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The Social Function of
Business
Class Instructor: Ms. Marion Pia B. Calderon
B U S I N E S S E T H I C S
Module 2: The Social Function of
Business
In 2002, all businesses worldwide produced more than US 40 trillion worth of goods and
services. Businesses play a major role in keeping any economy alive. It is, therefore, necessary to
ensure the proper and ethical governance of businesses. Business people-managers and
employees, but above all organizational leaders-must behave in an ethical manner in managing
and operating a business. Otherwise, no one will be willing to invest in or loan money to the
business. A discussed in Lesson 1, business activities must be viewed and examined from the
perspective of morality. Business without ethics threatens the survival of human society and in
some cases, destroys the fiduciary relationships of people.
By beginning to study the social function of business, we begin to be introduced to
fundamental concepts of what is right or wrong in our human conduct and their implications for
business as an important human activity. The fundamental reason for examining the activities of
business from the social and ethical perspective is for the promotion of the common good,
protection of the individual's interests, and the preservation of the human society in general.
Without this ethical consideration, the business will be a chaotic human activity because there
will be no common understanding and agreement about what is right and wrong human
conduct.
Given the long list of prominent business scandals just around the turn of the 21st century,
there is no escaping the fact that ethical reasoning is vital to the practice of business and finance.
Integrity is paramount for a successful managerial career: one must grasp the norms of ethical
behavior if one wants to succeed in the field of finance and business. In addition, the central role
of corporate leaders in settling the ethical tone for their organization is widely accepted.
In the first few years of the 21st century, the corporate world has come under increasing
pressure to behave in an ethically responsible manner. In particular, accountability failures have
led to bankruptcies and restatements of financial statements that have harmed countless
shareholders, employees, pensioners, and other stakeholders. These failures have created a
crisis of investor confidence and caused stock markets around the world to decline by billions of
dollars. Standards for what constitutes ethical behavior lie in a hazy are where clear-cut right
versus clear-cut wrong answers may not always exist.
Ethics are moral principles that guide the conduct of individuals. Unfortunately, business
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Module 2: The Social Function of
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managers and employees sometimes behave in an unethical manner. A number of managers of
companies in the last two decades engaged in accounting or business fraud. These ethical
violations led to fines, firings, and lawsuits In some cases, managers were criminally prosecuted,
convicted, and sent to prison.
The following are the four main reasons that may persuade a business to act ethically:
1. legal reasons, of which there are several sorts;
2. public image reasons, which again, may encompass a number of different types;
3. pragmatic reasons, acknowledging that sometimes, acting ethically might be the most direct
path to business success; and
4. moral reasons, where it s affirmed that these reasons are different from each of the other
three types.
Business' Role in Poverty Alleviation
Poverty is experienced and understood differently by different people in different regions
and at different times. Broadly, "poverty" is conceptualized as a deficiency or shortage of some
sort, typically in comparison either to the living standards of others within the same society or
culture (called "relative poverty") or to a universal measure of adequate provision (called
"absolute poverty"). Historically, this shortage has been considered synonymous with lack of
income, or at least insufficient income to meet a household's daily needs. Economic definitions of
poverty tend to concentrate on either income, such as the US 1.25 per day poverty line
established by the World Bank, or expenditure, such as the "basket of goods" assessment. The
former measures absolute poverty in terms of where a household's income falls on the universal
poverty line, whereas the latter assesses relative poverty in terms of whether a household can
afford to buy the basic goods necessary for survival within their specific context (typically with the
consequences for nutrition and hunger highlighted) (Lemanski, 2016))
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Module 2: The Social Function of
Business
Continuing Extreme Poverty in the Midst of Economic Growth
Even among the poor countries in Asia that experienced marked economic growth,
extreme poverty often continues to afflict significant parts of the population. Economic growth
is rarely uniformly distributed across a country. China's coastal provinces, linked to world trade
and investment, have grown much more rapidly than the hinterland to the west of the country.
