Chapter 7

Conducting stakeholder relations responsibly

As with most of the perspectives presented in this book, where we have reciprocities, stakeholder relations are also not unilateral. Exhibit 7.1 depicts the inputs from and the effects on stakeholders in these relations.

Stakeholders, mostly, are not anonymous institutions but human beings – be they shareholders, employees, clients or citizens of a firm’s constituency. They all have moral rights not to be harmed, and this includes the shareholders’ ownership rights. Do these also go so far as to determine the moral responsibilities of the management that works for the owners? From the other way, how far do obligations of the management go to serve the interest of the owners? Managers are agents for the shareholders; they are not “owned.” This very special relationship will be covered within this section, which will first deal with employees, as the human centered paradigm applies here above all, and then with the other main group of constituents, such as clients, suppliers and the investment community. The section ends with the more complex relations towards (local) communities and the biosphere.

In any business stakeholder relations are conducted at many levels, from the chief executive to the people who lead functional areas within a corporation. Their moral responsibilities play a decisive role in the corporation’s performance, reputation and sustained success. And they face moral dilemmas almost everywhere, from the market manager who needs to choose between a profitable decision and a socially responsible one, to the research and development (R&D) engineer whose technical judgments and risk assessments conflict with time-to-market deadlines, to the human resources manager who needs to straddle the fine line between the individual rights of employees and corporate interest. More often than not, and even though there are ethics codes and procedures manuals at hand, clear directions for resolving these types of dilemmas are not available through the corporate system.

An ethically guided manager could find answers from a general recommendation provided by a decades-old Harvard Business Review article by Laura L. Nash (1981), which has maintained its validity from when it was written during the not very turbulent 1980s through the financial and economic crises in the first decades of the 21st century (but seems not to have been followed very often, unfortunately). Nash, one of the presidents of the Society for Business Ethics, recommends a clear-cut procedure to test pragmatically the ethical content and human fallout of everyday decisions in business and other organizational settings (see Nash 1981, p. 80):

This would result in 12 questions (as per Exhibit 7.2) that were set up by Nash.

All stakeholder relations are complex and often have multi-level cause–effect chains. This requires systemic thinking. Executives often deal with issues where merely solving one relational problem does not improve the situation, so they need to learn to see behind the problem, why it evolved and how it is connected to other issues (Heracleous and Rao 2008). Systems thinking expedites the management of complex issues. With complexity defined as “many parts that interact with each other in multiple ways” (Principia Cybernetica Web 1996), a systemic approach helps to solve interconnected issues one by one in isolation. For instance, executives become aware that customer satisfaction, employee capacity and competitive technologies are entwined with each other. But from the logic of division of work, solutions for each of these different issues may not be closely intertwined. In systems thinking, the three issues would be viewed as complements that complete the system of a business operation. Similar interconnections exist in personnel management.

7.1 The employer–employee relationship

The focal point of a human centered perspective on ethics in labor relations is Kant’s second formulation of his categorical imperative: “Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end, but always at the same time as an end” (Kant 1785/1993, p. 36). Kant’s argument was not just that humans are entitled to respect – they have to be respected because they have dignity. An object that has dignity is beyond price; even though labor may have a price and a cost and be an input for production, and is interchangeable with other resources such as machinery and financial capital, violating respect for people in this context is off limits.

The dignity of humans in the workplace comes with their ability to be autonomous and self-governing. Autonomy and self-governance are the conditions for responsibility; acting responsibly and being held responsible in the workplace are self-explanatory. Employee dignity also requires that an employment contract should neither be coercive nor deceptive:

From Kant’s argument, we can conclude that since work is necessary for the development of selfhood, treating humans as an end and not a means would indicate that the firm needs to provide meaningful work. Norman E. Bowie, one of the important voices in ongoing debates over business ethics, in his Kantian approach to business ethics (Bowie 1999, p. 70 f.) derives six principles regarding the moral value of work from Kantian thought that go beyond the prospect that work just gives independence and self-respect. The six principles are:

1. 1 Meaningful work is work that is freely chosen and provides opportunities for the worker to exercise autonomy on the job.
2. 2 The work relationship must support the autonomy and rationality of human beings.
3. 3 Meaningful work is work that provides a salary sufficient for the worker to exercise his or her independence and provides for his or her physical well-being.
4. 4 Meaningful work is work that enables a person to develop his or her rational capacities.
5. 5 Meaningful work is work does not interfere with a person’s moral development.
6. 6 Meaningful work is work that is not paternalistic in the sense of interfering with the worker’s conception of how he or she wishes to obtain satisfaction from work.

Bowie connects these principles to 16 management practices that have been found to manage people successfully by Stanford professor Jeffrey Pfeffer in Competitive Advantage Through People (1994). The practices list is far-reaching, and it would seem that corporations did not employ all of them at the time when the book was written:

1.  1 Employment security
2.  2 Selectivity in recruiting
3.  3 High wages
4.  4 Incentive pay
5.  5 Employee ownership
6.  6 Information sharing
7.  7 Participation and empowerment
8.  8 Teams and job re-design
9.  9 Training and skill development
10. 10 Cross-utilization and cross-training
11. 11 Symbolic egalitarianism
12. 12 Wage compression
13. 13 Promotion from within
14. 14 A long-term perspective
15. 15 The measurement of practices
16. 16 An overarching philosophy.

Pfeffer was avant-garde and advocated the deployment of these practices in many other writings (e.g., Pfeffer 1998, 1995). In the two decades that have passed since then, the practices have become commonplace tools for personnel management in most companies, with the advent of the internet adding some features that extend autonomy from high-ranking white-collar workers to blue-collar employees. Information technology (IT) has dramatically improved the ability to collaborate, access data, and make decisions on one’s own. However, this empowerment also carries the risk of potential drains on productivity posed by employees surfing the Web, chatting over email or instant messages and accessing peer-to-peer networks for music or games. The loss of employee time and resources due to such activities has been estimated at approximately $50 billion annually in the US (Tafti, Mithas, and Krishnan 2007). But when firms exert too heavy managerial control through time tracking and monitoring IT use, this may undermine practices that are intended to empower employees, to give them a greater sense of autonomy, and to encourage information sharing. Another moral dilemma. To cope with it, careful management of the control–autonomy duality is required.

The control–autonomy duality, or so it may seem, becomes visible when looking at employees as stakeholders of the firm. Crane and Matten (2004, p. 228) give a list (Exhibit 7.3) from where it may look that the rights are outweighing the duties by far.

The argument supporting the obvious imbalance between employees’ rights and duties often is that employees are the less powerful partners in employment contracts. On the collective level, however, employees are often on a par with employers. The collective level will be discussed in the following subsection before investigating the individual level. Since collective relations will be studied mainly from the situation in Europe and in the US, a short note is inserted here on the situation that firms encounter outside their homeland.

Employees of a firm, in a globalized world, are scattered throughout all the locations of the firm on all continents. Corporations that operate in many countries will not only have to abide by labor laws and labor culture of those countries, they must also be aware that their behavior in this respect will be under scrutiny in their homelands as well – from civil society organizations (CSOs) and “watchdogs” and organizations such as Social Accountability International referred to in section 6.4 in connection with the Business Principles for Countering Bribery.

There are many CSOs that critically observe how multinational firms treat the rights of workers around the world. Critics have argued that firms choose countries that have weak labor laws, as it leads to low costs, abusing the lack of worker protection. This has been called a “race to the bottom” – but the other way to look at the issue of economic globalization on workers’ rights is “climb to the top,” meaning that foreign direct investment inflows are positively and significantly related to improvements of workers’ rights.

Generally speaking, the effects of economic globalization are contingent on the particular ways in which a developing country is integrated into the global economy. Inflows of direct investment are associated with better collective labor rights. In countries that are roughly disconnected from world trade or have only limited trade openness, workers’ rights will be on the low end of the spectrum (Mosley and Uno 2007). As adherence to the OECD Guidelines for Multinational Enterprises is mandatory for firms headquartered in an OECD country, those firms will quite likely transplant their home standards to a host country. Further, they may urge governments directly to improve the rule of law, protect the vulnerable, and invest in social services and infrastructure (Richards, Gelleny, and Sacko 2001). This would be another demonstration of true human centered management.

