse” and “Fair Stakeholder Relations”) should be inclusive of both socio-economic input and scientific analysis. All should have the opportunity to participate in this discourse, and this poses certain equity issues since participation can be difficult for people at considerable distance even though they are affected by our environmental policies. We do have global involvements and agreements that attempt to overcome these difficulties (such as the Paris Accord), but we still have the equity issue concerning our effects on future generations since they cannot participate in our current discourse. There are ways of overcoming this moral conundrum such as using long-­lasting decision criteria that we therefore expect would be acceptable to future generations. But the equity problems remain, and should not be avoided in our discourse just because of their difficulty. These are the problems also addressed in latter chapters.

4.3

 he Logic and Predominance T of the Environmental Argument

The ending of a popular movie of a few decades ago shows the protagonist posing the hypothesis that perhaps the reason for our problems with romantic interpersonal-­ relationships is that they help us to avoid thinking about the real problems that confront human existence, problems such as war, hunger, massive disease, and even environmental disaster.9 Do our frequent emotional reactions to these problems keep us distracted from the hard work of logically forming solutions? Is it the emotions stirred by these great problems that interfere with the hardness of logical analysis? In a similar vein, the author is old enough to remember the great and popular politically-oriented singing group The Weavers (Pete Seeger, Ronnie Gilbert, Fred Hellerman, and Lee Hayes), and also to remember their Carnegie Hall folk-revival concert of the late 1950s. The base of that group was Lee Hayes. His base voice started a song titled “Down by the River Side.” His initial lyric was “I’m going to lay down my sword and shield, down by the river side.” This concern was in the post WWII era, and the United Nations Building had recently been constructed along the East River of New York City. Much of the public still had hope that the UN would help avoid WWIII. The crowd’s reaction was immediate and strong; they were the post WWII generation, and the UN represented hope for peace during a “hard and  Woody Allen’s film Manhattan.

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bitter” cold war.10 The reaction was emotional as all immediately stood and joined enthusiastically in the remainder of the song. That elicited emotion was in response to a type of “clarion call to action.” Our emotions should be similar with respect to our environmental crisis, but do we still need a great “clarion call” to confront our society’s greatest problem? Today, our reasoned environmental analyses and actions are motivated by our collective imperfect environmental duties. These duties are manifested by our involvements in our relevant coalitions and NGOs.

5

Considered Moral Environmental Judgments

This section reviews Rawlsian criteria for considered moral judgments. It describes a judgment process for how our environmental duties should be recognized, i.e. a set of criteria for what we mean by “considered” or “reasonable.” These criteria include requiring decisions to be informed and stable across competent moral judges. It is argued that these criteria are relevant for our current environmental debate and decisions as reviewed in the next two chapters. The environmental decision problems of intergenerational equity and peoples at a distance concern those to be included in our social discourse, and the logic of the arguments included. They especially concern the decision criteria and the information necessary to reach environmental equity decisions. The Rawlsian criteria to be reviewed below assist in analyzing these moral problems, particularly in perceiving the obligations that result from our reasoned discourse. Consider that recent (2017) EPA Administrator Scott Pruitt initiated a rollback of more than 30 established environmental rules that he claimed stymied business development. These rollbacks include the following: • a weakening of the Obama Administration’s Clean Power Plan, • a weakening of established rules for curbing pollution in US waterways, • a weakening of established regulations to restrict leaks of methane associated with fossil-fuel extractions, • a weakening of established regulations of chemical plants aimed at preventing spills and explosions, • a weakening of established regulation of pesticides linked to damage of children’s nervous systems, and • the initiation of a withdrawal from the 196-nation Paris Agreement on Climate Change.11 Davenport (2017, p. A4) indicated that these regulatory rollbacks were without consultation with EPA’s extensive staff of scientists, but were composed after extensive consultation with industry lawyers and lobbyists, and also after $4.2 million in  This refers to JFK’s Inaugural Address.  On January 5, 2018, the Trump Administration also announced a rollback of restrictions on petroleum drilling in almost all offshore areas of the US.

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political contributions expended from energy-related business. The relevant question is “Were these rollbacks considered judgments in light of a public consensus concerning (1) the appropriate data to be considered, and (2) the appropriate decision criteria to apply?”12 (Note that the definition of a considered judgement is presented below.) Rawls (1951, p. 1) posed the relevant question for our analysis, “Does there exist a reasonable method for validating and invalidating given or proposed moral rules, and those decisions made on the basis of them?” Rawls’ purpose was to discern rules centered on inductive logic. He attempted to do so by elucidating two categories: competent moral judges, and considered moral judgments. He used the former as one condition for the latter.13 We can apply the latter to discern the rationality of our decisions, but this requires the former for defining what is termed the “stability criteria,” as explained below. Note that the use of “judge” can be replaced by “decision maker” and “judgments” by “decisions.” The criteria presented can therefore be applied to our environmental decision makers (or even to the participants in our environmental debates) and their decisions. Rawls’ competent moral judges manifest four characteristics: (i) They have a requisite degree of intelligence required for analysis of the issues at hand. (ii) They desire to be knowledgeable concerning the facts relevant for the analysis. (iii) They have a predilection to use reason, i.e. they are open-minded, they use inductive logic, and they are knowledgeable about their own potential biases. This includes not applying a prior ideology to the analysis of the facts at hand. (iv) They have the capacity and desire to consider all interests relevant to the considerations at hand. A predilection to exercise these four characteristics constitutes what Rawls terms intellectual virtue. (Ibid, p.  5) With respect to environmental concerns, we ask whether those engaged in the current environmental policy debate seek the relevant scientific knowledge, and whether they are open-minded and logical in their decisions or merely ideological? For example, with regards to our specific illustration above, we could ask “Was EPA Administrator Pruitt open minded and knowledgeable in ignoring the work of EPA scientists? Did he have a predisposition to consider all relevant information without ideological bias?” To answer these questions we should consider the above Rawlsian criteria. In addition to characterizing the criteria for competent moral judges, Rawls also characterizes considered moral judgments as manifesting four characteristics:  The rollbacks concerning methane gas emissions were overturned by a D.C.  Circuit Appeals Court that found that Administrator Pruitt had not followed the “public notice and comments solicitation” requirements under the Administrative Procedure Act of 1946. See Bravin (2017, p. A4). If this decision is accurate, then the public’s discourse opportunity was truncated. 13  Note that in this analysis, Rawls essentially differentiates a virtue ethics approach (the criteria required to be a moral judge) from a deontology approach (the ex post criteria for a moral decision). 12

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(i) The judge is disinterested, i.e. cannot benefit or be affected by the judgment (no conflict of interest). (ii) The judge is familiar with the relevant facts. (iii) All those affected have opportunities to present their arguments. (iv) The judgment is stable across decisions by other competent moral judges. These criteria can be applied to evaluate ex post whether a particular decision is a reasoned one. For example, were the decisions of Administrator Pruitt to overturn the regulations cited above informed? If not, then Pruitt’s judgments might not fit the category of stable under other moral judges. With respect to this fourth condition, individual predilections may be counteracted when many judgments are made in a wide variety of roughly similar cases. The reasonableness of a decision criteria can be decided by the acceptance of those competent moral judges who have freely weighed the evidence after open discussion and criticism. This provides evidence that it can “hold its own.” These criteria can be applied to our society’s environmental decisions. For example (1) are these decisions made by those with conflicts of interests, or (2) were the relevant facts rationally considered, or were decisions made on an ad-hoc basis and out-of-step with logical analysis. The sets of criteria for competent moral judges and considered moral judgments can be used to evaluate the reasonableness of the intergenerational-environmental decisions, as well as those addressing the effects of people at a distance. For example, conflicts of interests, and a prior ideology that interferes with either information gathering, or evaluation of data, both bias the objectivity of those decisions. In addition, it is apparent that being a moral judge does not necessarily result in a moral judgment in that violations of the criteria above might not pass the reasonableness test. For purposes of clarity and convenience, we explicitly define this test here: A “reasonable decision” (or uncorrupted decision) is a “considered moral judgement.” As such, it is “stable” across other competent moral judges according to the Rawlsian criteria.

These criteria, however, may appear to apply only to individuals and not to the overall societal decisions, but if a plurality of the unbiased and informed establishes environmental policy, then the reasonable criteria applies to the results of our social discourse. Open and informed democratic discussion might be expected to result in considered moral decisions with respect to the environment and associated intergenerational problems, but this might not always result. The Rawlsian criteria assists in discerning those that do not. As reviewed above, individuals have imperfect duties to be both informed and unbiased concerning these matters, criteria specified for both competent moral judges and considered moral judgments, but the public must also be wary of influences from those with conflict of interest in exploiting the environment as demonstrated by the examples reviewed in Chapters 14 and 15. There is, however, one criteria for being a competent moral judge that might be easily overlooked in this analysis. The criteria of having a predilection to use inductive logic, especially to envision potential impacts of our decisions, and also the

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gathering of the information necessary to assist in this envisionment, should be emphasized as necessary for aiding our environmental discourse. For example, people in general, and perhaps particularly business people since they are already involved in the cooperative ventures we call business, or even environmental coalition activists since they are also involved in organizational settings, should have the capacity and inclination to envision the degree of “environmental good” achievable through cooperative endeavors. Along with this, they also should have the capacity and inclination to participate in the pursuit of environmentally-conscious actions, and through this participation, they might develop community trust that perhaps leads to further actions, and further reinforcement. This might lead to overcoming the tragedy of the commons phenomena.

5.1

Collective Imperfect Duty

We recognize that our significant environmental problems such as global warming, acid rain, the problems generated by agricultural pollution, or the endemic problems caused by plastics throughout our biosphere, etc., generally require our collective actions that result from reasoned social discourse if we are to expect any acceptable resolution. To this end and as previously reviewed in this chapter, we have an imperfect duty to acquire and apply knowledge as it pertains to these problems. But how can even the individuals who have acquired this knowledge, and who wish to apply it to the environmental problems we consider important, be effective in this pursuit? The answer is to contribute as a member of our many and effective environmental NGOs and/or coalitions. To this end, we specify the following: Collective imperfect environmental duty: We have an imperfect duty to participate in the collective actions of those organizations we evaluate as effective (or potentially effective), and that aim to resolve our environmental problems.

Being an imperfect duty means that we are to select the organization(s) we individually deem as effective and also select the extent of our individual involvement. This implies that we assemble the knowledge necessary for an informed decision as to which organization we should be involved in. Our predilection, however, will likely be involvement in the organizations that we know something about, for which we have some expertise that may apply.

5.2

Considerations of Fairness

The environmental involvements addressed in this chapter include attempts to reach a variety of local agreements: (i) resource reallocations, (ii) local restorations of assets such as degraded watersheds, (iii) the prevention of pollutions that migrate to other locales, and (iv) many similar agreements. These agreements often take place between various public-coalitions or NGOs and various government agencies and

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institutions. These agreements also extend to international compacts such as the Paris Accord that are aimed at combating global warming, or combating other widespread global problems (widespread ocean pollution, elimination of wildlife or sea life). Whether these agreements exhibit flaws of unfairness can be judged by the Rawlsian criteria reviewed above. For convenience of applications, these Rawlsian fair and reasoned criteria are summarized into four categories here: The informed criteria: All relevant information (both scientific and socio-­economic) is considered without ideological bias by those affected, and is logically reflected in the negotiations. Criteria of inclusiveness: All affected parties have representative access to the negotiations, and all have the “power to avoid coercion.” All affected also have access to relevant information and are represented in the negotiations. Corruption or integrity criteria: All of the agreement’s negotiations are without deception. and all negotiators are transparent with respect to their interests, i.e. they have no hidden conflicts of interest. The objective evidence indicates that all negotiating parties have reasonable expectations of being able to fulfill their commitments, and fully intend to do so. Also, all negotiating parties exhibit “the noble nature” of voicing their ethical concerns in the relevant social settings. Logic and diligence criteria: Those involved in negotiating and reaching the agreements must communicate and explore the options for resolution of the relevant environmental problems. They must demonstrate the creativity and inductive logic for developing the best solutions to these problems. In this sense, the agreement must be judged as logical according to the “Rawlsian stability criteria” explained above. These four characteristics are hereafter termed the conditions for “fair and reasoned” environmental discourse and decisions. They are founded in the Rawlsian criteria for competent moral judges and considered moral judgments. If the four fair and reasoned characteristics listed above are met, then the Rawlsian criteria are also satisfied. For an example of application of these four sets of criteria, consider the Paris Accord, which is aimed at the mediation of global warming. This Accord is an example of inclusiveness in that 196 nations have signed this treaty; hence all nations can be included. It is also an example of diligence in that each nation develops their own options for reductions in carbon-based emissions. This encourages creative and logical solutions for global warming. It was lacking, however, in integrity at least from the US involvement in that having signed the Accord, and having developed strategies for reduction in carbon emissions via development of renewable energy, the Trump Administration withdrew from the agreement in November 2020. (The Biden Administration rejoined the Accord in January, 2021.) Having made the commitment, the Trump Administration reneged. This questions whether the US will be judged as reliable in future treaties.14 The Trump Administration argued that the Accord limits US business and questions the existence of global 14  The Trump Administration has withdrawn from other treaties involving trade and also nuclear limitations.

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warming and its human cause. If the Accord does limit business, then it should do so in other countries as well, but it is difficult to perceive how changes to alternative energy sources could be interpreted as limiting business. It might limit some businesses but encourage others. Withdrawal ignores the scientific evidence of the global common problem; it is not informed.

6

Summary Conclusion

The notion of pursuing an inclusive moral community, for example one that addresses intergenerational environmental concerns, is possible. But as explained in latter chapters, “certain guidelines of inquiry and publicly recognized rules of assessing evidence” must be understood and followed. The biases reviewed in latter chapters should be considered in the context of the Rawlsian criteria for competent moral judges and considered moral judgments as specified above. The critical barriers to reaching any possible consensus among overlapping generations, barriers that potentially prevent the full-public-reason required of a rational “focus” on environmental issues, consist of these biases and violations of the Rawlsian criteria. The distinctions between perfect and imperfect duties are essential for analysis of our environmental obligations. The obligations of (i) gathering knowledge concerning our environmental impacts, of (ii) applying that knowledge, of (iii) engaging in reasoned discourse concerning our environmental problems, of (iv) the recognition of the predominance of this global problem that each individual affects, and of (v) the requirements for contributing to collective actions for making moral environmental decisions, are all of wide obligation. They therefore all have perfect and imperfect duty dimensions where the imperfect duties constitute the particularly interesting and critical aspects. They involve our contributions to our environmental NGOs and coalitions that present the evidence, analyses, and cogent arguments for our reasoned environmental decisions. These issues are addressed in the next chapters. The business opportunities posed by our environmental crises are substantial. For our current era, these opportunities include: (i) new forms of energy generation and use, (ii) new water management methods, (iii) new agricultural products and production methods, and (iv) new eco-tourism and possibilities for natural interactions. These are reviewed in the next chapters. Review Questions 1. Explain the “capabilities argument” presented in this chapter? 2. List O’Neill’s 6 principles of reasoned environmental communication? 3. List the 4 criteria of fair and reasoned discourse and decisions? How should we judge what is “logical or reasoned” in environmental decisions, i.e. the “reasonableness test”?

