Theoretical Bases for Analyzing the Ethics of a DecisionAdapted .docx

Theoretical Bases for Analyzing the Ethics of a Decision
Adapted from a chapter by John R. Deckop, in Vida Scarpello
(ed). The Handbook of Human Resource Management
Education: Promoting and Effective and Efficient Curriculum,
Los Angeles: Sage Publications, 2008.
Philosophers have pondered ethical questions for millennia,
and have developed numerous theoretical perspectives to aid in
ethical decision-making. The range and depth of philosophical
theories on ethical decision-making can be daunting. So much
so that arguably, presenting all the major philosophical
perspectives, and their nuances, is likely to fail from a
pragmatic standpoint because there is no way most students can
absorb, much less apply on a day-to-day level, so much
material.
So this analysis will be restricted to the two “dominant”
(Beauchamp & Bowie, 1997) philosophical perspectives on
ethics: utilitarianism and universalism, and will deal with only
the most general features of these theories. Things will be
complicated a little, in that a third theoretical perspective that is
a subset of utilitarianism will also be discussed: profit
maximization.
The goal is to provide three perspectives (utilitarianism,
profit maximization, and universalism) on ethical decision-
making that can actually be easily remembered, taught, and used
in daily decision-making. Later other perspectives will be
overviewed, including theory that challenges the two dominant
perspectives.
Utilitarianism
The theory. Utilitarianism, developed primarily in the 19th
century, can be understood by the common phrases “The
greatest good for the greatest number” and “The ends justify the

means.” The utilitarian believes that the potential outcomes of
a decision should be analyzed to see who benefits and who is
harmed. The decision that results in the most total benefit
compared to harm is the best decision. The utilitarian is often
portrayed figuratively as holding a scale, with the benefits on
one side being weighed against the harm on the other.
A critical aspect of this theory is that a decision can result in
harm to some individuals and still be the most ethical course of
action. As long as benefit versus harm is maximized, the “ends
justify the means.” From a utilitarian perspective, an
organizational downsizing for example would be ethical as long
as the good that comes from it, perhaps in the form of long-term
company health and shareholder value, outweighs the harm to
dismissed and current employees, and other stakeholders.
To conduct a utilitarian analysis, one must first conduct a
stakeholder analysis. Put simply, a stakeholder analysis
assesses the effects of the alternate decisions facing the firm on
all that are affected by the decision. Specific methods for
conducting stakeholder analyses can be complex, though all
make explicit the nature of the effects and why they will occur.
Based on a stakeholder analysis, a utilitarian can assess whether
or not the overall benefit of a decision exceeds the overall harm
that the decision will cause.
Some criticisms of the theory. One criticism of utilitarianism is
that the ends may not always justify the means. Universalism,
the other dominant ethical theory to be discussed below, argues
that humans have inherent worth and thus fundamental rights
that should not be violated under any circumstances. Thus, for
example, while a utilitarian may defend drug testing, a
universalist might argue that drug testing fundamentally
violates an employees right to privacy. Another example relates
to sweatshops – a utilitarian would argue that exceedingly poor
treatment of employees can be justified if the benefits to the
firm and the community it resides in are large enough. A
universalist might disagree, arguing the exposing employees to

extremely dangerous conditions is not justified under any
circumstances.
Another criticism of utilitarianism relates to potential self-
serving biases of the person making the decision. The
utilitarian decision-maker in theory should weigh the benefits
and harm too all affected parties without bias. That may be
difficult to do if the decision-maker has a significant stake in
the decision. Owners of sweatshops often reply that poor
working conditions are necessary to stay competitive and
provide jobs for the community. Is this true, or just what the
owner tells himself as self-justification for getting rich?
Similarly, a supervisor may fire a subordinate with whom she
has a conflict, telling herself that this termination is good for
the company, when in reality the decision may be self-serving.
And even when the decision-maker attempts to be unbiased with
respect to self-interest, a variety of decision-making biases can
nevertheless result in unethical decisions when attempting a
utilitarian solution (e.g., Messick & Bazerman, 1996).
Profit Maximization
The theory. Profit maximization, as an ethical perspective, is a
prescription of what has been termed “neoclassical economics”
(Hosmer, 2008). The basic principle of profit maximization is
that decisions made by firms, and employees within firms,
should attempt to maximize firm profit in the long-run, subject
to assumptions or constraints.
The clearest explanation of profit maximization as an ethical
imperative is probably the article by Milton Friedman (1970),
titled “The Social Responsibility of Business is to Increase Its
Profits.” Profit maximization is actually a subset of
utilitarianism, because Friedman and other neoclassical
economists argue that if all firms strive to maximize long-run
profits (subject to constraints) then the overall societal welfare,
in terms of benefit versus harm, will be maximized (Evan &
Freeman, 1988). Why is this so? The explanation of this