7.1.1 The collective level

Employee rights are far reaching in most EU countries, where legislation resulting from the Social Chapter of the Maastricht Treaty, apart from regulating individual workers’ rights and protection, also asks for extensive worker representation. The agenda was expected to be very far-reaching, from the outset, and to produce constitutional and practical difficulties (Fitzpatrick 1992). This was the reason why the UK negotiated an opt-out from the Social Chapter. The agenda may seem overly bureaucratic, but there is an escape clause in Article 2 that asks for avoidance of administrative, financial and legal constraints that would hold back the creation and development of small and medium-sized undertakings. There may well be cases where the costs triggered by these constraints outweigh the benefits to employees even though there might be moral arguments for these benefits. With the enlargement of the European Union, several of the new member states have chosen not to adopt quite a few policies of the framework.

Business leaders who adhere to moral principles will not require compulsory regulation like the Maastricht Treaty Social Chapter for handling workplace issues that affect rights and duties of employees. To take just two cases of employee treatments that reach much further: one is the participative management at all levels of the Cadbury conglomerate in the UK (Saee 2005). The other is Levi Strauss’ (US) extensive workplace democracy, of which a good example is the involvement of forklift drivers in the decision on which new forklifts to purchase (Mirvis 2012). A firm that provides work conditions along the lines laid out before may be viewed as a “moral community” (Bowie 1999, p. 74; Pursey et al. 2008). The term has been developed to encompass the ability to mediate organizational conflicts that are inevitable in any firm – between functional departments, between different divisions, between managers and the board, and between employees and managers – and to create a strong relationship of employees with the firm based on shared values.

At first glance, the arguments for moral community, meaningful work and dignity may seem to be sufficient to regulate all employer–employee relationships. But there is also an argument that an employment contract is an action into which the employee enters voluntarily. If both parties to the contract are fully informed, one could argue like this: workers need to accept that the price of using a machine may become cheaper than the cost of labor, and when entering an employment contract they have unspokenly agreed that this development would have consequences for their employment status. Therefore, wages include a premium for the risk of layoffs (Williamson 1989, p. 145). This is acceptable if the “worker” is a high-paid executive who risks being fired if a new owner wants to replace his job by, for example, the capital that the new owner brings into the firm. But a layoff on the shop floor is not for the workers an ordinary event like receiving orders from the supervisor or being held accountable for the outcome of operations.

Even though there are legal provisions almost everywhere that protect workers from the negative consequences of layoffs, there are cases – all over the world – where business owners try to evade them. This has various features of immorality – negating responsibility, tricking legal institutions and often creditors as well and, above all, leaving employees without resources.

A striking case of business owner immorality towards employees occurred in Germany in 2012–2013. Schlecker AG, a German family-owned drugstore chain with roughly 7,000 stores and led by the second generation of the family, was led into insolvency on purpose, and assets were removed by the family and secured outside Europe. The structure of the enterprise, where each store was a firm of its own, had been built in this manner to stay out of the obligation to have employee representatives, and even the very powerful trade union of sales employees did not have a chance to intervene (Hiebl 2015).

A controversial aspect of the Maastricht Treaty’s Social Chapter is employer–employee consultations, which are required to be held whenever a management decision affects the employees. This has corroborated the long-standing German practice of co-determination through works councils. In other European countries, this EU suggestion has been met with criticism, and it was one of the reasons why the UK immediately opted out of the Social Chapter. The UK criticism was certainly based on the intervention of industrialists who had no interest in measures that would increase labor costs, above all in view of Britain’s productivity being lower than that of, for example, Germany (Falkner 2002). In the long run, though, it has become questionable that the British negotiating success really delivered an advantage. Researching the effects of Brexit, UK economists deplore that there has been virtually no increase in UK productivity since 2007 (Gudgin et al. 2016). There was cost increase from the effect of works council consultations, and consequently there was no pressure to compensate. One might say, however, that those consultations could as well have produced cost savings. The argumentation on productivity, in hindsight, was not a helpful criticism. There is, however, a moral argumentation.

The moral argumentation is about the moral justification for employer–employee consultations. The argument goes that if an employer–employee dialogue is directed at preventing conflict or confrontation, then clearly the aim of consultations has moral content. The same applies when there is a recognizable economic advance arising from consultation, e.g., from dialogues about increasing productivity (even though this might also be achieved through quality circles). But there are many other situations, such as planning a new production line or downsizing a business, where dialogue might even produce confrontation. With regard to the negative effects that this compulsory consultation has on the creation and development of small and medium-sized undertakings, a utilitarian argument against workers’ councils is that they will discourage the formation and growth of businesses.

In the US, one major focus of workers’ rights is on equal treatment. With this in mind, the Equal Employment Opportunity Act was passed in 1972. The measure is connected to the overall Affirmative Action Initiative against discrimination of workers on which formal legislation was launched in 1961 through an executive order issued by President Kennedy. While this order referred only to projects financed with federal funds and demanded that employment practices for these projects be free of racial bias, subsequent orders issued by Presidents Nixon and Carter established federal support for minority business enterprises. After this, additional legislation and court rulings drew the field wider to include all private and public organizations. Affirmative action is a subject of controversy in American politics. Opponents claim that some policies, such as racial quotas or gender quotas, are a form of reverse discrimination.

During the economic and financial crises, a more important topic in the US was job security. This is not a new topic, but it has received higher priority. Job security has always been an issue in the labor market, as reported over a long time span in research on employment conditions by, for example, the US consulting firm Willis Towers Watson (see www.willistowerswatson.com/en/insights). Their latest report shows that there are two more concerns that worry the public: retirement security and workplace safety, health and work-related risks (Willis Towers Watson 2016).

Job insecurity takes a toll on employee engagement, as does lack of transparency about the employer’s business strategies and about the firm’s financial performance. It affects each and every one, but it does so in different ways. Leaders should access this issue at the individual level.

7.1.2 The individual level

Human centered management exerts a positive influence on employee performance through intrinsic motivation and truthful job response. Leaders who head their employees responsibly encourage employees to report problems and suggest solutions. The recipes are all well known: increasing engagement of employees by involving them in decision-making, which is workplace democracy, accepting that workers have a say over their jobs and hold leaders accountable, self-managed teams and making workers think like executives. There is also a wide range of business practices that can remove the feeling of employees that they are somehow forced into a job procedure and that they are not fully informed. This refers back to what has been said previously about the need to avoid coercion and deception in the employment contract. One good practice is open book management. Open book management goes towards correcting the asymmetric information that supervisors possess. Another device is profit sharing, which Starbucks introduced right at its beginning, entitling employees to buy shares in their company in the future at the price in effect at the time this option is granted. It has been reported that with this option, employees with 10 years’ service at Starbucks will secure stock options worth three times their salary (Bollier 1996 p. 218).

So, if all the recipes are well known, why do we still hear of abusive supervisors, disinformation and managers who withhold not only information but also benefits to which employees are entitled? One answer may come from what was said in the previous section about the desire to remain in a secure job. This often suppresses criticism and complaints even though compliance officers and ombudspersons would be available to listen. And just why are abusive supervisors abusive? One answer conceptualizes abusive supervision as a function of the mistreatment that supervisors experience at the hands of their own superiors – the trickle-down effect (Mawritz et al. 2012); or as reciprocity for actions of subordinates who provoke mistreatment – the victimization effect (Lian et al. 2014).

If the effects of abusive supervision are known, remedies can be sought in trying to influence both sides – persuading the parties to contain hostility and to translate whichever mindfulness they have into changes of behavior (Liang et al. 2015). This would be the psychological approach. For an approach that is managerial, we can turn to open book management again, because as said earlier, it can override abusive behavior of supervisors. The adoption of practices such as open book management, by correcting the asymmetric information that managers possess, would contribute to eliminating abuse of power and deception. Seizing the tool of information power from abusive managers will probably educate them for the better.

