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Application of ethical theory to vignette Case Study

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Updated: Jul 3rd, 2020

Critics argue that the principles of business ethics are only theoretical since they are conceived within scholarly boundaries and thus not applicable to real life business. Regardless of this, there are numerous ethical theories which describe the process of ethical decision making. These include the social contact theory, the stakeholder theory, Kantian ethics, among others.

These theories have different assertions, all of them relevant to modern business ethics. To illustrate their usefulness in the development of modern business ethics, two of these theories are analyzed against the James Company vs. town council scenario.

The concept of business ethics varies from one society to another. While an aspect maybe considered as unethical in a given society, the same might be ethically acceptable in a different society. Regardless of this, Ostas (2007) argues that the motivation for violating business ethics is multifaceted, more so by pecuniary self interest, which is further complicated by conflict of interest.

There are numerous factors which need to be considered in determining whether a situation portends conflict of interest. These include the nature of affiliations between parties in a business contract, employment issues as well as legal and social obligations by firms towards the local community and business partners.

Ostas’ (2007) arguments illuminate a number of key issues relevant to this case study. To begin with, the nature of affiliations between James’ Company and the town council portends conflict of interest.

James’ Company had previously won tenders fairly. However, the fact that a third of employees in James’ Company come from the town pose crucial questions on the reason why the town council overpaid the Company in the latest tender.

Since this is a fixed price contract, extra payments portends breach of contract agreement, and is likely to be perceived as kickbacks or rewards to James’ Company for providing employment to members of the town’s community. This argument lends itself to the fact that there are three major stakeholders in this case: James’ Company, the town council and the company employees.

These stakeholders are likely to benefit from such unethical practices. Additionally, the dilemma is compounded by the fact that the town council, which is the client, adamantly maintains that the extra unauthorized payments are correct.

There are a number of business ethics theories which can be used to analyze this case. Since this case study involves conflict of interest regarding major stakeholders, the stakeholder theory of business ethics seems relevant. According to the stakeholder theory, business managers have the obligation to manage resources only for the purposes for which they are intended.

This implies that there exist fiduciary relationships between major stakeholders, which must be maintained without violating business ethics. The social contract theory is a set of ethical sub theories, which recognizes that business ethics are governed by social contract between a recognized business and the society served by the firm.

As such, firms should serve both their interests as well as those of the community without violating normative ethics (Hasnas 1998). In addition to these, while Kantian school of thought is one of the most complicated ethical theories, it postulates that business practices can only be moral if they are motivated by duty as well as goodwill.

Additionally, Kantian ethics are based on universally acceptable maxims (Bowie 1999a). All these theories provide plausible bases to analyze this case. However, the stakeholder theory as well as Kantian ethics override others due their close relationship with issues relevant to this case.

The case of James’ Company and the town council revolves around the relationship between major stakeholders and how resources are managed.

This relationship portends conflict of interest since all stakeholders are seen as benefiting from unethical business transactions. Using the stakeholder theory, it is evident that the town council violated normative business ethics by paying the contractor over the amount stipulated in the contract.

According to the stakeholder theory, business managers are the principle custodians of capital extended by stakeholders. As such, managers are obliged to ensure that money is only spent for the purposes stipulated in a business agreement (Hasnas 1998).

Hasnas’ (1998) argument should be considered against the requirements American business contract law which criminalizes making payments especially in cases that portend conflict of interest. The extra $ 10000 seems a reward to the company for employing the towns’ people, and thus illegal. Based on this argument, the town council management breached the contact terms by paying more than the amount agreed in the contract.

The stakeholder theory further asserts that stakeholders extend capital to business managers and as such, managers are obliged to cater for the wishes of stakeholders (Hasnas 1998). Since the town council is a major stakeholder, its wish is to use any means to protect jobs for the local population.

In this case, the extra $ 10000 seemed to have been paid to maintain trust between the three major stakeholders, but is not part of the business contract. But as Hasnas (1998) asserts, the use of capital for any purpose contrary to contract agreement, despite it being for the best interest of stakeholders becomes unethical.

Furthermore, the stakeholder theory postulates that managers are obliged to use business capital for the interest of all stakeholders. In this context the term stakeholders refers to “any group or individual who can affect or is affected by the corporation” (Hasnas 1998). Thus, the local community, James’ Company, the company employees and the town council become major stakeholders.

