A Deontological Approach to Business Ethics:

Beyond Maximization of Profits

Wataru Asanuma
St. Thomas University
Institute for Professional Studies
Organizational Leadership Program

Introduction

One approach to business ethics is that the observance of the moral obligations is inherent

or embedded in the success of business. At first sight, it seems indeed as though there is a

conflict between business and ethics, because the pursuit of profits as an aim of business

deems to be itself unethical or amoral. As DeGeorge calls “the Myth of Amoral

Business,” however, if a business or corporation were completely indifferent to ethical

judgments, it would be doomed to failure from the start. This paper shall explore whether

or not this sort of defense of business ethics can really provide a normative foundation for

business ethics. It is attractive to claim that the observance of the moral obligations,

which seems to be irrelevant to business, is embedded in the success of business, but then

we could not come to grips with, if any, the moral obligations that outrun the maximization

of profits.

To that aim, first of all, we shall see that, although the model of corporate governance

has changed from the shareholder to stakeholder model, a tension between business and

ethics still remains to be resolved (Section 1). We shall also see that, despite their merits,

new laws and regulations such as the Federal Sentencing Guidelines for Organizations

(FSGO) and the Sarbanes-Oxley Act are not good enough to deter unethical behaviors

(Section 2). Then, we shall examine why this is so in the light of consequentialism

(utilitarianism) vs. non-consequentialism (deontology) debate in classical ethical theory

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(Section 3). Furthermore, we shall consider the ethical limits of cultural relativism in

connection with deontological philosophy (Section 4). Finally, from a deontological

standpoint I conclude that there should be some social responsibilities that business must

take at the expense of its profits.

1. Shareholder to Stakeholder

There are the two models of corporate governance: “the shareholder (or stockholder)

model” and “the stakeholder model.” The shareholder model defines the purpose of

business as maximizing the economic interests of investors and owners (shareholders),

whereas the stakeholder model defines it from a broader perspective taking into account the

interests of those who have a stake in the business, such as employees, customers,

communities … etc (stakeholders). In most businesses the shareholder model has changed

to the stakeholder model. From an ethical point of view, however, we have to note here

that the reason why most businesses are now concerned not only with shareholder interests

but also with stakeholder interests is just because otherwise they could not maximize

shareholder interests and not lead to the success of business. For instance, by taking

Wal-Mart as an example, Ferrell, et al. explain that “(t)oday, the failure to balance

stakeholder interests can result in a failure to maximize shareholders’ wealth. … Most firms

are moving toward a balanced stakeholder model as they see that this approach will sustain

the relationships necessary for long-run success” (Ferrell, et al. (2009), p. 41).

So, in the stakeholder model shareholder interests are still paramount and it is not

that shareholder interests have been overcome by stakeholder interests. Then, could we

say that the stakeholder model gives us an adequate understanding of the moral obligations

in business? Consider the case in which filthy rich businessmen donate a lot of money to

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charity, and this does not arise from pure sympathy with the unfortunate, but rather from

selfish reasons (e.g., increased reputation that might lead to more financial gain). Are they

appropriately called morally virtuous persons? Some philosophers would say that

morality can be reduced to self-interests or has nothing to with motives and intentions.

But it seems to me that momentum is not on their side and they need to make more

compelling arguments concerning the foundation of morals to win over the opponents.

Perhaps there are many more ethical limits in the stakeholder model. For instance, Orts

and Strudler argues that the stakeholder model, because of its emphasis on the human

interests, is faced with philosophical difficulty when dealing with ethical issues that are not

directly involved in human activities (Orts and Strudler (2002)).

There is no doubt that the stakeholder model has more ethical merits than the

shareholder model. But should it be all there is to business ethics? By this I mean that

the two models together stop short of resolving a conflict between business and ethics.

For the model shift is due to the maximization of shareholder interests. Bowie follows the

line of thought with which we began our discussion: the observance of the moral

obligations is embedded in the success of business so business and ethics are reconcilable.

Against Bowie, Hoffman does not believe the rational that “good ethics is good business” is

a proper one for business ethics (Hoffman (1991), p. 176). There is a good reason that a

tension between business and ethics still remains to be resolved. Hoffman argues the

moral obligations of business from a biocentric against homocentric viewpoint in

connection with environmental ethics.