Under open book management, all employees are given all the economic information about the company on a regular, frequent basis. Experience shows that, with complete information and the proper incentive, employees behave responsibly without the necessity of layers of supervision (Kavaliauskas 2011). And how does open book management work? The simplest answer is:

There is also another side apart from the rational: human centered management must also address the needs of employees for social belonging. There are always three major human needs that must be satisfied in a workplace. Employment must provide:

• The basic economic resources and security for a worker to lead a good life
• Meaningful work and the opportunity to grow and develop as a person
• Supportive relationships.

Supportive relationships need to go across all areas and all levels of a firm. This may often be established by new leadership, as in an example reported by French sociologist Philippe d’Iribarne who has researched intensively on the influence of national cultures on the way organizations work. His book The Logic of Honor is essential for anyone who wishes to understand why corporations are managed differently in different parts of the world (D’Iribarne 2003). An example in a more recent publication (D’Iribarne with A. Henry 2007) is the endeavor of French food products multinational Danone to transfer a culture of social belonging to its establishments in, among others, Mexico. The idealistic objective was to create a “community of equals, in which mutual assistance can change individual weakness into collective strength,” where “helping one another to grow” would generate “a strong and proud whole made up of weaker elements … a family of brothers … a community of equals” (D’Iribarne with A. Henry 2007, pp. 46–58).

The Danone experiment in Mexico was successful. The firm implemented a mode of collective operations in its subsidiary that makes very effective use of the meaning that the Mexican context gives to a tight-knit and egalitarian community life, characterized by intense relationships founded on mutual aid. One feature was to connect the activity inside the company with an outside project aimed at helping disadvantaged children. The Let’s Build Their Dreams project (Construyamos sus sueños) was seen as embodying the company’s dual commitment towards employees and society. There is, in every society, not just in Mexico, the desire to help – sometimes latent, sometimes clearly manifest. Knowing how to activate this desire and employing it prudently is one of the wisdoms of human centered management.

Leaders who address social needs of employees in the internet society must take account of today’s “disclosure culture,” that is, what is documented in the blogs and other outlets of the internet. People are recording their daily lives, emotions and observations on Twitter, YouTube and Facebook. Much of this self-expression spills over into people’s experiences as workers. Firms can make use of this interactivity: at the least, they should pay attention to how employees (together with consumers, investors and others) are talking about them online; but they can also engage in these online conversations. Handling all this can be delicate; it relates to the issue of privacy in the workplace, which is the last topic to be dealt in this section on employees as stakeholders.

7.1.3 Privacy in the workplace

The handling of employee affairs lends itself easily to immoral treatment and not only on the large scale in actions such as laying off employees without fair notice or compensation. There are other subtler types of mismanagement that also go (intentionally) against fairness, justice and equity.

Protection of privacy has four areas: the physical area, that is, an employee being entitled to his or her “own space” (e.g., placing surveillance cameras in bathrooms and rest areas compromises physical privacy); the social area (freedom to interact with whichever persons and in whichever way one might choose); the informational area (determining how and to what extent private data is released to others); and the psychological area (not being compelled to share private thoughts and feelings). The fundamental aspect of privacy is that it serves to secure personal autonomy. Hence, a very conflictive theme is workspace surveillance. There will only be a common understanding on this if the issue is openly discussed. Voluntariness, choice and consent are essential ingredients for meaningful implementation. Whereas open-plan offices facilitate direct observation, computer-based performance monitoring, for example, key-logger systems and telephone call accounting, is not only more sophisticated, but it also provides an instrument for measuring employee capacity or productivity, which in some countries may collide with statutory law.

Informational privacy concerns the extent to which employees can decide matters that concern them personally, control who has access to information about them and establish and develop different types of relations (Palm 2009). This not only includes obviously sensitive data such as sexual orientation or genetic makeup, but also information that can become privacy sensitive in the context of work, for example, as a result of combinations of different types of data about the content of an employee’s computer screen and so forth. Electronic privacy in the workplace has come to the forefront in many disputes within firms and in labor courts. There are dissenting approaches when comparing Europe and the US.

No statutory or common law in the US guarantees a right to electronic privacy in the workplace unlike in Europe. Issues of privacy are dealt with by case law, which makes some critics believe that “we will see a legally guaranteed zone of privacy in the American workplace” (Kesan 2002, p. 289). But it seems that the issue has been satisfactorily addressed through a market-based, contractarian framework. US firms typically develop principles on employer–employee e-policies regarding access to email and the internet. The dilemma arises when a firm’s aspiration to fully capitalize on the enhanced efficiencies of the internet may result in an overall loss in the employer’s power and weakens the ability to take effective, unilateral action against misuse. In Europe, where national legislation was required through the EU Data Protection Directive, the experience has been that industry and government organizations in most countries, following the law, have issued binding guidance on electronic workplace monitoring practices (Bamberger and Mulligan 2013).

No monitoring practice will be able to eliminate what has been called “cyber-deviance,” referring to inappropriate or criminal behavior in a digital context. There is an alarming trend in individuals behaving inappropriately with information technology in the workplace. In many cases employees repeatedly break security protocols leading to the compromise of sensitive customer and important organizational data resources. Even with detailed guidelines, employees continue to cause breaches in security (Oakley and Salam 2012). We are talking about average PC users in organizations and their interactions, not cybercrime by felons. Workplace-related cyber-deviance causes significant damage in both human and financial terms. Firms need to act firmly on this, at least with disciplinary actions, otherwise the cost would be termination of contracts, loss of employees, breaches of corporate confidentiality and loss of reputation, court cases for personal and organizational liability and the associated legal expenses, as well as billions of dollars in lost productivity (Weatherbee 2010).

There are studies, though, which cast some doubt on the effectiveness of disciplinary actions with regard to specific types of deviant behavior in computer and internet usage (Holt and Bossler 2015). Even though whistle-blowing barriers have decreased online, the community of malevolent internet users obviously is very tightly knit and comes into the open only very reluctantly (Fichman and Sanfilippo 2016).

Whistle-blowing is a prominent example of a moral dilemma. It verges on the topics of workplace privacy, loyalty to co-workers and loyalty to the organization, and the question is where the limits of loyalty lie. When an employee finds out that the behavior experienced in his or her firm is at odds with what is morally acceptable in society at large, what is he or she supposed to do? This might begin with a supervisor asking an employee to invade the privacy of another, or asking an employee to tell lies or conceal the truth about pollution or safety standards. The decision to report another person’s unethical behavior to a third party – to engage in whistle-blowing – may place a person in an impasse. Some whistleblowers receive acclaim; others, especially in the cyber world, are blamed for fraying the social fabric. They face revenge from their community (Dyck, Adair, and Zingales 2010) and they risk reassignment, dismissal and diminishing job chances.

What, then, drives a whistle-blower? The ethical motivation is differences in people’s valuation of moral norms, and the decision to place fairness over loyalty. Fairness demands that all persons and groups be treated equally. By contrast, loyalty dictates preferential treatment, a responsibility to favor one’s own group over other groups. In the US, the Dodd-Frank Act, which was signed into law in July 2010 spurred in part by the Bernard Madoff Ponzi scheme, contains whistleblower provisions meant to both encourage reporting and expand protection from retaliation for informants. Dodd-Frank was not in force when an informant reported the fakes in Enron’s accounts, and when a Boeing employee reported seeing a fellow engineer with proprietary documents marked “Lockheed Martin.” But when Boeing fired the engineer, he sued the company for wrongful termination, claiming that Boeing fired him to cover up a company policy to seek out sensitive Lockheed information. Boeing denied those charges and won the lawsuit on a summary judgment. The legal problems did not end there. After an investigation by the Defense Criminal Investigative Service, the engineer was indicted in 2003 on federal charges of conspiracy, theft of trade secrets, and violating the Procurement Integrity Act (Oliver 2009).