requires a detailed economic analysis, which is usually covered
in basic economics courses. As Hosmer (2008) suggests, it may
make sense to simply accept these economic arguments, as they
are rigorously derived given the assumptions that underly the
model.
Profit maximization is a powerful tool for ethical decision
making because the basic premise – that business decisions
should maximize long-run firm profit – is easy to understand.
Yet its prescriptions may seem “hard-hearted” to some people.
For example, Friedman argued that firms are unethical if they,
for example, engage in pollution control beyond the
requirements of the law, if it hurts profits. Or if they hire the
hard-core unemployed in order to contribute to the social
objective of reducing poverty. In both cases however, Friedman
points out that the decision-maker is spending someone else’s
money (e.g., shareholders, customers) without their consent.
And in doing so, the firm would be making decisions that do not
result in the most economic benefit to society, according to this
perspective.
Profit maximization can also be applied to more mundane,
every day decisions. Should a certain employee be terminated?
The answer would be yes if, in the decision-maker’s judgment,
the termination is in the best interests of the firm. It would not
matter if the employee was only marginally a subpar performer,
or if the termination would result in severe problems for the
employee and his family.
The part about the theory that has not been discussed thus
far is the constraints. They are critical, because the degree to
which the constraints are met has direct implication as to
whether profit maximization can be considered an ethical
decision basis. Each analysis based on profit maximization must
assess whether the decision maximizes long-run profit, and
whether the constraints are met. What are these constraints?
Again, these are covered in a basic economic course. Put
simply, profit maximization and Friedman are saying that a
business should maximize profits while 1. obeying the law, 2.,

ensuring open and free competition, and 3. not engaging in
deception or fraud. Thus, if a firm makes a decision that in fact
maximizes long-run profit, but in doing so violates one or more
of the constraints, profit maximization would say that this
decision is unethical. As discussed above this is because in
violating a constraint the decision does not contribute to the
overall economic benefit of society.
The constraints of profit maximization sound
straightforward, though the most common criticism of this
profit maximization as an ethical decision basis relates to the
interpretation of these constraints. This and other criticisms
will be discussed next.
Criticisms of profit maximization. Profit maximization is
considered a subset of utilitarianism because, as mentioned, the
theory states that if all firms seek to maximize profit, the
overall welfare of society will be maximized. But the
constraints that must be met for the theory to apply have
undertones of other ethical perspectives. When Friedman says
“without deception or fraud,” he is sounding like a universalist,
who would claim that some actions (e.g., deception) are
inherently wrong. He also states in his article that profit
maximization should be subject to “the basic rules of society,
both those embodied in law, and those embodied in ethical
custom.” How does one define or identify ethical custom?
Using a common philosophical metaphor, this puts the theory on
a “slippery slope,” because without a clear standard of “ethical”
(which from a tautological perspective puts us back at the
beginning of all this discussion) almost any decision could be
supported or criticized using this theory. Those decision-
making biases discussed above with respect to utilitarianism in
general also apply here. Self-serving and other biases may well
affect whether a decision-maker in a given instance determines
that there is free competition, or no fraud. Another main
criticism of profit maximization is that as a utilitarian theory, it
could support doing significant harm to individuals in the name

of profit (i.e., the ends justify the means).
Universalism
The theory. Universalism is probably most associated
historically with Immanuel Kant, who wrote (primarily) in the
18th century. Two key principles are commonly associated with
it: “Never treat another inappropriately as a means to an ends,”
and “Would you get what you want if everyone did it, under
similar circumstances?” This second principle, which Kant
labeled the “categorical imperative” bears resemblance to what
in Christianity is called the golden rule, or “Do unto others as
you would have them do unto you.” Kant was trying, among
other things, to put “philosophical muscle” on the golden rule.
Interestingly, the golden rule is not a principle limited to
Christianity; it is a fundamental tenet in every major religion in
the world (Parliament of the World's Religions, 1993).
Universalism is more than the golden rule, however, and is
arguably more useful for determining ethical decision in a
business context. This is because the golden rule supposes the
decision maker is ethical to begin with (e.g., Trevino & Nelson,
2007). If not, the application of the golden rule may not make
much sense. For example, imagine that you are sitting in a café
looking out the window as you sip your drink. Across the street
you witness a bank robbery, and the man who just robbed the
bank then walks into the café and sits next to you. He asks you
to tell the police when they arrive that he’s been sitting there
for the past hour, thereby providing him an alibi. Now, if
you’re an ethical person (and don’t fear for your life!) you
probably won’t agree to lie. However, what if you’re a bank
robber yourself, and think, “do unto others as you would have
them done unto you.” Well, following the golden rule, you’d
want him to lie for you, so that means that you’d lie for him.
And that’s not ethical! A more realistic example might be this.
Let’s say your boss often crosses the line when it comes to
sexual harassment. He makes inappropriate remarks about your