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Advanced Questions for Class Discussion and/or Essays 4. What does servility mean, and how is non-servility related to environmental ethics? 5. What is the proposition of environmental knowledge? What is the proposition of environmental community and briefly explain its importance to business ethics? 6. What is the collective imperfect environmental duty, and why is it important?

References Arendt, Hannah 1971, 2003. Thinking and Moral Considerations. In Responsibility and judgement. New York, NY: Shocken Books of Random House. Bravin, Jess. 2017. EPA Push on Emissions Standards Blocked. Wall Street Journal. p. A4, Wednesday, July 5, 2017. Davenport, Coral. 2017. Counseling by Industry, Not Staff: EPA Chief Is Dismantling an Environmental Legacy. New York Times. and reprinted in the Buffalo News, July 2, 2017, p. A4. Kant, Immanuel. 1793. Religion Within the Limits of Reason Alone. In Basic writings of Kant, ed. Allen W. Wood. New York: The Modern Library Classics, The Modern Library. ———. 1797. The Metaphysics of Morals, edited by Mary Gregor. Cambridge, UK: Cambridge University Press. Korsgaard, Christine M. 1986. The Right to Lie: Kant on Dealing with Evil. Philosophy and Public Affairs: 15. O’Neill, Onora 1989, 1995. Constructions of Reason: Explorations of Kant’s Practical Philosophy. Cambridge University Press, New York, NY. Rawls, John. 1951. Outline of a Decision Procedure for Ethics. Philosophical Review 60 (2): 177–197. Reprinted in Collected Papers – John Rawls, edited by Samuel Freeman, Harvard University Press, 1999. Robinson, Richard. 2012. The Philosophy of Evil and Business Code Abandonment. BRC Journal of Business 2 (1): 135–156. ———. 2021. Our Environmental Organizations and Reasoned Discourse. New  York, NY: Palgrave-Macmillan. Sullivan, Roger 1994, 1997. An Introduction to Kant’s Ethics. Cambridge University Press, Cambridge, UK.

Additional Advanced Readings Robinson (2021) presents a comprehensive review of the global environmental crisis, and also of the contributions of our environmental advocacy organizations to our reasoned discourse.

Chapter 14: The Philosophy of Community and the Environmental Ethic

1

Considerations of Environmental Duty

My father was a member of the WWII generation. In general, that generation was civic minded. Following the tradition of a small New England town, he and his fellow citizens went to the “town meetings;” they organized and paid for the 4th of July festivities; they volunteered to build the playgrounds and ballfields; they kept our lake and town common clean; they paid their taxes; they were proud of the community they created, and wanted the next generation to also be proud and be similarly civic minded.1 The local environment was considered a community asset worthy of collective effort towards preservation and support. It had an “intrinsic value” to be preserved – or perhaps enhanced – for the next generation. Businesses recognize that to “fit into” local communities, they must also respect these environmental assets. Today, the issues of preservation and restoration for the purpose of “passing on” these worthy assets is considered important. Despite this community dedication, our society’s environmental assets have generally deteriorated since the 19th century’s industrial revolution. The significant cause is “business development.” The significant question has always been, “Do we expand business development opportunities so as to benefit both the current and future generations, or do we preserve or restore the environment now?” Perhaps this is a false choice. Concerning this community preservation issue, the philosopher Richard De George writes, There is no moral imperative that requires each generation to sacrifice so that the next generation may be better off than it is. Parents do not owe their children better lives than they 1  During my last visit to my boyhood town, I discussed the periodic “cleanup of the lake” with those of my generation. They belonged to the same civic organizations that were first organized by the WW II generation, and they pursued the same duties.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_14

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had. They may wish their children to have better lives; but they do not owe it to them. (1981, p. 162)

There is no doubt that De George is correct. There is no absolute obligation owed, nor perfect duty, nor even an obligation of sacrifice to try to better the next generation. There is no perfect duty to try to offer the next generation – whether in one’s own children or those of others – better or even similar opportunities to our own. But each generation appears to try to expand opportunities for the next one; at least that is the current political rhetoric. Even in our cynical age, perhaps that rhetoric has substance. How do we explain these attempts especially within the environmental sphere? I suggest they cannot be explained by theories of perfect duty, but perhaps by a theory of collective (or community) imperfect duty. This is the theory presented and explored in this chapter.

1.1

 he Imperfect Collective Duties T of Environmental Preservation

As suggested above, the environmental obligation that we sense we owe to future generations may be explained by a theory of collective imperfect duty, as presented here. It must be collective because we know that acting in isolation, we cannot hope to resolve the environmental problems we face. This “sense” is generated by the following: • We observe that the current environmental state is degraded and poor as compared to the past. • We sense a need to leave future generations better off than the current especially with respect to environmental amenities. • We also sense that this duty of environmental preservation and restoration is one of wide aim, i.e. an imperfect duty.2 Because this imperfect duty must be collective to be effective, it is manifested by our society’s various involvements in community organizations that aim to restore or preserve environmental amenities. We therefore act through coalitions and advocacy organizations that are dedicated to these concerns. Note that environmental organizations such as The Sierra Club, The Waterkeepers Associations, and the Wilderness Society are popular today for the reasons expressed here. What motivates us to join and pursue these collective imperfect duties? • We have sympathy for others who suffer deprivation due to environmental degradation. This includes the anticipated deprivations to be suffered by future generations.3  This notion of “wide aim” is well explored in the previous chapter and in Chapter 4.  “Sympathy for the suffering of others” is more Humean than Kantian.

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• We recognize the duty (imperfect duty) to respect the dignity of all including ourselves in the sense that we regard our moral self-worth as enhanced by our pursuit of this environmental duty of wide aim. • We recognize the value of our collective pursuit of a moral community, and we judge this pursuit as motivating our collective environmental efforts. From where do these three factors stem? They stem from our past character development expressed in our sense of virtue.4 This “sense” is reinforced by our virtuous community friendships, including our business friendships, and our desire to further reinforce our own and our business community’s virtuous behavior. This is essentially explained by Aristotle’s theory of virtuous friendships.5 (This was reviewed in Chapter 4: “Moral Virtues and Ethical Decisions”.) It applies to our current communal and business organizations. Following Aristotle, we note that these “virtuous community friendships” are necessary for the pursuit of the flourishing life, and for community cohesion. The essential idea is that friendships of virtue reinforce one another. We admire each other’s virtuous qualities, and this admiration motivates us to reinforce one another. (These relations of virtue were explored in depth in Chapter 7: “Relations of Virtue, Pursuit of the Moral Community, and the Ends of Business”.) Our sense of imperfect environmental duty then becomes a community dynamic through which our friendships reinforce our environmental concerns and pursuits, and this includes our environmentally sound business development. We should further recognize that our community, and our own person, must be sufficiently prosperous to be able to serve future generations. The prosperity generated by business development is also necessary to produce the community stability that facilitates our efforts at environmental restoration and preservation. For example, consider the current wave of northward immigration of coffee bean farmers, and other farmers from Central America. These immigrations are caused by global warming and its agricultural disruptions. People in flight may be courageous and desperate, but they are not facilitators of environmental restorations. If these restorations are to be promoted, then it must be from a reasonably prosperous economy. Our collective environmental imperfect duty must have a foundation of a minimum necessary level of prosperity. For the purpose of analyzing the tradeoffs between the environment and business development, allow us to theoretically measure a metric “I” for the total value of industrial production measured over a year, and an index “E” for the value society places on the environmental amenities existing at the end of the year. We conceptualize the environmental amenities to consist of our extractable resources such as timber, minerals that could be mined, existing fish populations, but also air quality, water quality, the natural values of vistas that could be interfered with by development, etc. We assume a reduction in “E” occurs due to development, but note that 4  Virtue ethics was partly explored in Chapter 7: “Relations of Virtue, Pursuit of the Moral Community, and the Ends of Business” along with Kant’s (1797) exploration of “character.” 5  See Cooper (1980) and also Robinson (2018) for explorations of Aristotle’s theory.

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this tradeoff of “E for I” is seriously questioned below. We assume, however, that there is diminishing marginal productivity to this environmental input to production. The production possibility frontier of PPF1 in Fig. 1, is shaped to illustrate this decreasing marginal productivity assumption. Note that starting at a zero level for “I,” a small deduction in “E” yields a large increase in “I.” But as “I” gets larger, the reduction in “E” required to yield any particular increase in “I” becomes larger. Hence the diminishing marginal productivity of the environmental input to production. In Fig. 1, we assume that PPF1 is our current tradeoff possibility, but PPF2 is what we typically and mistakenly think of as the result of social regulation of industry where we expand the possibilities for environmental amenities but restrict industrial production. PPF3, however, is the potential future function when we correctly take our changing technology into consideration, together with the induced changing tastes for environmental amenities. For example, we have changed from the old blast-furnace coke related steel production to new technology that is much cleaner and more productive. We simultaneously improve our possibilities via more environmentally friendly production and greater delivery of amenities such clean air and water. In economic terms, we reduce negative externalities, but promote positive externalities associated with environmental enjoyment. (These conceptions of externalities were reviewed in the previous chapter.) The resulting PPF3 is therefore an outward expansion of both the value of industrial production (I) and the value of environmental amenities (E), although the tradeoffs continue to exist within any particular time period. Note that we value the cleaner production greater than the polluting production. This appears to be a reasonable analysis of current trends. This is the natural result of people discovering and enjoying the improved environmental amenities. This situation of PPF3 is not merely that simultaneous industrial production is cleaner while environmental amenities improve, but that the former is directly generating the latter. This describes a positive externality associated with environmental improvement. When we begin with environmental degradation and then improve through cleaner technology or other changes, the populace Fig. 1 Production possibility frontiers with the Environmental – Technology Dynamic: “I” is the Index of Industrial Production and “E” is the Value of Environmental Amenities

E PPF3

PPF2

PPF1 I

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will often begin to enjoy these amenities to a greater degree and then demand more.6 This is an environmental – technological dynamic. It is an essential dynamic associated with environmental restoration. As an example of this dynamic, consider the pre-1980 degradation of Boston Harbor (Massachusetts Bay) by sewage. Improvements in sewer treatment technology began in the 1980s. The new sewage treatment system was completed in 2001 and the water quality of the Bay and area beaches dramatically improved. The use of the harbor for recreational fishing and boating increased. Early in the 2000s, however, the area noted that the construction had damaged the Bay’s natural eelgrasses that the crustaceans and other sea-life relied on for habitat. Methods for the restorations of these grasses had been successfully researched in the previous decade, and these methods were then used in Boston Harbor during 2004–2007 by the Massachusetts Division of Marine Fisheries. The ecology of the system was restored, and the recreational usage currently continues to be significant.7 The initial environmental improvements led to the public demanding further improvements. Science and technological improvements advanced to provide the methods. The production possibilities depicted by PPF3 present the public’s options for environmental amenities (E) versus industrial production (I); it does not present its preferred combination. This choice of the optimal combination of these sorts (one category of goods versus another) are usually made in the market for the goods involved, but environmental amenities are usually not capable of being marketed. They are “public goods,” but there is some public choice exerted by the location people select to live at, and some by the market for natural resource inputs to production (extractable resources). But these forces cannot be expected to reveal the public’s collective preferences. Why? The public’s preferences should reflect its knowledge of what is possible, and these “possibilities” are not known by individuals in isolation. The possibilities would need to be explored through reasoned social discourse, and be selected as “publicly preferred” by a “fair and reasoned collective decision.” This is explored in the next sections, especially Sect. 4.

2

 he Equity Considerations of Future Generations T and Distant People

In our system of moral construction, society’s legal regulations should apply as perfect duties assuming our CIP is followed for their formation. As reviewed in Chapter 3: “The Categorical Imperative Process and Moral Duties,” the CIP assumes a high degree of reasoned social discussion that is open to all. John Rawls (1980) reviewed the Kantian requirements necessary to assert that society’s regulations are fair, but Rawls’ analysis did not directly consider environmental issues, especially 6  Increases in wealth is associated with technological advances for society. Wealthier people locate where environmental amenities are stronger, and they expend resources on enjoying these amenities. 7  See www.mwra.state.ma.us/01news/bhpenvironmental/success/bhpenusuccess.html.

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those involving intergenerational equity, and fairness to people at distance.8 These consideration are addressed below by applying Rawls’ broad philosophical principles to these issues. It is shown here that the Rawlsian criteria for considered moral judgments are applicable to the formation of environmental policies.9 This set of objective criteria assists in clarifying the nature of “reasoned” in the context of reasoned public discourse. Reviews of the equity related problems (the intergenerational and distant people problems) are presented in this next section.

2.1

The Intergenerational Problem

Rawls (1987) argued that any social conception of justice derived by the CIP should be sufficiently acceptable to the populace as to be stable from one generation to another, i.e. it should be built upon those lasting moral foundations that are acceptable to overlapping generations. With respect to these moral foundations, Rawls (ibid, p. 427) states, They are both general and comprehensive moral doctrines: general in that they apply to a wide range of subjects, and comprehensive in that they include conceptions of what is of value in human life, that is the ideals of personal virtue and character that are to inform our thought and conduct as a whole. Here I have in mind Kant’s ideal of autonomy and his connecting it with the values of the Enlightenment.

This notion of autonomy, as applied to the problem at hand, must counter any paternalism towards the needs of the future or for those at distance. The public’s current preferences for the myriad of environmental amenities we might enjoy versus the consumption of other goods must not be imposed on future generations as though they are mere reflections of ourselves. To do so would pose the ethical problem of paternalism, i.e., the imposition of one’s decision on another (or others) capable of making that reasoned decision for themselves. The essence of the intergenerational problem is the irreversibility of much of our current environmental decisions. What we decide now may not allow a remedy of reversal tomorrow as is illustrated by three broad categories of examples: (i) species extinction, (ii) depletion of non-renewable resources, and (iii) other significant environmental degradations that cannot be reversed without considerable expense. (We might term the latter as “the mess that’s left behind problem.”) Kant’s “axiom of autonomy” lies in the second formula of the categorical imperative.10 If our need for autonomy poses one of those essential comprehensive and moral doctrines that we should use as guides for establishing our practical moral principles (as in our categorical imperative process), and it certainly must be, then with respect to our

8  Rawls analysis primarily considered distributional issues, and not environmental issues, but the philosophical principles of the former also apply to the latter. 9  See Chapter 13: “Recognizing Environmental Duties.” 10  See Chapter 2: “An Applicable Western Ethical View?”.

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society’s environmental policy decisions, a practical principle of flexibility is implicitly demanded. Principle of flexibility: Given that many current environmental decisions have potential uncertain (unforeseen) negative impacts, options for reversal should have considerable value in our cost-benefit analyses.