In the UK, the Public Interest Disclosure Act 1998 protects both internal and external disclosures from retaliation. In order to encourage companies to institutionalize whistle-blowing, the UK Financial Services Authority introduced the Combined Code on Corporate Governance in July 2003 (now the Corporate Governance Code, as per the update of 2010, where clause C.3.5 states that the audit committee of a corporation “should review arrangements by which staff of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters”). There is no whistle-blowing provision in the German Corporate Governance Code, and German courts seem to be ambiguous on whistle-blowing. The Employment Court of Wuppertal made a decision against Walmart in 2005 regarding its new Code of Business Conduct and Ethics, which contained a specific whistle-blowing procedure that included a hotline. Walmart had failed to consult the works council before implementation, and while the court stated that works council consent was required, it did not take a position on whether or not the hotline was legal according to German law (Hassink, De Vries and Bollen 2007).

The cases presented here give evidence of differences not only in the legal situation but also in the cultural awareness of the issue. And they show that leaders face multifold dilemmas. Was the German Walmart executive well advised to install procedures in Germany that he should have known were not compatible with German attitudes and regulations? Or did he think it was a moral compulsion for him to bring “Walmart culture” to the German subsidiary? Should a leader or a compliance officer/ombudsperson encourage a whistle-blower who might severely damage the firm’s business, or should he or she search for solutions that protect both?

Whistle-blowing, to lead into what the next section will discuss on a firm’s relation to its customers, points to a conflict between the ethos of the organization and public criticism of organizations’ separation from society’s ethics. This was the motive in the early 1970s of Ralph Nader, noted for his work in consumer protection, to campaign for legal protection for whistle-blowers. When the question is asked whether a firm’s whistle-blowing policies make “employees responsible or liable” (Tsahuridu and Vandekerckhove 2008), the answer should be that there is a contradiction in the question. Implementing whistle-blower policies turns responsibility into liability, making employees responsible not only for reporting organizational wrongdoing but for organizational wrongdoing. But this is what the business community owes to society. Interestingly, in that context, the Japanese government’s regulation on whistle-blowing is an integral part of the Quality-of-Life Policy and part of the Cabinet Office’s Ideal Consumer Policy for the 21st Century package (Mizutani 2007). This relation to consumer policy dates back to when the Quality-of-Life Policy Council was established in the Japanese Economic Planning Agency in 1965, which then redefined consumers as being autonomous rather than needing protection. Availability of information is a basic consumer right, and in line with this, all information sources that serve the purpose are protected by law (Yamagami 2004).

7.2 Relations with customers and consumers

Within this relationship, business leaders must look at five dimensions: the marketer, the offer of goods or services, the nature of the prospective buyer, the payment to be collected and the promotional representation. These elements roughly encompass the five “Ps” of marketing – product, price, place, promotion and people. The human perspective is twofold: while “people” refers to the persons involved in the marketing process (“the marketer”), the “nature of the prospective buyer” also includes attitudes and behavior.

7.2.1 The product

The moral way to bring a product into the consumer market would avoid harm, not deceive, and create value for the customer where profit for the seller is a result and not an objective. It is about marketing only “good” products or services. Philosophy offers two aspects for “good”: an object is intrinsically good when its value does not depend on the fact that it is desired; by contrast, an object is extrinsically good when its value depends entirely on the fact that it is desired (Hill 2011; Reginster 2007). But there is also a distinction between two types of desire. Object-based desires are desires motivated by one’s recognition of the object’s intrinsic desirability: it is because one judges the object “good” that one comes to desire it. Need-based desires are motivated, instead, by a pre-existing need. Without this need, the object loses its desirability and therefore its appeal or interest. One example is the desire for a good night’s rest: it is need-based; the desire for a particular sleeping pill would be object-based.

This brings us to the ethics of creating desire. Whether need-based or not, desires met by marketing divide into two kinds: those existing antecedently to marketing and those created by it. Is it moral for business to create desire? Or is doing so unjustifiably manipulative? It would be a mistake to claim this right away. Many things that make life enjoyable are not needed either biologically or for moral reasons. However, if a firm advertises cigarettes for minors, it would violate the moral obligation of not doing harm.

A firm should also not create desires that have disproportionate strength – disproportionate in that though not need-based themselves, like the consumption of hard drugs, they come to outweigh need-based desires. For example, the drug addict fails to value housing and eating. Hard drugs are the extreme of addiction; but there may be other addictions, such as online gambling or even smartphones. It is the marketers’ moral obligation to explore how their products or services affect the promotion of human good. Marketers should primarily aim at persuading potential customers with arguments based on their needs, and if their business is about goods that are not need-based, they should refrain from evoking excessive desires by manipulating with images and information that produce intemperate addiction (Audi 2012, pp. 65–66).

7.2.2 Pricing and the place of product/service delivery

Competition over price is the core element of a free market economy, but misuse of this freedom occurs repeatedly. There are several notions of pricing that connect to immoral behavior: price collusion, price-fixing, deceptive price advertising, predatory pricing, resale price maintenance, price confusion, and price discrimination, to name just the most commonly known. This not only erodes the markets and damages public well-being, but it also distorts the objectives to be achieved with proper pricing, such as meeting revenue, communicating a certain level of quality, suggesting savings or a deal, encouraging customers to “trade up” to a higher-priced product in the line or increasing market share. Consumers are harmed when the sacrifice they make, in the form of the price they pay, is excessive; eventually the economic system will break down and the natural forces of competition will fail. Similar effects arise when firms misuse their power to determine the place of product/service delivery to the disadvantage of the customer.

Abuse of a dominant position is an explicitly moral dimension because the causing of injury is intentional. This not only relates to unfair selling prices (if too high, to the detriment of consumers; if too low, to the detriment of weaker competitors) but also to granting high rebates in order to hold on to discriminatory prices (charging one customer more than another, thereby placing the first customer at a competitive disadvantage). These abusive practices were a major concern when the European Economic Community (EEC, later to become the European Union) was formed in 1957. Article 86 of the EEC treaty is a clear description of what regulators need to look at when the free market is endangered. The article states:

The pertinent regulatory body in the US is the Federal Trade Commission (FTC), established in 1914 at a time when trusts/price cartels and trust-busting were significant political concerns. The FTC (and its counterpart in Europe, the European Commission’s Directorate General for Competition) also supervises mergers and acquisitions – where abuse of a dominant position may also occur. Corporate leaders on both sides of the Atlantic have had to appear before the FTC or its European equivalent in numerous cases.

The longest-running case on the abuse of a dominant position is that of Google, which both the FTC and the European Union have formally charged over its alleged monopoly abuse that has, it is claimed, hit businesses of all shapes and sizes across the world. There is not much doubt about Google’s superiority in market share in search and search advertising, but there is room for more than cursory debate about its significance and persistent or possibly transitory nature. If competition, as Google often says, is “just a click away,” then market shares may not signify very much. A more severe accusation is that the search market exhibits major barriers to entry, in which case a persistently dominant or super-dominant position would carry special responsibilities, which may well include refraining from at least some of the practices alleged against Google.

The huge case of the European Union vs. Google is in the limelight of free market critics – but they often do not really analyze how the public authorities work. The critics are mostly absent when there is proof that both the authorities and the market achieve consumer protection. Fortunately, cases become widely transparent nowadays. Consumers modify their purchase and consumption behaviors when they experience price abuse; they change their attitude towards a firm if they become aware that it is facing allegations, and usually there are repercussions on the firm and its marketing strategies. Firms will not reap the benefits from price-fixing and monopolistic behavior for long. But they are, in any case, in the minority.

On the positive side, there are numerous enterprises with transparent pricing schemes and full product/service descriptions. They will “help the consumers to know themselves.” Product disclosure regulation, which is increasingly asked for by consumer activists, may look socially desirable (and may be effective in, e.g., the food industry). But it is the market that will regulate the issues: the buyers who understand that they need to become informed or generate demand for information, and the sellers who understand that they need to provide the information (Bar-Gill and Ferrari 2010).

7.2.3 Promotion

The main instrument of promotion, advertising, has been a controversial topic for many years. Thirty years ago, a scholarly paper could still argue that advertising “does not require of merchants they tell all” (Machan 1987, p. 59). Not only has consumer awareness changed since that time, legal provisions have changed as well, with EU Advertising Directives for a wide spectrum of goods, the UK government’s advertising regulations and the US Federal Trade Commission, which opens about 50 advertising investigations a year and publishes rules that have the force of law (Petty 2015).