looks and the way you dress. Yesterday he came up behind you
and started rubbing your back. You could say to him “how
would you like it if I did it to you?” His response might well be
“Go ahead!” So in this way his actions pass the golden rule test
- but clearly aren’t ethical. As such, when applying
universalism, it is important to apply one or both of its key
principles and not the golden rule.
Universalism directly challenges utilitarianism, in that the
first statement above contradicts the principle that the ends do
not justify the means. It implies that employees have inherent
worth, and that a firm or manager that violates the employee’s
inherent dignity and worth by using them as a means to an end
is acting unethically. For example, most would agree that sexual
harassment violates the victim’s fundamental rights as an
employee, and is universally wrong, no matter what.
When applying this perspective, you should ask yourself if
no amount of good could make up for the harm that you’re
causing the individual. And if so, that means that the harm is
fundamentally wrong, and unethical according to universalism.
This would be the case in the sexual harassment example above.
If not, however, then the action may well be ethical (or not
unethical) by universalist thinking. For example, let’s say an
employer decides to downsize its workforce by 20% in order to
avoid bankruptcy. Terminating those employees certainly
causes them harm. However, many do not believe that an
individual has a universal right to work for a particular
organization and never lose his/her job, under any
circumstances. So a universalist may consider this downsizing
ethical.
The categorical imperative (second statement above) gets at
notions of reversibility and hypocrisy (Schumann, 2001).
Consider an action by a manager – lying to an employee about
her chances of promotion in order to avoid her quitting the firm.
The universalist would oppose this because a world where all
firms lied about such things would mean that employees,
including this one, would not believe anything about promotions

in the first place, and as such, the intent of the action (to retain
the employee) would not be realized. In other words, if
everyone did what this manager did, he would not benefit from
his action.
The categorical imperative can be considered a way to test
whether you are correctly applying the “don’t treat employees
as a means” principle (Hosmer, 2008). The categorical
imperative implies that unless an action is morally right for
others to do, then it is not morally right for you to do. As such,
all humans are of equal value. Treating people inappropriately
as a means to an ends denies the inherent worth of the
individual, and denies them fundamental rights.
Criticisms of Universalism. A strict application of the
categorical imperative is considered by many to be difficult to
apply in practice (Hosmer, 2008). For example, lying is
prohibited. But probably everyone lies at least occasionally,
and few of us would consider all lies to be unethical.
Supervisors are often trained to provide supportive feedback to
their subordinates, and it may be effective in some
circumstances to restrain brutal honesty when discussing
performance with an employee who has difficulty grasping
something. Most of us would think that the dishonesty is
justified by the outcome – protecting the employee’s feelings of
self-worth. This would be a utilitarian way to look at the issue.
Another criticism relates to the first formulation of
universalism. It’s hard to avoid treating others as a means to an
end. We do it all the time – arguably, professor and student
treat the other as a means to an end. The key in applying the
perspective is the term “inappropriately.” A good guide would
be to ask if the treatment violates fundamental human rights of
respect and dignity, such that no amount of good can make up
for it. But drawing this line can be difficult and introspection
and consistency are necessary.
Universalism also suffers from the same potential of self-
serving biases that the other ethical theories face. The

categorical imperative asks the decision-maker to situationalize
the problem. That is, under similar circumstances, would I be
willing to make it a “universal law” for others to do the same?
A universalist decision-maker can be tempted to justify almost
any action by situationalizing the action in restrictive fashion.
For example, a manager might be tempted to skew a
performance evaluation to give an employee a very good raise,
which, let us say, would benefit the manager politically in the
organization. Without situationalizing the problem, the action
would not be justifiable because if all managers biased their
performance evaluation results when it was convenient to them,
performance evaluation would not represent a rational pay
policy for the firm, which is one of its key objectives. So it
would not be used, and this manager could not benefit from her
action. However, she could tell herself that she will do it only
this one time. Thus, she could rationalize that if there were a
world where all managers biased their performance evaluation
results only once in their careers, then the intent of her action
would still be realized. The limited occurrence of the practice
would still mean that employees and firms would trust the
validity of performance evaluation. This may be so, but most of
us would consider her action unethical.
Applying the Theories in Everyday Decision-making
The purpose of ethical training is not to learn the concepts in
order to get questions right on an exam, or to impress others by
dropping the names of impressive sounding theories. It is to
affect everyday decision-making. The three theories presented
above – utilitarianism, profit maximization, and universalism,
are simple enough in their basic principles that they can be
easily remembered after you finish reading this.
Perhaps the next step after reading the theories is to think
about which fits best with one’s moral/religious upbringing and
education. Which of these theories makes the most sense as a
basic rule of organizational life? If one had to pick one to