2. Laws and Business Ethics

Which way should the business world be governed—by no rules, its own rules or the

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ordinary rules of society?1 Friedman claims that the free market acts better than new laws

and regulations as a natural deterrent to unethical behaviors. Friedman of course does not

advocate dog-eat-dog style business practices but says that business must remain “within

the rules of the game” (Friedman (1970)). But what kind of game? When business is

seen as a game like contact sports, the ordinary rules of society do not hold for the business

world and sometimes this view constitutes a pretext for illegal or unethical behaviors of

businesspeople. As DeGeorge points out, however, if we did not expect businesspeople to

do business in accordance with the ordinary rules of society, we would not be shocked or

outraged by their unethical behaviors (Rosenstand (2009), pp. 654, 660). The reason why

the business world should be governed by the ordinary rules of society is that people cannot

decline the game of business because they are not economically self-sufficient (Ferrell, et al.

(2009), p. 62).

The new laws and regulations, such as the Federal Sentencing Guidelines for

Organization (FSGO) of 1991 and the Sarbanes-Oxley Act of 2002, have been implemented

in order to discourage illegal or unethical behaviors and enhance programs designed to

improve business ethics and social responsibility (Ferrell, et al. (2009), p. 107). The

FSGO and the Sarbanes-Oxley Act provide incentives for developing core practices that

help ensure compliance with legal requirements and social expectations (Ferrell, et al.

(2009), p. 111). Given the recent corporate scandals, these additional laws and regulations

are indeed absolutely necessary and there should be the implementation of stricter rules for

1
When the business world is governed by its own rules, we shall put more emphasis on the rules that run
afoul of the general codes of ethics rather than the business-specific rules.

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ethical and legal compliance.2 But new laws and regulations alone would not be good

enough to solve the current issues in business ethics.

In general, one of the ways to see that the new legislations are not good enough to

solve the current issues in business ethics is that there still remains a loophole for

cost-benefit analysis of compliance or violation of the law. Consider a simple example in

which a company would rather pay a fine or penalty in favor of the bottom line. So the

harsher punishment for the violation of the law is the right direction. But the compliance

cost of the Sarbanes-Oxley Act is so high that many small companies cannot help delisting

themselves from the U.S. stock exchange. There are some executives who attempt to

bend corporate codes for fear of litigation as a result of increased disclosure required by the

Sarbanes-Oxley Act. So some people claim the supremacy of managerial integrity over

additional laws and regulations as the key to solving the ethical issues in business (Ferrell,

et al. (2009), p. 104). In any case, the laws and regulations are just the minimum set of

socially responsible behaviors. The social responsibilities of business are not limited to no

fraud or deception. There are some social responsibilities of business that must go beyond

the dictates of positive laws, sometimes at the expense of its profits.

3. Consequentialism (utilitarianism) vs. Non-consequentialism (deontology)

In this section we shall subject the previous discussions to a more philosophical perspective.

The debate over consequentialism (utilitarianism) vs. non-consequentialism (deontology) is

classical and most fundamental in ethics. When considered in light of this debate,

business ethics starts to take on a clearer shape. As epitomized in the famous phrase “the

2
The list would be inexhaustible: Enron, Bernard Madoff, Lehman Brothers, Fannie Mae, Freddie Mac, AIG,
… etc. It is ironic that Toyota and Goldman Sachs can be added to this list in a timely manner.

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greatest happiness of the greatest number,” utilitarianism is a hedonistic doctrine which is

committed to maximize actual or expected utility.3 A utilitarian prioritizes public utility

(efficiency) over justice in the sense that someone’s win means other’s loss (zero-sum

game), so the less advantaged could sacrifice themselves to the more advantaged. On the

other hand, a deontologist claims that there must be some basic rights guaranteed for every

single individual whatever it takes to protect them, and prioritizes justice over public utility

(efficiency) in the sense that inequalities are only allowed in so far as they are to the benefit

of all. John Rawls, in a voluminous book titled A Theory of Justice, contrasts

utilitarianism with social contract theory, and defends the latter against the former. The

point is that there are some cases in which the greatest good is in a stark contrast with the

rights of all individuals. In short, utilitarianism is a Good-based philosophy, whereas

deontology is a Right-based philosophy. Consequentialism or non-consequentialism is an

ultimate choice in moral philosophy.