These legal provisions are in close linkage with rules against unfair competition and they pronounce regulatory frameworks where consumers’ interests are at stake. The moral justification for this type of legislation seems relatively straightforward. Any secret collusion amounts to dishonesty or at least a violation of the free market philosophy that businesses conduct their marketing in open competition to the benefit of consumers. Most businesses will operate openly and fair for this reason alone. On the other hand, even the regulators, such as the UK Competition and Markets Authority (CMA) have pronounced at times that the consumers also have a responsibility: “Rational self-interest of consumers, properly pursued, removes unfairness and inefficiency to a great extent” (CMA 2016, Appendix 1). Still, for the sake of balancing powers, as the CMA says, the operation of self-interest needs to be supported by regulatory, educational and policy initiatives. This assistance would help the consumers and the businesses to “exercise a duty of care on their own behalf” (Sorell and Hendry 1994, p. 76).

The responsibility laid on the consumers does not withstand the fact that there is no point any more to the “buyer beware” principle (caveat emptor), which advocates of individualism and laissez-faire have upheld until the 20th century as best serving the promotion of free trade. Caveat emptor ceased to be a ruling norm with the introduction of consumer protection laws in most developed countries. From an ethics perspective, it is the broader moral responsibility of business in society that connects disseminating advertisement content with being responsible for not only what consumers believe they will purchase but also for how that product or service may be used.

For legal reasons, and so as not to set precedent, businesses will generally disclaim responsibility for protecting consumers from wrong usage of a product, but many cases have shown that the general public will hold them accountable. Corporations have learned this since the disastrous error of Nestlé in promoting the sale of processed milk formula in many developing countries. In India, Nestlé gave gifts to health workers and used saleswomen dressed as “nurses” to provide donations of formula and advice to mothers. Poverty, illiteracy and poor sanitation often led to improper formula preparation. Mortality in very young infants from malnutrition, diarrhea and pneumonia, virtually unknown previously, increased dramatically (Post 1985).

So morally, in advertising, a duty of care needs to be exercised intensively. Exercising a duty of care is at the core of moral behavior. Caring on one’s own behalf or “rational self-interest,” as per the denomination of the UK Competition and Markets Authority (CMA 2016, Appendix 1), must, however, find its limits on behalf of others; self-interest must be constrained by employing morality in the systemic way that is the concept of this book – an interconnected respect for ethics, society, stakeholders and economic interest. Morality of this multifaceted type is needed over and above self-interest to determine the scope of and the limits of a firm’s responsibility towards consumers.

As said before, a producer needs to make aware the harm which can be caused by its products. The warnings which have to be exhibited in, for example, tobacco advertising, are a clear example of this. However, where the risk carried by a product is identifiable but remote (such as a butcher’s knife that might conceivably be used for murder), the moral reasons for protecting the customer would have to carefully weighed. This does not mean that consumer protection is always overdone, but while consumerism, that is, the belief that consumers’ interests are always weightier than those of producers or sellers, is second nature in a consumer society, there needs to be some counterbalance. For instance, in the issue of consumer credit and consumer indebtedness, both the businesses and the customers/consumers have responsibility for things going right.

7.3 Relations with suppliers and competitors

Much like relations with customers and consumers, it is not just businesses that conduct supplier- and competitor relations: it is businesspersons, and there is always a human side. The ethical issues are about fairness and honesty, honoring promises and positive bargaining attitudes. The negative side might be procurement staff offering or being offered bribes, exploiting the seller with unfair clauses in the vendor contract or shortchanging consumers by collusive agreements with competitors over pricing. Ethics in negotiation will be included in this section.

Suppliers have close ties with a firm – but why are competitors considered to be stakeholders? The assessment of competitors as secondary stakeholders is derived from the corporate accountability of all firms that belong to an industry sector. It is in the interest of all members of the industry that each of them acts responsibly. Irresponsible behavior can damage a whole industry. Another angle is the legal rights that protect a firm from its competitors, such as the protection of brand names and intellectual property, but also the right to freely enter a market, to set prices free from coercion and the right to provide information on services and products. From there, we get to the moral rights and duties, that is, what should be expected morally from an organization that competes with others in a free market. There is no carte blanche, no free rein, for a firm, that is, its leaders and employees, to act in whatever way seems necessary to beat a competitor. Lying, deceiving or spreading false information about competitors or poaching their staff are not only immoral but punishable by law as well.

7.3.1 A case of outright immorality

The immoral treatment of suppliers has become infamous through the practices applied by José Ignacio López de Arriortúa at General Motors and Volkswagen in the 1980s and 1990s. Since then, the view that suppliers need to be “squeezed” has been replaced, not only in these companies, by collaborative practice. Still, the López case serves very well to explain how far the immoral can go in supplier relations. López continually reopened negotiations with suppliers and provided proprietary information of one supplier to other suppliers so that they could provide a product more cheaply. This might be termed as lying and stealing, respectively. That such a person would leave his employer General Motors to join its German competitor Volkswagen should be no surprise, then. Nor that he took with him some of his associates and General Motors’ proprietary purchasing data. One might ask why the new employer even considered hiring a person of whom suppliers would report that he lied to and stole from them. Sadly, similar questions as to why things happened have to be asked in the recent Volkswagen emissions scandal (see section 6.2). With López, in the end, General Motors took Volkswagen to court for up to USD 4 billion in damages, and López was charged by German prosecutors with the theft of trade secrets (Wernz 2014). But the damage to the supply market lasted for a long time.

Since the López era, collaborative practices have been adopted in buyer–supplier relations (developed at Toyota; see Langfield-Smith and Greenwood 1998), which prevent unethical practice at the organizational level. These partnership-based approaches involve personnel at all levels on the buyers’ and vendor’s sides, from technicians and engineers in R&D departments to procurement and sales officials up to the leadership level of the firms. At the level of the individuals who conduct these agreements, temptation always lingers – of giving and accepting gifts, bribes, hospitality and other inducements that lead to terms that are not in the interest of the firm. Another topic is the use of questionable tactics on negotiation (of which the López case gave an illustration and which will be dealt with as follows).

Before leaving the organizational level, we need to briefly cover the misuse of market power (which is also an issue in competitor relations, as will be set out as follows). To take one example: in Germany, France and the UK, a handful of very powerful supermarket chains dominate the food market, and farmers are often forced to accept disadvantageous sales terms. None of their suppliers would take any action if products were withdrawn from the market. The criticism against this abuse of power does not stop with condemning the immoral behavior of the supermarkets (and their leaders) in squeezing their suppliers; what needs to be condemned as well is their indifference to the wider consequences, such as forcing the market to provide reduced quality, job losses from suppliers going out of business, lack of investment and overall industry decline. The opposite of power abuse is assisting the less powerful partners in the market with knowledge, financial support and management resources where needed. These are signs of loyalty to suppliers.

7.3.2 Loyalty to suppliers, and ethics in negotiation

Loyalty to suppliers can be warranted both at the organizational and the individual levels. If suppliers are going through difficult times, at least payment terms should be honored. Payment delays are not morally excusable in general as it is morally wrong to break an agreement (on paying at the stipulated time). But it may seem to be morally right to withhold payment of a debt to a cash-rich firm to the benefit of a cash-poor creditor. Other organizational means would be providing state-of-the-art techniques, prepayments and managerial support. They would all have to be accompanied by empathy and some kind of altruism. The opposite would be greed and selfishness at the buyer’s end, which brings us to the topic of ethics in negotiation. Do purchase agents really need a directive on how to negotiate properly? There are ethics codes in the procurement profession on principles and guidance (see the example in Exhibit 7.4).

Again, as in other areas, the appeal to act morally is often not taken up voluntarily and participants in negotiation do not feel an automatic obligation to behave as laid out, for example, in guidelines like the one shown previously. In the US, rules for responsible procurement were codified in the Procurement Integrity Act at 41 U.S.C. § 423. It prohibits disclosing or obtaining procurement-sensitive information, including contractor bid or proposal information and source selection information for public tenders. Court rulings in the US have extended the jurisdiction of the act from government contracting to contracting between private business firms.