This principle is best conceptualized through reflections on some current and significant environmental problems and decisions. One of these, briefly reviewed here for illustration, is the problem of water resource use in the Western US.  In particular, consider the problem of building an oil pipeline over one of the Country’s most important aquifers, the Ogalala. We know from financial economics that real options have value. For example, the Ogalala Aquifer is the source of irrigation water for much of our Central and Northern Plains States. The proposed Excel Oil Pipeline is being constructed on top of the Ogalala.11 With respect to impacts on the Aquifer, rather than ignoring the potential catastrophic consequences of a breakage in the Excel Pipeline, we should measure the costs of (a) creating a system for which leakages would be immediately discovered, and (b) having the pipeline immediately shutdown in case of leakage. Perhaps the costs of creating such systems would be prohibitive, but the costs of catastrophe to the Oglala would be extraordinarily high. These systems would create the option of reversibility in case of breakage. Consequently, the value of this option would be high. We should admit that the environmental needs of future generations should not be considered inferior to our own. In addition, our social conception of environmental justice must form “a fund of implicitly shared fundamental ideals and principles.” (Rawls, 1987, p. 427) Such a conception might then be seen as “a fair system of social cooperation.” (Ibid, p. 428) “General and comprehensive moral doctrines” recognized through reasoned social-discourse are likely acceptable to each cohort of overlapping generations since logical analysis is easily communicated as compared to emotional declarations. This is true because emotional appeals are based on the current fashions of the sort that are time dependent to the particular age. The history of philosophy, however, illustrates logical arguments that have lasted centuries. Rational arguments are likely to be longer lasting than emotional ones. One problem posed, however, is that these fundamental ideals must include “certain guidelines of inquiry and publicly recognized rules of assessing evidence to govern applications.” (Ibid, p. 429) This notion robustly applies to environmental inquiry and judgment, especially with respect to intergenerational judgments as explored here. Consider the issue of “shared fundamental ideals and principles.” Who is doing this “sharing?” Presumably this is answered by the Kantian notions of “everyone” as expressed in the CI. (This assumes Kant’s notion that the CI expresses the common sentiments of the populace.) This “everyone” answer means that we must be 11

 A permit for the pipeline was denied by the new Biden Administration in January, 2021.

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fair to both future generations and people of distant lands. The problem is that agreements concerning the “general and comprehensive moral doctrines reached by reasoned discourse,” and the agreement with respect to the scientific evidence relevant to judgements concerning environmental catastrophe, along with the resulting appropriate decision-criteria, may be difficult to achieve within one generation, let alone for overlapping generations. Between generations an overlapping consensus must be formed with respect to what one generation owes the next, i.e. the degree of environmental degradation, preservation, or enhancement desired, allowed and owed. The universal principle of justice, referred to in Chapter  3: The Categorical Imperative Process and Moral Duties, applies to this intergenerational conundrum in that the freedoms of future generations are affected when we make current environmental choices. If we treat the next generation cavalierly, without regard to the quality of its future, without reasonableness or fairness, then it will likely treat the following generation similarly. The environment will collapse from human destruction. To achieve the opposite requires the use of “full public reason,” according to Rawls. (Ibid, p. 442.) “Full public reason” requires that logical public discourse and debate utilize the relevant scientific knowledge as to future environments. This is the focus of reasoned environmental discourse. It should also be noted, however, that one generation might decide that it was unfairly deprived of some environmental resources, and seek its restoration or enhancement, and as a result it bequeaths its conception of a better world to the next generation. In our ethical analysis, the pursuit of the moral community must not be generated from egoistic consequentialist motives in that the third formula of the CI provides the moral motive for actions of volition. Egoistic consequentialist motives are the sort expressed by neoclassical utilitarianism. In keeping with this notion, one generation must consider the impacts on future generations. The third formula does appear, however, to be linked to communitarian motives. Identifying with a community in pursuit of environmental initiatives inclusive of the future may provide a vision of oneself as a moral crusader along with a community of others who are similarly moral. This potentially provides a “friendship of virtue” reinforcement as in Aristotle’s Nicomachean Ethics.12 As such, it yields positive psychic benefits, but these psychic benefits are ancillary to the pursuit of the moral community motive, and not the basis of the motive. If it were otherwise, the motive would likely be weak and unreliable.

2.2

Distributional Effects on the Disadvantaged

Real estate values tend to be positively correlated (in a statistical sense) with locally available environmental amenities, provided other confounding effects are statistically controlled. For example, Midwest rust belt locations which are close to industrial facilities – such as Gary, Indiana, with its older steel production plants - have 12

 See Robinson (2018) and Cooper (1980) for reviews of this dynamic reinforcement.

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lower real estate values as compared to Chicago’s “lakeshore area” with its parks and Lake Michigan beaches. Middle income and upper income populations pay to avoid water and air pollution, and also noise and congestion given the constraint that they still need to locate close to employment interests. Suburban and urban lower-­ income populations tend to locate close to industrial facilities, or old-style energy generating plants, or significant transportation arteries. Rural populations of lower income tend to locate closer to concentrated animal feeding operations (CAFOs) and those water resources affected by CAFO generated pollution. Areas with degraded environments exhibit lower real estate costs and are therefore more amenable to lower income location. As a result, lower-income populations tend to be more negatively affected by environmental degradation, and higher-income populations tend to benefit more from environmental preservations and restorations. For these reasons, society’s concerns for environmental amenities could be perceived as serving elitist interests. But the cost-benefit analyses of environmentally related projects should be (and are) designed to take these lower-income distributional effects into account. Note that the author’s family experienced an opposite effect in the 1950s. A significant portion of the family’s enjoyment was rendered from the use of the public beaches along the North Shore of Boston’s suburbs. When these beaches deteriorated due to public neglect, the lower income families of that area suffered as a result. When those beaches again became clean and publicly supervised and controlled, lower income families again benefitted. The positive correlation between location costs and environmental amenities is therefore somewhat complex. With respect to environmentally related projects (or those that otherwise have environmental impacts), the above observations beg three important questions: (i) Is it fair to expend Federal resources on projects that benefit only a local few? (ii) Might the Nation prefer placing greater weight on projects that positively impact poor under-developed or economically stricken areas even though it does not produce significant National Economic Development benefits (NED benefits)? (iii) Would the Nation wish to negatively affect already marginalized groups in order to generate significant NED benefits? These three questions essentially concern resource transfers or compensations to disadvantaged groups via environmentally related projects. The usual answers to these three questions are to separate the public benefits of resolving problems of the disadvantaged from the generation of positive NED benefits of public projects. Politically, however, these are not easily separable solutions? The answers to the first two questions above are generally “Yes!” The US Army Corps of Engineers identifies disparate impacts on the disadvantaged in analyses of all of its projects including those environmentally related. With particular relation to question (iii), the efficient answer is to generally undertake all projects with positive NED

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benefits, but to compensate those disadvantaged by those projects. (The explicit problems of compensation are addressed below.) The discourse problems posed by the issues reviewed above are: (i) clear identification of those groups impacted, (ii) as clear as possible identification of the disparate costs and benefits impacting these groups, and (iii) clear identification of the methods and amounts that could be used for compensation to those negatively affected. The information necessary to be provided to the decision makers in the political process in order to resolve these “difficulties” is substantial, but clarity in the above can potentially make this public discourse “reasoned.” Once these effects are identified, and the solicitation of public input is issued, the appropriate political discourse is facilitated.

2.3

The Problem of Equity for Distant People

As with the intergenerational problem, providing environmental equity for people at distance requires general inclusive agreements as to the relevant information to be considered, and the appropriate decision criteria to be applied. These are specific problems logically analyzed in the next section, but it should be sufficient here to point out that global warming is the environmental conundrum of our age, and it applies to both intergenerational problems and the problem of providing equity to those at a distance. Distant people cannot equally participate in our own social discourse, at least not without significant effort. The Paris Climate Accord, however, organized by the United Nations Framework Convention on Climate Change (UNFCCC) includes 196 signatories from five continents. The Accord was signed on December 12, 2015. It illustrated the possibilities of overcoming the problems of distance.13 The Accord seeks to limit greenhouse gas via having each signatory nation pursue its own goals through both expansion of clean renewable energy sources and energy efficiencies; both of which are business problems of great importance. For example, as part of the Accord, France plans to ban all petrol and diesel vehicles by 2040, and to discontinue coal production after 2022. Technical experts are to monitor progress with each signatory agreeing to transparency with respect to this monitoring. The ultimate stated goal is to limit average global temperature increases to a maximum of two degrees centigrade as compared to preindustrial revolution

 The Trump Administration withdrew the US from the Accord in November, 2020, but the Biden Administration resigned the Accord in January, 2021.

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temperatures. The agreement does allow for carbon trading between countries to enable reaching their goals.14

3

Efficiency and the Coase Theorem

Chapter “The Moral Construction Process and Duties” argued that there is a role for environmental knowledge that is either passively acquired through typical interactions, or that could be acquired through a purposeful search. Businesses, however, have natural conflicts of interest with respect to environmental exploitation, namely business may be able to profit through developing negative externalities associated with environmental exploitation, i.e. dumping costly byproducts on the environment thereby externalizing them. Classical cases of these exploitations involve water, air, and various poison-type pollutions associated with industrial, agricultural, and suburban development. These business examples stem from the origins of the industrial revolution, but prior to those “origins,” society likely had problems of wastewater flowing past downstream neighbors, and other garbage type problems. Negative externalities have always existed, and perhaps it has always been acceptable in some geographic areas to pollute rivers. Using rivers and streams as sewers for business generated pollutants such as the example of the textile industry’s dumping of industrial chemicals into the Chattahoochee River of North Georgia, or pollutants from pulp mills as another example, therefore have long histories going back to the origins of the industrial revolution in the US and Europe.15 Developing landfills with chemical pollutants from business, such as Love Canal in Western NY, provides other examples.16 The point is that business has historically had conflicts of interest when involved with formation of the public’s environmental policy. These conflicts of interest imply that business’ input must be considered by the public as “biased” in its discourse efforts, but this does not imply that when business acts within the constraints of those fairly established public policies, it cannot contribute to environmental enhancement. Business overall may be destructive in its biased influence on public environmental policy, but this does not imply that individual businesses cannot positively affect environmental enhancement through its efforts. Preserving the latter effect while recognizing the problem with the former effect is required for our public discourse to be reasonable.  The U.S. National Climate Assessment, a consensus report of scientists at U.S. agencies and peer-reviewed by the National Academy of Sciences, recognizes global warming and assigns the causation to greenhouse gas. 15  See Thoreau (1849) for observations of early-industrial revolution river pollution on the Concord and Merrimack Rivers. Also, see https://chattahoochee.org/water-quality/ for a review of the textile industry’s pollution of the Chattahoochee River. 16  For a review of the Love Canal environmental tragedy, see https://archive.epa.gov/epa/aboutepa/ love-canal-tragedy.html. 14

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The Nobel Laureate Ronald Coase contributed to the literature and considerations of negative environmental externalities.17 One of his contributions is the Coase theorem, a version of which is presented below. This has been used to argue that negative environmental externalities are not as severe a public problem as often cited. The Coase theorem: (1) under conditions of well-defined property rights, and (2) in the absence of transactions costs associated with negotiations over property rights it may be socially-efficient for those who exploit environmental resources to continue doing so provided they can sufficiently compensate those who suffer the negative externalities.18 The market can therefore be efficient even in the presence of negative externalities.

One problem with the Coase Theorem, and its implications for compensation, is that we most often do not have “well defined property rights” with respect to public resources such as breathable air or clean water. The public typically does not have the right to sell the quality of air or water to private interests. In addition, the incentives to exploit these resources via pollution also stimulate public corruption associated with the legalities necessary to control negative externalities. The tragedy-of-the-commons phenomena always concerns public resources and their destruction, and not the destruction of private property rights. (The section below addresses the “tragedy of the commons” phenomena.) These public resources also have considerable positive externalities, as with the old-growth forest and watershed examples also reviewed previously. Without public management that is uncorrupted by business, these positive externalities will also be destroyed. Compensation for these externalities is seldom feasible. With respect to the equity problem of degrading the environment for future generations, can we compensate for this degradation via provision of some other good, perhaps technological advances as an example? A public decision to degrade a future environment in exchange for some other non-environmental provision would be purposely paternalistic, as defined above. In this situation, the current generation would decide the compensation for the future generation. “We will take your environment, but as compensation, we will give you this technology that we like!” This is clearly paternalistic in its presumption, and would not occur if current public discourse ethically incorporates the interests of future generations. This is required of our current rhetoric and decision methods, i.e. the cost-benefit system reviewed below. But can this method resolve the moral problem of paternalism?

4

The Search for a Just Environmental Policy

Previous to my academic career, the author of this book spent several years gathering the necessary data and computing the cost-benefit analysis required for allocating water resources to irrigated agriculture, hydro-power, household water use, 17 18

 See Coase (1960). Coase won the Nobel Prize in Economics in 1991.  By socially efficient, we mean from the standpoint of welfare economics.

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industrial water use, and fish and other natural preservations, all from one of the US’ more significant river-basin systems, the Columbia River Basin. This occurred under the aegis of the US Army Corps of Engineers – the government institution trusted with the public authority allocated for this civic purpose. This governmental cost-benefit analysis has specified procedures for evaluating both costs and benefits, procedures prescribed by the US Water Resources Council – a supervisory group formed from the experts of various federal agencies and informed by academic and other scholars. The analysis is ostensibly designed to incorporate all relevant information including the market related dollar-designated values of the potential outcomes of the policies, which include the marketed goods that result from the water allocations, but also the recreational person-days (or reduction therein), and any other values that could be assigned as directly related to the allocations. For those effects for which monetary values cannot be assigned, the “Council” directs that other quantifications should be identified. All this information is to be used by policy decision makers in their subjective judgements for the final decisions. For example, consider those effects for which values are difficult to define  – such as the impacts on remotely located old-growth wilderness preservation for which few recreational days are anticipated. Economists have proposed methods for valuing these effects such as measuring “reservation demands” for which people are surveyed as to their valuations for the existence of the resource even though they do not anticipate a likely visitation. Preservations such as these certainly have value, but because they have no direct market for their attributes, dollar valuations are problematically difficult. This partly illustrates the problem posed by the market-valuation paradigm as it applies to our environmental policies. But the market-valuation paradigm has other problems than indicated above. Consider the tragedy-of-the-commons environmental conundrum. As described by Hardin (1968), this “tragedy” is illustrated by the grazing problem where a lone farmer allows her stock to overgraze on a common area, i.e. beyond a regeneration capacity. She allows the overgrazing because she believes that if she does not, then others will and the resource will inevitably be depleted, so she may as well have her stock do the overgrazing. We ask, “Why not join with the other farmers to manage the resource?” This is the logical solution to overgrazing, but it also involves the transaction costs of finding the other farmers, persuading them to join, establishing a rational agreement, and effectively monitoring the agreement to prevent any free-­ rider violation. The point of the illustration is that people acting alone would place values on environmental assets and amenities that differ from acting effectively in consort. If they believe that the environmental asset could be preserved and managed effectively then it would have a higher value to them, and their behavior would change accordingly. The market-valuation paradigm, however, is naturally biased towards treating all valuations as made by the consumer as an individual, not as a member of a collective who might prefer that the asset be preserved. Why use the term “naturally biased?” Because since market purchases are relatively easy to observe, simple individual market-based transactions are easier to use in cost-benefit analysis. It is much more difficult to elicit the value of a natural asset as judged by society acting as a

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whole rather than a collection of individual consumers. There is no easily observed market for valuing society’s collective preservations and restoration. How much do you value a breath of fresh air, or the clear view of a mountain vista? You do value these, but these valuations are difficult to solicit and consequently measure. Compare this sort of valuation problem to measuring how much you value a hamburger. The former is probably substantially valued but difficult to measure. The latter is probably small in value but easily measured; it is the price you paid. In addition to these “in communal consent” versus “multi-isolated individuals” considerations, market transactions might have external effects (such as pollution) that are not included in the costs of production. This result in overproduction of the marketed good, and a less than “optimal level” for the affected environmental amenity.19 Envisioning “what could be” for a clean environment, and then valuing this possibility in dollar measures, is a particularly difficult task. But in using this market paradigm for valuing economic activity and environmental amenities, all of these problems result in what Freeman (1993, p. 485) and Gillroy (2000, p. xxix) point out are (i) a lack of recognition of the moral integrity of the individual acting in consort with others and her community, and (ii) a lack of concern for the intrinsic value of the environment. “These problems” are difficult for the cost-benefit analyst, but we know the “intrinsic values” are likely to be enormous. In many cases – some cited in Sect. 7 below  – we suspect they significantly outweigh any value derived from commercial market exploitation. Gillroy (Ibid) particularly addresses the conundrum of environmental risk analysis as a public policy problem. Environmental risk concerns the significant threats to nature such as global warming, significant pollutions of water and air, genetic modifications of significant foods (wheat, rice, soy and the like), and species reductions. The market paradigm is obviously inadequate to address these threats to the broad – perhaps global  – environment. As Gillroy states, “To establish an alternative approach to (evaluating) environmental risk we must move beyond a reliance on self-interested preferences … ; we must concentrate on the ramifications of individual practical reason as this translates intellectual imperatives into human choices and physical actions involving the natural environment.” (Ibid, p xxx, parentheses added.) I argue that these translations of “intellectual imperatives” into “physical actions” require the exercise of collective imperfect duties as briefly suggested above. Gillroy (ibid) contends that in cases of environmental risk, “the citizen’s use of practical reason” to evaluate and resolve this risk must rely “on the moral integrity of humanity and the functional integrity of the environment.” Furthermore, Gillroy argues that by using our Kantian practical reason, then the “intellectual reflection and deliberation that moves the individual to action, includes more than mere instrumental rationality,”20 i.e. it must use more than the anthropocentric vision of the environment as a mere “instrument” for human use. This “reflection and deliberation” must pose the bridge between “ought and is, between intellect and  “Optimal” refers to economic efficiency as reviewed in Chapter 13.  The term “Kantian practical reason” refers to The Critique of Practical Reason, Kant’s (1788) significant publication.

