Week 5 · Chapter

Chapter 5 — What the Business Owes: Ethics & Social Responsibility

Introduction to Business Free sample edition

The module's primary reading · ~30–40 minutes · Objective 3 (evaluate business conduct with ethical reasoning and the corporate-social-responsibility frameworks, presenting the shareholder and stakeholder positions with their reasons and without a verdict, and distinguishing what is ethical from what is legal) · Read it first this week; the lecture, the slides, the tutorial, and the quiz all build on it.

In plain language

Some business choices are perfectly legal and still feel wrong, and this week gives you words and tools for that gap. Business ethics (the standards of right and wrong behind business choices) asks what is right, while the law only sets the lowest bar. Corporate social responsibility (what a business owes the society around it) turns out to cover far more than giving to charity. Then you meet an old argument: is a corporation (a business the law treats as a person of its own) run for its owners, or for everyone its choices touch? By the end you can lay out both answers fairly, with an illustrative factory's decision in front of you.

Why you already care about this

Think about the last time a store charged you a fee nobody mentioned until checkout. It was probably legal. Did it feel fair? Or think of a coworker who saw something unsafe on a shift and kept quiet, because speaking up felt risky. Both moments sit in the space between what the rules allow and what a person ought to do.

Businesses live in that space every day. A bike shop learns that a brake part it sold wears out early. A hospital kitchen needs cooks who speak up when an allergy label is missing. A factory of 120 people weighs a machine that would do the work of 40 of them. None of those questions is answered by the law alone.

This week you will learn to separate the legal question from the ethical one, see how a workplace shapes the way people act, and meet two frameworks for what a business owes society. Then you will take the two big positions on a corporation's purpose and argue a real-feeling case from both sides.

By the end of this chapter you will be able to:

tell an ethical question from a legal one, and run the three ethical-reasoning questions on a business decision;
name four tools an organization uses to shape conduct, and say what each one adds;
sort a business's actions into the four levels of the pyramid of corporate social responsibility;
sort a decision's effects into the three lines of the triple bottom line;
state the shareholder position and the stakeholder position, each with its strongest reasons;
compute the net change in positions for an automation decision and argue the decision from both positions without declaring a winner.

Carry this line with you: legal is the floor, not the ceiling — ethics builds above it.

Where we are

Already covered: Week 1, The Idea and Its Environment, defined a business and its stakeholders; Week 2, The Market It Sells Into: Economics for Business, placed the cart in its market; Week 3, From Idea to Plan: Entrepreneurship, Small Business & the Business Plan, built the cart's plan and funding; Week 4, Choosing a Legal Form: Ownership, Franchising & Mergers, explained what a corporation and its stockholders are.
This week: ethics versus legality, how organizations shape conduct, the pyramid of corporate social responsibility, the triple bottom line, and the two positions on what a corporation is for.
How they connect: the stakeholders from Week 1 are the people a business owes something to, and the corporation from Week 4 is the business whose purpose the two positions argue about.
Where we're going next: Week 6, Making the Product: Operations, Quality & Information Systems, starts a new unit on how the cart makes its drinks and how many it can make in an hour.

Two earlier weeks matter most here. In Week 1 you learned that a stakeholder is anyone who can affect a business or is affected by it: owners, employees, customers, suppliers, lenders, the community, and government. This week asks what a business owes each of them. In Week 4 you learned that a corporation is a legal person separate from its owners, the stockholders. In this chapter the words shareholder and stockholder mean the same thing: an owner of shares. Now that you know who owns a corporation, you can ask whom it should be run for.

1. Separate legal from right: the law is the floor

Picture an illustrative neighborhood bike shop. Over two years it has fitted one brand of brake pad on about 80 bikes. Then a note arrives from the parts supplier: the pads wear out faster than anyone expected. In this illustrative case, no rule requires the shop to warn its past buyers. Calling every one of them would cost the staff a few days of work.

The owner faces two different questions, and they are easy to blur together. Is staying quiet allowed? And is staying quiet right?

Business ethics is the standards of right and wrong that guide the choices people make in a business, including choices the law leaves open.