We have to note here that “deontology” does not mean “a decision-maker’s

individual rights to make a decision” but “a decision-maker’s obligation or duty to

prioritize the rights of all individuals over anything else.” So it is a utilitarian who

sacrifices some for the benefit of others and it is a deontologist who protects the rights of

all individuals against the greatest good. It would be possible for one to make a decision

without placing oneself at the center of the decision-making. To see this, it would be

helpful to regard utilitarianism as universal hedonism, as distinct from egoistic hedonism.

3
Although the famous phrase “the greatest happiness of the greatest number” is often introduced as
Bentham’s, Hutcheson (1694-1746) is the first one to introduce it in the history of ethics. But whether
Hutcheson is a utilitarian, and whether Hume, who takes over a lot from him, is a utilitarian is still
controversial, so the phrase itself allows a lot of interpretations. Later J. S. Mill made improvement on it,
taking into account not only the quantity but also quality in the calculation of happiness: “It is better to be a
human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied.”

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In egoistic hedonism one indeed places oneself at the center of the decision-making and

chooses an action that maximizes one’s own happiness in the calculation of happiness. On

the other hand, utilitarianism (universal hedonism) calculates happiness from a broader

perspective and chooses an action that maximizes the common good (“the greatest

happiness of the greatest number”). In the extreme case, utilitarianism requires one to

sacrifice oneself to others. Deontology, however, treats the rights of all individuals as

being equal and does not demand such a supererogatory action (for this, see John Rawls

(1971), p. 155). The point is that, since from a deontological standpoint the rights of all

individuals deem to be equal, claiming one’s own rights does not imply egoism.

It is interesting to see a hypothetical scenario that Ferrell et al. come up with in order

to make stand out the overarching differences between utilitarian and deontological

decision-making (Ferrell, et al. (2009), pp. 148ff.). Sam Colt is a sales person whose

company produces nuts and bolts and he is considering a deal with a bridge contractor.

Assume that the bolts of his company have a 3 percent defect rate, which is not unlawful

but turns out to be unfit for use at the time of disaster such as earthquake. A utilitarian

Sam Colt conducts a cost-benefit analysis. The probability of an earthquake is 50 percent

and even if there should be an earthquake, those who are benefited from the bridge (the

community as a whole) would exceed the fatalities (as many as one hundred people). A

utilitarian Sam Colt would make the deal because he conceals the defect rate of the bolts

from the bridge contractor (which deems the greatest good as a result of a cost-benefit

analysis). On the other hand, a deontological Sam Colt sees the rights of all individuals as

being equal. If there should be an earthquake, some must lose their lives even though the

number of them would be small compared with the number of those who are benefited from

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the bridge. A deontological Sam Colt would decline the deal because he informs the

bridge contractor of the defect rate (which deems the protection of the rights of all

individuals). This hypothetical scenario illustrates the case in which the greatest good is

in a stark contrast with the rights of all individuals: a utilitarian Sam Colt prioritizes the

greatest good over the rights of all individuals, whereas a deontological Sam Colt

prioritizes the rights of all individuals over the greatest good.

Friedman thinks that promoting a social interest such as providing employment,

eliminating discrimination and avoiding pollution should not be the social responsibilities

of business. According to Friedman, “there is one and only one social responsibility of

business—to use it resources and engage in activities designed to increase its profits so long

as it stays within the rules of the game, which is to say, engages in open and free

competition without deception or fraud” (Friedman (1970)). The executive, as an agent of

the stockholders, employees, or customers, should spend their money in such a way that

they can receive benefits in the form of higher dividends, higher wages, or lower prices, so

Friedman says. According to Friedman, although “social responsibilities” promoting a

general social interest may be left up to the executive as an individual (principal) spending

one’s own money, the executive as an agent spending someone else’s money on something

from which he or she can make no profits (e.g., donating money to charity) is to impose

him or her on taxes, and Friedman is opposed to it by citing the famous battle cry of the

American Revolution: “no taxation without representation.” Friedman’s philosophy is

basically utilitarian and he holds the position with which we began our discussion: the

observance of the moral obligations is embedded in the success of business. It seems that

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his position is more radial libertarian because he believes that the free market acts as a

natural deterrent to unethical behaviors without governmental intervention.