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action, between humanity’s duty to itself and to the environment,” and also between humanity’s “internal autonomy and its external moral agency.” But although all of this “bridging” refers to individual autonomy, to be effective it must be the result of reasoned social discourse, and it also must be manifested in collective action. But Gillroy further states that as a process, “The ends of policy (should no longer be) the (economic) welfare of the material person but the autonomy of the moral agent.” (Ibid. p xxx, with parentheses added.) The moral integrity of selecting natural preservation for future generations should be a virtue for all individuals. How could our social policy support this “autonomy of the moral agent?” This could only occur by recognizing and supporting our collective efforts. (The precedent setting Storm King legal decision described in chapter “Some Current Environmental Problems for Business”, and many other similar decisions, provide examples of public policy that supports “autonomy of the moral agent.”) This autonomy must be viewed as manifested in this collective environmental action, and this is the theory explored in this chapter. Gillroy (2000) poses a theory he titles Justice from Autonomy, an “autonomy” that integrates the individual into the community, where this integration into a “common life” exhibits neither the “dominance of social convention nor atomistic isolation.” This, he claims, is essentially Kantian in providing an ethical foundation for our society’s public choice that “focuses on the moral autonomy of practical reason as it finds voice in the policies of a just state.” (Ibid, p. xxxi.) Gillroy argues that Kantian ethics, and the politics that result from our reasoned social discourse, should be sufficient “to provide specific content to political decisions that create the social conditions within which we live.” (Ibid) Kantian ethics is anthropocentric (as in Enlightenment ethics). It creates our duty to nature as arriving from our duties to ourselves and others so as to reflect our autonomy and our pursuit of a the moral community. Our public policies, therefore, manifest a process for managing nature in order to facilitate this pursuit. Note that the last section of this chapter reviews some of the classic literature that essentially argues this linkage between environmental policies and this “pursuit.” We must conclude from our analyses that personal autonomy should lead away from isolated concerns for our environment and into collective action, both because our society’s process requires reasoned social discourse and because our pursuit of a moral community logically requires these efforts. Our isolated efforts are less than likely to be effective, but the evidence documented in the last chapter shows that our reasoned collective efforts have demonstrated effectiveness.

5

 elations of Virtue, the Moral Community, R and Environmental Organizations21

Involvement in collective environmental action involves more than the pursuits of moral preservations and restorations. It involves the human interactions of virtuous friends with dedicated purpose. These friendships reinforce one another to form the

21

 This section relies on Robinson (2018).

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pursuit of the moral community as manifested in their environmental actions. This is expressed in the ancient philosophies of Aristotle and virtue ethics as reviewed in chapter “Relations of Virtue, Pursuit of the Moral Community, and the Ends of Business”. Friendships of virtue are the foundation of our environmental advocacy organizations (EAOs). The citizenry involved in these EAOs are expressing the collective environmental duty described above. They do so by their own individual efforts, and by reinforcing the virtuous efforts of others. As described extensively in chapter “Relations of Virtue, Pursuit of the Moral Community, and the Ends of Business”, these efforts of admiration for one another’s virtues are necessary for the pursuit of the flourishing life, as well as the pursuit of the moral community. But it is important here to also recognize the contributions of these EAOs to our reasoned social discourse, although these contributions are reviewed in detail in latter chapters. Without these citizen collective efforts, our society would be inhibited from reaching fair and reasoned environmental decisions.

6

The Specialness of Process

There are several attributes of our process for forming our environmental maxims which we should consider as absolutely required for any claim of “fairness.” These issues of fairness were addressed in Chapters 3 and 10: The Categorical Imperative Process and Moral Duties” and “Fair Stakeholder Negotiations”, and are also addressed here.22 In addition, if as Kant claimed, the categorical imperative process (CIP) represents the common social understanding of how our moral maxims should be formed, then we might be justified in attributing some high degree of specialness, or perhaps even sacredness, to the attributes of this process.23 These considerations are also examined in detail in this chapter. These paramount, or sacred, attributes include the following: • All those affected must have equal access to the social-democratic discourse required to establish our moral maxims. This should be considered the epitome of our “fairness” consideration. • This discourse must be scientifically and socio-economically informed. All relevant and available information should be considered. • While equal access is a prior requirement for fair discourse, it is also rationality that is the use of rational reflection and logic in argument concerning the moral issues at hand – that is required for this process of discourse to be ex post considered “fair.”24

 Rawls (1980) particularly explores issues of “fairness” in the CIP.  “Sacred” applies to more than religious considerations. It is commonly defined as “regarded with reverence,” or “secured from infringement by reverence or sense of right.” In this sense, the two Kantian attributes of the CIP cannot be infringed, and therefore are “sacred” for these reasons as juxtaposed against religious “sacredness.” 24  See Wood (1999, pp. 306–309), for a review of Kantian reasoned discourse. 22 23

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These “attributes” are part of our “fair and reasoned discourse and decision processes” reviewed in Chapters 3 and 10: “The Categorical Imperative Process and Moral Duties” and “Fair Stakeholder Negotiations.” The requirements for our environmental reflections to be “rational” are examined here. According to Kant (1793, 6: 26; 1785, 4: 435–440) “rationality” is the defining characteristic of humans, a characteristic that makes life itself sacred. If this is true, then “rationality,” i.e. the ability and inclination to make logical and informed decisions that result from reflection, is the attribute that must be applied to our environmental considerations as explored below. As an example of this “rationality,” consider to what extent may I pollute clean water or clean air? Can I even exist without being a polluting entity? The answers must involve the extent of the pollution, the intention (social or personal) embodied in this action, and the impacts and methods of the pollution. A more relevant question is to what extent does my pollution affect others, and should it be controlled in some legal way? Must the universal principle of justice (UPJ) be violated by our personal pollutions since we know others must be affected, and their freedom impinged in some way however small or large? These are the social questions that should be considered by our reasoned public discourse. We know we cannot exist without generating pollution of some sort. We also know we must reach general agreements as to their controls. If we are alone in some vast wilderness, our personal pollution might be of little social concern, but polluting in a dense environment is another matter. Population density, however, potentially generates the economies of scale associated with pollution’s control. It can be ameliorated by large scale efforts. But in a dense city, personal pollution would also be perceived as more offensive by the many around us. For these reasons, we recognize that regulation is likely to be more strict. In a city, garbage is managed, and civic complaints are few provided it is managed. Today, however, even our small personal pollutions when aggregated across populations can contribute to severe diseconomies of scale that affect the whole globe. Our rivers, oceans, atmosphere, and food supply can all be affected. Hence massive social controls form the considerations of our discourse. “Alone in the wilderness,” we are not. The point is that our pollution, even our personal pollution, is now a global problem because of its global effects. Recognizing that this is a new era places our environmental considerations as paramount in our social discourse.

6.1

 roblems in Our Environmental Categorical Imperative P Process (CIP)

Our formula of universal law prohibits us from behaving by personal maxims that are applicable only to us, and that are designed only for our own convenience. This also applies to our environmental considerations. Universality requires knowledge of and participation in our social environmental discourse, but since future generations cannot be included in this discourse, we must fairly consider and currently represent their interests when considering environmental impacts. In a similar way,

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our formula of respect for the dignity of persons would also be violated by ignoring the interests of future generations. Providing the future with an environment that is limiting as compared to the current one would constitute ignoring the as-yet-unborn. It would force them to accept an inferior status within our considerations, and that violates our ideal norm for our CIP. Our conundrum is, “How do we include and represent the interests of future generations in our discourse?” Perhaps our obligations are to assure our environmental amenities are not further degraded, and perhaps they must even be enhanced. For one generation to decide the interests of another would appear to be paternalistic. O’Neill (1989/1995, p. 120) defines paternalism as using others without awareness of their desired ends, but by imposing ends that we judge as should be desired by them. In the consideration at hand, environmental paternalism with respect to future generations appears unavoidable, so we must logically suppose what future generations will desire, perhaps doing so by projecting the preferences of the current onto the future, or perhaps by also referring to those preferences desired by the previous generations in a search for consistent values. If a current generation enjoys a particular set of environmental characteristics (clean water, air, and green spaces as examples), then perhaps these are the minimums that should be bequeathed to the next generation. (These necessary minimums, however, may not be sufficient as explored in the next section where environmental restoration is considered.) As reviewed in Chapter 3: The Categorical Imperative Process and Moral Duties, through our moral maxims, we must seek a kingdom of ends, and by this “kingdom,” Kant meant “the union of different rational beings in a system by common laws” or maxims. (1785, 4: 433) Through the first two formulae of the categorical imperative, duties are derived and motivated by the pursuit of this kingdom of ends. The harmony referred to in the third formula, means that these rational beings pursue consistent and coordinated duties aimed ultimately at pursuing this kingdom of ends. This applies to all individuals in this ideal union. Moral actions are therefore those that are motivated by the pursuit of this ultimate good. They cannot be those that serve only the self at the expense of others in this “union of rational beings.” (1785, 4: 430) They cannot, therefore, knowingly exploit future generations. Indeed, in the Fundamental Principles of the Metaphysics of Morals (1785, 4: 390), Kant argued that examination of motivation is the only basis for judging the morality of some action, and pursuit of the moral community provides the only justifiable moral motivation.25 Other possible motivations would be self-centered and selfish. Motivation to enhance the environment should not be self-centered, but it should broadly serve the pursuit of a moral community built upon the respect for the legitimate ends of all including those at distance and as-yet-unborn. If our discourse does not fairly confront these issues of equity, then it loses its claim to be moral in process and resolution. When it confronts these issues, however, it meets our aspirational standards for sacredness. This poses the foundational moral philosophy of environmental preservation and restoration. 25

 Also see Sullivan (1994, p. 30.)

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281

Nature as Sacred

The categorical imperative process (CIP) is the product of Enlightenment philosophy, of which Kant’s contributions are essential components. Given the religious and quasi-religious character of our environmental sentiments, the Kantian approach might appear to be strictly contradictory to these “sentiments” since being Enlightenment philosophy, it is usually viewed as not amenable to religious considerations, even those that only bear “family resemblances” to religion. The argument presented below, however, explicitly addresses this dichotomy. It argues that to the extent the public accepts the quasi-religious logic concerning the sentiments generated by natural experiences, then these sentiments should be reflected in the reasoned democratic discourse of the CIP as described below. Nevertheless, Kant (1784, 1793) argued against the assertion of religious dogma for the purpose of exclusion of reasoned discourse. I have emphasized the main point of enlightenment, that is of man’s release from his self-­ incurred minority, primarily in matters of religion. (1784, 8: 41)

It is the dogmatic assertions that inhibit discourse, not the quasi-religious rhetoric of “I am inspired by nature!” Individual autonomy is not breached by reasoned non-dogmatic but still religiously motivated discourse.26 As a result, notions of the instrumental benefits to humanity of the sort outlined below would presumably be included in this reasoned discourse. There is, however, more to the American cultural perspective of the role of nature than directly addressed in Kantian philosophy. In particular, there is the perspective of “nature as inspiration,” although this approach does not contradict the Kantian philosophy as presented above. The ethical basis for the “specialness of nature” typically utilizes either (i) the metaphysics of nature’s sacredness (unique specialness) as a stand-alone entity, or (ii) the metaphysics of humanity’s transcendent spiritual-type interconnectedness with nature, or (iii) a hybrid philosophy that combines the above two.27 The expositions of these approaches fit Saler’s (1993) categorizations of “family resemblances” to traditional organized religion in that the environmental movement uses language similar to the religious canonical literature.28 If the traditional religious experience is centered on “an uncanny, awesome, or powerful manifestation of reality, full of ultimate significance,” as claimed by Chidester and Lilienthal (1995, “Introduction”), then interacting with nature also has this potential “significance,” i.e. it is capable of offering an epiphany similar to that experienced in traditional religious experience.29  This is also a point made by Habermas (2002).  Schuler et al. (2017, p. 216) identifies the second of these arguments (humanity’s transcendent connectedness) as necessarily utilitarian. This is not the position developed below where a Kantian approach is presented. 28  See Taylor (2017, p. 248). 29  Wood (1998, p.192–204) argues that nature is a teleological system that serves humanity so that its preservation is a perfect duty as described below. O’Neil (1989) reinforces notions of this teleological perfect duty. 26 27

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As examples of this religious approach, Emerson (1836) and Thoreau (1854) provide early versions of the “transcendental inter-connectiveness” school. Concerning Thoreau’s philosophy, Taylor (2017, p.  250, parentheses added) observed, “What everyone needs is direct, visceral and sensory contact with nature; this was his (Thoreau’s) spiritual epistemology.” An intimate relationship with nature was the essence of Emerson’s and Thoreau’s transcendental epistemology.30 In My First Summer in the Sierra, Muir (1911) especially emphasized the transcendental religious aspects of contact with nature.31 The excerpts below indicate the deep spiritual aspects of his philosophy concerning the benefits of contact with nature. In his published diary, he used expressions such as, These blessed mountains are so compactly filled with God’s beauty, no petty personal hope or experience has room to be. (Muir, 1911, Entry of July 20, 1869) … I gaze and sketch and bask, oftentimes settling down into dumb admiration without definite hope of ever learning much, yet with the longing, unresting effort that lies at the door of hope, humbly prostrate before the display of God’s power, … (Muir, 1911, Entry of July 20, 1869) … Wherever we go in the mountains, or indeed in any of God’s wild fields, we find more than we seek…. (Muir, 1911, Entry of August 4, 1869)