Legality is whether the law allows an act; the law sets a minimum that conduct must not fall below, so a legal act can still be unethical.

Think of the law as the floor of a building. Nobody may go below it. Ethics asks how far above the floor you choose to build. The reverse also holds: believing an act is right does not make it legal, so the law still applies to well-meant choices.

When a decision sits in that gap, a manager needs a way to think it through. This course uses a short set.

The ethical-reasoning questions are a short set of questions a manager can run on any decision: is it legal, is it fair to everyone it touches, and would I be comfortable if it were public.

Worked example — the bike shop runs the three questions. The shop and its 80 bikes are illustrative.

Is it legal? In this case, staying quiet is legal, and so is calling. The first question does not separate the two choices.
Is it fair to everyone it touches? The riders depend on their brakes and do not know about the note. Staying quiet saves the shop a few days of work and leaves the risk with 80 riders who cannot see it. Calling spreads the cost back to the shop, which chose the part.
Would I be comfortable if it were public? Picture a neighborhood post that says "the shop knew and said nothing". Then picture one that says "the shop called every rider". Most owners would rather be the second story.

In words: staying quiet passes the legal question and struggles on the other two, so the questions point toward calling the riders. That conclusion is a judgment, not a fact; the questions do not print an answer, they show you where the weight of a decision sits.

Misconception check. Students often think "ethical" and "legal" mean the same thing, so anything the law allows must be fine. That is tempting, because the law feels like the official list of right and wrong. But the law sets only a minimum, and it cannot foresee every situation, like a brake note that arrives years after the sale. The cure is to ask two separate questions every time: is it allowed, and is it right?

Memory hook: allowed is not the same as right.

2. Shape conduct at work: four tools, not one poster

Picture an illustrative hospital kitchen that cooks every meal for the people staying in its wards. Some of them have food allergies, so each of their trays must carry an allergy label and get a second check. During the lunch rush, a new cook notices that a few labels are being skipped. The cook wonders whether to say something, and to whom.

Whether that cook speaks up depends a great deal on what the kitchen has built. Organizations use four tools to shape how their people act.

A code of ethics is a written statement of the values and the conduct an organization expects from its people, including what to do when something goes wrong.
Ethics training is instruction that teaches people an organization's code of ethics and how to use it when the right choice at work is unclear.
Leadership by example is shaping conduct by having managers follow the same rules they ask of others, in plain view of the people they lead.
A protected reporting channel is a way for a worker to report suspected wrongdoing, such as a hotline or a named contact, that shields the person reporting from punishment for a good-faith report.

The person who uses that channel has a name.

A whistleblower is a worker or other insider who reports suspected wrongdoing in an organization to someone who can act on it.

Worked example — what each tool does for the kitchen. The kitchen and its cooks are illustrative.

The code of ethics states the rule in writing: every allergy tray is labeled and checked twice, and anyone who sees a skipped check reports it.
Ethics training walks new cooks through sample rush-hour orders, so they practice the check before a real person in a hospital bed depends on it.
Leadership by example means the head cook labels and checks every allergy tray in full view, even when the line is backed up.
The protected reporting channel gives the new cook a named contact outside the line, and a promise that a good-faith report will not cost the cook a shift or a job.

In words: the code says what is expected, training makes it usable, leaders make it believable, and the channel makes it safe to speak up. Take away any one of the four, and the skipped labels are more likely to stay hidden.

Caveat: this course describes reporting channels as general education. The laws that protect people who report wrongdoing vary by situation, and this chapter does not cover them; a worker with a real concern can ask the government agency that handles the issue.

Misconception check. Students often think a code of ethics posted on the wall is enough to make people act ethically. That is tempting, because a written rule looks like a finished job. But a code nobody is trained on, that leaders ignore, and that punishes people who report is only a poster. The cure is to check all four tools: the words, the practice, the leaders, and a safe way to speak up.

Pause and try this. Choose one: (a) describe a job or team you have been part of and name which of the four tools it had and which it lacked; or (b) explain why a protected reporting channel matters more to a brand-new worker than to a long-time manager.