characterize your concept of what is right, which would it be?
This theory can be the individual’s “home base” theory. It is
the first one to turn to when assessing the ethicality of a
decision. It is applied to the situation, and if what it says to do
makes sense, the decision-maker acts accordingly.
However, its application may not make sense for a variety of
reasons. Many people, in understanding the criticisms of the
various theories, are reluctant to commit to using one theory in
all circumstances. The theory may not provide a clear guide to
action in a given case. Or there might be a competing ethical
principle that makes more sense in a given circumstance.
So it is also fine to be willing to apply other theories in
situations where the home base theory does not make sense.
Philosophers, as proponents of one or another of these theories
might object, but until the philosophers or management theorists
can identify one set of ethical principles we can all agree upon,
each of us has the responsibility to develop an ethical
framework for ourselves, one that we can live with and use.
Next, each theory will be discussed in terms of how it might
be used as a home base theory, and how it might be modified in
given circumstances.
Let’s use utilitarianism is the home base theory. The decision-
maker believes in weighing the consequences of a decision
against all affected stakeholders to the decision. It is
acceptable if decisions cause harm to some, as long as the
benefit that others receives outweighs the harm.
However, in thinking through a particular decision, a
question may be asked along the lines of universalism: “Does
my decision violate an employee’s fundamental rights as a
human?” The answer may be no to this. A termination or
downsizing may be justified, assuming that employees do not
have a fundamental right to continued employment in a firm.
Alternatively, the may answer yes to this question. Perhaps a
firm has decided to downsize a group of employees. This may
be an ethical decision on a utilitarian basis. However, let us say

top management proposes to not notify affected employees
about the downsizing until the day of termination. This action
may also be acceptable from a utilitarian standpoint, if one
believes that the benefit to the firm from this practice will
outweigh the harm to employees. However, one may decide that
this action, given the situation, is inherently wrong, because it
violates fundamental rights of affected employees. In this
instance, it could be recommended that ample notice be
provided to employees of the downsizing, even while the
decision-maker otherwise makes decisions on a utilitarian basis.
Let us say profit maximization is the home base theory. One
believes that the objective of business decision-making should
be to maximize the long-term profitability of the organization.
It can be an easy guide to apply, and it can be argued that it is
an employee’s duty to make decisions that benefit the firm,
subject of course to the assumptions of the theory. But as with
utilitarianism, the question may arise: “Are there instances
where the best interests of the firm should take second place in
my decision-making?” “Are their instances where the harm
caused to employees cannot be outweighed by any amount of
profit?” This issue comes up, for example, when the ethicality
of sweatshops is considered. More and more, production has
shifted to countries in which labor standards afford workers and
their communities little protection from harmful practices, such
as dangerous working conditions and environmental pollution
(e.g., Varley, 1998). Should a U.S. firm operate in another
country using what would clearly be considered inhumane
treatment of workers by U.S. standards? Even if so, should a
firm provide only the absolute minimum in protection to
workers and their communities dictated by the law in that
country (often almost none), in order to maximize profit? Many
who believe in profit maximization as a general principle would
answer no to one or both of these questions. One might instead
argue that the firm should provide treat workers as humanely as
possible, while still allowing for a reasonable profit. This

would be a utilitarian solution, one that does not conform to
strict profit maximization.
At a more mundane level, managers are faced everyday with
issues of employee treatment. Though the best interests of the
firm may be one’s basic orientation, there may be situations
where a more utilitarian solution is appealing, such that the
shareholders of the firm (the ultimate beneficiaries of profit
maximization) are considered but one stakeholder to the
decision. And, from a universalist perspective, there may be
certain actions to employees that one would not be willing to do
under any circumstances, simply because the action is
inherently wrong.
Let us say universalism is the home base theory. One may have
been brought up that certain things are fundamentally wrong,
and certain actions never justifiable. Do not lie. Do not break
promises. Do not steal company property. Good treatment of
employees is not necessarily a means to benefit the company or
other stakeholders in this view, but fundamentally the right
thing to do. Universalism is the home base theory, but as with
the others, it may not be possible or practical to apply it in all
circumstances.
To exercise universalist principles, one must either the
choose to work in a firm that has similar values, or one must be
willing to constantly challenge HRM policies or actions that are
considered wrong. It may be difficult to consistently practice
universalistic principles in the workplace. We all have different
value systems, and honest assessments of a business policy even
by two universalists might contradict. For example, Grossman
(2001), in applying universalistic principles, suggests that
incentive pay is a basic individual right. Conversely, Heery
(1999) argues that incentive pay, and the risk it imparts to
employees, can represent a fundamental injustice.
It may be difficult for an employee to find a firm to work for
that has exactly the same universal values. One cannot quit
every time the firm does something, or asks one to do

something, that is inconsistent with one’s principles. Though
one’s home base theory is universalism, it may be necessary to
search for a utilitarianism or profit maximization solution in
some circumstances.
Drawing Lines
As mentioned above, universalists cannot fight every fight,
every time they see something in their firm that they consider
unethical. This same argument applies to other ethical theories.
We cannot try to change things, or quit, every time our ethical
principles are violated. Thus, living up to one’s ethical
principles at work is also about learning where to draw the line
– how bad things must get to speak out, or quit.
And, most importantly, it is important to think about where
these lines should be drawn ahead of time - as in an educational
environment versus the real world. Otherwise, the pressure of
the situation may result in drawing a line in a place looks
reasonable at the time, but later is perceived as unethical (e.g.,
McCoy, 1997). The single-minded pursuit of a goal, say getting
a project accomplished, can blind individuals to the ethical
consequences of some of the decisions made along the way.
Sometimes decisions must be made within a very short time
frame, maybe even a split second. Maybe financial or family
pressures make it extremely difficult to do what ethical
principles dictate. In all these situations, it is helpful to have
thought through ethical principles ahead of time. Each of the
three ethical theories discussed above share one common
criticism: all can easily be misapplied if the decision-maker
engages in self-deception. The pressures of a situation may
cause one to apply self-serving biases that while in the short-
run appear acceptable, in the long-run result in damage to one’s
firm, career, or self in terms staying true to ethical principles.
Other Ethical Perspectives