Prior to Muir, Ralph Waldo Emerson (1803–1882) also emphasized the quasi-­ religious aspects of nature. He was a minister, philosopher, essayist, and lecturer. He was the leading member of Concord’s (Massachusetts) 19th century intellectual and artistic movement that included Thoreau and Dickenson. He was born in Boston, graduated Harvard in 1821, and subsequently abandoned the ministry over dogmatic disagreements. His seminal essays and lectures included “Nature,” and the “American Scholar,” the latter being a clarion call for the recognition of American intellectual and academic excellence. “Nature” began the American transcendental-­ natural philosophy as emphasized and expanded by Thoreau, and reviewed below. Emerson’s dwelling was a sizeable Concord house overlooking a meadow, and with an expansive natural view. He described his experience in “Nature.” To go into solitude, a man needs to retire as much from his chamber as from society. I am not solitary whilst I read and write, though nobody is with me. But if a man would be alone, let him look to the stars. … Nature never wears a mean appearance. Neither does the wisest man extort her secret, and lose his curiosity by finding out all her perfection. Nature never became a toy to a wise spirit. (1836, Chapter I, pp. 1–2) The charming landscape which I saw this morning is indubitably made up of some twenty or thirty farms. Miller owns this field, Locke that, and Manning the woodland beyond. But none of them own the landscape. There is a property in the horizon which no man has but

 Thoreau (1849, 1862) offers additional explorations of the benefits of transcendental interactions with nature. 31  Muir’s diary was published as My First Summer in the Sierra (1911). 30

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he whose eye can integrate all the parts, that is the poet. This is the best part of nature, of these men’s farms, yet to this their warranty-deeds give no title. (Ibid, Chapter I, p. 2)

Because the Socratic and Aristotelian philosophies sought to ground ethics as similar to the laws of nature, ethics and the natural law were perceived as equivalent, and studying nature could then lead one to discern the ethic of how to live. Emerson expanded on that philosophy in “Nature.” It has already been illustrated that every natural process is a version of a moral sentence. The moral law lies at the center of nature and radiates to the circumference. It is the pith and marrow of every substance, every relation, and every process. All things in which we deal preach to us. What is a farm but a mute gospel? The chaff and the wheat, weeds, weeds and plants, blight, rain, insects, sun, – it is a sacred emblem from the first furrow of spring to the last stack which the snow of winter overtakes in the fields. But the sailor, the shepherd, the miner, the merchant, in their several resorts, have each an experience precisely parallel, and leading to the same conclusion: because all organizations are radically alike. Nor can it be doubted that this moral sentiment which thus scents the air, grows in the grain, and impregnates the waters of the world, is caught by man and sinks into his soul. The moral influence of nature upon every individual is that amount of truth which it illustrates to him. (Ibid, Chapter V, p. 42)

Nature and humanity’s ethics were unified in Emerson’s transcendental view. Hence nature becomes the teacher, the sacred instructor. Henry David Thoreau (1817–1862) was an associate of Emerson, and also a Concord naturalist. His philosophy of “live a simple life” facilitated his year of living in a small cabin on the north side of Walden Pond, a mile or so South of Concord. His year at “Walden Woods,” and other New England adventures enabled his naturalist lifestyle. He grew up in borderline poverty and lived his life thus. He nonetheless graduated Harvard in 1837. He published A Week on the Concord and Merrimack Rivers in 1849 and Walden in 1854. The following indicates his naturalist philosophy: I went to the woods because I wish to live deliberately, to confront only the essential facts of life, and see if I could not learn what it had to teach, and not, when I came to die, discover that I had not lived. I did not wish to live what was not life, living is so dear, nor did I wish to practice resignation, unless it was quite necessary. (Walden, 1854, Chapter titled “Where I lived, and what I lived for.” p. 182) One attraction in coming to the woods to live was that I should have leisure and opportunity to see the spring come in. The ice in the pond at length begins to be honey-combed, and I can set my heel in it as I walk. Fogs and rains and warmed suns are gradually melting the snow; the days have become sensibly longer; and I see how I shall get through the winter without adding to my wood pile, for larger fires are no longer necessary. (Walden, 1854, Chapter titled “Spring,” p. 342.)

Thoreau was clearly inspired by his naturalist experiences at Walden, and also canoeing New England rivers. He perceived nature as “sacred” as humanity’s home, and that nature taught the lessons one should live by.

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The Supreme Court Justice William O. Douglas was a polio victim as a child. He was raised in Tacoma, Washington, close to national forests and wild areas. To strengthen his legs, he hiked the forests of the Pacific Northwest, and doing so, he became a passionate life-long advocate of “wilderness values.” With respect to wilderness’ transcendental values, Douglas (1965, Chapter I, pp. 25–27) eloquently stated, Wilderness values may not appeal to all Americans. But they make up a passionate cause for millions. They are, indeed, so basic to our national well being that they must be honored by any free society that respects diversity. We deal not with transitory matters but with the very earth itself. We who come this way are merely short-term tenants. Our power in wilderness terms is only to destroy, not create. Those who oppose wilderness values today may have sons and daughters who will honor wilderness values tomorrow. Since one function of a free society is to protect minority rights, we need to guarantee that large areas of the original America will be preserved in perpetuity. Those who love the wildness of the land and who find exhilaration in backpacking and sleeping on the ground may be idiosyncratic; but they represent values important in a free society. Wilderness people are at the opposite end of the spectrum from any standardized product of the machine age; yet they represent basic values when they protest against automation for the wilderness and for their grandchildren. The preservation of wilderness values requires a Wilderness Bill of Rights, … and its preamble would read as follows: “We believe in the right of children to an understanding of their place in nature’s community, of which they are a part. “We believe in their right to acquire skills for living in the out-of-doors as part of their heritage as descendants of pioneers, to swim, fish, to manage a canoe, to climb, to hike, to worship. We believe in their right of discovery and adventure in nature’s world, their right to pit their strength against the elements and in their right to a sense of achievement. We believe in their need of the healing found in the wilderness of nature. We believe in their unfolding response to the warm earth, the friendly stars, the music of streams, the unknown life in hidden places, great trees, sunsets and storms.” We believe that all these are pathways for them, and for us, to God, and that their language is universal. Wilderness is a therapist – a physician, indeed a preeminent one. The noise of civilization is one of man’s worst enemies. Like a bacillus hostile to man, it produces disease  - not directly but through the fatigue and weariness that it creates. Tension caused by noise is enervating. … Wilderness has noise as when great winds make treetops roar, setting up the cadence of pounding surf. Wilderness noise is also the murmur of brooks, the chatter of squirrels, the scolding of camp robbers. Wilderness noise is the sequence of bird calls just before dawn, the ecstatic music of the whippoorwill at dusk, and the deep quiet of a darkened forest. The noise of wilderness is varied; it has no monotony; it is the music of the earth of which man is an integral part whether he knows it or not. The healing effects of wilderness are well known. Cares slough off; the conscious and unconscious springs that create tension are relaxed … (Douglas, 1965, Chapter II, pp. 33–34.) We need a new conservation ethic if we are to have sanctuaries of wilderness left commensurate with the need. This ethic was described by Leopold in A Sand County Almanac: “A

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thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. (Ibid, Chapter II, p. 37)

John Muir (1911) and Aldo Leopold (1949a, b) both criticized anthropocentric theism - especially as initiated by Abrahamic religious-extensions – as leading to nature’s destruction. As emphasized by Leopold (1966, pp. xvii–xix), Conservation is getting nowhere because it is incompatible with our Abrahamic concept of land. We abuse land because we regard it as a commodity belonging to us. When we see land as a community to which we belong, we may begin to use it with love and respect. There is no other way for land to survive the impact of mechanized man, nor for us to reap from it the esthetic harvest it is capable, under science, of contributing to culture. … That land is a community is the basic concept of ecology, but that land is to be loved and respected is an extension of ethics. That land yields a cultural harvest is a fact long known, but lately often forgotten.” (From “Forward.”)

Other religious sentiments, i.e. those that honor nature as independent of our dominance, are emphasized in Native American beliefs.32 Muir (1911), however, emphasized natural preservation for the purpose of human interaction, and termed its destruction as evil.33 Muir pointed out that today “we go to the woods” as a substitute for churches and temples.34 These philosophies contain a foundational motivation aimed at providing the metaphysical grounding for valuing nature either as sacred in itself, or sacred due to its spiritual contributions to humanity. If there is no spiritual basis for natural preservation or enhancement, “then one could argue that any valuing of nature expresses mere emotion. … without some sort of sacred ground for this (natural) experience, the accompanying feelings and values are at best transient, and at worst delusional.” (Taylor, 2017, pp. 256–257 parenthesis added.) In reviewing the analysis below, we should recognize the concept of a natural sacredness, or perhaps a sort of unique specialness, as instrumental to the human experience. This claim is justified by the substantial literature that supports this traditional view. The important point is that our moral processes of reasoned-discourse should have the ability to reflect this instrumental spiritual role of nature if this is society’s reasoned view. But the Kantian environmental philosophy is essentially “the other side of the coin” from the sacredness or specialness of nature argument. In Kantian philosophy, if nature is special, it is stems from its instrumentality to humanity. This instrumentality is due in part from nature’s inspirational influence, but also because the natural environment is humanity’s home, and separation from it is extraordinarily unsettling.

 See La Duke (1999).  See Taylor (2017, p. 252). 34  See Burroughs (2009, p. 246). 32 33

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The Collective and the Environment

Environmental preservation and restoration concern both wild areas and domesticated areas, the latter being a myriad of geographies as varied as urban dwellings, parks, and rivers and streams that flow through both densely populated and less-­ densely populated areas. It concerns rural areas, some with degraded environmental amenities, some with relatively healthy amenities. All need clean air, clean water, less noise, green areas with varied plants and trees, and more wild animals (as in non-domesticated animals). Humanity benefits by all of the improvements that produce a greater evocation of contact with the natural. Physical and mental health demand these evocations. A person acting alone, however, is not likely to contribute much in this direction; people acting in concert as a collective are able to exploit political economies of scale and will likely continue to impact these problems, assuming the problems don’t grow so fast as to overwhelm those so dedicated. I have spent much of my life interacting with our natural environments throughout the US and also in sections of Canada and the Caribbean. But I have not experienced it all, and I am not capable of doing so. I have not properly experienced Alaska, or British Columbia, and some other important areas, but I do not want to see these despoiled. I have reservation demands to see some, but I have no specific plans to see them as of yet. Perhaps this is the way we all act, that is with “reservation demands” but no specific plans.35 Even if I were to know I won’t visit some specific area of natural greatness, I still would pay to prevent it from being degraded. We have a sense of the need for preservation for the future. We want preservation on a global scale! We should be willing to sacrifice if necessary for this preservation fully knowing that it produces positive and intrinsic net-values for humanity. As explained above, the rhetoric of “we must further degrade the environment or the economy suffers” is patently false; it purposely misrepresents “what is economic,” and “what strengthens the economy.” The rhetoric of “we should further degrade because it won’t hurt anybody,” is similarly false; we are all hurt by environmental degradation. The rhetoric of “we should further degrade because those who claim otherwise are all elites, with hollow interests that we need not respect,” is similarly false. In general, we and future generations benefit greatly from environmental preservation and restoration. There is intrinsic value to the natural environment, a value generated by its instrumental quasi-religious inspiration to humanity, and also by its provision of a healthy human home. Review Questions 1. What generates the “sense” that we owe environmental preservation and restoration to future generations? 2. Do “relations of virtue” contribute to environmental organizations? Briefly explain?  A reservation demand implies a willingness to bear some expense of preservation even though there is little likelihood of our personal use.

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3. Briefly review who Emerson, Thoreau, Muir, Leopold and Douglas were? Briefly describe their contributions to the environmental movement? 4. What is the principle of flexibility? What is its relevance? 5. What are the two “equity problems” associated with environmental preservation and restoration? Explain how certain Rawlsian principles can be used to overcome these problems? 6. What is the Coase theorem, and what difficulties does it point out with respect to negative externalities? 7. What are the problems with the market-valuation paradigm? 8. What is anthropocentric theism? What problem is caused by this theism, and who emphasized this problem? Advanced Questions for Class Discussion and/or Essays? 9. Why do we have a sense for environmental preservation and restoration? 10. Why is collective imperfect duty necessary for environmental preservation and restoration? What are the advantages of participation in EAOs? (Review chapter “Relations of Virtue, Pursuit of the Moral Community, and the Ends of Business” for your complete answer.) 11. Why might the distributional problems associated with environmental issues persist? 12. Is “nature sacred?” Review some American thought on this question? What is the instrumental theory of nature’s specialness? What is the enlightenment view of this question, and also the question concerning nature’s intrinsic specialness? 13. Explain the environmental-technological dynamic? Give some examples of this dynamic not presented in the text?

References Burroughs, J. 1912, 2009. Time and Change, Fredonia Books, Amsterdam, The Netherlands Chidester, D., and D. Lilenthal. 1995. Introduction. In American Sacred Space, Indiana University Press, ed. D. Chidester and D. Lilenthal. Bloomington, IN. Coase, Ronald. 1960. The Problems of Social Cost. Journal of Law and Economics. October: 1–44. Cooper, John M. 1980. Aristotle on Friendship. In Essays on Aristotle’s Ethics, ed. Amelie Rorty. Berkeley, CA: University of California Press. Douglas, William O. 1965. A Wilderness Bill of Rights. Boston, MA: Little Brown. Emerson, Ralph Waldo. 1836. Nature. In The Collective Works of Ralph Waldo Emerson, ed. R. Spiller et al. Cambridge, MA: Harvard University Press. Freeman, Myrick A. 1993. The Measurement of Environmental and Resource Values: Theory and Method. Washington, D.C.: Resources for the Future. De George, Richard T. 1981. The Environment, Rights, and Future Generations. In Responsibilities to Future Generations, Prometheus Books, ed. Ernest Partridge. Buffalo, NY.