But what are the temptations and the pitfalls in negotiation? Is it “tricky tactics” or even “dirty tricks”? Reitz, Wall, and Love (1998, p. 5) list 10 popular negotiating tactics. They are:

1.  1 Lies – about something material to the negotiation.
2.  2 Puffery – exaggerating the value of something.
3.  3 Deception – including misleading promises or threats and misstatements of facts.
4.  4 Weakening the opponent – by directly undermining the strengths or alliances of the opponent.
5.  5 Strengthening one’s own position – for example, by means not available to the opponent.
6.  6 Non-disclosure – deliberately withholding pertinent information that would be of benefit to the opponent.
7.  7 Information exploitation – misusing information provided by the opponent in ways not intended by them.
8.  8 Change of mind – engaging in behaviors contrary to previous statements or positions.
9.  9 Distraction – deliberately attempting to lure an opponent into ignoring information or alternatives that might benefit them.
10. 10 Maximization – exploiting a situation to one’s own fullest possible benefit without concern for the effects on the other.

All these tricks and tactics come with losses. In the long run, suppliers (or buyers) will discontinue procurement relations, which will probably result in not only cost of change (in production, design and engineering), but also damage to reputation, cost for hiring replacement personnel and legal expenses. “Dirty tricks” ’ like this are also found when firms try to outmaneuver competitors. Another activity to the detriment of suppliers is “phoenixing,” which is bringing a business into doubtful solvency or insolvency, depleting the assets of the failed company shortly before the cessation of business, and setting up a new one to trade in the same or similar trading activities as the former. The new firm does not honor the debts of the old one, creditors’ claims are on hold; and it may also happen that preferential payments are made to key creditors of the old company to assure supply to the successor company. Fraudulent phoenixing activity is of increasing concern in some industries, especially in the construction industry. It is intentional fraud that is immune to any attempt at deterrence or moral persuasion.

Deterrence or moral persuasion might work in another context, which is the prevention of bribery. The activities of Transparency International (mentioned in section 6.4) have not only turned the global spotlight on corruption with tools such as the Corruption Perception Index and the Bribe Payers Index, which targets supply-side corruption. They have even achieved some improvements in a few countries. However, the reports also show that there has been a gradual escalation in the bribe amounts (Logue 2005). Translational bribery is bad enough, but bribery at home? The UK legislature, in passing a modern Bribery Act in 2010, explicitly mentioned it should serve to combat “bribery at home and abroad.” Although the UK has a good rating on the Transparency International Index of Perceived Corruption, the legislature obviously felt there was a need to provide for strict criminal liability for an organization failing to prevent bribery by that organization. Criminalizing private bribery wherever it occurs underscores the need for totally transparent business transactions. The act is meant to close the loophole of facilitating “courtesy payments” – payments that used to be given to government officials on a small scale (Osajda 2011).

7.3.3 Second, third and fourth tier suppliers and fair trade

A corporation’s responsibility reaches beyond its relations with its immediate suppliers. Businesses have faced serious consequences for not monitoring working conditions among their suppliers’ suppliers (Locke, Qin, and Brause 2007). For example, Nike and other apparel distributors such as Levi Strauss, Benetton, Adidas and C&A, which were under scrutiny for questionable procurement and production practices occurring at their suppliers, have learned their lessons (Preuss 2001; Locke et al. 2007). They take employ institutions that audit their second, third and fourth tier suppliers along internationally established and accepted standards such as SA 8000 or AA 1000.

SA 8000 was founded in 1997 and is now under the control of Social Accountability International (SAI), a partner of Transparency International. The standard is designed to manage, audit and certify compliance with workplace practices.

AA 1000 was created by the Institute for Social and Ethical AccountAbility as a standard for assessing and strengthening the credibility and quality of an organization’s social, economic and environmental reporting. Stakeholder engagement is central and enables AA 1000 to build confidence and give legitimacy for a good reputation.

Reaching beyond the first tier supplier is also associated with the concept of fair trade. Consumers in developed countries are familiar with the term from grocery products such as chocolate or coffee labeled with, for example, the logo of FLO (Fairtrade Labelling Organizations International), which works to secure a better deal for farmers and workers in developing countries. And one might find this in a responsible organization’s cafeteria. But the concept extends beyond farming to other small-scale enterprises, for example, independent garment workers in Bangladesh or small enterprise development in non-traditional exports in Mozambique (Carr 2004).

According to Fair Trade Labelling International (www.fairtrade.net), fair trade is about development and trading standards that stipulate that buyers must

• Buy from registered groups that are democratically organized
• Pay a price to producers that covers the costs of sustainable production and living (“living wage”)
• Pay a premium that producers can invest in development
• Make partial advance payments when requested by producers
• Sign contracts that allow for long-term planning and sustainable production practices.

Fair Trade Labelling International monitors and inspects producers and exporters to ensure confidence in the guarantees being offered behind the claim of “fair trade.” The effort will extend the benefits from trade and market liberalization to those segments of the population in developing countries who are at the bottom of the supply chain. There is growing trust in the replicability and sustainability of fair trade achievements, which has led to new ventures. Support comes from responsible purchase agents of morally led organizations and from policymakers throughout the world that establish programs to enable a shift of access, power and returns in favor of low-income producers and workers within global value chains.

7.3.4 Moral issues and competitors

Abusing the openness of a free market, unfair advantage seekers repeatedly employ tactics that restrict competition. The intention is to put rival firms out of business. Anti-competitive practices usually contravene competition law, as said earlier. However, charges that would stand up in court can be extremely difficult to prove, and many smaller competitors may well be forced out of business before authorities intervene. Even though it could be claimed that they are not necessarily motivated by deliberate intention, the aggressive market expansion strategy of high street brands such as McDonald’s, Starbucks and Gap squeeze out smaller competitors such as independent cafés, coffee shops and boutiques. By increasingly saturating an area with more and more stores, overall company sales increase, and the big chains accept that returns from individual stores may be reduced through this “cannibalization.”

Overly aggressive competition may resort to illegal tactics for securing information about competitors that go as far as manipulative intelligence gathering (as we have seen from the López case) and industrial espionage. Less blatant questionable activities would take advantage of the fact that corporations consist of, and deal with, multiple individuals, making control of information difficult. Much corporate activity takes place in public and quasi-public spaces such as shops, hospitals and colleges, and via shared infrastructure such as buses and railway cars. Conversations can be overheard; documents can be furtively copied. The more sophisticated attempts attack telephone lines, fiber optic cables and so forth, which are open to being easily observed and usually quite legitimately. With improvements in information and communication technologies, the ease of replication of digital information, as well as the refinement of reverse engineering techniques (where competitors’ products are stripped down, analyzed and copied), unauthorized access to and exploitation of protected intellectual property has been on the rise (Parr and Smith 2013).

Beyond illegally stealing secrets and spying on competitors, there are some tactics that fall under the category of being immoral but not illegal (see Jones and Pollitt 1998):

• Negative advertising: where the firm deliberately sets out to publicly criticize its competitors or their products, or any product or performance claims a competitor may have made.
• Stealing customers: where a rival’s customers are specifically approached in order to encourage them to switch suppliers, often using underhanded methods such as misrepresentation, providing false information, bribery or impersonating the competitors’ staff.
• Predatory pricing: as we saw in the previous chapter, this involves the deliberate setting of prices below cost in order to initiate a price war and force weaker competitors out of the market.

Also in the spectrum are collusion and cartels, where select groups of competitors are banding together in price-fixing or other trading arrangements for their own mutual benefit. Again, this was discussed earlier in this book. This is not just a threat to consumer interests; insufficient competition harms the chances of job creation and innovation for newcomers in a market. This is a cause for ethical concern beyond the affected industry because all members of the society would be disadvantaged as a result.