Memory hook: write it, teach it, live it, protect it.

3. Climb the pyramid: what a business owes, from the base up

Picture the coffee cart on a busy morning. In Week 1 you drew its stakeholder map. This week, take five of those stakeholders: the customers in line, the part-time helper, the bean supplier, the neighbors whose sidewalk the cart shares, and the city's permit office. Each one expects something different from the cart.

That set of expectations has a name.

Corporate social responsibility is the responsibilities a business carries toward the society it operates in, covering earning its way, obeying the law, acting ethically, and giving back.

A widely taught way to organize those responsibilities comes from Carroll (1991), "The pyramid of corporate social responsibility", published in the journal Business Horizons. It is a classroom model: a simplification you can hold in one hand, not a description of every real business.

The pyramid of corporate social responsibility is a classroom model from Carroll (1991) that stacks four kinds of responsibility: economic at the base, then legal, then ethical, with philanthropic at the top.

Economic responsibility is a business's duty to make goods or services people want and to earn enough to stay in business; the base of the pyramid of corporate social responsibility.
Legal responsibility is a business's duty to obey the laws and rules that apply to it; the second level of the pyramid of corporate social responsibility.
Ethical responsibility is a business's duty to do what is right and fair even where no law requires it; the third level of the pyramid of corporate social responsibility.
Philanthropic responsibility is a business's voluntary giving back to its community, such as donations or volunteer time; the top of the pyramid of corporate social responsibility.

Worked example — sorting the cart's actions by level. The cart and its choices are illustrative.

The cart prices its drinks to cover its costs, so it stays open and the helper keeps a job: economic responsibility, owed to customers and the helper.
The cart holds its city permit and follows the food-safety rules: legal responsibility, owed to the permit office and every customer.
The cart tells customers when the oat milk has run out instead of quietly using a different milk, and keeps the sidewalk clear for the neighbors beyond what the permit asks: ethical responsibility, owed to customers and the neighbors.
The cart gives coffee to volunteers at a neighborhood cleanup: philanthropic responsibility, owed to the community.

In words: the cart's most visible good deed, the free coffee, sits at the top, but it rests on three levels below it. A cart that cannot pay its bills, breaks the rules, or misleads its customers has no pyramid left to put a donation on.

Misconception check. Students often think corporate social responsibility means giving money to charity and nothing else. That is tempting, because donations are the part of responsibility that gets announced. But the pyramid's base is economic and its next level is legal; philanthropy is only the top. The cure is to read the pyramid from the bottom up: earn, obey, do right, then give.

Memory hook: earn, obey, do right, then give.

4. Weigh three bottom lines: profit, people, planet

Picture an illustrative family farm that waters its fields by flooding them, the way it always has. A salesperson offers drip lines that put water right at the roots. The owners could look only at the cost. Or they could ask what the change does to the people who work the farm and to the water the valley shares.

A second framework asks a business to keep three scores at once.

The triple bottom line is a classroom model associated with Elkington that weighs a business's results on three lines, profit, people, and planet, instead of on profit alone.

Elkington's 1997 book is Cannibals with Forks: The Triple Bottom Line of 21st Century Business. In a 2018 essay he recalls coining the phrase about 25 years earlier, and he proposes a "recall" of it. When exactly the phrase was coined is taught here in words, not as a date to memorize.

Worked example — the farm's choice on three lines. The farm and its choice are illustrative, and the example uses no figures.

Profit: the drip lines cost money to buy and install, and they may lower the farm's water bill over time. Both effects go on the profit line.
People: workers would spend less time moving flood gates and more time on other tasks, and neighbors who share the valley's water would have more of it. Those effects go on the people line.
Planet: the farm would draw less water from the shared supply. That effect goes on the planet line.
The owners now see effects on all three lines, not only the cost.

In words: the triple bottom line does not tell the farm what to choose; it makes sure the effects on people and the planet are on the table next to the cost before anyone chooses.

Honesty note: the triple bottom line is a way of looking, and even the person who named it later proposed a "recall" of the phrase.

