Unit III: Business Ethics

Theories of Ethics – Natural Law, Utilitarianism, Kantian Virtue. Ethics in Corporate Strategy:
Corporate Philanthropy, Strategic Philanthropy, Corporate Governance. Ethical dilemma at workplace
and their resolution.

THEORIES OF ETHICS
Ethics also called ‗Moral Philosophy‘ is a branch of philosophy that seeks to determine the correct
application of moral notions such as good and bad, right and wrong or a theory of the application or
nature of such notions. Both 'ethics' and 'morality' have their roots in a word for 'customs', the former
being a derivative of the Greek term from which we get 'ethos', and the latter from the Latin root that
gives us 'mores', a word still used sometimes to describe the customs of a people. Although ethics has
always been viewed as a branch of philosophy, its all-embracing practical nature links it with many
other areas of study, including anthropology, biology, economics, history, politics, sociology, and
theology. Yet, ethics remains distinct from such disciplines because it is not a matter of factual
knowledge in the way that the sciences and other branches of inquiry are. Rather, it has to do with
determining the nature of normative theories and applying these sets of principles to practical moral
problems.

Ethics is traditionally subdivided into normative ethics, meta-ethics, and applied ethics.
1. Normative ethics seeks to establish norms or standards of conduct; a crucial question in this field is
whether actions are to be judged right or wrong based on their consequences or based on their
conformity to some moral rule, such as ―Do not tell a lie.‖ Theories that adopt the former basis of
judgment are called consequentialist; those that adopt the latter are known as deontologists.
2. Metaethics is concerned with the nature of ethical judgments and theories. Since the beginning of
the 20th century, much work in metaethics has focused on the logical and semantic aspects of moral
language. Some major metaethical theories are naturalism, intuitionism, emotivism, and
prescriptivism.
3. Applied ethics, as the name implies, consists of the application of normative ethical theories to
practical moral problems (e.g., euthanasia). Among the major fields of applied ethics are bioethics,
business ethics, legal ethics, and medical ethics.

Teleological and Deontological Theories

Ethical theories that concentrate on moral rules that can‘t be broken are deontological. For
deontological ethics, the important thing isn‘t the result or the consequence of the action, but the
action itself. If the action is wrong, then it won‘t do. For a deontologist, the end never justifies the
means. Another group of philosophers argue that whether something is right or wrong depends on the
result or the end of that action.

Theories that are interested in ends are called teleological, from the Greek word for ‗end‘ – telos. For a
teleological ethical thinker, the end justifies the means. You decide the rightness of an action by the
end it produces. A choice that results in a good end is morally better than a choice that results in a bad
end. Qualities such as love, honesty and kindness are not good in themselves. They are only good in an
instrumental way because they cause good results.

Example: Consider torture. A deontologist may argue that torturing prisoners is always wrong, no
matter what the situation. On the other hand, a teleologist will want to look at the consequences of
either choosing to torture or not choosing to torture before deciding whether or not it is right. Let us
suppose that the prisoner has secrets that, once revealed will save the lives of many innocent people.
The prison guards know he has the information. The teleological thinker will maintain that it is right to
go ahead and torture to discover the truth, as it will save the lives of many innocents.

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NATURAL LAW
Key philosophers are:
St. Thomas Aquinas (1224-1274). His main work is: Summa Theologica (1273)
Aristotle (384-322BCE). His main work is: Nichomachean Ethics
Cicero (106-43BCE). His main work is: On the Republic

Ethics is the struggle to determine what is right or wrong, or ‗good‘ and ‗bad‘. Some ethical theories
are hedonistic – they say that pleasure (and the absence of pain) are the only ultimately ‗good‘ ends
towards which to aim. Some Christian ethicists argue that following God‘s will – as revealed through
prayer, scriptures and prophecy – is the ultimate good. The roots of natural law can be found in the
ancient Greek and Roman world. The Greek philosopher Aristotle wrote that natural justice was not
always the same as that which was just by law. He observed that while laws may vary from place to
place, natural justice is independent and applies to everyone no matter where they live. The ancient
Stoics emphasised the importance of Logos, or rationality that governs the world and sees human
nature as part of one natural order. They considered natural law, a law of right reason.

Reason and human purpose

Natural Law says that everything has a purpose, and that mankind
was made by God with a specific design or objective in mind Deon- duty;
(although it doesn‘t require belief in God). It says that this purpose deontological ethical
can be known through reason. As a result, fulfilling the purpose of positions have absolute rules
our design is the only ‗good‘ for humans. The theory of Natural that it is our duty to follow.
Law was put forward by Aristotle but championed by Aquinas
(1225-74). It is a deductive theory – it starts with basic principles, Telos- purpose);
and from these the right course of action in a particular situation The meaning is ‗What is our
can be deduced. It is deontological, looking at the intent behind purpose - what are we
an action and the nature of the act itself, not its outcomes. In more designed for?‘
detail, Aquinas talked of Primary Precepts. While Natural Law
may be thought of as a deontological position, a part of it is teleological. The main purpose described
in Natural Law is WORLD i.e.:
W Worship God,
O to live in an Ordered society, Seven deadly sins
R Reproduction, 1. Wrath 2.Greed
L Learning and to 3. Sloth 4. Pride
D Defend the innocent 5. Lust 6.Envy
7. Gluttony
Real and apparent goods
Aquinas argued that the self should be maintained. As a result, Natural Law supports certain virtues
(prudence, justice, fortitude and temperance) that allow the self to fulfil its purpose. Similarly there
are many vices (the seven deadly sins) that must be avoided as they prevent the individual from being
what God intended them to be. Following a ‗real‘ good will result in the preservation or improvement
of self, getting nearer to the ‗ideal human nature‘ that God had planned. There are many apparent
goods that may be pleasurable (e.g. drugs) but ultimately lead us to fall short of our potential. Reason
is used to determine the ‗real‘ goods. To correctly distinguish between apparent and real goods is to
use reason rightly and to choose the right thing to do. Reason identified the ‗natural‘ or ‗cardinal‘
virtues: prudence, temperance, fortitude and justice. Scriptures reveal theological virtues as faith, hope
and charity. To adhere to natural law, an individual should seek to develop the cardinal virtues. This
development requires practice. It is also possible for the very opposite to become habitual if people are
not careful.

Exterior and interior acts

For Aquinas, both the intention and the act are important. To act in a good way for the wrong reason is
to perform a good exterior act but a bad interior act. Example: to help an old lady cross the road (good

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exterior act) to impress someone (bad interior act) is wrong. It should be done out of charity rather
than for sake of admiration by others. On the other hand, good intentions don‘t always lead to good
actions. The only end that Aquinas values is God. Aquinas believes that acts are intrinsically good or
bad (good or bad in themselves) because when human beings act in accordance with their ultimate
purpose, God is glorified.