7.4 Relations with investors

Shareholders are owners of a firm, and respect for their rights as owners, as set out in Chapter 2, is one of the cornerstones of the free market system. Shareholding is a morally desirable form of public ownership of business, because shareholders are less justified in taking a return on investment at significant expense to the business than other investors, such as loan holders who mostly are secured against the assets of the firm. Shareholders have obligations from their ownership, such as keeping in touch with the management in order to convey and receive information, ensuring the presence of independent directors on the board, exercising and enlarging voting rights, to name the most important ones. Reciprocally, management that is acting as the agent of the shareholder (“the principal”) must conduct a continuous thorough and transparent dialogue with the owner in spite of any conflicts of interest inherent in this relation.

Agent and principal share risks: both wish to maintain and enlarge the firm’s capital, and both have to uphold the reputation of the firm. But they may have different views on how to accomplish these goals, which investments to choose, which key personnel to hire and so forth. It is often said that as the principal–agent relationship involves a transfer of trust and duty to the agent, this should exclude opportunism and the pursuit of personal interests. A widely held belief is that this can be solved by structuring executive incentives, for example, stock options, in such ways that they align executive behavior with stockholder goals (e.g., Davis, Schoorman, and Donaldson 1997). Is there another solution?

The principal–agent issue is a topic that has been studied in practice and examined by economists (see, e.g., Rogerson 1985), sociologists (Shapiro 2005), and management theorists (see, e.g., Laffont and Martimort 2009). Much of the discussion revolves around incentives. If managers were paid on a long-term performance basis, the argument goes, short-term opportunism would recede as managers strove to fulfill long-term performance goals (De Ruiter and Souër 2005). However, finding and agreeing on adequate targets that meet the ultimate goal of long-term profit maximization will not be without difficulty. Nobel laureate Jean Tirole contends that the stakeholder society is best served by flat remuneration structures, meaning fixed salaries without performance-oriented incentive structures (Tirole 2001). So we are left with ambiguity.

Let us try another solution. From a moral standpoint, business leaders who act as agents for shareholders face conflicts between “self-interest and altruism, ethics and interests, ethical demands and economic realities, moral and financial costs, profit motives and ethical imperatives, and even consumer’s interests versus the obligation to provide shareholders with the healthiest dividend possible” (Stark 1992). Business leaders need to make choices – but it is not that their motivation would be either altruistic or self-interested; it is always both, as we have seen in the explanation of advantage-based business ethics in Chapter 2.

In order to address the multiple moral dilemmas that managers face daily, leadership not only needs to understand the underlying motivations but also has to employ novel concepts such as moderation, pragmatism and minimalism. This also applies to handling the complex connection to shareholders. Managers have genuine moral responsibility to shareholders, and this responsibility is derived from what may be called Adam Smith’s fundamental theory of welfare, where the “invisible hand” should make it possible to improve any one person’s condition without worsening someone else’s: the manager’s obligation to help the shareholder get a reasonable return on its capital is a derivative of the latter’s entitlement to do so. There are no normative conclusions in this (“it is the duty of …”), but a predetermined reasoning (Heath 2004; Maak and Pless 2006). This reasoning would also serve as guidance for disentangling the conflicts enumerated by Stark (1992). Like conjoining the profit motive and an ethical imperative, self-interest and altruism can also be bound together and will cease to be conflictive, ethical demands do not get in the way of economic realities, and consumers’ interests do not oppose shareholders’ expectation of dividends.

The too close connection between of majority shareholders and corporate executives is broken when all the shareholders get equal access to information. This has become easier through the transparency provided by online corporate reporting. From there, one area that is becoming more and more visible in shareholder relations is activist investors: the term “activist business ethics” was first applied to defending the rights of minority shareholders by the Israeli businessman and academic lecturer Jacques Cory (see Cory 2002).

In Cory’s opinion, the greatest danger for minority shareholders and other stakeholders who are not represented on company boards lies with the immorality of an impenetrable alliance between top executives and majority shareholders. The alliance is immoral in the sense that it leads irresponsible business leaders to withhold information, to reap risk-free rewards from preferential warrants by the companies they lead and even to manipulate share prices. The recent history of the stock markets in the US and in Europe is filled with negative developments that corroborate Cory’s opinion (Hannes 2013; Wray 2011); what is worse though, is that those who commit wrongdoings have not been clearly ostracized by society. But there were also those activist shareholders who succeeded in changing the initiatives of very large companies (see, e.g., Prado-Lorenzo, García-Sánchez, and Gallego-Álvarez 2012).

The investor community lives on information about an investment object – and this is mainly information from corporate accounting. Business leaders ought to be held accountable for all information given out by their firms. With trust and reliability being two of the moral values per se, proper representation of a firm’s financial position becomes an ethical issue. There is a wide body of literature on this subject, from basic books and articles on “financial shenanigans” (e.g., Schilit 2010) to extremely sophisticated papers on forensic accounting (e.g., Bierstaker, Brody and Pacini 2006).

The underlying challenge in financial reporting is that there always exists a space for judgment because all accounting standards and rules, even though highly specific in some instances, need to be generally applicable, and they cannot prescribe which particular figure has to be assigned to a specific book entry. Inventories and real estate property can be understated or overstated in the accounts; contracting a loan can be performed through channels that remain outside the statutory accounts such as the “special purpose entities” used by Enron; and depreciation and write-offs are another field that is open to judgmental discretion.

Enron’s “special purpose entities,” where debt was incurred without burdening the statutory accounts of the firm, is an example of a legal instrument whose deployment is immoral when its only purpose is to avoid disclosure. In disclosure, generally, the borderline between legal and immoral is thin. Deceiving may start with obscuring the financial statements through technical terms that are only understandable for a few readers, or by using ambiguous language, or by presenting graphs with scales that blur the record. External auditors who are hired by the firm have a dilemma when their professional standards are challenged by reporting modes that are not against the law but might prevent less knowledgeable investors having proper insight. And they will also find themselves in conflict-of-interest situations at times when a powerful client pronounces the intention to hire another auditor.

Conflicts between an accountant and an auditor may be brought to the table of the audit committee that publicly listed companies are required to have in most countries. As audit committees are staffed with independent (external) directors, a discussion with this body could solve the problem. But the moral issue may persist. Auditors’ independence from their clients is often compromised by any relationship that builds a common identity between the two – which may very well be explained by common professional backgrounds. As auditor independence and the quality of auditing decisions necessarily deteriorate when the auditor–client relationship lengthens, morally responsible leaders in both the corporation and the audit firm should accept the need for auditor rotation. Switching to another auditor would thus be a moral demand. Again, moral appeal not being sufficient, legal provision comes into place. Corporate governance codes all over the world request auditor rotation (Du Plessis, Hargovan, and Bagaric 2010).

7.5 Community relations

Business involvement in communities or, generally speaking, in civil society, usually begins with charitable giving and other forms of corporate philanthropy and voluntary participation in community affairs – educational institutions, libraries, the arts, sports and so forth. This is based on the notion of “giving back.” Some corporations have made enormous contributions to civic life through such activities. Corporate giving is significantly larger in the US than in Europe, with US corporations giving, for example, something like five times more to charity than UK companies (Campbell, Moore, and Metzger 2002). US corporations usually enjoy more generous tax breaks on charitable donations than European corporations; in Europe the state and the church have traditionally been expected to take responsibility for public welfare, although in the US much of this is also taken care of by organized religion and church groups.

But the constituency of an enterprise, or the “community” in which it operates, is much wider than the local citizens. It stretches even wider than to customers of the firm’s customers’ customers, or to the third and fourth tier suppliers. Those suppliers are a part of the firm’s community, too, and businesses need to monitor working conditions among their suppliers’ suppliers as was mentioned previously. They must also be aware that they can be held accountable for their predecessors’ wrongdoings, which may result, for example, in the obligations to indemnify all victims of environmental damages caused a long time before by firms they acquired, like Chevron in the Ecuador/Texaco dispute (see Giorgetti 2013).