There are numerous other ethical perspectives that can be
used as conceptual tools for ethical decision-making. Some
challenge the dominant perspectives discussed above, and other
complement these perspectives. Two categories will be
discussed below: justice theories and the theories related to the
duty to care.
Justice
The goal of justice theories is to analyze whether a
procedure, outcome, or both, is inherently fair (Thorne, Ferrell,
& Ferrell, 2003). Note that theories of procedural and
distributive justice are frequently discussed in textbooks, and
are often based on philosophical concepts of justice. However,
the use of these theories in textbooks, as well as in academic
research, is mainly as a means to the ends of employee
productivity (Greenwood, 2002). Justice, as a principle worthy
of realization in its own right in decision-making, has not
received significant attention in texts.
Many justice theories relate to the distribution of wealth in
society. For example, John Rawls’ theory of distributive justice
asks the decision-maker, when thinking about what is right, to
wear a “veil of ignorance” with respect to personal
characteristics, such as race, family background, special talents,
etc. Then, one should make a decision that reflects this
impartiality to personal circumstances. Rawls argues that if we
do this, our decisions would be to distribute economic goods
and services equally, unless an unequal distribution would work
to everyone’s advantage (Beauchamp & Bowie, 1997). The
focus of this perspective is often on the disadvantaged in
society, and many of its implications imply the need for a more
egalitarian distribution of wealth both in society and within
firms. However, Rawls does not argue for complete equality.
For example, differential compensation practices, such as
incentive systems for entrepreneurs, would be acceptable as
long as the result was improved job opportunities for the least
advantaged members of society (Beauchamp & Bowie, 1997).

Another justice theory can be termed “contributive liberty”
(Hosmer, 2008). In contrast to theories of distributive justice,
such as Rawls’ theory, this theory, developed by Robert Nozick,
focuses on an individual’s right to liberty in the process of
decision-making. As such, it relates to procedural, not
distributive justice. From a resource allocation perspective, this
theory emphasizes the role of free markets, which, it argues,
result in the fairest allocation of resources. This theory
represents a companion of sorts to profit maximization. While
profit maximization argues that market mechanisms produce the
most societal welfare, contributive liberty argues for the
inherent justice of free markets.
All the theories up till this point focus on the individual –
her rights, and the duties of the decision-maker with respect to
these rights. Another justice-based theory, communitarian
theory, focuses instead on the community. Rather than discuss
the rights of the individual versus the government or the firm,
communitarian theory stresses the development of communal
values, and how those communal values should affect the
individual (Beauchamp & Bowie, 1997). One aspect of this
theory is that too much focus on individual rights obscures the
responsibility the individual has to the collective. As a member
of a community (the firm), an employee thus has the
responsibility to be, among other things, part of establishing a
workplace that is fair and just (Barrett, 1999).
The Duty to Care
Most well-known and established ethical theories, including
all the theories discussed thus far, focus on the development of
an abstract set of ethical principles upon based on rights and
justice. There is no role for sensitivity to others, emotion, and
relationships for their own sake in these theories. Even
universalism, with its focus on “doing unto others” emphasizes
the development of abstract principles not specifically related to
particular individuals.
The duty to care is a label for several theories developed

from a feminist tradition that emphasize character traits that are
valued in close personal relationships, such as sympathy and
compassion (Beauchamp & Bowie, 1997). One aspect of this
work is to address societal inequality of women, and how laws,
and even ethical theories developed by men, have contributed to
this (Grimshaw, 1986).
Another focus is to advocate a basis for ethical decision-
making based on care. One prominent example is the work of
Carol Gilligan (e.g., Gilligan, 1982). She asserts a framework
of care and compassion, traits often associated with women, as
underlying moral reasoning and ethical duty. Gilligen argues
that a decision based on caring and concern for others can be as
ethical, or more ethical, than a decision based on adherence to a
set of abstract principles.
This relates to duties in a variety of areas in the workplace
(Beauchamp & Bowie, 1997). Managers should exhibit
sensitivity to employees’ personal problems not because it may
result in a more productive employee or protect against a
lawsuit, but because it is the right thing to do. We have the
duty be sensitive to the points of view of others. When there
are conflicting rights, this sensitivity can help in finding
solutions where all party’s voices and perspectives are heard.
Feminist thinking and the duty to care also involve metaphors in
the workplace. Metaphors more commonly associated with
men, such as sports and war, often reflect competition and
conflict. Metaphors more commonly associated with women,
such as relationships and family, are often seen as “soft” and
not as important, despite the fact that these orientations may be
correct (Beauchamp & Bowie, 1997).
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Milton Friedman
The Social Responsibility of Business is to Increase Its