Primary and secondary precepts

Whether or not acts lead towards God depends upon whether the action fits the purpose that humans
were made for. The main purpose of human nature is to preserve the self and the innocent, to
reproduce, to acquire knowledge, to live in an ordered society and to worship God. Secondary
Precepts are the rules - absolute deontological principles - that are derived from the Primary Precepts.
For example, the primary principle "Protect and preserve the innocent" leads to secondary principle
such as "Do not abort," "Do not commit euthanasia" etc. These rules cannot be broken, regardless of
the consequences. They are absolute laws.

UTILITARIANISM
Key philosophers are:
Jeremy Bentham (1748-1832). His main works include: Principles of Morals and Legislation (1789);
A Fragment on Government (1776)
John Stuart Mill (1806-1873). His main work is: Utilitarianism (1863)
Henry Sidgwick (1838-1900). His main work is: The Methods of Ethics (1874)

Utilitarianism is the most famous teleological theory. The theory of utilitarianism was devised by
Jeremy Bentham, an Englishman. Bentham worked on legal reform and wrote The Principles of
Morals and Legislations (1789), in which he put forward his ethical theory. These are:
1. His view on what drove human beings, what goodness and badness was all about.
2. The principle of utility (from the Latin utilis, meaning ‗useful‘), which is his moral rule.
3. The hedonic calculus, which is his system for measuring how good or bad a consequence, is.

The motivation of human beings: Bentham maintained that human beings were motivated by
pleasure and pain, and so he can be called a hedonist (hedone is Greek for ‗pleasure‘). He said,
‗Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is
for them alone to point out what we ought to do, as well as to determine what we shall do.‘ Bentham
believed that all human beings pursued pleasure and sought to avoid pain. He saw this as a moral fact,
as pleasure and pain identified what we should and shouldn‘t do. Bentham believed that pleasure was
the sole good and pain the sole evil: hence, Bentham‘s utilitarianism is called hedonic utilitarianism.

The principle of utility: Once Bentham had established that pleasure and pain were the important
qualities for determining what was moral, he developed the utility principle. The rightness or
wrongness of an action is determined by its ‗utility‘ or usefulness. Usefulness refers to the amount of
pleasure or happiness caused by the action. The theory is known as the greatest happiness principle, or
a theory of usefulness. ‗An action is right if it produces the greatest good for the greatest number‘,
where the greatest good is the greatest pleasure or happiness and the least pain or sadness, and the
greatest number are the majority of people. Good is the maximisation of pleasure and the minimisation
of pain. When faced with a moral dilemma, Bentham argues that one should choose to act in such a
way that brings the maximum possible happiness for the most people. However, the possible
consequences of different actions must be measured clearly to establish which option generates the
most pleasure and the least pain. To measure the results, Bentham proposed the hedonic calculus.

Hedonic Calculus: Bentham‘s hedonistic utilitarianism states that we always ought to perform that act
that leads to the greatest pleasure. This raises the question as to how we are to quantify pleasure; if we
cannot put a value on the quantity of pleasure that an act produces, then we cannot compare it to other
acts in order to decide which of them we ought to perform. To overcome this difficulty, Bentham

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proposed the hedonic calculus. The hedonic calculus lists seven features of pleasure to which attention
must be paid in order to assess how great it is: intensity, duration, certainty, propinquity, fecundity,
purity, and extent.
1. Intensity - The intensity of the pleasure caused by an act is reasonably self-explanatory. Mild
pleasure is less valuable than intense pleasure, and so acts leading to the latter are to be preferred
to acts leading to the former, other things being equal.

2. Duration - The duration of the pleasure caused by an act must also be taken into account when
assessing the goodness of the act. Transient pleasure is less valuable than lasting pleasure, and so
acts leading to the latter are to be preferred to acts leading to the former, other things being equal.

3. Certainty - The certainty criterion refers to the probability of the pleasure resulting from the act;
how likely is it that the act will bring about the anticipated pleasure? If we must choose between
an act that will definitely cause pleasure and an act that will only possibly bring about pleasure,
then we do better to perform the former.

4. Propinquity - When deciding what to do, Bentham thought, we should bear in mind how distant
are the anticipated benefits of each possible course of action. The more distant the benefits, in
either space or time, the less weight we should give them in making our decision.

5. Fecundity - The fecundity of an act is the likelihood that the pleasures or pains that it causes will
be followed by similar pleasures or pains. If the happiness that an act causes is likely to be
followed by yet more happiness, then that act is better than a similar act that will cause only one
isolated instance of happiness. Similarly, if the pain that an act causes is likely to be followed by
still more pains, then that act is worse than it would otherwise be.

6. Purity - It is also important to be attentive to the purity of pleasure and pain caused by an act. An
act that causes only pleasure is better than one that causes the same amount of pleasure mixed
with a little pain. When pleasure or pain is unmixed with their opposites, their purity is high;
when they are so mixed, their purity is diminished.

7. Extent - The final criterion for quantifying the pleasure caused by an act is its extent: the more
people enjoy the pleasure, the better. This criterion, unlike the previous six, was not among the
original criteria described by Bentham, but was added by John Stuart Mill.

John Stuart Mill was the son of a follower of Jeremy Bentham. He was perhaps the greatest British
philosopher of the nineteenth century. An administrator for the East India Company, he was also a
member of Parliament. He wrote On the Subjugation of Women, one of the inspirations behind modern
feminism. His works concerning ethics were On Liberty (1859) and Utilitarianism (1861). Mill
maintained that the well being of the individual was of greatest importance and that happiness is most
effectively gained when individuals are free to pursue their own ends, subject to rules that protect the
common good of all.