Misconception check. Students often think the triple bottom line is an accounting standard that every firm must report. That is tempting, because "bottom line" sounds like a line on a financial statement. But it is a classroom model and a way of thinking, not a rule every firm must file. The cure is to treat it like the pyramid: a lens for weighing a decision.

Pause and try this. Choose one: (a) name one decision at a place you have worked or shopped and sort one of its effects onto each of the three lines; or (b) explain in two sentences why the pyramid and the triple bottom line are both called models.

Memory hook: three lines, one decision.

5. Argue what a corporation is for: two positions, no verdict

Picture two people on a corporation's board looking at the same report. One says, "Our job is to do well for the owners who hired us." The other says, "Our job is to do well by everyone this company touches." Both are serious. Both have long arguments behind them.

This course presents each position at full strength, with its reasons, and gives no verdict. The verdict is yours to weigh.

The shareholder position is the view argued by Friedman (1970) that, within the law and ethical custom, a corporate executive's duty runs to the owners who employ them.

Friedman (1970) set out this view in an essay titled "The Social Responsibility of Business Is to Increase Its Profits", published in The New York Times Magazine. Supporters give reasons like these. The owners put their money at risk and hired the executives to manage it. An executive who spends that money on causes the owners never chose is making the owners' choices for them, and owners can give to causes on their own. And the essay itself keeps two limits in place: the law and ethical custom.

The stakeholder position is the view set out by Freeman (1984) that a firm is managed for everyone who can affect it or is affected by it, not for its owners alone.

Freeman (1984) set out this view in his book Strategic Management: A Stakeholder Approach. Supporters give reasons like these. Workers, customers, suppliers, and towns also carry risk when a firm makes a choice. A firm depends on all of them to survive, so managing for all of them protects the firm too. And the people a decision touches deserve to be counted when it is made.

Each side also has critics. Critics of the shareholder position say the law can lag behind new harms, so "within the law" may not protect everyone a firm affects. Critics of the stakeholder position say a manager answerable to everyone may end up answerable to no one, because the groups' interests often pull in different directions.

Worked example — the same choice, read two ways. The two board members and their choice are illustrative.

The board weighs paying for a training program that would raise costs this year.
Shareholder reading: is the program a sound use of the owners' money, within the law and ethical custom? If it pays back through better work, it may serve the owners.
Stakeholder reading: who does the program touch, and how? Workers gain skills, customers may get better service, and owners carry the cost.
Both readings can approve the program, for different reasons, and both can reject it.

In words: the two positions often agree on what to do and disagree on why; the difference shows most when what helps the owners and what helps another group pull apart.

Misconception check. Students often think Friedman's position means "anything goes, as long as it makes money". That is tempting, because the essay's title talks only about profits. But the essay keeps the law and ethical custom as limits on what an executive may do. The cure is to state the shareholder position with both of its limits every time you state it.

Memory hook: owners first, within limits — or everyone touched, by design.

6. Apply both positions to the appliance-parts plant

Picture an illustrative appliance-parts plant in a small town, with 120 employees. The owners are weighing whether to automate one production line. The case carries no names, and it carries no verdict. Your job is to see it fully from both positions.

Three terms help you count what the choice does.

Automation is using machines or software to do work that people used to do by hand.
Retraining is teaching current workers new skills so they can move into different roles instead of leaving the organization.
The net change in positions is the positions an automation decision eliminates minus the workers retrained into new roles: the number of positions the organization has fewer of afterward.

Worked example — counting the plant's positions. The case is illustrative, constructed for this course and not real data.

Employees before automation: 120 employees.
Positions eliminated by automating one line: 40 positions.
Workers retrained for maintenance roles: 15 of the 40 workers whose line positions end.
Net change in positions: 40 − 15 = 25 positions.
Employees after automation: 120 − 25 = 95 employees.

In words: automating one line ends 40 line positions, retraining moves 15 of those workers into maintenance roles, so the plant ends with 25 fewer positions, 95 employees instead of 120. The count is a fact both positions accept; whether the change is right is the question they answer differently.