ProfitsThe New York Times Magazine, September 13, 1970
When I hear businessmen speak eloquently about the "social
responsibilities of business in a free-enterprise system," I am
reminded of the wonderful line about the Frenchman who
discovered at the age of 70 that he had been speaking prose all
his life. The businessmen believe that they are defending free
enterprise when they declaim that business is not concerned
"merely" with profit but also with promoting desirable "social"
ends; that business has a "social conscience" and takes seriously
its responsibilities for providing employment, eliminating
discrimination, avoiding pollution and whatever else may be the
catchwords of the contemporary crop of reformers. In fact they
are--or would be if they or anyone else took them seriously--
preaching pure and unadulterated socialism. Businessmen who
talk this way are unwitting puppets of the intellectual forces
that have been undermining the basis of a free society these past
decades.
The discussions of the "social responsibilities of business" are
notable for their analytical looseness and lack of rigor. What
does it mean to say that "business" has responsibilities? Only
people have responsibilities. A corporation is an artificial
person and in this sense may have artificial responsibilities, but
"business" as a whole cannot be said to have responsibilities,
even in this vague sense. The first step toward clarity in
examining the doctrine of the social responsibility of business
is to ask precisely what it implies for whom.
Presumably, the individuals who are to be responsible are
businessmen, which means individual proprietors or corporate
executives. Most of the discussion of social responsibility is
directed at corporations, so in what follows I shall mostly
neglect the individual proprietors and speak of corporate
executives.
In a free-enterprise, private-property system, a corporate
executive is an employee of the owners of the business. He has
direct responsibility to his employers. That responsibility is to
conduct the business in accordance with their desires, which

generally will be to make as much money as possible while
conforming to their basic rules of the society, both those
embodied in law and those embodied in ethical custom. Of
course, in some cases his employers may have a different
objective. A group of persons might establish a corporation for
an eleemosynary purpose--for example, a hospital or a school.
The manager of such a corporation will not have money profit
as his objectives but the rendering of certain services.
In either case, the key point is that, in his capacity as a
corporate executive, the manager is the agent of the individuals
who own the corporation or establish the eleemosynary
institution, and his primary responsibility is to them.
Needless to say, this does not mean that it is easy to judge how
well he is performing his task. But at least the criterion of
performance is straight-forward, and the persons among whom a
voluntary contractual arrangement exists are clearly defined.
Of course, the corporate executive is also a person in his own
right. As a person, he may have many other responsibilities that
he recognizes or assumes voluntarily--to his family, his
conscience, his feelings of charity, his church, his clubs, his
city, his country. He may feel impelled by these responsibilities
to devote part of his income to causes he regards as worthy, to
refuse to work for particular corporations, even to leave his job,
for example, to join his country's armed forces. If we wish, we
may refer to some of these responsibilities as "social
responsibilities." But in these respects he is acting as a
principal, not an agent; he is spending his own money or time or
energy, not the money of his employers or the time or energy he
has contracted to devote to their purposes. If these are "social
responsibilities," they are the social responsibilities of
individuals, not business.
What does it mean to say that the corporate executive has a
"social responsibility" in his capacity as businessman? If this
statement is not pure rhetoric, it must mean that he is to act in
some way that is not in the interest of his employers. For
example, that he is to refrain from increasing the price of the

product in order to contribute to the social objective of
preventing inflation, even though a price increase would be in
the best interests of the corporation. Or that he is to make
expenditures on reducing pollution beyond the amount that is in
the best interests of the corporation or that is required by law in
order to contribute to the social objective of improving the
environment. Or that, at the expense of corporate profits, he is
to hire "hardcore" unemployed instead of better qualified
available workmen to contribute to the social objective of
reducing poverty.
In each of these cases, the corporate executive would be
spending someone else's money for a general social interest.
Insofar as his actions in accord with his "social responsibility"
reduce returns to stockholders, he is spending their money.
Insofar as his actions raise the price to customers, he is
spending the customers' money. Insofar as his actions lower the
wages of some employees, he is spending their money.
The stockholders or the customers or the employees could
separately spend their own money on the particular action if
they wished to do so. The executive is exercising a distinct
"social responsiblity," rather than serving as an agent of the
stockholders or the customers or the employees, only if he
spends the money in a different way than they would have spent
it.
But if he does this, he is in effect imposing taxes, on the one
hand, and deciding how the tax proceeds shall be spent, on the
other.
This process raises political questions on two levels: principle
and consequences. On the level of political principle, the
imposition of taxes and the expenditure of tax proceeds are
governmental functions. We have established elaborate
constitutional, parliamentary and judicial provisions to control
these functions, to assure that taxes are imposed so far as
possible in accordance with the preferences and desires of the
public--after all, "taxation without representation" was one of
the battle cries of the American Revolution. We have a system