India's southern states, also deeply integrated into world trade, have experienced much faster
economic development than the northern regions in the Ganges valley. Thus, even when
average economic growth is high, parts of a country may be bypassed for years or decades
(Sachs, 2005).
Another reason for persistent poverty is the failure of government. Growth may enrich
households linked to good market opportunities, but it may bypass the poorest of the poor
even within the same community. The very poor are often disconnected from market forces
because they lack the requisite human capital-good nutrition and health and adequate
education. It is vital that social expenditures directed at human capital accumulation reach the
poorest of the poor, yet governments often fail to make such investments. Economic growth
enriches households, but they are not taxed sufficiently to enable governments to increase
social spending commensurately. Or even when governments have the revenue, they may
neglect the poorest of the poor if the destitute groups are part of ethnic or religious minorities
(Sachs, 2005).
A third possible reason for continued poverty in the midst of growth is cultural. In many
countries, women face extreme cultural discrimination, whether or not those biases are
embedded in the legal and political systems. In South Asia, for example, there are an
overwhelming number of case studies and media reports of young women facing extreme
undernutrition within the household even when there is enough to go around. The women,
often illiterate, are poorly treated by in-laws and lack the social standing and perhaps legal
protections to ensure their own basic health and well-being (Sachs, 2005).
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Module 2: The Social Function of
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Businesses' Role in Overcoming the Poverty Trap
When countries get their foot on the ladder of development, they are generally able to
continue the upward climb. All the good things tend to move together at each rising rung:
higher capital stock, greater specialization, more advanced technology, and lower fertility
(Sachs, 2005). Some studies show that small and medium enterprises (SMEs)- defined usually
as businesses with up to 250 employees-are believed to be important contributors to
economic growth and a tool to reduce poverty in developing countries. Also, microfinance is
believed to be an effective tool in the arsenal of the war against poverty by many witnesses to
its success in many developing regions around the world, including Africa, Southeast Asia, the
Middle East, and the Americas (Piza et al., 2016).
As mentioned above, all this should move us to take action. But it is important to precede
such action with study and knowledge. In the next section, we will enumerate the areas of
individual action in businesses where ethics is most urgent.
Areas of Business Most in Need of Ethical Attention
Authentic and sustainable development means working at the real solutions in order to
eradicate or at least alleviate poverty. In agriculture-based economies such as the Philippines,
the ultimate solutions are to be found in the countryside and rural infrastructures; quality
basic education for the children of the poor and in Muslim area, especially the education of
women; cash transfers to the poorest of the poor; primary health services; microcredit and
microenterprise programs; technical skills training for secondary school students; and social
housing such as that provided by Gawad Kalinga. Concretely, it has been found that, as far as
food security in the Philippines is concerned, the focus should be placed on addressing
constraints on agricultural finance in order to boost food productivity. Along with this, focus
should be put on investing in roads, since the unreliable and inadequate infrastructure in the
Philippines has been found to be a major impediment to economic growth. Given the physical
and environmental constraints on increasing land and water use for food production and
other economic activities, agricultural productivity will have to substantially improve to meet
the increasing demand for food. For this to happen, substantial investments must be made by
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Module 2: The Social Function of
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both the government and the private sector.
Each role in a business organization involves unique responsibilities (such as the
obligations of an employee to an employer or the fiduciary duties of management to the
shareholders) that determine what a person should do. Ethical issues arise in relationships
with every corporate constituency, including: (a) employees; (b) customers; (c) suppliers; (d)
shareholders; and (e) society at large.
In the case of the Philippines, it might be good to examine issues relating to the following:
A. The Social Responsibilities of Capitalist Business Practices
Milton Friedman (American economist) famously stated that the only social responsibility
of a business is to increase its profits. On the other hand, William Sauser, in the Journal of
Business Ethics article "Ethics in Business: Answering the Call" explained that business
organizations have four levels of responsibility: (1) Earning a profit; (2) Legal responsibility; (3)
Ethical Responsibility ; (4) Discretionary responsibility. Responsibilities of businesses beyond
profit-making have come to be called Corporate Social Responsibility or CSR. CSR, as defined
by the World Business Council for Sustainable Development (WBCSD), is a continuing
commitment by business to behave ethically and contribute to economic development while
improving the quality of life of the workforce and their families, the local community, and
society at large." More and more companies are embracing the CSR because of profitability,
and also because more managers now believe that being a better corporate citizen is a
source of competitive advantage.