Now name the stakeholders by role, as the case does. The owners would get lower costs. Customers would get steadier quality. The 15 retrained workers keep a job in a new role, and the maintenance staff gain colleagues. The 25 workers whose positions end lose their jobs at the plant. Suppliers may sell the plant different parts. And the town would see a smaller payroll.

From the shareholder position: the owners hired the managers to run the plant well for them. Lower costs and steadier quality serve the owners, and the plan stays within the law. Supporters add that a plant that falls behind on cost may later put all 120 jobs at risk.

From the stakeholder position: the line workers, the maintenance staff, and the town are affected, so their interests count in the decision. Supporters ask whether more workers could be retrained, whether the change could be slower, or how the town could be helped through it.

This course stops there. Weighing the two readings is your work this week, in the discussion and the workshop.

In practice (your tools). You can check the count in any free spreadsheet, such as Google Sheets. Type 120 in cell B2, 40 in cell B3, and 15 in cell B4. In cell B5 type =B3-B4 for the net change in positions. In cell B6 type =B2-B5 for the employees after automation.

Misconception check. Students often think the net change in positions is the whole story, so 25 is "the cost" of the choice. That is tempting, because one number is easy to hold. But the 25 is a count, not a verdict: it leaves out the 15 workers starting new roles, the steadier quality customers get, and the town's smaller payroll. The cure is to put the count next to every stakeholder it touches before you judge it.

Pause and try this. Choose one: (a) argue the plant's decision from the position you find weaker, as strongly as you can, in three sentences; or (b) name the one stakeholder you think the 25-position count hides most, and explain why.

Memory hook: count it first, then weigh it both ways.

Key terms

business ethics — The standards of right and wrong that guide the choices people make in a business, including choices the law leaves open. (first used: 1. Separate legal from right: the law is the floor)
legality — Whether the law allows an act; the law sets a minimum that conduct must not fall below, so a legal act can still be unethical. (first used: 1. Separate legal from right: the law is the floor)
ethical-reasoning questions — A short set of questions a manager can run on any decision: is it legal, is it fair to everyone it touches, and would I be comfortable if it were public. (first used: 1. Separate legal from right: the law is the floor)
code of ethics — A written statement of the values and the conduct an organization expects from its people, including what to do when something goes wrong. (first used: 2. Shape conduct at work: four tools, not one poster)
ethics training — Instruction that teaches people an organization's code of ethics and how to use it when the right choice at work is unclear. (first used: 2. Shape conduct at work: four tools, not one poster)
leadership by example — Shaping conduct by having managers follow the same rules they ask of others, in plain view of the people they lead. (first used: 2. Shape conduct at work: four tools, not one poster)
protected reporting channel — A way for a worker to report suspected wrongdoing, such as a hotline or a named contact, that shields the person reporting from punishment for a good-faith report. (first used: 2. Shape conduct at work: four tools, not one poster)
whistleblower — A worker or other insider who reports suspected wrongdoing in an organization to someone who can act on it. (first used: 2. Shape conduct at work: four tools, not one poster)
corporate social responsibility — The responsibilities a business carries toward the society it operates in, covering earning its way, obeying the law, acting ethically, and giving back. (first used: 3. Climb the pyramid: what a business owes, from the base up)
pyramid of corporate social responsibility — A classroom model from Carroll (1991) that stacks four kinds of responsibility: economic at the base, then legal, then ethical, with philanthropic at the top. (first used: 3. Climb the pyramid: what a business owes, from the base up)
economic responsibility — A business's duty to make goods or services people want and to earn enough to stay in business; the base of the pyramid of corporate social responsibility. (first used: 3. Climb the pyramid: what a business owes, from the base up)
legal responsibility — A business's duty to obey the laws and rules that apply to it; the second level of the pyramid of corporate social responsibility. (first used: 3. Climb the pyramid: what a business owes, from the base up)
ethical responsibility — A business's duty to do what is right and fair even where no law requires it; the third level of the pyramid of corporate social responsibility. (first used: 3. Climb the pyramid: what a business owes, from the base up)
philanthropic responsibility — A business's voluntary giving back to its community, such as donations or volunteer time; the top of the pyramid of corporate social responsibility. (first used: 3. Climb the pyramid: what a business owes, from the base up)
triple bottom line — A classroom model associated with Elkington that weighs a business's results on three lines, profit, people, and planet, instead of on profit alone. (first used: 4. Weigh three bottom lines: profit, people, planet)
shareholder position — The view argued by Friedman (1970) that, within the law and ethical custom, a corporate executive's duty runs to the owners who employ them. (first used: 5. Argue what a corporation is for: two positions, no verdict)
stakeholder position — The view set out by Freeman (1984) that a firm is managed for everyone who can affect it or is affected by it, not for its owners alone. (first used: 5. Argue what a corporation is for: two positions, no verdict)
automation — Using machines or software to do work that people used to do by hand. (first used: 6. Apply both positions to the appliance-parts plant)
retraining — Teaching current workers new skills so they can move into different roles instead of leaving the organization. (first used: 6. Apply both positions to the appliance-parts plant)
net change in positions — The positions an automation decision eliminates minus the workers retrained into new roles: the number of positions the organization has fewer of afterward. (first used: 6. Apply both positions to the appliance-parts plant)