of checks and balances to separate the legislative function of
imposing taxes and enacting expendituress from the executive
function of collecting taxes and administering expenditure
programs and from the judicial function of mediating disputes
and interpreting the law.
Here the businessman--self-selected or appointed directly or
indirectly by stockholders--is to be simultaneously legislator,
executive and jurist. He is to decide whom to tax by how much
and for what purpose, and he is to spend the proceeds--all this
guided only by general exhortations from on high to restrain
inflation, improve the environment, fight poverty and so on and
on.
The whole justification for permitting the corporate executive to
be selected by the stockholders is that the executive is an agent
serving the interests of his principal. This justification
disappears when the corporate executive imposes taxes and
spends the proceeds for "social" purposes. He becomes in effect
a public employee, a civil servant, even though he remains in
name an employee of a private enterprise. On grounds of
political principle, it is intolerable that such civil servants--
insofar as their actions in the name of social responsibility are
real and not just window-dressing--should be selected as they
are now. If they are to be civil servants, then they must be
elected through a political process. If they are to impose taxes
and make expenditures to foster "social" objectives, then
political machinery must be set up to make the assessment of
taxes and to determine through a political process the objectives
to be served.
This is the basic reason why the doctrine of "social
responsibility" involves the acceptance of the socialist view that
political mechanisms, not market mechanisms, are the
appropriate way to determine the allocation of scarce resources
to alternative uses.
On the grounds of consequences, can the corporate executive in
fact discharge his alleged "social responsibilities"? On the one
hand, suppose he could get away with spending the

stockholders' or customers' or employees' money. How is he to
know how to spend it? He is told that he must contribute to
fighting inflation. How is he to know what action of his will
contribute to that end? He is presumably an expert in running
his company--in producing a product or selling it or financing
it. But nothing about his selection makes him an expert on
inflation. Will his holding down the price of his product reduce
inflationary pressure? Or, by leaving more spending power in
the hands of his customers, simply divert it elsewhere? Or, by
forcing him to produce less because of the lower price, will it
simply contribute to shortages? Even if he could answer these
questions, how much cost is he justified in imposing on his
stockholders, customers and employees for this social purpose?
What is his appropriate share and what is the appropriate share
of others?
And, whether he wants to or not, can he get away with spending
his stockholders', customers' or employees money? Will not the
stockholders fire him? (Either the present ones or those who
take over when his actions in the name of social responsibility
have reduced the corporation's profits and the price of its
stock.) His customers and his employees can desert him for
other producers and employers less scrupulous in exercising
their social responsibilities.
This facet of "social responsibility" doctrine is brought into
sharp relief when the doctrine is used to justify wage restraint
by trade unions. The conflict of interest is naked and clear when
union officials are asked to subordinate the interest of their
members to some more general purpose. If the union officials
try to enforce wage restraint, the consequence is likely to be
wildcat strikes, rank-and-file revolts and the emergence of
strong competitors for their jobs. We thus have the ironic
phenomenon that union leaders--at least in the U.S.--have
objected to Government interference with the market far more
consistently and courageously than have business leaders.
The difficulty of exercising "social responsibility" illustrates, of
course, the great virtue of private competitive enterprise--it

forces people to be responsible for their own actions and makes
it difficult for them to "exploit" other people for either selfish
or unselfish purposes. They can do good--but only at their own
expense.
Many a reader who has followed the argument this far may be
tempted to remonstrate that it is all well and good to speak of
Government's having the responsibility to impose taxes and
determine expenditures for such "social" purposes as controlling
pollution or training the hard-core unemployed, but that the
problems are too urgent to wait on the slow course of political
processes, that the exercise of social responsibility by
businessmen is a quicker and surer way to solve pressing
current problems.
Aside from the question of fact--I share Adam Smith's
skepticism about the benefits that can be expected from "those
who affected to trade for the public good"--this argument must
be rejected on the grounds of principle. What is amounts to is
an assertion that those who favor the taxes and expenditures in
question have failed to persuade a majority of their fellow
citizens to be of like mind and that they are seeking to attain by
undemocratic procedures what they cannot attain by democratic
procedures. In a free society, it is hard for "evil" people to do
"evil," especially since one man's good is another's evil.
I have, for simplicity, concentrated on the special case of the
corporate executive, except only for the brief digression on
trade unions. But precisely the same argument applies to the
newer phenomenon of calling upon stockholders to require
corporations to exercise social responsibility (the recent G.M.
crusade, for example). In most of these cases, what is in effet
involved is some stockholders trying to get other stockholders
(or customers or employees) to contribute against their will to
"social" causes favored by activists. Insofar as they succeed,
they are again imposing taxes and spending the proceeds.
The situation of the individual proprietor is somewhat different.
If he acts to reduce the returns of his enterprise in order to
exercise his "social responsibility," he is spending his own