Evaluating Utilitarianism
First it seems reasonable to link morality with pursuit of happiness and the avoidance of pain and
misery.
Second, it also seems natural to consider the consequences of our actions before deciding what to do.
Third, utilitarianism offers a balanced, democratic morality that promotes the general happiness. It
doesn‘t support individual pursuits that are at the expense of the majority. It is a commonsense system
that‘s practically applicable to real life situations. It has no need for a special wisdom.
However, there are a number of difficulties with utilitarianism.
The first concerns all theories that rely on consequences for deciding which actions are good. One
needs to be sure that what he thinks will come about as a result of a particular action will actually

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come about. Utilitarianism depends upon accurate predictions of the futures, but human beings don‘t
always display accurate foresight. The consequences of actions may not become apparent until years
into the future.
A second difficulty is found in measuring pleasure. The balancing process brought about using the
seven criteria of the hedonic calculus appears straightforward. However, can the different pleasures
and different pains be so easily quantifiable? Can the pain of an inoculation be compared with the pain
of getting injured? Some pain is good for us, it is there for a reason. The hedonic calculus formula isn‘t
as straightforward as it at first appears. It is questionable whether an action can be declared good by an
empirical test as suggested by hedonic calculus.
Third and a more profound difficulty concerns the issue of justice. While utilitarianism ensures a
maximum pleasure result, it does not set out how that pleasure is distributed. It ensures that most
people receive pleasure but it guarantees nothing for minorities. Five bullies get pleasure from
torturing a single boy. His pleasure is sacrificed for the greater benefit of theirs! That men are happy
with their lot never entails that their lot is what it ought to be. For the question can always be raised of
how great the price is that is being paid for the happiness.
The fourth difficulty is utilitarianism‘s failure to consider different views on what happiness is. It
asserts that there‘s common agreement about what brings pleasure and what brings pain. This can be
challenged at many levels. Not only do people have different tastes and preferences, but there are even
extreme exceptions with regard to physical sensations – there are people who find pleasure in
experiencing pain. Despite these weaknesses, utilitarianism has proved popular and useful.

Negative Utilitarianism
While most forms of utilitarianism tend to be fixed on promoting the greatest good for the greatest
number, negative utilitarianism is focused on promoting the least amount of evil (or harm) for the
greatest number. Some view this as a more effective ethical theory because there are more ways to do
harm than good and the greatest harms have more serious consequences than the greatest goods.
The main objection to this ethical formula is that taken to its logical conclusion, it requires employing
all our knowledge to discover the quickest and least painful method of killing the entire human
population. This is because every human being experiences pain throughout their life and the only way
to be sure of effectively minimising their pain would be to end their life.

Preference Utilitarianism
This type of utilitarianism defines the good to be maximised as the fulfilment of people‘s preferences.
The right action remains that which produces the best consequences but the best consequences are
those that satisfy personal preferences and can be a variety of goods/values besides pleasure. This is
not pluralist utilitarianism, which recognises several important values.

KANTIAN PHILOSOPHY
Key Philosopher:
Immanuel Kant (1724-1804). His main works include: Groundwork for the Metaphysics of Morals
(1785); Critique of Practical Reason (1788); The Metaphysics of Morals (1797)

Kant was concerned with Deontological ethics. Deontological theories are concerned with actions
rather than the consequences. The theory states that if an act is wrong, it is wrong in all circumstances,
irrespective of the consequences. This view of ethics stands in opposition to the teleological views
such as utilitarianism, which tend to hold consequences as the determining factor for the moral worth
of an act. Kant‘s theory is deontological as its base is duty. To act morally is to do one‘s duty and to
do one‘s duty is to obey the moral law. Deontological theories of ethics focus on (1) the rights of all
individuals and (2) the intentions of the person(s) performing an action. Deontological theories differ
substantially from utilitarian views on ethics and would not allow, for example, the harming of some
individuals in order to help others. To the deontologist, each person must be treated with the same
level of respect and no one should be treated as a means to an end. Deontology proposes that the
principles of ethics are permanent and unchanging—and that adherence to these principles is at the

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heart of ethical behavior. Many deontologists believe that the rights of individuals are grounded in
"natural law." Deontology is most closely associated with the German philosopher Immanuel Kant.

Kant’s Maxims (Fundamental Principles)

1 Act only on maxims which you can will to be universal laws of nature.
2 Always treat the humanity in a person as an end, and never as a means merely.
3 So act as if you were a member of an ideal kingdom of ends in which you were both subject and
sovereign at the same time.

Kant believed that only human beings can follow laws of their own choosing (i.e. act rationally).
Human beings are the only creatures that are free, and it is the fact that we are free that enables us to
be rational and moral. Our free will is what gives us our dignity and unconditioned worth. The ethical
person is the person who acts from the right intentions. We are able to act in this way because we have
free will. The fundamental principle of ethics, the categorical imperative, is a requirement of reason
and is binding on all rational beings. These are the essentials of Kant‘s ethics.

Application of Kantian Maxims to Business

The self-defeating nature of immoral actions: Kant‘s first formulation of the categorical imperative is
―Act only on that maxim by which you can at the same time will that it should become a universal
law.‖ Although the phrasing is awkward, Kant is providing a test to see if any proposed action,
including actions in business, is moral. Since Kant believed that every action has a fundamental
principle, we are to ask what would happen if the principle (maxim) of your action were a universal
law (one that everyone acted on). Would a world where everyone acted on that principle be possible?
One example Kant used to illustrate his theory was a business one. Suppose you desperately needed
money. Should you ask someone to lend you money with a promise to pay the money back but with no
intention of paying it back? Do your extreme financial circumstances justify a lying promise? To find
out, Kant would require us to universalize the maxim of this action: ―It is morally permissible for
anyone in desperate financial circumstances to make a lying promise, that is, to promise to repay
borrowed money with no intention of doing so.‖ Would such a universalized maxim be logically
coherent? The answer is a resounding no. Let us consider another example to illustrate Kant‘s point.
Theft by employees, managers, and customers is a major problem in business. Suppose that an
employee, angry at the boss for some justified reason, considers stealing from the firm. Could a maxim
which permitted stealing be universalized? It could not. Because goods and services are in limited
supply and universal collective ownership is impossible, the institution of private property has
developed. If a maxim that permitted stealing were universalized, there could be no private property. If
everyone were free to take from everyone else, then nothing could be owned. Given the practical
necessity of some form of private property, a universalized maxim that permitted stealing would be
self-defeating. Thus, if the employee steals from the boss, the theft is morally wrong. Another example
found in the press concerns companies that try to renegotiate contracts. A favorite ploy of General
Motors was to demand price reductions from negotiated contracts with suppliers. In this way, General
Motors cut costs and contributed to its bottom line. Would such a tactic pass the test of the categorical
imperative? No, it could not. If a principle that permitted contract breaking were universalized, there
could be no contracts (and contracts would cease to exist). No one would enter into a contract if he or
she believed the other party had no intention of honoring it. A universalized maxim that permitted
contract breaking would be self-defeating.

Treating stakeholders as persons since human beings have free will and thus are able to act from laws
required by reason, Kant believed they have dignity or a value beyond price. Thus, one human being
cannot use another simply to satisfy his or her own interests. This is the core insight behind Kant‘s
second formulation of the categorical imperative: ―Always treat the humanity in a person as an end
and never as a means merely.‖ What are the implications of this formulation of the categorical
imperative for business? To understand Kant fully here, we need to draw a distinction between
negative freedom and positive freedom. Negative freedom is freedom from coercion and deception.