Summary

The law sets a minimum; ethics asks what is right beyond it, so a legal act can still be unethical.
The three ethical-reasoning questions: is it legal, is it fair to everyone it touches, would I be comfortable if it were public.
Organizations shape conduct with a code of ethics, ethics training, leadership by example, and a protected reporting channel.
Carroll's pyramid stacks economic, legal, ethical, and philanthropic responsibility, from the base up.
The triple bottom line weighs profit, people, and planet; it is a model, not a required report.
The shareholder position: an executive's duty runs to the owners, within the law and ethical custom.
The stakeholder position: a firm is managed for everyone who can affect it or is affected by it.
At the plant, 40 positions end and 15 workers are retrained, so 25 fewer positions leave 95 employees instead of 120; the count alone settles no verdict.

Check your understanding

Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.

An illustrative call center with 60 employees adds software that answers simple questions. It eliminates 18 positions and retrains 6 of those workers as quality coaches. Find the net change in positions and the number of employees afterward.
Sort each action of an illustrative delivery company into a level of the pyramid of corporate social responsibility: (a) its drivers obey the speed limits; (b) it sponsors a youth soccer league; (c) it sets prices that keep the company open; (d) it tells customers about a delay before they have to ask, though no rule requires it.
A used-phone store may legally sell a phone without mentioning that its battery holds a weak charge. Run the three ethical-reasoning questions on staying quiet.
A classmate says, "Friedman thought a company could do anything for profit." Explain what the shareholder position actually keeps as limits.

Answers (worked reasoning — read after attempting)

Net change in positions: 18 − 6 = 12 positions. Employees afterward: 60 − 12 = 48 employees. In words, the call center ends with 12 fewer positions, 48 employees instead of 60, and 6 workers start new roles as coaches. Like the plant's count, this number describes the change; it does not decide whether the change is right.
(a) Obeying the speed limits is legal responsibility. (b) Sponsoring a soccer league is philanthropic responsibility. (c) Pricing to stay open is economic responsibility, the base. (d) Warning customers about a delay when no rule requires it is ethical responsibility. The trap is calling (b) the only "socially responsible" act; it is the top of a pyramid that rests on the other three.
Is it legal? Yes, in this case. Is it fair to everyone it touches? The buyer pays for a phone without knowing its main weakness, while the store does know, so the deal leans against the buyer. Would I be comfortable if it were public? A review saying "they knew the battery was weak and said nothing" would hurt the store. Staying quiet passes the first question and struggles on the other two, which is the gap between legal and ethical that the questions are built to show.
The shareholder position, as Friedman (1970) argued it, says a corporate executive's duty runs to the owners who employ them, within the law and ethical custom. Those two limits mean the position does not allow "anything" for profit: breaking the law or ethical custom is outside what it permits.

Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, and the quiz — and next week the course turns to operations, where the cart's process map, a model of how each drink is made, shows how many drinks it can make in an hour.

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