Liechty disagrees with Freedman. The point of Liechty’s rebuttal is that Friedman’s

logic is self-defeating. To see this, consider the case in which the executives are debating

a proposal to install scrubbers on smokestacks at a cost of five million dollars, as mentioned

in Liechty’s article (Liechty (1985), p. 57). The point is that there are no laws to force the

company to install scrubbers at the moment. So this is not just a matter of deception or

fraud. Liechty argues that then there are some people who have to foot the bill for a five

million dollar “debt” in non-market sector of the community. According to Friedman’s

logic, however, it is not acceptable because this in turn means imposing an illegitimate tax

on some sector of the community. It’s even worse because they hold no stakes in the

company.

We shall contrast utilitarian and deontologist decision-making in this scenario. A

utilitarian would decide not to install scrubbers on smokestacks (which deems the greatest

good as a result of a cost-benefit analysis), whereas a deontologist would decide to install

scrubbers (which deems the protection of the rights of all individuals). From a

deontological standpoint, it is particularly important Liechty claims that “it is not a material

question of how large this non-market sector of the community as a whole may be”

(Liechty (1985), p. 59). He goes on to say that “(a)n illegitimate tax is an illegitimate tax,

whether levied on one person, thousands or an entire nation.” This argument shows that

there are some social responsibilities that business must take at the expense of the

maximization of profits.

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 The need for deontological decision-making is not limited to environmental issues.

First, we shall draw upon the case of corporate disclosure. The Securities Exchange Act

of 1934 requires the disclosure of information that has a material bearing on shareholder

interests: the large amount of money that causes significant financial losses to a company.

So the act was not concerned with a trifling amount, and materiality was a proportional

concept in the sense that how much constitutes a material amount depends on the size of the

company. According to Brummer, however, the materiality standard has changed to the

reasonableness standard by the Foreign Corrupt Practices Act (FCPA) of 1977 and SEC’s

supplementary regulations. So the company is now required to disclose even a small

amount of money, which could have an important bearing on shareholder interests.

Brummer defends the reasonableness standard against the materiality standard based on the

three deontological arguments.4 Although the high compliance cost of the new standard is

often raised as a ground of objection, Brummer dismisses this objection as being

consequentialist in nature. The point of Brummer’s argument is that disclosure is an

overriding duty that plays an important part in corporate accountability, and in this sense

his defense of the stricter standard of corporate disclosure is deontological. So, according

to Brummer, a strong burden of proof must remain with those who wouldn’t give priority to

this duty.

4
1) According to W. D. Ross, we can only know basic duties to perform unless one duty is overridden by the
other. In order to express the duties of this sort, he coins the term “prima facie duties.” Inspired by Ross,
Brummer claims that disclosure is a prima facie duty that the executive has to shareholders. 2) Kant’s
argument is deontological in that it appeals not to the consequences of but to the internal incoherency of the
restraint of shareholders’ freedom that is caused by deficiencies in disclosure. 3) The new standard protects
the self-correcting function of the internal accounting control recommended by SEC. The self-correcting
process assumes that all participants can equally get access to all information relevant to the inquiry, which
can only be achieved by the stricter standard.

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 Advertising ethics is another good place to see that there stands out vividly a contrast

between utilitarian and deontological ethics because telling the truth sometimes conflicts

with efficiency of advertising. Pratt and James conducted the research via a questionnaire

to 174 members of American Advertising Federation (AAF) from 25 states.5 In the

questionnaire, the sample practitioners are asked about four ethically problematic scenarios

and respond to six statements on a scale of four-points.6 Four out of the six statements (1,

2, 3, 6), which contain deontological terms such as “did something wrong,” “should be

fired,” “I would do,” and “regardless of my response,” particularly serve as direct measures

of deontological ethics in industry. Since the sample practitioners’ responses vary

significantly depending on the scenarios, the results of the research suggest that there are a

variety of degrees in which advertising practitioners apply deontological ethics to their

decision-making, and utilitarian or relativistic ethics is prevalent in industry. From the

results of the research, the authors conclude that there is a need for advertising practitioners

to more strictly adhere to deontological ethics in their decision-making, even though

advertising codes of ethics are often written using deontological terms. The

implementation of deontological ethics will provide advertising practitioners with stability

in their decision-making in the sense that, when they are faced with perceived risks,

deontological practitioners are least likely to alter their decisions, whereas utilitarian

practitioners are most likely to change their decisions.