The leadership of many Philippine businesses spearheading the contemporary CSR
movement is generally motivated by a commitment to social or environmental goals. CSR in
the Philippines has evolved over the last four decades mainly as a response to the country's
worsening socio-economic conditions. For example, in the 1970s, not-for-profit organizations
dealing with the business community grew to prominence. Associations such as the Bishop
Businessmen's Conference of the Philippines (BBCP), Association of Foundations (AF), and the
Philippine Business for Social Progress (PBSP) were born. In the decade of the 1980s, from
the assistance provided companies emerged the movement and institutionalization of
community relations or COMREL. From COMREL arose the notion of corporate citizenship:
contributions to society's well-being became a "must" and not simply a public relations (PR)
stunt. As a concern, CSR was raised to the highest corporate levels-management and the
board itself. Thereafter, market forces generally became the major driver of CSR behavior in
the Philippines.
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B. The Morality of Advertising
Advertising presents several ethical issues, one of them being Deceptive Advertisements.
Deceptive ads are those that make false statements about or misrepresent the product, for
example, the picture presented in the advertisement is different from the actual product.
Deceptive ads may occur not only through sentences or propositions but also through pictures,
individual words, or through certain combinations of objects which can deceive the eye and the
mind. A typical example of deceptive advertising is one where the pictures from the box of the
product do not look the same as the contents of the product. In this case, the picture is said to
be deceptive.
Article 108 of the Consumer Act of the Philippines (Republic Act No. 7394) declares that "The
State shall protect the consumer from misleading advertisements and fraudulent sales
promotion practices." Article 110 states that "It shall be unlawful for any person to disseminate
or to cause the dissemination of any false, deceptive or misleading advertisements by Philippine
mail or in commerce by print, radio, television, outdoor advertisement or other medium for the
purpose of inducing or which is likely to induce directly the purchase of consumer products or
services. An advertisement shall be false, deceptive, or misleading if it is not in conformity with
the provisions of this Act or if it is misleading, there shall be taken into account, among other
things, not only representations made or any combination thereof but also the extent to which
the advertisement fails to reveal material facts in the light of such representations, or materials
with respect to consequences which may result from the use or application of consumer
products or services to which the advertisement relates under the conditions prescribed in said
advertisements, or under such conditions as are customary or usual."
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Module 2: The Social Function of
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C. Basic Employee Rights, Job Discrimination, Other Labor-Related Ethical Issues
The Labor Code of the Philippines (or Presidential Decree No. 442) (a decree instituting a
labor code thereby revising and consolidating labor and social laws to afford protection to labor,
promote employment and human resources development, and ensure industrial peace based
on social justice) lays down the rights of workers in relation to wage, rights to self-organization,
collective bargaining, security of tenure, and just and humane conditions of work. Republic Act
No. 6727 (also known as the "Wage Rationalization Act" mandates the fixing of the minimum
wages applicable to different industrial sectors. This law rationalized wage determination by
establishing the mechanism and proper standards through the creation of Regional Tripartite
Wages and Productivity Boards (RTWPBs) authorized to determine the daily minimum wage
rates in the different regions.
Book Four of the Labor Code of the Philippines lays down the "Health, Safety, and Social
Welfare Benefits" accorded to workers. Book Five, on the other hand, entitled "Labor Relations"
lays down the policies of the State with regards to labor. These policies are: (1) to promote and
emphasize the primacy of free collective bargaining and negotiations, including voluntary
arbitration, mediation, and conciliation, as modes of settling labor or industrial disputes; (2) to
promote free trade unionism as an instrument for the enhancement of democracy and the
promotion of social justice and development; (3) to foster the free and voluntary organization of
a strong and united labor movement; (4) to promote the enlightenment of workers concerning
their rights and obligations as union members and employees; (5) to provide an adequate
administrative machinery for the expeditious settlement of labor or industrial disputes; (6) to
ensure a stable but dynamic and just industrial peace; and (7) to ensure the participation of
workers in the decision and policy-making processes affecting their rights, duties, and welfare.