It is logical to argue that the source of council capital is taxation and rates imposed on the local community. Thus, making such unauthorized payments amounts to misuse of public funds, and is not for the best interest of the public.

While the stakeholder theory seems to focus on fiduciary relationship between stakeholders, Kantian ethics focus on categorical imperativism. In this case, an individual must have the will and is duty bound to act on maxims that are universally acceptable. Therefore, only those actions motivated by universally acceptable maxims are morally permissible (Bowie 1999b).

As indicated earlier, an act portends conflict of interest depending on the nature of affiliations, legal and social obligations as well as issues of employment, which seems to underlie The James’ Company town council scenario; the town council made extra $ 10000 payments to James’ Company, arguably based on profits that would be accrued by all stakeholders.

Following Kantian ethics, making extra payments follows the maxim that it is morally permissible for a client to make extra payments to sustain fiduciary business relationships. Thus, the council management ought to ask itself whether making unauthorized payments to a contractor to sustain fiduciary relationships follows a universally acceptable maxim.

Kant further argues that people have free will and thus have the ability of follow the law based on reasonable virtues rather than self interest.

As such, Kant requires business managers to treat other stakeholders as ends, rather than means to an end. Following this argument, it is evident that the management at the town council treated James as a means to a greater end. Additionally, Kant argues that a business enterprise is part of the moral community.

Like the stakeholder theory, Kantian ethics proposes that for moral reasons, all the genuine interest of all stakeholders must be upheld if a business practice is to be considered moral (Bowie 1999b). Making extra payments amounts to breaching the initial contract agreement. This led to misappropriation of public funds. Thus, the town council failed to uphold the interests of one of the stakeholder, the taxpayer.

Using the stakeholder theory and Kantian ethics, it is evident that the management at the town council violated normative business ethics. In addition, James seems to have noted the anomaly arising from extra payment and alerted the town council, which remained adamant that the correct payment was made.

The fact that the previous contract had lost James’ Company an equivalent value to the extra payments made, puts James in a moral dilemma. Choosing to accept the payments compensates the company against previous losses and thus increases company profits. However, according to the stakeholder theory managers do not have the moral obligation to increase company’s profits at the expense of the interest of other stakeholders.

This implies that there are ethical constraints which require managers to only increase profitability through honest dealings (Hasnas 1998). Therefore, there are ethical constraints that do not allow James to accept the extra payments. In addition, Kant argues that businesses are moral communities, with stakeholders having a moral duty towards each other (Bowie 1999b).

Based on this, James has a moral obligation to maintain honest dealings with other stakeholders and as such cannot accept dishonest payments. Furthermore, Kant’s categorical imperativism asserts that where there are principles that cannot be universalized, it is immoral for businesses to make exceptions for themselves (Bowie 1999b).

Thus James cannot make exemptions for his business by accepting illegal payments. According to Duska (2007) parties within a business contract are bound by the contract agreement.

As such, any decision that contravenes the contract is unethical. In view of Duska’s (2007), Bowie’s (1999b) and Hasnas’ (1998) assertions, James is bound by the contract agreement which is worth $ 50000. Therefore it amounts to breach of contract if he accepts extra $10000.

To abide by the contract agreement, James ought to accept $ 50000 but return the extra $10000 to the client. Additionally, contractors have the right to investigate contract breaches (Summerford 2001). Thus, James should conduct further investigation to reveal the extent of the fraud to determine whether legal action is necessary.

Modern business management is complicated, especially with regards to business ethics. This is compounded by the fact that societies have different ways through which ethics are perceived. In this regards, ethicists have developed numerous ethical theories, which form the basis of modern business ethics.

These theories have varied assertions, but as evidenced in James’ company vs. town council case study, a business practice is only ethical if it follows laid down agreements. Thus, business managers have an obligation of adhering to established rules since most of the business failures emanate from unethical business practices. When adherence is consistent it sets precedence for successful businesses ventures.

Reference List

Bowie, N., 1999a. Business ethics: a Kantian perspective. Oxford: Blackwell Publishers.

Bowie, N., 1999b. . [online].

Duska, R., 2007. Contemporary reflections on business ethics. Boston: Springer.

Hasnas, J., 1998. The normative theories of business ethics: a guide for the perplexed. Business Ethics Quarterly [online].

Ostas, D., 2007. When Fraud Pays: Executive Self-Dealing and the Failure of Self- Restraint. American Business Law Journal [online].

Summerford, R., 2001. Reserving the right to audit the suspicious vendor [online].

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