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However, simply refraining from coercive or deceptive acts is not sufficient for respecting the
humanity in a person. Additional requirements can be derived from Kant‘s view of positive freedom.
Positive freedom is the freedom to develop one‘s human capacities. For Kant, that means developing
one‘s rational and moral capacities. In interacting with others, we must not do anything to diminish or
inhibit these uniquely human capacities. Thus, treating the humanity in a person as an end, and not as a
means merely, in a business relationship requires two things. First, it requires that people in a business
relationship not be used, i.e. they not be coerced or deceived. Second, it means that business
organizations and business practices should be arranged so that they contribute to the development of
human rational and moral capacities, rather than inhibit the development of these capacities. These
requirements, if implemented, would change the nature of business practice.

Kant's third formulation of the categorical imperative says that you should act as if you were a
member of an ideal kingdom of ends in which you were both subject and sovereign at the same time.
Organizations are composed of persons and, given the nature of persons, organizational structures
must treat the humanity in persons with dignity and respect (as an end). Moreover, the rules that
govern an organization must be rules that can be endorsed by everyone in the organization. This
universal endorsement by rational persons is what enables Kant to say that everyone is both subject
and sovereign with respect to the rules that govern them. Thus, with respect to a business
organisation:
1. The business firm should consider the interests of all the affected stakeholders in any decision it
makes.
2. The firm should have those affected by the firm's rules and policies participate in the determination
of those rules and policies before they are implemented.
3. It should not be the case that, for all decisions, the interests of one stakeholder automatically take
priority.
4. When a situation arises where it appears that the interest of one set of stakeholders must be
subordinated to the interests of another set of stakeholders, that decision should not be made solely on
the grounds that there is a greater number of stakeholders in one group than in another.
5. No business rule or practice can be adopted which is inconsistent with the first two formulations of
the categorical imperative.
6. Every profit-making firm has a limited, but genuine, duty of beneficence.
7. Every business firm must establish procedures designed to ensure that relations among stakeholders
are governed by rules of justice.

A Kantian views an organization as a moral community. Each member of the organization stands in a
moral relationship to all the others. On one hand, the managers of a business firm should respect the
humanity in all the persons in the organization. On the other hand, each individual in a business firm,
managed as a Kantian moral community, should view the organization other than purely
instrumentally, that is, as merely a means for achieving individual goals. Organizations are created as
ways of achieving common goals and shared ends. An individual who views the organization purely
instrumentally is acting contrary to the "respect for persons" principle.

Purity of motive is the central tenet of Kant‘s moral philosophy that an action is only truly moral if it
is morally motivated. Truly moral actions cannot be contaminated by motives of self interest. Since the
good acts of even the most enlightened corporations are almost always justified in part on the grounds
that such actions are profitable, it appears that even the best actions of the best corporations are not
truly moral. To put this in more Kantian terms, perhaps profits will be enhanced if the manager
focuses on respecting the humanity in the person of all the corporate stakeholders. Perhaps one should
view profits as a consequence of good business practices rather than as the goal of business!

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ETHICS IN CORPORATE STRATEGY: CORPORATE PHILANTHROPY,
STRATEGIC PHILANTHROPY, CORPORATE GOVERNANCE.
ETHICS IN CORPORATE STRATEGY: CORPORATE PHILANTHROPY, STRATEGIC
PHILANTHROPY.
Philanthropy is the "altruistic concern for human welfare and advancement, usually manifested by
donations of money, property, or work to needy persons, by endowment of institutions of learning and
hospitals, and by generosity to other socially useful purposes".

Philanthropy is a tactic often used by businesses to achieve a positive image to the public; whether
their donation is done in kindness or for self benefit. India is the first country in the world to enshrine
corporate giving into law. Following a change in company law in April 2014, businesses with annual
revenues of more than 10bn rupees (£105m) must give away 2% of their net profit to charity. Areas
they can invest this money in include education, poverty, gender equality and hunger. The nation is in
the process of accelerating the implementation of the corporate social responsibility (CSR) regulations
under the new Companies Act. The Act not only makes contributions by large profitable companies
mandatory but is also likely to improve the governance of the non-profit space by stipulating
programmatic donations from corporations and oversight from their CSR boards. CSR is now a legal
requirement and is mandatory for companies that make profit. Donations under CSR are linked to the
company‘s strategy.

However, individual philanthropy is neither a legal requirement nor mandatory. It is something that
emerges from the heart. Therefore, it has much more personal value than CSR and connects the donor
emotionally to the citizenry. The new Companies Act will also trigger a positive disruption in the
philanthropy space, bringing in more corporate donors and creating greater accountability and
transparency. While CSR is important for non-profit organizations engaged in social work to build a
strong corpus for the long run, individual philanthropy is required to spread the concept of giving
horizontally to cover more segments of society. So any developing society needs both CSR and
individual philanthropy to work in collectively and yet complement each other.

Some prominent examples in the area are: Swades Foundation started by media baron Ronnie
Screwvala and his wife Zarina. The Foundation operates with the single-minded focus of empowering
rural India. It believes that the partnership of rural India with corporates, young urban India, the
Government and other foundations is the key to create a permanent and irreversible change for good.
For this, the Foundation has created a model of sustainable development, which is a benchmark in the
industry and can be replicated on a large scale. Swades‘ mission is to empower 1 million rural Indians
every five years, creating a permanent, irreversible change for good. Sampark Foundation, started by
former HCL Technologies CEO Vineet Nayar, has been consistently working on improving education,
climate, livelihood and entrepreneurship in the rural areas. The philanthropic work of foundations
belonging to TATA and the Birlas, are of course, legion. Sir Ratan Tata Trust supports efforts in the
development of society, through institutional grants in areas of Rural Livelihoods & Communities,
Education, Enhancing Civil Society & Governance, Health and Arts & Culture. Besides institutional
grants, the Trust also makes individual grants for education and medical relief. Similarly, the Birla
Foundation has embarked on a journey to revolutionize education in India, by becoming educational
change agents to learners across all educational segments.

CORPORATE PHILANTHROPY
Corporate philanthropy is a company‘s way of giving back to its community -- local, regional, national
or international -- through financial donations and non-cash contributions such as time, expertise and
tangible goods like computers, medicine, food and textbooks. Companies can donate to charities and
nonprofits by giving directly from the company‘s cash or assets, fundraising through its employees
and fundraising from others. A company giving its time or money to charities and nonprofits not only
helps those that its donation serves but also the company as well through improved employee
engagement. Research has revealed that companies which encourage their employees to volunteer had
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a higher retention rate because employees who enjoyed their workplaces were less likely to leave. This
directly affects the company‘s bottom line because it will spend less on recruiting, hiring and training
new employees.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

Corporate Social Responsibility (CSR) is the integration of social and environmental concerns in the
business operations of companies. Through CSR, companies achieve a balance of economic,
environmental and social imperatives (or what is called the ‗Triple-Bottom-Line approach‘ of people,
planet and profits), through the business model itself, or through charity, sponsorships or philanthropy.