Attending to issues that relate to the area of environmental damages and of harms to humans from environmental wrongdoing requires careful diligence. Business will seek collaboration with local expertise and with expertise on international human rights and on the relevant standards and resolutions, such as global and national human rights networks and organizations, both official and private. The United Nations Human Rights Council and its offices in the UN member states cooperate with a large number of private associations that can be joined or consulted. Three will be presented here briefly as they are exemplary:

• The International Service for Human Rights (ISHR) is an independent, non-profit organization with offices in Geneva and New York (www.ishr.ch). Its mission is to strengthen international and regional human rights systems by supporting human rights defenders at international and regional levels through advocacy, training and information services. Financial support comes from donors including governments, trusts and foundations, law firms and private persons.
• The Extractive Industries Transparency Initiative (EITI) is an international organization that maintains a standard for assessing the levels of transparency regarding exploitation of oil, gas and mineral resources worldwide (https://eiti.org). The EITI International Secretariat is located in Oslo, Norway, and as of 2016 the EITI Standard is implemented in 48 countries. Funding is twofold. There are membership fees provided through the industry, and governments can ask for financial assistance from a trust fund managed by the World Bank for the costs associated with implementing the EITI Standard in their country.
• The Ethical Trading Initiative (ETI) is a London-based alliance of companies, trade unions and CSOs (www.ethicaltrade.org) that promotes respect for workers’ rights around the globe. Companies that join adopt a code of labor practice that they expect all their suppliers to work towards. Codes address issues such as wages, hours of work, health and safety, and the right to join free trade unions. Funding derives from a combination of members’ fees, a grant from the UK Department for International Development, individual project finance and trading income.

These three organizations will provide support to an industry and to the communities affected by its business, and they will arbitrate and monitor. They will also be helpful for corporations that wish to assess the extent and limits of collaboration with CSOs from the viewpoint of power imbalance and mutual benefits. One would expect business partners to be considerably more powerful than CSOs in terms of size, capital, political influence and other key power resources. However, such a perspective tends to overlook the important power that CSOs wield in terms of specific knowledge, communications expertise and public credibility (Dahan et al. 2010).

With regard to the benefits of partnerships between businesses and CSOs, a caveat is often raised. The benefits of many CSO–business partnerships may be garnered more by the CSO partners than they are by the constituencies that are supposed to be aided (Ashman 2001). Globalization has spurred this evolvement. In particular, sometimes anti-corporate sentiment has been mobilized across the world, with international protests and boycotts, the use of sophisticated technology to transmit images into the media, and a circus of protesters travelling around the globe (with zero benefits for those whom the protesters pretend to “defend”). This reached its peak in the late 1900s and then started to diminish (St. John 2008), but corporations need to take account of this.

While many firms would rather focus on engaging with multiple local civil societies they are faced with something more akin to a global network of campaigners with giant CSOs such as Greenpeace and Friends of the Earth International (FoEI) as the frontrunners. Some of their objectives may be reasonable, but some are absolutely questionable, such as FoEI’s campaign report Fuelling the Fire: New Coal Technologies Spell Disaster for Climate (Walker 2016). The study admits that there is only one supposedly commercial underground coal gasification (UCG) plant in the world (in Uzbekistan; p. 5) – but the campaign makes the layman believe that the world is coming to its end because of this technology. However, responsible business leadership has to maintain a dialogue on a global level with these campaigners (and devote considerable resources to building argumentation, proofs and technical documentation).

At the other end of the spectrum, issues originating at the local level require no lesser attention. There are issues with local government, tax authorities, neighboring municipalities and so forth. They may have an effect that requires the attention not only of the company professional who deals with this specific relation but of top management as well. Following the well-known saying that “all business is local,” most of the issues that emerge at a local level will spread up to the corporate level and throughout, like the Nestlé baby formula case that was referred to earlier. One case that started on a local level in Myanmar and developed to an unprecedented lawsuit in US federal court was the Moattama Gas Project.

Wider constituencies, overcoming economic, technological, political and ideological divides, and workers’ rights are all human-related. Nature is a concern of humans as well, and so it is to be treated as another stakeholder of responsible business.

7.6 The natural environment: a multifaceted stakeholder relationship

Business has been a partner of nature since the beginnings of organized agriculture millennia ago. Agriculture and its output was a main topic of economists of the 18th century, with Thomas Robert Malthus (1766–1834) coming to prominence for his 1798 essay on population growth. In it, he argued that population multiplies geometrically and food arithmetically; therefore, the population eventually outstrips the food supply. Malthus anticipated terrible disasters resulting from population growth and consequent imbalance in the proportion between the natural increase of population and food. However, since then the world population has grown nearly six times larger, while food output and consumption per person are considerably higher now, and there has been an unprecedented increase both in life expectancies and in general living standards, even in the poorest regions of the world.

The fact that Malthus was mistaken in his diagnosis as well as his prognosis 200 years ago does not, however, indicate that contemporary fears about population growth must be similarly erroneous. The increase in the world population has vastly accelerated over the last century. And there is certainly reason for concern. But the world community is acting, and the UN accord of September 2015 on the Sustainable Development Goals sets challenging but nevertheless achievable objectives for nutrition, access to water, minimization of waste and other essentials for human well-being. Civil society will have to contribute a big effort to reach these goals, and so must business. One contribution is ever-improving technology and better means for exploitation of natural resources.

There has undoubtedly been overexploitation of natural resources in many places, which needs to be stopped and its effects need to be repaired. The effects go far beyond the depletion of nature: we still see what is called the “natural resource trap,” the paradoxical situation that the discovery of valuable resources such as minerals and fuel is not a catalyst for prosperity but a curse, because it causes malfunctioning of social order when governments and enterprises fail to provide inclusive governance (Collier 2007). Technology is just one part of the contribution this story tells: business – responsible business – when bringing the technical means to improve agriculture and mining in developing countries must also comprehend that the people who live in these areas have a relationship to nature that is much closer than in the Western world.

In their relations with nature, businesses always encounter the dilemma between leaving it intact for future generations or changing its landscape for improving the living conditions of the present generation. This dilemma is what produced the definition of sustainable development by the Brundtland Commission: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED 1987). But to meet both these needs man must change the landscape of nature. We live off nature – it is our capital (“natural capital” – like investors living off their financial capital). Implicit in this proposition is that we must, to the best of our ability, live off the “interest” on this capital stock and not draw it down. One well-intentioned notion of the proposition that the current generation must leave to its descendants a stock of capital no less than is currently available has been coined in the term “transient caretakers” by Mervyn King and Teodorina Lessidrenska (2011).

The only way to ensure that our descendants get the same amount of fruit as ourselves depends on natural capital bearing the same amount of fruit at all times. By making better use of the capital we are still responsible caretakers. Thus, if a part of this capital is consumed, it must be replaced by substitute capital. Therefore, we can consume some of our natural capital (in the form of environmental degradation, for example) as long as we offset this loss by increasing our stock of man-made capital, by making use of the technological advances mankind is continuously adopting. This way of dealing with resources has been called “weak sustainability” as opposed to “strong sustainability,” which requires that the resource structure must remain unchanged (Pearce and Atkinson 1993).

Advocates of the “strong sustainability” criterion see nature as an indivisible heritage and reject what they call “commodification” of the environment. In their view, the market functions as a collective action against preservation as extraction/production of resources subjugates nature to human technology and methods, when it should rather be the other way around (Scherhorn 2004). There may be reasonable arguments on how much substitution of man-made and natural capital is moral. However, it is commonly agreed that natural and man-made capital should be managed at optimal levels and these should be maintained over a very long period.

One example of the relationship between natural resources and technology is that the productivity of bigger fishing nets (man-made capital) will decline with the decline in stock of fish, and their relation is complementary (Daly 1990). This may be transferred into improvements in mining and the stock of phosphate or copper ore. Maintaining the stock of natural capital is not an issue of the size of fishing nets or mining devices. If the stock is limited, economic logic requires investment in the limiting factors, and this would translate into encouraging the growth of natural capital by investing in projects to relieve pressure on this type of natural capital stock and by increasing the end-use efficiency of products. This indicates a path to a proper mix of natural and man-made capital. It is business enterprises that produce this mix – by building a dam on a river, by drilling water holes, by cutting trees and reforesting, by mining in woodlands and consequential recultivating.

This view on the relation between business and nature concludes the discussion of responsible dialogues with stakeholders. The next chapter will consider what is meant to be a moral person, a moral leader and a moral organization and how they are tied together. And this may also be viewed at as an issue of implementing human centered management.