5
AAF is the largest professional organization in advertising industry in the U.S.
6
Four ethically problematic scenarios are: 1) Giving gifts to a potential client., 2) Lying about an update on
an account., 3) Seeking confidential information, 4) Using outdated data. Six statements are: 1) What X did
was wrong., 2) X should be fired., 3) I would do just what X did., 4) Most ad execs would do just what X did.,
5) My firm/dept. has a policy, either written or oral, on situation or practice., 6) Regardless of my response to
No. 5, it is a good idea for my firm/dept. to have a policy, either written or oral, on situation or practice. A
scale of four-points is “definitely yes” to “definitely no.” For this, see Pratt and James (1994).

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 4. The Ethical Limits of Cultural Relativism

In this section we scale up the previous discussions to the international level. Although in

global business ethics arise a number of specific issues that we haven’t encountered in the

national level, we shall keep sight of the consequentialism vs. non-consequentialism debate

here as well. We are going through the following three stages in global business ethics: 1)

Cultural imperialism, 2) Cultural relativism, 3) Universal values. In cultural imperialism,

we unconsciously tend to impose our own culture on others. It would be easy to see that

cultural imperialism turns into confrontation or clashes between different cultures. So we

move up to the next stage: cultural relativism. We learn from cultural relativism that the

moral distinction between right and wrong is different from culture to culture and has

meaning only in the culture where it is placed. Applying the lesson of cultural relativism

to business ethics, we are told that “When in Rome, do as Romans do.”

Caution is in order, however, when we take this lesson to the extreme. Take the

Chinese melamine scandal as an example. The Chinese manufactures added toxic

melamine to raw milk to increase the apparent amount of protein contained in it. A

cultural relativist might advise us that, even though the Chinese companies are to blame

above all else, this is just a matter of business practices in the country concerned. It seems

to me, however, that the melamine scandal reminds us that there must be some general or

universal moral values (“core values”) beyond the cultural differences. These are basic

values that apply regardless of social structure, whether it may be capitalism or socialism.

This leads us to the natural law theory: beside the positive laws of each nation, the natural

law reflects ethical codes that all nations ought to abide by.

Even though all empirical evidence points to the lack of universal codes, it doesn’t

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follow from this that there are no general or universal codes because they have yet to appear.

Actually, “When in Rome, do as Romans do” style business practices don’t hold for every

country. Take as an example the sales of harmful products in foreign countries. Despite

a decline in domestic cigarette sales for various reasons (e.g., increasing public awareness

of the health effects associated with smoking) tobacco companies expanded their markets to

developing countries and increased their sales. Indeed cigarette sales in developing

courtiers could be justified on the basis of low longevity rates there. But in such a case

the common sense tells us that there is a need for an international agreement to regulate the

sales of harmful products.

Conclusion

As far as business sticks to the maximization of profits, even if shareholder interests are

extended to stakeholder interests or short-term interests to long-term interests, the

observation of the moral obligations is limited to those which can maximize profits. But

we have seen that in some cases the greatest good conflicts with the rights of individuals in

the light of consequentialism (utilitarianism) vs. non-consequentialism (deontology) debate

in classical ethical theory. So there still remains a tension between business and ethics in

the sense that some unethical behaviors are included in and some moral obligations are

excluded from the maximization of profits.

Some social responsibilities of business must go beyond the dictates of laws and

regulations, sometimes at the expense of its profits. We began our discussion with

Bowie’s view that the observance of the moral obligations is embedded in the success of

business or Friedman’s liberalism that the free market is a natural deterrent to unethical

behaviors. But I believe that the pursuit of profits relatively easily escapes the observance

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of the moral obligations and there must be some moral force to prevent business practices

from unethical behaviors. It might be objected that deontological ethics is more likely

inclined to formalistic rigorism and heteronomy of will. Given that Kant’s categorical

imperative is the basic tenet of deontological ethics, however, it is Kant who attempts to

bring moral law nearer to intuition by saying that three formulations of categorical

imperative are basically equivalent, and it is Kant who establishes the moral law upon

persons who view themselves as rational agents with autonomy of will.

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