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DeShalit, A. 1995. Why Posterity Matters: Environmental Policies and Future Generations. London, UK: Routledge. Habermas, Jürgen. 2002. Religion and Rationality: Essays on Reason, God, and Modernity., edited by E. Medieta. Cambridge, MA: MIT Press. Hardin, Garret. 1968. The Tragedy of the Commons. ScienceI 62:1243–1247. Kant, Immanuel. 1784. What is Enlightenment? In Basic Writings of Kant, ed. Allen W. Wood. New York: The Modern Library Classics, The Modern Library. ———. 1785. Fundamental Principles of the Metaphysics of Morals. In Basic Writings of Kant, ed. Allen W. Wood. New York: The Modern Library Classics, The Modern Library. ———. 1788. Critique of Practical Reason. In Basic Writings of Kant, ed. Allen W.  Wood. New York, NY: The Modern Library Classics, The Modern Library (2001), Random House Inc. ———. 1793. Religion Within the Limits of Reason Alone. In Basic Writings of Kant, ed. Allen W. Wood. New York: The Modern Library Classics, The Modern Library. ———. 1797. The Metaphysics of Morals, edited by Mary Gregor. Cambridge, UK: Cambridge University Press. La Duke, W. 1999. All Our Relations: Native Struggles for Land and Life. Philadelphia, PA: South End Press. Leopold, Aldo 1949a, 1966. A Sand County Almanac with Essays on Conservation from Round River, Sierra Club and Ballantine Books, New York, NY. ———. 1949b. A Sand County Almanac. New  York, NY: Tamarack Press and Oxford University Press. Muir, John 1911, 1997. My First Summer in the Sierra. In Muir: Nature Writings, edited by W. Cronon, New York, NY: The Library of America. O’Neill, Onora 1989, 1995. Constructions of Reason: Explorations of Kant’s Practical Philosophy, Cambridge University Press, New York, NY. Rawls, John. 1980. Kantian Constructivism in Moral Theory. Journal of Philosophy 77: 515–572. Reprinted in Collected Papers – John Rawls, edited by Samuel Freeman, Harvard University Press, 1999. ———. 2001. Justice as Fairness: A Restatement. The Belknap Press of Harvard University Press. ———. 1987. Idea of an Overlapping Consensus. In Oxford Journal of Legal Studies, 7: 1–25. Robinson, Richard. 2018. Friendships of Virtue, Pursuit of the Moral Community, and the Ends of Business. Journal of Business Ethics 151: 85–100. ———. 2021. Our Environmental Organizations and Reasoned Discourse. New  York, NY: Palgrave-Macmillan. Schuler, Douglas, Andreas Rasche, Dror Etzion, and Lisa Newton. 2017. Corporate Sustainability Management and Environmental Ethics. Business Ethics Quarterly 27: 213–237. https://doi. org/10.1017/beq.2016.80. Stewart, J.A. 1892. Notes on the Nicomachean Ethics. Oxford, UK: Oxford University Press. Sullivan, Roger. 1994. An Introduction to Kant’s Ethics. Cambridge, UK: Cambridge University Press. Taylor, Bron. 2017. The Sacred, Reverence for Life, and Environmental Ethics in America. In The Oxford Handbook of Environmental Ethics, ed. Stephen M.  Gardiner and Allen Thompson. New York, NY: Oxford University Press. Thoreau, Henry David. 1849. A Week on the Concord and Merrimac Rivers., https://archive. org/details/aweekonconcorda00thorgoog/ reprinted in 2011. New  York, NY: Princeton University Press. ——— (1854), Walden, http://etext.lib.virginia.edu/toc/modeng/public/ThoWald.html. ——— 1862. Walking, https://www.org/wp-­content/uploads/2016/03/Walking-­1.pdf. Wood, Allen W. 1998. Kant on Duties Regarding Non-Rational Nature. Proceedings of the Aristotelian Society Supplement 72: 189–210. ———. 1999. Kant’s Ethical Thought. Cambridge, UK: Cambridge University Press.

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Additional Advanced Readings Robinson (2021) presents a comprehensive review of the global environmental crisis, and also of the contributions of our environmental advocacy organizations to our reasoned discourse.

Chapter 15: Some Current Environmental Problems for Business

1

Introduction

Garret Hardin described the fundamental problem of environmental degradation as the tragedy of the commons. It applies to common property resources such as parks, rivers, oceans, and earth’s atmosphere. The problem is caused by individuals who perceive that a common property will be degraded whether they personally hurt the property or not; hence they continue with their behavior. The classic example is a common used by a community for grazing by animals belonging to the community’s members (a common property). Overgrazing will destroy the common for future use, but each individual rationalizes that if they limit their animal(s) from grazing, others will not, and therefore the overgrazing occurs. Of course, this type of tragedy could also occur with overfishing, or air pollution, or any other negative externality (defined as transactions or other actions that have negative effects on others not directly involved with that transaction or action). (See chapter “The Philosophy of Community and the Environmental Ethic” for a more detailed definition.) The only solution is collective action that regulates the use of the common resource. This “collective action” is the subject of this chapter.

2

Rationality in Environmental Concerns

Business exists in a world of limited resources; there are costs and possible benefits resulting from its decisions, and these include externalities. One principle externality is caused by the bias associated with atomistic competition as compared to cooperative action, particularly when combined with the natural bias towards the known Much of this chapter stems from Robinson (2019) for which the author owns the copyright. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 R. M. Robinson, Business Ethics: Kant, Virtue, and the Nexus of Duty, Springer Texts in Business and Economics, https://doi.org/10.1007/978-3-030-85997-8_15

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present as compared with an uncertain future.1 Consider, for example, the tragedy of the commons as illustrated by a fishery - any particular fishery, perhaps the Grand Banks cod-fishery as one of many examples, could be completely eliminated through overfishing. At some point, the stocks could reach levels below the critical-level needed for a positive net-reproductive rate, and the fishery could completely collapse.2 If the individual fishermen, or fishing boats as business enterprises, know this is occurring, they may believe that if they do not harvest cod, others will, and so overfishing continues beyond the critical mass level. For this fishery destruction to occur, any one of four things might be causal assuming fishermen believe individually that the continuance of the fishery is desirable: 1. The fishermen are either not knowledgeable, or perhaps are in willful denial about the effects of overfishing, i.e. what overfishing constitutes in terms of overall harvests. 2. The cost of reaching a cooperative agreement among fishermen to limit harvests is considered too high. 3. Either the overall society does not consider the fishery as desirable, or perhaps all the fishermen are old, and see no future in cod fishing anyway, so they have little impetus to save the fishery. (This third possibility, however, would demonstrate a severe bias against future use, something we consider below.) 4. The discovery of the potential fishery-collapse comes too late to save the fishery. In the fourth case, there is a knowledge problem, one that can be potentially solved through collective scientific-action based upon information about the stock levels. Knowledge about optimal harvests is a business problem, and in these tragedy of the commons cases, a solution generally requires collective action and cooperation. That is the rational business solution. This example illustrates one of many cases of the moral obligation of business to be rational with respect to environmental concerns.3 Rational moral approaches concerning environmental problems always consider the future. Besides the possible knowledge problem illustrated above, there are four other destructive biases of business associated with environmental problems. These are explored below. Avoiding these biases is necessary to provide some logical rationality to environmental analyses, a rationality demanded of our democraticsocial discourse at least within a Kantian framework. 1  This bias against atomistic competition and against cooperative action is a bias against giving up control associated with the latter, and in favor of the individual entrepreneurial independence of the former. 2  For a history of this phenomenon involving the Grand Banks see Murawski (2017). 3  The Clark (1976) exploration of the fisheries problem demonstrates an application of rational economic analysis to finding an optimal fish stock, and this example is worth keeping in mind as demonstrating “rationality” for further analyses below. In this solution, the optimal stock exceeds that necessary for “maximum sustainable yields” in that higher stocks lower the costs of harvesting, and perhaps other external costs as well. See also Bjorndal and Munro (2012) for reviews of the management of fisheries around the world.

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2.1

293

The Bias Due to Abundance

If we believe that some environmental resource is so abundant that the cost of exploitation (harvesting) is very low, then alternatives will probably not be explored until a high degree of scarcity occurs. This is so because the initial costs of developing alternatives, as broadly defined, will be higher than current narrowly-measured exploitation costs.4 Incorporating the effects of externalities, however, especially the externalities imposed upon future generations, may remedy this bias. Scarcity likely causes higher costs for exploitation, and involves possible future deprivation of the goods in question. Pricing a common resource use so as to consider the possible scarcity for future generations is justified from the Kantian view. For example, consider harvesting old-growth timber in the rain forests of the Northwest where this timber is likely found on steeply-sloped higher-elevation mountainous terrain.5 Preserving the old growth likely preserves the water shed below in that after harvesting, the soils are easily and quickly washed-away down the steep slopes so that with the top soil eroded, replanting is difficult, and reinvestment unlikely. The soil erosion, however, clogs streams, destroys their flow, and ruins fish-spawning beds. The future is deprived of the natural water shed, plus the sight and recreational value of the slopes, streams, and the fishery. This illustrates that current abundance does not necessarily mean that the resource is relatively inexpensive to harvest, not when future external effects are considered.

2.2

The Bias Due to Narrow Vision

As illustrated by the timber-harvest problem reviewed above, an “overly narrow vision” leads to bias towards current natural-resource exploitation when perhaps the resources should be preserved. Not envisioning the value of recreational use of hiking through the old-growth forests further illustrates the problem. Also, not envisioning substitutes for the timber that would be harvested, substitutes such as particle board, or substitutes other than wood, also describes “too narrow of a vision,” but this begs the question, “Who does the envisioning?” The answer could be that business should be searching to develop and market new substitutes, but this search is truncated by too-narrow a vision. Once substitutes are posed, society may answer, “It is preferable to preserve an old-growth forest, and use the substitute!” The point is that business, with sufficient expertise, can pose alternatives to environmental exploitation and degradation. In fact it can lead society into broadening its vision for resource use so that alternatives can protect the environment. Examples of business providing these alternatives are so numerous that publication space prevents a longer listing, but consider a partial listing of (1) 4  Note that “broadly defined” requires incorporating the costs of those disrupted due to being forced to change, plus any externality costs. 5  See Oregon Wild (2017a, 2017b).

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development of environmentally safe insecticide and detergents, (2) grocery-chain provision of renewable totes as substitutes for disposable plastic bags, (3) improvements in auto and truck emissions, and (4) the increase in renewable energy projects.

2.3

The Bias Due to “It’s Gone!”

“Out of sight, out of mind!” “When its gone, its gone!” These adages may apply to those environmental resources that are either completely eliminated or so degraded as to not be recognizable as an environmental asset; yet like the steelhead runs that are completely eliminated by gillnetting, they can be restored although at sizable public expense. (For an example of this gillnetting phenomenon, see https://www. youtube.com/watch?v=KmZ1ScAUxA0.) Rivers and watersheds provide numerous examples of tragedy-of-the-commons phenomena, but they also provide numerous examples of citizen-business coalitions working to restore water-based resources. These resources have been severely degraded, but restoration coalitions, such as those of the Waterkeepers Associations, have organized to regenerate virtually every significant river in the US. The regeneration consists of (1) restoration of the ecology of riverbanks and drainage basins, (2) establishing and enforcing pollution-prevention laws, and (3) monitoring of environmentally safe development of river usage. Consider the Ipswich River, once a scenic trout stream in Northeastern Massachusetts. The river feeds a marshy coastal area once of considerable beauty. Sixty years previously it was an environmental asset; it was a meandering trout stream that added considerable sight value to those areas it flowed through. It also provided a valuable shell-fish resource, a salt-water fish resource, and tourist attraction. Today it is largely a filled-in quagmire destroyed by real estate development, both home dwellings and commercial enterprises, although this degradation decreased the area’s land values below what they otherwise would be. The Ipswich River Basin now is an example of the tragedy-of-the-commons phenomena. It occurred despite legal prohibitions as to destruction of the drainage and river route, i.e. the legal prohibitions that local governments responsible for their enforcement ignored. Currently, however, the Ipswich River Watershed Association is attempting restoration by purchasing land along the river’s route to protect the ecology of the watershed, by controlling polluting suburban-water run-off, by restoring tributary drainage, and by restoring the legal river-banks that have been filled in.6 Other rivers in Massachusetts, such as the Charles, Deerfield, Concord, and Shawsheen Rivers as examples, also have public restoration efforts to clean up considerable pollution. Environmental restoration is possible if the bias of “Its gone!” is overcome. Rivers such as the Merrimack, a significant New Hampshire and

 See www.ipswichriver.org.

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Massachusetts river, have restored fish runs by eliminating dams, and restoring water quality. Unlike previously, the Merrimack is now worthy of considerable public usage.7

2.4

The Bias of Not Having “broad vision”

Each of the above bias categories is a subset of “not having a broad vision.” There may be other biases, but essentially the vision of sustainability and environmental restoration and/or enhancement can motivate rational decisions. The environment is humanity’s home and inspiration. It provides sustenance necessary for life. Destroying it dims humanity’s future, and lessens its lifestyle and enjoyment. This is irrational! Business bears much of the blame for environmental degradation, but enhancing humanity’s home and lifestyle is potentially also an essential business task. It poses opportunities for business people who have a proper “broad vision.” Business is a cooperative endeavor, and so is environmental enhancement. Personal consumption need not cause environmental degradation; it can lead to environmental enjoyment without degradation, and this can stimulate further enhancement. It is natural for business to acquire knowledge related to its current and potential future-activities. It is natural, therefore, for business to use this knowledge for the environmental tasks indicated above. If we use the Ipswich River example reviewed above, note that the Ipswich clams that come from the marshy beds of its delta are a highly-prized resource of considerable value.8 Knowing this, some businesses seek to harvest this renewable resource. They promote the Ipswich River Watershed Association, its activities, and the sustainability and restoration of this resource. But in general, environmental restoration enhances the values of the locales and the welfare of those affected.

3

Business Knowledge and Conflicts of Interest

The previous chapters and the above section indicate that there is a role for business knowledge that is either passively acquired through providing the public with goods and services, or that could be acquired through the search for new opportunities. The public sector also acquires knowledge with respect to its environmental concerns. Business people either acting in isolation or through business enterprises, however, have natural conflicts of interest with respect to environmental exploitation, namely business may be able to profit through developing negative 7  See www.combat-fishing.com/massstipersmerrimackrvr.html for a review of striped bass restoration in the Merrimack, and www.concordmonitor.com/fish-stocking-2127105 for a review of restoration of herring in the river. 8  See www.ipswichfishmarket.com/clams.aspx for an example of business involvement in restoration of this resource, and www.saveur.com/article/Kitchen/Ipswich-Clams for a review of this delicacy.

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externalities associated with environmental exploitation. Classical cases of these exploitations involve water, air, and poison-type pollutions. Using rivers and streams as sewers for business generated pollutants, such as the textile industry’s dumping of industrial chemicals into the Chattahoochee River of North Georgia as an example, or pollutants from pulp mills as another example, have long histories going back to the origins of the industrial revolution in the US.9 Developing land-fills with chemical pollutants from business, such as Love Canal in Western NY, provides other examples.10 The point is that business has conflicts of interest when being involved with the public’s environmental policy. These conflicts of interest imply that business’ input must be considered by the public as potentially biased in its discourse considerations, but this does not imply that when business acts within the constraints of those fairly-established public-policies, it cannot contribute to environmental enhancement. Business overall may have been destructive in its biased influence on public environmental-policy, but this does not imply that individual businesses cannot positively affect environmental enhancement through its efforts. Given the record of pollution since the industrial revolution, negative externalities have become associated with business, and this association is not entirely unjustified. Along with this judgement, we also have numerous examples of obfuscations associated with these externalities, obfuscations that attempt to claim that the pollution is not as bad as it clearly appears to be, or that methods are underway to mitigate the problem so that society’s regulations are not necessary. The sections below present three examples of severe pollutions from business and their associated attempts at obfuscation: pollutions for coal and from agriculture and industry. In addition, the sections below also review the tragedy of the destruction of one of the world’s most important fisheries.