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D. Insider Trading
Insider trading in the stock market is characterized as the buying or selling of shares of stock
on the basis of information known only to the trader (an "insider," somebody belonging to the
company, as opposed to the public) or to a few persons. Insider trading, in finance, is the reverse
of speculation. It is reward without risk, wealth generated-and injury done to others-by an unfair
advantage in information. Is insider trading unethical? Is insider trading illegal? The answers
depend on how we define insider trading and how we interpret the issue.
The growing importance of ethics in finance has been recognized by people from all
disciplines. However, even among academic researchers, there is still no consensus on what
kinds of conduct should be regarded as unethical. Opponents of insider trading, for example,
Werhane (1989) seem simply to believe that insider trading is inherently immoral. She argues
that insider trading, both in its present illegal form and as a legalized market mechanism,
undermines the efficient and proper functioning of a free market. Proponents, on the other
hand, assert that insider trading is a viable and efficient economic means and can be used to
serve the best interests of shareholders and the economy at large. For example, some say that
insider trading provides a powerful incentive for creativity and is the only appropriate way to
compensate entrepreneurial activity.
E. Pollution and Resource Depletion
The Encyclical Laudato Si': On Care for Our Common Home, issued by Pope Francis in 2015
is a wake-up call to help humanity understand the destruction that man is rendering to the
environment and his fellow man. While addressing the environment directly, the document's
scope is broader in many ways as it looks at not only man's effect on the environment but also
the many philosophical, theological, and cultural causes that threaten the relationships of man
to nature and man to each other in various circumstances. Paragraph no. 20, which is on
Pollution waste and the throwaway culture, states: "Some forms of pollution are part of people's
daily experience. Exposure to atmospheric pollutants produces a broad spectrum of health
hazards, especially for the poor, and causes millions of premature deaths. People get sick, for
example, from breathing high levels of smoke from fuels used in cooking or heating. There is
also pollution that affects everyone, caused by transport, industrial fumes, substances which
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contribute to the acidification of soil and water, fertilizers, insecticides, fungicides, herbicides,
and agrotoxins in general. Technology, which, linked to business interests, is presented as the
only way of solving these problems, in fact, proves incapable of seeing the mysterious network of
relations between things and so sometimes solves one problem only to create others." Business
organizations should take seriously the task of caring for the earth, by regularly embarking on
projects seeking to diminish or eradicate pollution and to renew the natural resources they tend
to use up or deplete.
F. Whistle Blowing
Whistle-blowing is the act, for an employee (or former employee), of disclosing what he
believes to be unethical or illegal behavior to higher management (internal whistle-blowing) or to
an external authority or the public (external whistle-blowing). Its status is debated: some see
whistle-blowers as traitorous violators of organizational loyalty norms; others see them as heroic
defenders of values considered to be more important than company loyalty. Whistle-blowing is
generally considered to be more important than company loyalty. Whistle-blowing is generally
considered from the viewpoint of professional morality. Unfortunately, these "messengers of
truth" are almost always the subject of dreadful retaliations; hence, to decide to "blow the
whistle" can be quite difficult and complicated. Whistle-blowing can be taken from the
perspective of duty and rights theories: does anyone have the duty to blow the whistle? If so,
whose rights are being trampled upon? There is also a tendency to judge it based on the
motivation of the whistle- blower. In a way, whistle-blowers should strive to act like saints. Yet, it
is logically impossible to hold both whistle-blowing as mandatory and whistle-blowers as heroes
or saints. The ethics student should, thus, carefully weight all the factors involved and come up
with a comprehensive decision criterion or framework.
Reference: BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
Author: ALIZA RACELIS
Business Ethics