Corporate social responsibility not only deals with corporate philanthropy but also other issues that
affect the environment, consumers, human rights, supply-chain sustainability and transparency for the
greater good of the world at large. Businesses that integrate social responsibility into their missions
acknowledge that their business processes have an impact beyond the company. Therefore, they
address issues like philanthropy, environmental-impact assessments and providing good working
conditions, among others, to try to better their communities or diminish potential harm, such as
greenhouse gas emitted from their manufacturing plants. Beyond the feel-good aspect of helping
communities, taking responsibility for their social impact helps businesses build trust with their
communities, consumers and other companies. This added trust can help elevate the brand, opening
the possibility for increasing market share and increasing profit. Engaging the community can also
help generate new ideas and product innovations.

STRATEGIC PHILANTHROPY
When it comes to philanthropy, executives increasingly see themselves as caught between critics
demanding ever higher levels of "corporate social responsibility" and investors applying pressure to
maximize short-term profits. Increasingly, philanthropy is used as a form of public relations or
advertising, promoting a company's image through high-profile sponsorships. But there is a more truly
strategic way to think about philanthropy. Corporations can use their charitable efforts to improve their
competitive context--the quality of the business environment in the locations where they operate.
Using philanthropy to enhance competitive context aligns social and economic goals and improves a
company's long-term business prospects. Addressing context enables a company not only to give
money but also leverage its capabilities and relationships in support of charitable causes. Taking this
new direction requires fundamental changes in the way companies approach their contribution
programs. Adopting a context-focused approach requires a far more disciplined approach than is
prevalent today. But it can make a company's philanthropic activities far more effective.

Strategy is ‗a plan, method, or series of manoeuvres or stratagems for obtaining a specific goal or
result‘. Business organizations use strategic planning to achieve specific objectives. The concept
of strategic philanthropy suggests that organizations may be able to 'do good' for society while at the
same time benefitting themselves in a strategic way.

Strategic Philanthropy is defined as ‗assisting donors and charitable organizations to develop

strategic philanthropic programs to achieve their goals‘. It is also seen as a process by which
contributions are targeted to serve direct business interests while also servicing beneficiary
organizations.

CORPORATE GOVERNANCE
There were several frauds and scams in the corporate history of the world. It was felt that the system
for regulation is not satisfactory and it was felt that it needed substantial external regulations. These
regulations should penalize the wrong doers while those who abide by rules and regulations, should be
rewarded by the market forces. There were several changes brought out by governments, shareholder
activism, insistence of mutual funds and large institutional investors, that corporate they invested in
adopt better governance practices and in formation of several committees to study the issues in depth

9
and make recommendations, codes and guidelines on Corporate Governance that are to be put in
practice. All these measures have brought about a metamorphosis in corporate that realized that
investors and society are serious about corporate governance.

Corporate governance involves a set of relationships amongst the company’s management, its board
of directors, its shareholders, its auditors and other stakeholders. These relationships, which involve
various rules and incentives, provide the structure through which the objectives of the company are
set, and the means of attaining these objectives as well as monitoring performance are determined.
Thus, the key aspects of good corporate governance include transparency of corporate structures and
operations; the accountability of managers and the boards to shareholders; and corporate
responsibility towards stakeholders.

Better corporate governance adds considerable value to their operational performance:

• It improves strategic thinking at the top by inducting independent directors who bring a wealth of
experience, and a host of new ideas
• It rationalizes the management and monitoring of risk that a firm faces globally
• It limits the liability of top management and directors, by carefully articulating the decision making
process
• It assures the integrity of financial reports
• It has long term reputational effects among key stakeholders, both internally and externally

THEORIES OF CORPORATE GOVERNANCE

Agency Theory: The purpose of agency theory is to identify points of conflict among corporate
interest groups. Banks want to reduce risk while shareholders want to reasonably maximize profits.
Managers are even more risky with profit maximization, since their own careers are based on the
ability to turn profits to then show the board. The fact that modern corporations are based on these
relations creates costs in that each group is trying to control the others. One of the major insights of
agency theory is the concept of costs of maintaining the division of labor among credit holders,
shareholders and managers. Managers have the advantage of information, since they know the firm
close up. They can use this to enhance their own reputations at the expense of shareholders. Limiting
the control of managers itself contains costs (such as reduced profits), while profit seeking in risky
ventures might alienate banks and other financial institutions. Monitoring and limiting managers itself
contains sometimes substantial costs to the firm.

Stewardship Theory: The stewardship theory holds that managers inherently seek to do a good job,
maximize company profits and bring good returns to stockholders. They do not necessarily do this for
their own financial interest, but because they feel a strong duty to the firm. For stewardship theory,
managers seek other ends besides financial ones. These include a sense of worth, altruism, a good
reputation, a job well done, a feeling of satisfaction and a sense of purpose. If a firm adopts a
stewardship mode of governance, certain policies naturally follow. Firms will spell out in detail the
roles and expectations of managers. These expectations will be highly goal-oriented and designed to
evoke the manager's sense of ability and worth. Stewardship theory advocates managers who are free
to pursue their own goals. It naturally follows from this that managers are naturally "company men"
who will put the firm ahead of their own ends. Freedom will be used for the good of the firm.

Agency and stewardship theories begin from two very different premises. The basic agency problem
revolves around individuals considering themselves only as individuals, without any other meaningful
attachments. However, stewardship theory holds that individuals in management positions do not
primarily consider themselves as isolated individuals. Instead, they consider themselves part of the
firm. Managers, according to stewardship theory, merge their ego and sense of worth with the
reputation of the firm. The consequences of stewardship theory revolve around the sense that the
individualistic agency theory is overdrawn. Trust, all other things being equal, is justified between
managers and board members. In situations where the CEO is not the chairman of the board, the board

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can rest assured that a long-term CEO will seek primarily to be a good manager, not a rich man.
Alternatively, having a CEO who is also chairman is not a problem, since there is no good reason that
he will use that position to enrich himself at the expense of the firm. Put differently, stewardship
theory holds that managers do want to be richly rewarded for their efforts, but that no manager wants
this to be at the expense of the firm.