4

 he Negative Externalities of Coal T and Industry Obfuscations11

4.1

Clean Coal and Acid Rain

Prior to 2010, 100 million tons of toxic airborne solid waste - including mercury, uranium and arsenic – were produced annually in the US by coal plants.12 In 2008, the World Health Organization (WHO) estimated that perhaps world-wide as many 9  See Thoreau (1873), for observations of early-industrial-revolution river pollution on the Concord and Merrimack Rivers. Also, see https://chattahoochee.org/water-quality/ for a review of the textile industry’s pollution of the Chattahoochee River. 10  For a review of the Love Canal environmental tragedy, see https://archive.epa.gov/epa/aboutepa/ love-canal-tragedy.html. 11  This and the next section are based on excerpts from Robinson (2021). 12  US Department of Energy, October 13, 2010, “Where Greenhouse Gases Come From – Energy Explained.” Murray Energy is now bankrupt as of early 2021.

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as a million lives were previously lost annually due to the health effects of coal; as many as 24,000 lives were possibly lost annually in the US. The WHO also estimated that compared to using natural gas as a fuel, coal is 10–100 times more toxic depending upon the type of coal. As part of greenhouse gas emissions, burning coal is the largest single contributor of any fossil fuel. A 2001 European Union Study found that when health externalities were considered, the cost of coal-based power was actually twice the market value of the energy generated, and these costs were from 1% to 2% of Europe’s GDP. Among these adverse externalities are asthma, lung cancer, other respiratory diseases, cardiovascular disease, and birth defects. In addition, the sulfuric acid from coal has been the major contributor to acid rain and its effects on infrastructure, forests, and water resources. The coal and power generating industries have offered the potentials of clean coal technology as a remedy for the negative aspects of dirty coal. These proposed technologies include gasification of coal, chemical washing of coal, and “carbon capture” for the gas emissions. These technologies are not currently economically viable in that natural gas and renewable energy are cleaner and also provide substantially lower cost sources of energy than clean coal.13 Concerning the potential of clean coal, Robert Murray, CEO of Murray Energy - the largest privately owned coal-mining company in the US – stated, “It is neither practical nor economic, CCS (carbon capture storage) is just cover for the politicians, both Republicans and Democrats that say, “Look what I did for coal!” knowing all the time that it doesn’t help coal at all.” (Parentheses added.)14 Robert Murray is a member of the American Coalition for Clean Coal Electricity, which has spent millions of dollars to persuade the public that clean coal is the solution to global warming. Other “front organizations” that give the appearance of being unconnected to the coal industry, but that are actually funded by the industry, include America’s Power Army, Families to Represent the Coal Economy, and Kansas for Affordable Energy. These organizations were essentially formed to market the industry’s vision of “clean coal.” For example, in 2010, America’s Power Army launched a “Clean Coal Technology: It Works” campaign aimed at “educating people” at state fairs, festivals, sporting events, college campuses, and town squares through mobile classrooms and other presentations. The goal was to educate the public about the role of clean coal technology in “providing affordable, reliable electricity, well-paying jobs, and a cleaner environment.” These efforts supposedly instruct the public about reduced emissions of sulfur dioxide, nitrogen oxide, particulate matter, mercury and carbon.15 Carbon capture storage (CCS) requires liquifying the CO2 from captured coal emissions and injecting it into a stable underground reservoir. In response to these 13  See “The True Cost of Coal,” Greenpeace, 12-23-2008 and “Time to Bury the Clean Coal Myth,” Fred Pearce, The Guardian, London, UK, 10-30-2008. 14  “Coal CEO admits that “clean coal” is a myth.” July 6, 2017. Think Progress, at www.thinkprogress/clean-coal-isnt-real-edqu3e2841060/. Note that Robert Murray died in 2020, and Murray Energy is now in bankruptcy. 15  See www.sourcewatch.org/index.php/clean_coal.

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efforts, Prof. Michael Economides, University of Wyoming, indicated that these reservoirs require 5 to 20 times greater volume than previously estimated, and this renders the storage option not feasible. Capturing and compressing CO2 raises costs by 30-60% above other energy sources such as natural gas and renewable sources.16 There are, however, two new US power plants that use some version of clean coal technology – Petra Nova and Kemper. The former is located close to Houston and the latter is located in Mississippi. Petra Nova attempts to liquify CO2 and pumps it into oil fields to render additional oil. The Department of Energy’s subsidy for this plant was $290 million. Kemper gasifies the coal in order to attempt cleaner burning. The Department of Energy’s subsidy for Kemper was over $100 million. (As of July 1, 2017, there were 1600 new coal plants planned in 62 countries.) Neither gasification nor CCS substantially “cleans” the coal. Much of the social discourse concerning clean coal has occurred in the context of presidential politics. At his State of the Union address of 2010, President Obama called for rapid adoption of the clean coal technology in order to “overcome barriers to the widespread cost-effective deployment of CCS within 10 years, with the goal of bringing 5–10 commercial demonstration projects online by 2016.” Federal Government stimulus subsidies of $3.8 billion were authorized in 2009 for “clean coal development.”17 On September 20, 2012, the US House passed the “Stop the War on Coal Act,” by a vote of 233-175. This would have eliminated the EPA’s ability to regulate coal-fired power. The Act did not pass the Senate, but on June 19, 2019, President Trump issued his “Affordable Clean Energy Rule” that allowed regulation of carbon emissions from power plants to be the responsibility of states rather than the federal government. This overturned the Obama Administration’s climate initiatives for federally regulating these plants.18 President Trump frequently mentioned “clean coal” while campaigning, but he also apparently generated public skepticism with respect to his understanding of the technology. This has been noted by various commentators, i.e. he spoke of “clean coal,” or “beautiful coal” as a campaign-rally slogan in locations where coal mining and its power generation are important to the local economies.19 (A partial list of these rallies with these slogans can be found on YouTube for the dates of February 29, 2016; March 1, 2016; April 20, 2016; October 4, 2016; October 16, 2016; and August 22, 2017.) In 1985, seven states – New York, Connecticut, Minnesota, Rhode Island, New Hampshire, Vermont, and Massachusetts  – plus four environmental advocacy groups, sued the EPA over acid rain generated from nineteen coal-fired power plants in Pennsylvania, Ohio, West Virginia, and Kentucky. The “good neighbor”  “CO2 Sequestration Isn’t practical,” Casper Star-Tribune, February 20, 2010.  See David Sassoon , Inside Climate News, February 10, 2010.www.insideclimatenews.org/ news/20100210/Obama-making-clean-coal-president. 18  See “EPA roles back Obama-era plan limiting coal-fired power plant emissions,” by Ellie Kaufman, CNN, June 19, 2019. www.cnn.com/06/2019/politics/. 19  See “What Trump has said about “clean coal” and what it is.” By Meaghan Keneally of ABC News, August 23, 2017. 16 17

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provision of the Clean Air Act’s (CAA) 1999 amendment requires the EPA and the states to assure that air pollution in home states do not affect downwind states.20 Acid rain is a downwind precipitation containing carbonic acid, sulfuric acid and nitrogen oxide. The “good neighbor” provision of the CAA was designed to control this downwind phenomenon; i.e. downwind pollution that crosses state boundaries was to be regulated by the EPA. This CAA amendment (Title IV) requires large cuts in acid emissions from power plants. This was manifested in EPA’s “Clean Air Interstate Rule.” Because of these regulations, between 2000 and 2006, SO2 emissions declined by 54%, and by 85% between 1980 and 2012.21 A 2011 EPA report by its “Office of Science and Technology Policy” estimated that the direct human- health annual benefits from the EPA’s regulation of acid rain was $170 billion. The nonhuman effects of acid rain include forest destruction (especially the New England red spruce), the acidification of water bodies and its associated effects on aquatic life, plus acidic degradation of the organic nutrients in soils.22 The forest destruction occurs in part through soil degradation that weakens the trees. After this weakening, the red spruce forests were subsequently attacked by the “swift moth” which ultimately killed much of these forests.23

4.2

Coal and “reasoned” Discourse

Can we claim that the social discourse of “clean coal” is reasoned? By applying our fair and reasoned criteria to the rhetoric of the coal industry, we would conclude that the evidence is a bit mixed. We note that the industry’s obfuscations have been refuted by EPA reports and other government agencies, and by the arguments of environmental NGOs such as the Sierra Club and Greenpeace. These obfuscations stemmed from two categories. We should first recognize that much of the propaganda comes from the coal industry which masks its proponents in the form of supposedly non-industry related civic organizations such as Families to Represent the Coal Economy. These organizations have conflicts of interest in being funded by the industry, but these conflicts have now been unmasked. We should also note, however, that the expense in terms of government subsidies and negative externalities, especially health effects, are somewhat hidden from the view of the general public. In the US, renewable energy sources receive little if any subsidies, but their costs are

 This provision requires EPA and the states to address interstate downwind pollution that produced effects in violation of the National Ambient Air Quality Standards. 21  The source is US EPA National Acidic Precipitation Assessment Program (NAPAP), 2013. 22  See Henry Graber, Shutterstock, “50 Years After Its Discovery: Acid Rain has Lessons for Climate Change,” September 10, 2013. 23  Note that industry supported dissenters such as cfact.org argued that the “swift moth” is the isolated cause of this deforestation. This ignores the linkage between the weakened forest and the subsequent moth onslaught. See www.cfact.org/2018/05/24/the-moth-of-dangerous-acid-rain/, May 24,2018. 20

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substantially lower than that of a complete cleaning of coal that is sufficient enough to make it as clean as the renewable energy. The policy conclusions that follow from the biased arguments of the coal industry are therefore not logical. The evidence indicates that subsidies for clean coal are not warranted, that expansion of the less expensive renewable energy sources are warranted, especially when negative externalities are considered.24 Furthermore, since pollution crosses artificial political boundaries, regulation must be sufficiently regional in geographic breadth (i.e. multi state) so as to capture the externalities. Should one impose non-compensated negative externalities on another? Equity suggests otherwise. This “crossing of political boundaries,” however, is definitely exhibited by the problem of “acid rain,” but it is also exhibited by the problem of agricultural pollution examined below.

5

The Tragedy of the Commons as a Dead Zone25

5.1

States’ Rights, and State Pollution Responsibilities

Every summer, nutrients from agricultural runoff drain into the Mississippi River and its tributaries. From the Mississippi, these nutrients then drain into the Gulf of Mexico fueling algae blooms that starve the water of oxygen thereby killing marine life.26 These nutrients are from crop fertilizers (including on-sight animal wastes), and from concentrated animal feeding operations (CAFOs). The latter include industrialized swine, poultry, and dairy operations all of which have rapidly spread throughout the Mississippi Basin. (These operations are also prevalent in other Southern US states.) Every summer, at the mouth of the Mississippi a dead zone of oxygen-starved seawater is created in the Gulf of Mexico. In 2019, because of the heavy rainfall in the watershed, the dead zone reached a record size of 7, 829 square miles (approximately the size of the state of Massachusetts).27 The “Pure Farms, Pure Waters” campaign of the environmental advocacy coalition Waterkeepers is an attempt to promote regulations of CAFOs.28 Over the last 50 years, these industrialized animal feeding operations have been a growing phenomenon. They involve large concentrations of animals for feeding, and associated large concentrations of untreated animal wastes which are either stored in “lagoons” or are spread in excessive amounts on feeder-crop fields. Subsequent rainfall causes the “lagoons” to overflow, and the overly-manured fields to drain. Like the large  As of May, 2021, the replacement of fossil fuels by renewable energy sources is more rapid than previously anticipated. See Blunt, WSJ, May 17, 2021, p. 1. 25  This section is partly based on an excerpt from Robinson (2021). 26  For a review, see The Wall Street Journal, Wednesday July 3, 2019, p. A6. 27  Ibid. 28  The Water Keepers Alliance began in 1999 as a coalition of the many local Riverkeepers and similar NGOs (over 200 organizations in 2019). The original Riverkeepers was organized in 1983 for the purpose of restoring the Hudson River. 24

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dump-truck driving fast down the highway with an uncovered bed filled with fall-­ leaf cleanup, these lagoons and excessively manured fields intentionally dissipate the waste into negative externalities. This appears to be intended by the design of this concentrated industrial process, i.e. the design of the waste systems of these CAFOs necessitates that the rainfall creates a sewer of untreated animal wastes that eventually drains into the Mississippi Basin. In 2017, the Environmental Protection Administration (EPA) reported that only 30% of the CAFOs had the permits required by the Federal Clean Water Act (CWA, 1972).29 The enforcement of permits, however, was left to the states. In 2005, the EPA initiated its National Aquatic Resource Surveys (NARS) for the purpose of identifying nitrogen and phosphorus pollution in American waters. It found that in the Upper Mississippi Basin -where 61% of the land is agricultural – 50% of streams had unacceptably high levels of nitrogen and phosphorus. In the Lower Basin, the pollution levels were higher. In response, The Mississippi River Coalition (MRC) – a coalition of environmental NGOs – was formed for the purpose of seeking stronger EPA oversight of the state-controlled permitting processes for CAFOs. Under the Clean Water Act (CWA), however, the states were to take the initiative in setting standards for, and the regulation of non-point agricultural pollution.30 The CWA’s authorization of state regulations resulted in legal conflicts. The MRC sued the EPA asking it to regulate this pollution. The National Pork Producers Council, the American Farm Bureau Federation (AFBF), and a coalition of 44 other states and agricultural coalitions joined in defending the “states rights” decision, and challenged the MRC’s suit by pointing out that the states were assigned the pollution control under the CWA. Note that the FDA had previously reached a precedent setting consent-decree for “total maximum daily loads” of agricultural non-point pollution in the Chesapeake Bay area, and the AFBF feared that this sort of consent decree might be established for the Mississippi River Basin. These sorts of maximum limits on the total pollution from geographic areas would force the states to regulate under the supervision of the EPA, a practice the AFBF resisted because it considered the EPA to be a stricter regulator than the states acting alone. This sort of area wide regulation under EPA supervision was not, however, the court’s decision. In December, 2016, the court found in favor of allowing states to lead in these regulations. The AFBF argued that, “States are working on the issue; they are performing their role and it would be bad policy to overstep states at this time.” The AFBF general counsel stated, “The time may come when the EPA may no longer reasonably let states remain in the lead. The AFBF and all these  See “NPDES CAFO Permitting State Reports” at www.epa.gov/sites/production/files/2017-04/ documents/tracksum_endyear2016_v2.pdf. 30  “Point-source” water pollution originates from an identifiable spot such as a discharge pipe. “Non-point” pollution refers to runoffs such as from streets or agricultural fields. 29

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organizations will need to redouble their efforts to help generate programs and assistance for farmers to do the good work they want to do and get those right practices in place to see those improvements.”31 In 2019, however, the dead zone reached record size.

