Business Ethics Theories

Why This Matters

When you're tested on business ethics, you're not just being asked to define theories—you're being asked to apply them to real business scenarios. Exam questions often present a dilemma (layoffs, environmental damage, executive compensation) and ask you to analyze it through different ethical lenses. The key is understanding that each theory asks a fundamentally different question: Should we focus on outcomes? On rules? On character? On relationships? Knowing which question each theory prioritizes is what separates a passing answer from an excellent one.

These theories also connect to broader course concepts like corporate governance, stakeholder management, and corporate social responsibility. You'll see them resurface when studying leadership, organizational culture, and strategic decision-making. Don't just memorize definitions—know what type of business decision each theory handles best, and be ready to compare how two different theories would analyze the same situation.

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Outcome-Based Theories

These theories evaluate ethics by looking at results. The morality of an action depends on what happens because of it.

Utilitarianism

• Maximizes overall good—decisions are ethical if they produce the greatest happiness for the greatest number of people
• Consequence-focused analysis means the same action could be ethical or unethical depending on its outcomes
• Common business application includes cost-benefit analyses, though critics note it can justify harming minorities if the majority benefits

Ethical Egoism

• Self-interest as the guide—argues individuals should pursue their own good, provided it doesn't directly harm others
• Adam Smith connection links to the idea that individual self-interest can produce collective benefit through market mechanisms
• Key limitation raises questions about where self-interest ends and exploitation begins in competitive business environments

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Rule-Based Theories

These theories focus on duties, principles, and rights that must be followed regardless of consequences. Some actions are inherently right or wrong.

Deontological Ethics

• Duty over outcomes—certain actions (lying, breaking promises) are wrong even if they produce good results
• Kant's categorical imperative is the philosophical foundation, asking whether an action could become a universal rule
• Business application shapes corporate codes of conduct and compliance policies that apply uniformly regardless of situation

Rights Theory

• Individual entitlements must be respected—focuses on protecting fundamental human rights like privacy, safety, and free expression
• Negative vs. positive rights distinction matters: negative rights require businesses not to interfere, positive rights may require active protection
• Guides policy creation in areas like employee privacy, whistleblower protection, and consumer data handling

Justice Theory

• Fairness in distribution—concerned with how benefits and burdens are allocated among individuals and groups
• Rawls' "veil of ignorance" test asks whether a policy would be fair if you didn't know your position in the organization
• Directly applies to hiring practices, compensation equity, promotion decisions, and resource allocation

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Character-Based Theories

These theories emphasize who you are over what you do. Ethics flows from moral character and virtuous habits.

Virtue Ethics

• Character over rules—focuses on developing moral traits like honesty, courage, and integrity rather than following specific guidelines
• Aristotelian roots emphasize that virtues are habits developed through practice, not innate qualities
• Leadership implications make this theory central to discussions of ethical leadership and organizational culture

Care Ethics

• Relationships matter—emphasizes empathy, compassion, and attending to the needs of those we're connected to
• Context-dependent decisions reject one-size-fits-all rules in favor of understanding specific circumstances and relationships
• Workplace applications include employee wellness programs, family leave policies, and community engagement initiatives

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Relationship-Based Theories

These theories define ethics through obligations that arise from social connections and agreements. Business operates within a web of relationships and expectations.

Social Contract Theory

• Implicit agreements bind businesses to society—companies receive benefits (infrastructure, legal protection, educated workforce) and owe obligations in return
• License to operate concept suggests businesses must meet societal expectations to maintain legitimacy
• Violations occur when companies externalize costs (pollution, worker exploitation) that society must absorb

Stakeholder Theory

• Beyond shareholders—argues businesses must consider employees, customers, suppliers, communities, and environment in decisions
• Freeman's framework identifies stakeholders as anyone who can affect or is affected by the organization's actions
• Contrasts with shareholder primacy which holds that managers' only obligation is maximizing returns for owners

Corporate Social Responsibility (CSR)

• Voluntary commitment to positive social and environmental impact beyond legal requirements and profit-making
• Triple bottom line thinking evaluates success through people, planet, and profit rather than financial metrics alone
• Strategic value includes enhanced reputation, customer loyalty, employee retention, and risk management

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Quick Reference Table

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Self-Check Questions

1. A company discovers a product defect that will harm 5% of customers but recalling it will bankrupt the company and eliminate 500 jobs. Which two theories would most directly conflict in analyzing this decision, and why?

2. Compare and contrast how deontological ethics and utilitarianism would evaluate a manager who lies to protect employees from layoffs.

3. Which three theories would be most relevant when evaluating a company's decision to source materials from suppliers with poor labor conditions? Explain the question each theory would ask.

4. A CEO known for personal integrity leads a company with a toxic workplace culture. Using virtue ethics, explain the disconnect and what it suggests about organizational ethics.

5. If an exam question asks you to analyze a business's environmental practices, which theories provide the strongest frameworks, and what specific concepts from each would you apply?