Shareholder Theory: The shareholder theory was originally proposed by Milton Friedman and it
states that the sole responsibility of business is to increase profits. It is based on the premise that
management are hired as the agent of the shareholders to run the company for their benefit, and
therefore they are legally and morally obligated to serve their interests. The only qualification on the
rule to make as much money as possible is ―conformity to the basic rules of the society, both those
embodied in law and those embodied in ethical custom.‖

The shareholder theory is now seen as the historic way of doing business with companies realising that
there are disadvantages to concentrating solely on the interests of shareholders. A focus on short term
strategy and greater risk taking are just two of the inherent dangers involved. The role of shareholder
theory can be seen in the demise of corporations such as Enron and Worldcom where continuous
pressure on managers to increase returns to shareholders led them to manipulate the company
accounts.

Stakeholder Theory: Stakeholder theory, on the other hand, states that a company owes a
responsibility to a wider group of stakeholders, other than just shareholders. A stakeholder is defined
as any person/group which can affect/be affected by the actions of a business. It includes employees,
customers, suppliers, creditors and even the wider community and competitors.

Edward Freeman, the original proposer of the stakeholder theory, recognised it as an important
element of Corporate Social Responsibility (CSR), a concept which recognises the responsibilities of
corporations in the world today, whether they be economic, legal, ethical or even philanthropic.
Nowadays, some of the world‘s largest corporations claim to have CSR at the centre of their corporate
strategy. Whilst there are many genuine cases of companies with a ―conscience‖, many others exploit
CSR as a good means of PR to improve their image and reputation but ultimately fail to put their
words into action. Recent controversies surrounding the tax affairs of well known companies such as
Starbucks, Google and Facebook in the UK have brought stakeholder theory into the spotlight. Whilst
the measures adopted by the companies are legal, they are widely seen as unethical as they are
utilising loopholes in the British tax system to pay less corporation tax in the UK. The public reaction
to Starbucks tax dealings has led them to pledge £10m in taxes in each of the next two years in an
attempt to win back customers.

CORPORATE GOVERNANCE IN INDIA

There have been several major corporate governance initiatives launched in India since the mid-1990s.
The first was by the Confederation of Indian Industry (CII), India‘s largest industry and business
association, which came up with the first voluntary code of corporate governance in 1998. The second
was by the SEBI, now enshrined as Clause 49 of the listing agreement. The third was the Naresh
Chandra Committee, which submitted its report in 2002. The fourth was again by SEBI — the
Narayana Murthy Committee, which also submitted its report in 2002. Based on some of the
recommendation of this committee, SEBI revised Clause 49 of the listing agreement in August 2003.
Subsequently, SEBI withdrew the revised Clause 49 in December 2003, and currently, the original
Clause 49 is in force.

The CII Code

More than a year before the onset of the Asian crisis, CII set up a committee to examine corporate
governance issues, and recommend a voluntary code of best practices. The committee was driven by
the conviction that good corporate governance was essential for Indian companies to access domestic

11
as well as global capital at competitive rates. The first draft of the code was prepared by April 1997,
and the final document (Desirable Corporate Governance: A Code), was publicly released in April
1998. The code was voluntary, contained detailed provisions, and focused on listed companies.

Desirable Disclosure
―Listed companies should give data on high and low monthly averages of share prices in a major stock
exchange where the company is listed; greater detail on business segments, up to 10% of turnover,
giving share in sales revenue, review of operations, analysis of markets and future prospects.‖ Major
Indian stock exchanges should gradually insist upon a corporate governance compliance certificate,
signed by the CEO and the CFO.‖ If any company goes to more than one credit rating agency, then it
must divulge in the prospectus and issue document the rating of all the agencies that did such an
exercise. These must be given in a tabular format that shows where the company stands relative to
higher and lower ranking.‖

―Companies that default on fixed deposits should not be permitted to accept further deposits and make
inter-corporate loans or investments or declare dividends until the default is made good.‖ The CII code
is voluntary. Since 1998, CII has been trying induce companies to disclose much greater information
about their boards. Consequently, annual reports of companies that abide by the code contain a chapter
on corporate governance

Kumar Mangalam Birla committee report and Clause 49

While the CII code was well-received and some progressive companies adopted it, it was felt that
under Indian conditions a statutory rather than a voluntary code would be more purposeful, and
meaningful. Consequently, the second major corporate governance initiative in the country was
undertaken by SEBI. In early 1999, it set up a committee under Kumar Mangalam Birla to promote
and raise the standards of good corporate governance. In early 2000, the SEBI board had accepted and
ratified key recommendations of this committee, and these were incorporated into Clause 49 of the
Listing Agreement of the Stock Exchanges.

This report pointed out that the issue of corporate governance involves besides shareholders, all other
stakeholders. The committee‘s recommendations have looked at corporate governance from the point
of view of the stakeholders and in particular that of shareholders and investors.The control and
reporting functions of boards, the roles of the various committees of the board, the role of
management, all assume special significance when viewed from this perspective.

At the heart of committee‘s report is the set of recommendations, which distinguish the
responsibilities, and obligations of the boards and the management in instituting the systems for good
C.G. Many of them are mandatory. These recommendations are expected to be enforced on listed
companies for initials disclosures. This enables shareholders to know, where the companies are in
which they have involved. The committee recognized that India had in place a basic system of
corporate governance and that SEBI has already taken a number of initiatives towards raising the
existing standards.

Mandatory Recommendations
Board of Directors:
An effective corporate governance system is one, which allows the board to perform these dual
functions efficiently. The board of directors of a company thus directs and controls the management of
a company and is accountable to the shareholders. The board directs the company, by formulating and
reviewing company‘s policies strategies, major plans of action, risk policy, annual budgets and
business plans, setting performance objectives, monitoring implementation and corporate performance
and overseeing major capital expenditures, appositions and change in financial control and compliance
with applicable law taking into the account the interests of the stake holders.

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Independent Direction:
Independent directions are those directors who apart from receiving director‘s remuneration do not
have any other material pecuniary relationship with company. Further, all pecuniary relationship or
transactions of the non executive directors should be disclosed in the annual report. The committee
recommended that the board of a company have an optimum combination of executive and non-
executive directors with not less than fifty percent of the board comprising the non-executive directors.
In case a company has a non-executive chairman, at least one third of board should comprise of
independent directors and in case a company has an executive chairman at least half of board should
be independent.

Nominee Directors:
These directors are the nominees of the financial as investment institutions to safeguard their interest it
may be present of retired employee of financial institution on outsider. The committee recommend that
institutions should appoint nominees on the boards of companies only on a selective basis and where
such appointment in is considered necessary to protect the interest of the institutions.