5.2

CAFOs and “Reasoned Discourse”

The problem with our current CAFO regulation is similar to the downwind pollution from acid rain (reviewed above) in that downstream pollution is a negative externality forced by upstream producers onto others. The AFBF and other agricultural coalitions have clear conflicts of interest in arguing for the dumping of external costs onto those who are downstream. The science is, however, established concerning the dead zone. The externalized costs are obvious, and are clearly the result of intentional design, i.e. not by accident. The regulation and supervision must be regional; in this case it must be by a regional body such as the EPA that has authority and intent to regulate the entire Mississippi Basin as an entity. In addition, the political pressure that the agricultural industry places on one state to allow its pollution to flow to another is extreme and corrupting. States are not “performing their role,” and have no incentive to effectively regulate the externalities imposed on other states. The social discourse concerning the dead zone problem appears to be reasoned, but the law is cumbersome in expecting states to regulate their own externality. We should not ask a polluting entity to regulate itself, and likewise we should not ask this of a state that pollutes its neighbor. (Pollution of this sort is not consistent with the “good will” referred to in previous chapters.) The Waterkeepers associations, and the Mississippi River Coalition have led the discourse concerning this “dead zone” pollution, but this reasoning has not yet led to the resolution of regional EPA supervised regulation. If the individual states do not respond with regulations – and they likely will not – then the time of ultimate resolution is delayed at best.

6

 orth Atlantic Fisheries and the Tragedy N of the Commons

6.1

The Grand Banks and Georges Bank

The Grand Banks are a group of underwater plateaus southeast of Newfoundland but on the North American continental shelf. These plateaus are 50–300 feet below the ocean’s surface. Here, the cold Labrador current mixes with the warm Gulf Stream to bring nutrients to the surface and create what previously was perhaps the richest fishing grounds in the world, particularly for cod, swordfish, haddock, halibut, flounder, capelin and shellfish such as scallops and lobster. In the late 20th  See “NPDES CAFO Permitting State Reports” at www.epa.gov/sites/production/files/2017-04/ documents/tracksum_endyear2016_v2.pdf.

31

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century, overfishing caused the collapse of several of these important and once abundant fish populations  – especially cod  – forcing Canada’s “Department of Fisheries and Oceans” (DFO) to close the Grand Banks to fishing in 1992. Prior to the collapse of the Grand Banks, the Georges Bank was closed to ground-­ fishing, i.e. fishing for cod, haddock, flounder and halibut. The Georges Bank is west of the Grand Banks, between Cape Cod and Nova Scotia. This plateau is more easily accessible to fishing than the Grand Banks, and it is responsible for the rise of New England fishing ports such as Gloucester, Massachusetts, and also Yarmouth, Nova Scotia. Because the rise of foreign factory trawlers severely depleted the ground-fish of both the Georges Bank and the Grand Banks, in 1972 both Canada and the US declared “exclusive economic zones” (EEZs) of 200 miles offshore in order to assert exclusive jurisdictions to benefit their own domestic fishing industries. These Canadian and US jurisdictions overlapped in the Georges Bank. In 1984, the International Court of Justice in the Hague split the maritime boundary in the Gulf of Maine between both nations. Management of this important natural resource became the responsibility of both nations. The management problem stems from the technology of fishing trawlers. These are large factory ships that drag-net the bottom surface and then freeze their catch. The first of these was the British Fairtry that fished the Grand Banks in 1951. It was 280 feet, four times the size of previous trawlers. Below deck was an onboard processing plant with automated filleting machines, a fish meal rendering factory, and an enormous freezing capacity. The Fairtry fished 24 h a day for weeks at a time on the Grand Banks. It used electronic fish finders to pinpoint and capture whole schools of fish. By the 1970s, the Soviet Union had 400 similar factory trawlers; Spain had 75; West Germany had 50; France and Britain had 40. They mostly fished the Grand Banks and Georges Bank for cod. In response to fish depletion, in 1977 Canada followed Iceland in unilaterally extending its territorial waters from 12 to 200 miles offshore (its EEZ), and Canada eliminated the factory trawlers from the Grand Banks. This decision was popular in the Atlantic Provinces of Canada, but in a remarkable display of faulty analysis and foresight, Canada then built a deep-­ trawler fleet of its own. Further depletion of multiple fish stocks on the Grand Banks and Georges Bank continued. The drag-netting technology of large trawlers uses considerable weight to keep the net on the bottom as the trawler moves along the plateau. This disturbs and levels the sea floor of the areas where small fish hide and feed on crustaceans. The technique threatens, captures and kills the entire ecology that supports the fish stock. One might think that the resulting destruction to the resource would be obvious, and that this technology would be immediately outlawed. It was not! The destruction occurred. In 1988, the scientific evidence indicated that the fishing quota should be no more than half the existing stock. Nevertheless, the Grand Banks’ quota was set well above this portion by Canada’s DOF. The estimates are that more than 60% of the stock was removed for several years prior to 1988. In 1992, scientists estimated that the stock of cod was 1.1% of the level of the early 1960s. Canada finally closed the Grand Banks to allow recovery. The Georges Bank was similarly closed by both the US and Canada in 1994. The scientific evidence indicates that the

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factory trawlers not only captured all the fish stock, they also destroyed the sea bottom ecology that supports the stock.32 The collapse may now be permanent. As of 2020, the “closings” continues. The Grand Banks of Newfoundland provided a stable livelihood to island residents for five centuries, and made Canada one of the world’s leading fishing economies. But by the end of the 20th century, the great schools of cod had disappeared. The July, 1992, moratorium on cod fishing led to the single largest layoff in Canadian history, affecting not only the fishermen and women, but processing plant employees, and those in the retail and wholesale trade, and those in other infrastructure industries. Newfoundland communities shrank considerably. But as cod declined, scallop, crab and lobster flourished, and have partly replaced the cod as a basis of livelihoods. Between 1992 and 2007, the value of the Grand Banks catch rose from Can $275 million to Can $470 million. After adjusting for inflation, the catch was 20% higher in value. But this increase in the value of the catch does not reflect the tragedy of losing some overwhelmingly significant global resource stocks  – cod, haddock, and others. They were depleted because collective regulation was slow to adjust. Industrial factory technology overran sustainable methods that kept the resource replenished.

7

 iverkeepers: “Not Radical, but American R in Disposition”33

This section presents examples of negative externalities generated by business, and citizen reactions via collective imperfect duties. In the process, they enforced our significant law applicable to water pollution, and brought our federal courts to our most important precedent decision for environmental regulation. These citizens also organized one of our more important environmental advocacy organizations (EAO). The Hudson Riverkeepers did not seek to change our environmental policies, but rather to enforce existing environmental law. In doing this, however, they brought the existing laws to life through citizen empowerment. In so many cases, they instilled the notions of “fair and reasoned” into the law’s intent. They brought faith in the applicability of this slogan to environmental restoration. The origination of the Riverkeepers is linked to the journalist and fishing enthusiast Robert Boyle who published articles critical of those who did not recognize the environmental knowledge of fellow fishermen. The precipitating event behind the Riverkeepers formation was the electric utility Consolidated Edison’s attempt to build a hydropower facility on Storm King Mountain in the Hudson Highlands. Local environmentalists, led by the Hudson River Fishermen’s Association (HRFA) responded by forming the Scenic Hudson Preservation Conference, which  See “A Run on the Banks,” The Environmental Magazine, July 20, 2004. https://emagazine. coma/a-run-on-the-banks/. 33  Richie Garret, President of  the  Hudson River Fishermen’s Association in  testimony before a Congressional Committee. 32

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challenged the Federal Power Commission’s (FPC) decision to grant a permit for this utility location.34 Consolidated Edison hired a biologist to claim that the location’s surrounding waters were not critical for fish, but Robert Boyle exposed this “paid for science” as fraudulent; that actually the area was a crucial striped-bass spawning ground. In December of 1965, the US Second Circuit Court of Appeals reversed the original FPC decision that the environmentalists should not be given standing in the permit process. The Court held “that injury to aesthetic or recreational values was sufficient to provide an aggrieved party with constitutional standing.” This “Storm King Doctrine” was a precedent. For the first time environmentalists were given standing to object to scenic or recreational injury without showing tangible economic harm. The newly formed HRFA, founded by Boyle, also persuaded the Atomic Energy Commission to consider fish kills in relicensing Consolidated Edison’s existing Indian Point Nuclear Plant. Knowing that because of the “Storm King precedent,” fish kills would now be an issue in future litigation, the Consolidated Edison cancelled the offending expansion. “The Storm King Doctrine” then became coded into environmental law through the “National Environmental Policy Act” of 1970. The efforts of the Hudson Riverkeepers changed our national environmental policy. Why was such precedent law needed? Did we not have other environmental laws for the control of pollution? The US actually had an old law that was applicable, but it had not been enforced. The Refuse Act of 1899 assigned fines of $500 to $2500 for pollutant discharges into navigable waters. This law also allowed individual citizens to enforce it by showing evidence in court that a violation occurred. The fines in part would be given to those who brought the evidence of pollution. The HRFA took note. By the early 1970s, it was an organization of working-class environmentalists who locally sought redress for environmental degradations, the first of which was generated by the Penn Central Railroad. It had been releasing petroleum products into the Croton River, a tributary of the Hudson. Suit was brought by the HRFA. It won, and this brought the first fines transferred to a private organization since the Act was passed in 1899. A subsequent case involved Anaconda Wire and Cable Company’s release of oil and solvents directly into the Hudson. One-hundred counts of violation of the Refuse Act were successfully brought by HRFA against Anaconda. In the 1980s, HRFA evolved into the Riverkeepers. This organization created a “riverkeeper” position of someone who would monitor violations of the existing environmental law. John Cronin, who already had some involvement in the Hudson River monitoring, became the Riverkeeper.35 He was warned by the State Police that Exxon was discharging petroleum products into the River. In his Riverkeeper assignment, Cronin was able to document seventy-seven Exxon tanker violations. Cronin’s proof was so substantial that Exxon settled, and paid $1.5 million in fines with some of this going to the Riverkeepers.  Scenic Hudson Preservation vs. Federal Power Commission.  Cronin was involved with Pete Seeger’s Clearwater Sloop program for raising awareness of pollution problems along the Hudson.

34 35

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Riverkeepers have also pursued two other categories of “local causes:” • Riverkeepers have pursued issues of “environmental justice.” It successfully sued to assure that those in poorer city neighborhoods have the similar transit capabilities to reach the Hudson River and area parks than those in wealthier neighborhoods. They have also successfully sued to assure the availability of clean water in cities such as Newburgh where the children of poorer neighborhoods were being poisoned by their public water supply. • The Riverkeepers have successfully sued the city’s lackluster enforcement agencies to assure that its water sources (reservoirs and streams) are clean. In 1992, under the direction and leadership of the Hudson Riverkeepers, the National Alliance of Riverkeepers was formed. This now includes over 300 organizations working on the Nation’s waterbodies. It shares resources and accredits new programs. Their grassroot local enforcements and activism are different from organizations that focus more on national policy. But all of the environmental organizations essentially come down to involvement in  local issues: local preservations, affecting local environmental responses, and locally enforcing national regulations. The advantage of having grassroots environmental movements, however, is that by involving many local activists with broad backgrounds, it further popularizes the environmental movement. It gives an appearance that is “less elite.” It demonstrates that environmental amenities are essentially a significant portion of every individual’s wealth. In this sense, the National Alliance is a substantial advance in the environmental movement. The HRFA and Hudson Riverkeepers illustrate the role of EAOs in providing the reasoned social discourse to our environmental policies, i.e. they illustrate bringing (i) inclusive argument, (ii) informed argument, (iii) uncorrupted argument, and (iv) reasoned analysis as demonstrated by the significant court decisions that supported their arguments. But their efforts also illustrate their support of environmentally sound business development of the sort illustrated in chapter “The Philosophy of Community and the Environmental Ethic”.

8

Business’ Environmental Involvement

The Kantian enlightenment philosophy is humanity centered. It does not view nature as a sacred entity independent of human consideration. The Kantian ethic, however, requires rationality associated with public discourse for establishing our social maxims, both legally established rules and non-legally-enforceable social-norms. These maxims include environmental considerations. The Kantian categorical-imperative process requires (1) duty motivated by pursuit of a moral community, and (2) the inclusion of both future generations and distant people within this conception of community. Since both of these groups cannot be included within the social discourse required for establishing our ethical-­ maxims, then rationality requires that we represent and preserve their interests. This

8  Business’ Environmental Involvement

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rationality requires knowledge acquisition and application by and for business. Although this business knowledge and expertise may be necessary for environmental preservation, the conflict-of-interests inherent in business’ profit exploitation of negative environmental-externalities, a common phenomenon observed since the early industrial revolution, implies a limited role for business in our Kantian social discourse. Business expertise, however, can still be an asset too valuable to ignore. It should and must play a role in environmental-enhancement coalitions. Of particular importance is that the biases that apparently are inherent in public consideration of environmental enhancement must be overcome by logical analysis so that coalitions of the public with business avoid a cynical attitude towards these possibilities. Obfuscations that attempt to bias reasoned discourse is in clear violation of the pursuit of a moral business community. It violates the sacredness of the categorical imperative process. This Kantian analysis presents a rational foundation for business-environmental considerations. It is not based on common religious considerations, so it is free of religious disputes and conflicts. It is based on consensus after logical democratic and fully informed discourse. As such, it is a proper logical basis for rationally enhancing humanity’s future. Review Questions (1) Review the business obfuscations (or attempts at obfuscations) involved with each of the following:

(a) clean coal and acid rain, (b) CAFOs and its associated “dead zones.”

(2) What are the common underlying problems with acid rain and CAFOs? What do these problems mean for regulation of negative externalities? (3) What is the “Storm King Precedent?” Why is this important to business development? Explain the role that HRFA and Riverkeepers play in this environmental regulation? (4) What is the linkage between wilderness and environmental ethics? Advanced Questions for Class Discussion and/or Essays (5) Use the “fair and reasoned criteria” for environmental discourse and decisions to briefly review our problems with respect to

(a) clean coal and acid rain, (b) CAFOs and its associated “dead zones,”

Review each as a separate question. (6) Review Douglas’ arguments for wilderness? Are these arguments built upon the sacredness of nature as independent of humanity, or upon wilderness’ role as an instrument for humanity?

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(7) Why should business be aware of the efforts of the HRFA and Riverkeepers? (8) Review business’ history of finding substitutes for environmentally depletable goods? Mention some substitute goods that are not mentioned in this chapter. (9) What were the underlying problems that caused the tragedies of the commons with respect to the North Atlantic Fisheries?

References Bjorndal, Trond, and Gordon Munro. 2012. The Economics and Management of World Fisheries. New York, NY: Oxford University Press. Clark, Colin. 1976. Mathematical Bioeconomics: The Optimal Management of Renewable Resources. New York, NY: John Wiley and Sons. Murawski, Steven A. 2017. History of New England Groundfish Fishery, www.nefse.noaa.gov/ history/stories/groundfish/grndfsh1.html. Oregon Wild 2017a. What is an Old-Growth Forest? www.oregonwild.org/oregon_forest/ old_growth_protection/what-­is-­an-­0ld-­growth-­forest. ——— 2017b. Northwest Forest Plan. www.oregonwild.org/forests/ forest-­protection-­and-­restoration/nwfp. Robinson, Richard. 2018. Friendships of Virtue, Pursuit of the Moral Community, and the Ends of Business. Journal of Business Ethics 151: 85–100. ———. 2021. Our Environmental Organizations and Reasoned Discourse. New  York, NY: Palgrave-Macmillan. Thoreau, Henry David 1873. A Week on the Concord and Merrimac Rivers., https://archive.org/ details/aweekonconcorda00thorgoog/.

Additional Advanced Readings Robinson (2021) presents a comprehensive review of some of business’ environmental problems, and also of the contributions of our environmental advocacy organizations to our reasoned discourse.

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