Chairman of the Board:

The committee recommended that a non-executive chairman should be entitled to maintain a
chairman‘s office at the company‘s expense and also allowed reimbursement of expenses incurred in
performance of his duties. This will enable him to discharge the responsibilities effectively.

Audit committee (Non Mandatory):

The committee is of the view that the need for having an audit committee grows from the recognition
of the audit committees‘ position in the larger mosaic of governance process. The audit committee‘s
job is one of oversight and monitoring and carrying out this job it relies on similar financial
management and outside auditors. The committee believes that the progressive standards of
governance applicable to the full board should also be applicable to the audit committee. The
committee therefore recommended that the board of a company should set up a qualified and
independent audit committee. The committee states that audit committee should have minimum three
members, all being non-executive directors, with the majority being independent and with at least one
director having financial and accounting knowledge.

Frequency of Meeting and Quorum (Mandatory Recommendation):

The committee recommends that to begun with the audit committee should meet at least thrice a year.
One meeting must be held before finalization of annual accounts and one necessarily every six
months. The quorum should be either two members or one third of members of audit committee,
whichever is higher and there should be a minimum of two Independent directors.

Powers of audit committee (Mandatory):

(1) To investigate any activity within its terms of reference.
(2) To seek information from any employee.
(3) To obtain outside legal on other professional advice.
(4) To secure attendance of outsiders with relevant expertise, if it considers necessary.

Functions of Audit Committee (Mandatory):

(1) To ensure that the financial statement is correct, sufficient and creditable.
(2) Recommending the appointment and removal of external audit.
(3) Reviewing with management annual financial statement before submission to board related to
changes in accounting policies and practices.
(4) Reviewing with the management about adequacy of control.
(5) Discuss with internal auditors into the matter suspecting fraud on irregularity.
(6) Discuss with external auditors before the audit commences and also post-audit discussion to
ascertain any area of concern. .

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Remuneration Committee (Mandatory):
The committee is of the view that a company must have a creditable and transparent policy in
determining and accounting for the remuneration of the directors. For this purpose the committee
recommends that the board should set up a remuneration committee to determine on their behalf and
on behalf of the shareholders with agreed terms of references. The Remuneration Committee should
comprise of at least three directors, all of them should be non-executive directors, the chairman being
an independent one. The chairman of Remuneration Committee should present at AGM. It is
important for the shareholders to be informed of the remuneration of the directors of the company,
which is mandatory.

Narayana Murthy Committee report on Corporate Governance

The fourth initiative on corporate governance in India is in the form of the recommendations of the
Narayana Murthy committee. The committee was set up by SEBI, under the chairmanship of Mr. N. R.
Narayana Murthy, to review Clause 49, and suggest measures to improve corporate governance
standards. Some of the major recommendations of the committee primarily related to audit
committees, audit reports, independent directors, related party transactions, risk management,
directorships and director compensation, codes of conduct and financial disclosures.

Corporate governance: Recent Developments in India

It is observed that the scale and scope of economic reform and development in India over the past 20
years has been impressive. The country has opened up large parts of its economy and capital markets,
and in the process has produced many highly regarded companies in sectors such as information
technology, banking, autos, steel and textile manufacturing. These companies are now making their
presence felt outside India through global mergers and acquisitions. In April 1998 the country
produced one of the first substantial codes of best practice in corporate governance in Asia. It was
published not by a governmental body, a securities regulator or a stock exchange, but by the
Confederation of Indian Industries (CII), the country‘s peak industry body.

The following year, the government appointed a committee under the leadership of Kumar Mangalam
Birla, Chairman, Aditya Birla Group, to draft India‘s first national code on corporate governance for
listed companies. Many of the committee‘s recommendations were mandatory, closely aligned to
international best practice at the time and set higher governance standards for listed companies than
most other jurisdictions in Asia.

The Indian Code of Corporate Governance, approved by the Securities and Exchange Board of India
(SEBI) in early 2000, was implemented in stages over the following two years and led to changes in
stock exchange listing rules, notably the new Clause 49 in the Listing Agreement. The recent Satyam
fraud of late 2008 led to renewed reform efforts by Indian authorities and regulators. SEBI brought out
new rules in February 2009 requiring greater disclosure by promoters (i.e., controlling shareholders) of
their shareholdings and any pledging of shares to third parties.

ETHICAL DILEMMA AT WORKPLACE AND THEIR RESOLUTION

ETHICAL DILEMMA
Ethics in business has to do with making the right choices - often there is no apparent one right way
and one must choose the best in the circumstances. Managers are sometimes faced with business
choices that create tensions between ethics and profits, or between their private gain and the public
good. Any decision where moral considerations are relevant can potentially give rise to an ethical
dilemma, for example:
• A decision that requires a choice between rules
• A decision where there is no rule, precedent or example to follow
• A decision that morally requires two or more courses of action, which are in practice incompatible
with each other.
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 • A decision that should be taken in one‘s self-interest, but which appears to violate a moral principle
that you support.
It is the imperative to act, combined with the uncertainty of which action to take, that causes a
dilemma.

Factors affecting Ethical and Unethical Behaviour

Ethical Dilemma:- Stage of Moral Development + Individual Characteristics + Issue Intensity +

Structural Variables + Organisational Culture = Ethical/Unethical Behaviour

Individual Characteristics
Personality Variables
 Ego strength: A personality measure of the strength of a person‘s convictions. An individual with
solid ego-strength approaches challenges with a sense that he or she can overcome the problem and
even grow as a result. By having strong ego-strength, the individual feels that he or she can cope
with the problem and find new ways of dealing with struggles. These people can handle whatever
life throws at them without losing their sense of self. People with good ego strength tend to be very
resilient in the face of life's difficulties. Rather than giving up in the face of an obstacle, these
individuals view such events as tasks to be mastered and overcome. Even when very difficult
events or tragedies occur, those who possess ego strength are able to pick themselves up, dust
themselves off and move forward with a sense of optimism. On the other hand, low ego strength is
often characterized by a lack of psychological resilience. In the face of life's challenges, those with
low ego strength may simply give up or break down and are more susceptible to being influenced
into taking unethical decisions.
 Locus of Control: A personality attribute that measures the degree to which people believe they
control their own life.
– Internal locus: the belief that you control your destiny. People with a high internal locus
of control believe in their own ability to control themselves and influence the world around them.
They see their future as being in their own hands and that their own choices lead to success or failure.
Rotter (1990) describes the internal locus of control as: 'the degree to which persons expect that a
reinforcement or an outcome of their behavior is contingent on their own behavior or personal
characteristics'. Their belief in their ability to change things may well make them more confident and
they will hence seek information that will help them influence people and situations. They will also
likely be more motivated and success-oriented. These beliefs may even lead them to be more
politically active. They are more likely to have expectancy shifts, where a sequence of similar events
are expected to have different outcomes. They tend to be more specific, generalizing less and
considering each situation as unique. People in middle age tend to have the highest internal locus of
control. A downside of an internal locus of control is that, in accepting responsibility, the person has
to also accept blame for failures.
– External locus: the belief that what happens to you is due to luck or chance. People with a
high external locus of control believe that control over events and what other people do is outside
them, and that they personally have little or no control over such things. They may even believe that
others have control over them and that they can do nothing but obey. Rotter (1990) describes the
external locus of control as: 'the degree to which persons expect that the reinforcement or outcome is a
function of chance, luck, or fate, is under the control o f powerful others, or is simply unpredictable.'.
With such beliefs, people with an external locus of control tend to be fatalistic, seeing things as
happening to them and that there is little they can do about it. This tends to make them more passive
and accepting. When they succeed, they are more likely to attribute this to luck than their own efforts.
They are less likely to have expectancy shifts, seeing similar events as likely to have similar outcomes.

15
they hence step back from events, assuming they cannot make a difference. Younger and older people
tend to have higher external locus of control than people in middle age.

Structural Variables
 Organizational characteristics and mechanisms that guide and influence individual ethics:
– Performance appraisal systems
– Reward allocation systems
– Behaviors (ethical) of managers
– An organization‘s culture
– Intensity of the ethical issue
 Good structural design minimizes ambiguity and uncertainty and fosters ethical behavior.

Issue Intensity
 Greatness of Harm – How many people will be harmed
 Concentration of Effect – How concentrated is the effect of the actions on the victims
 Proximity to Victims – How close are the potential victims
 Immediacy of Consequences – Will harm be felt immediately
 Probability of Harm – How likely is it that this action will cause harm
 Consensus of Wrong – How much agreement is there that this action is wrong

Organisational Culture
 Cultural relativism: Ethical behavior is always determined by cultural context. Cultural relativism
theorizes that the way people act, behave and perceive things is relative to their cultures. It is not
possible to truly understand certain actions or customs without also understanding the culture from
which those actions are derived. Anthropologists utilize the concepts of cultural relativism when
studying groups of people in order to interpret their observations. If someone in the group is
subjected to painful treatment, the action could represent punishment, healing, purification, a rite
of passage or something else entirely. The idea is not to judge the action, but simply to understand
it based on the culture in which it occurs.
 Ethical or Moral Relativism: Ethical or moral relativism focuses specifically on what a particular
culture judges to be right or wrong. When people act against the ethical norms of a community,
they are judged as immoral or unethical by other members of that community. Since the judgments
are relative, actions judged as unethical by one culture could be viewed with neutrality by another
culture, and could even be considered as a moral necessity by people in yet a different culture.

KOHLBERG’S STAGES OF MORAL DEVELOPMENT

Kohlberg's conception of justice follows that of the philosophers Kant and Rawls, as well as great
moral leaders such as Gandhi and Martin Luther King. According to these people, the principles of
justice require us to treat the claims of all parties in an impartial manner, respecting the basic dignity,
of all people as individuals. The principles of justice are therefore universal; they apply to all

I. Pre-conventional Level
At this level, the child is responsive to cultural rules and labels of good and bad, right or wrong, but he
interprets the labels in terms of either the physical or hedonistic consequences of action (punishment,
reward, exchange of favors) or the physical power of those who enunciate the rules and labels. The
level is divided into the following three stages:
Stage 0: Egocentric judgement. The child makes judgements of good on the basis of what he likes
and wants or what helps him, and bad on the basis of what he does not like or what hurts him. He has
no concept of rules or of obligations to obey or conform independent of his wish.
Stage 1: The punishment and obedience orientation. The physical consequences of action
determine its goodness or badness regardless of the human meaning or value of these consequences.
Avoidance of punishment and unquestioning deference to power are values in their own right, not in
terms of respect for an underlying moral order supported by punishment and authority.
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Stage 2: The instrumental relativist orientation. Right action consists of what instrumentally
satisfies one's own needs and occasionally the needs of others. Human relations are viewed in terms
such as those of the market place. Elements of fairness, reciprocity, and equal sharing are present, but
they are always interpreted in a physical, pragmatic way. Reciprocity is a matter of "you scratch my
back and I'll scratch your", not loyalty, gratitude, or justice.

II. Conventional Level

At this level, the individual perceives the maintenance of the expectations of his family, group, or
nation as valuable in its own right, regardless of immediate and obvious consequences. The attitude is
not only one of conformity to personal expectations and social order, but of loyalty to it, of actively
maintaining, supporting, and justifying the order and identifying with the persons or group involved in
it. The level consists of the following two stages:
Stage 3: The interpersonal concordance or "good boy-nice girl" orientation. Good behavior is
what pleases or helps others and is approved by them. There is much conformity to stereotypical
images of what is majority or "natural" behavior. Behavior is frequently judged by intention -- "he
means well" becomes important for the first time. One earns approval by being "nice".
Stage 4: The "law and order" orientation. The individual is oriented toward authority, fixed rules,
and the maintenance of the social order. Right behavior consists in doing one's duty, showing respect
for authority, and maintaining the given social order for its own sake.

III. Post-Conventional, Autonomous, or Principled Level.

The individual makes a clear effort to define moral values and principles that have validity and
application apart from the authority of the groups of persons holding them and apart from the
individual's own identification with the group. The level has the two following stages:
Stage 5: The social-contract legalistic orientation (generally with utilitarian overtones). Right
action tends to be defined in terms of general individual rights and standards that have been critically
examined and agreed upon by the whole society. There is a clear awareness of the relativism of
personal values and opinions and a corresponding emphasis upon procedural rules for reaching
consensus. Aside from what is constitutionally and democratically agreed upon, right action is a
matter of personal values and opinions. The result is an emphasis upon the "legal point of view", but
with an additional emphasis upon the possibility of changing the law in terms of rational
considerations of social utility (rather than freezing it in terms of stage 4 "law and order"). Outside the
legal realm, free agreement, and contract, is the binding element of obligation. The "official" morality
of the American government and Constitution is at this stage.
Stage 6: The universal ethical-principle orientation. Right is defined by the decision of conscience
in accord with self-chosen ethical principles that appeal to logical comprehensiveness, universality,
and consistency. These principles are abstract and ethical (the Golden Rule, the categorical
imperative); they are not concrete moral rules like the Ten Commandments. At heart, these are
universal principles of justice, of the reciprocity, and equality of the human rights, and of respect for
the dignity of human beings as individual persons.

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