money, not someone else's. If he wishes to spend his money on
such purposes, that is his right and I cannot see that there is any
objection to his doing so. In the process, he, too, may impose
costs on employees and customers. However, because he is far
less likely than a large corporation or union to have
monopolistic power, any such side effects will tend to be minor.
Of course, in practice the doctrine of social responsibility is
frequently a cloak for actions that are justified on other grounds
rather than a reason for those actions.
To illustrate, it may well be in the long-run interest of a
corporation that is a major employer in a small community to
devote resources to providing amenities to that community or to
improving its government. That may make it easier to attract
desirable employees, it may reduce the wage bill or lessen
losses from pilferage and sabotage or have other worthwhile
effects. Or it may be that, given the laws about the deductibility
of corporate charitable contributions, the stockholders can
contribute more to charities they favor by having the
corporation make the gift than by doing it themselves, since
they can in that way contribute an amount that would otherwise
have been paid as corporate taxes.
In each of these--and many similar--cases, there is a strong
temptation to rationalize these actions as an exercise of "social
responsibility." In the present climate of opinion, with its
widespread aversion to "capitalism," "profits," the "soulless
corporation" and so on, this is one way for a corporation to
generate goodwill as a by-product of expenditures that are
entirely justified on its own self-interest.
It would be inconsistent of me to call on corporate executives to
refrain from this hypocritical window-dressing because it harms
the foundation of a free society. That would be to call on them
to exercise a "social responsibility"! If our institutions, and the
attitudes of the public make it in their self-interest to cloak
their actions in this way, I cannot summon much indignation to
denounce them. At the same time, I can express admiration for
those individual proprietors or owners of closely held

corporations or stockholders of more broadly held corporations
who disdain such tactics as approaching fraud.
Whether blameworthy or not, the use of the cloak of social
responsibility, and the nonsense spoken in its name by
influential and prestigious businessmen, does clearly harm the
foundations of a free society. I have been impressed time and
again by the schizophrenic character of many businessmen.
They are capable of being extremely far-sighted and clear-
headed in matters that are internal to their businesses. They are
incredibly short-sighted and muddle-headed in matters that are
outside their businesses but affect the possible survival of
business in general. This short-sightedness is strikingly
exemplified in the calls from many businessmen for wage and
price guidelines or controls or income policies. There is nothing
that could do more in a brief period to destroy a market system
and replace it by a centrally controlled system than effective
governmental control of prices and wages.
The short-sightedness is also exemplified in speeches by
businessmen on social responsibility. This may gain them kudo
in the short run. But it helps to strengthen the already too
prevalent view that the pursuit of profits is wicked and immoral
and must be curbed and controlled by external forces. Once this
view is adopted, the external forces that curb the market will
not be the social consciences, however highly developed, of the
pontificating executives; it will be the iron fist of Government
bureaucrats. Here, as with price and wage controls, businessmen
seem to me to reveal a suicidal impulse.
The political principle that underlies the market mechanism is
unanimity. In an ideal free market resting on private property,
no individual can coerce any other, all cooperation is voluntary,
all parties to such cooperation benefit or they need not
participate. There are not values, no "social" responsibilities in
any sense other than the shared values and responsibilities of
individuals. Society is a collection of individuals and of the
various groups they voluntarily form.
The political principle that underlies the political mechanism is

conformity. The individual must serve a more general social
interest--whether that be determined by a church or a dictator or
a majority. The individual may have a vote and say in what is to
be done, but if he is overruled, he must conform. It is
appropriate for some to require others to contribute to a general
social purpose whether they wish to or not.
Unfortunately, unanimity is not always feasible. There are some
respects in which conformity appears unavoidable, so I do not
see how one can avoid the use of the political mechanism
altogether.
But the doctrine of "social responsibility" taken seriously would
extend the scope of the political mechanism to every human
activity. It does not differ in philosophy from the most
explicitly collective doctrine. It differs only by professing to
believe that collectivist ends can be attained without collectivist
means. That is why, in my book Capitalism and Freedom, I have
called it a "fundamentally subversive doctrine" in a free society,
and have said that in such a society, "there is one and only one
social responsibility of business--to use its resources and
engage in activities designed to increase its profits so long as it
stays within the rules of the game, which is to say, engages in
open and free competition without deception or fraud."
How Capitalism Is Killing Democracy
By Robert B. Reich
September/October 2007
Free markets were supposed to lead to free societies. Instead,
today’s supercharged global economy is eroding the power of
the people in democracies around the globe. Welcome to a
world where the bottom line trumps the common good and
government takes a back seat to big business.
It was supposed to be a match made in heaven. Capitalism and
democracy, we’ve long been told, are the twin ideological

pillars capable of bringing unprecedented prosperity and
freedom to the world. In recent decades, the duo has shared a
common ascent. By almost any measure, global capitalism is
triumphant. Most nations around the world are today part of a
single, integrated, and turbocharged global market. Democracy
has enjoyed a similar renaissance. Three decades ago, a third of
the world’s nations held free elections; today, nearly two thirds
do.
Conventional wisdom holds that where either capitalism or
democracy flourishes, the other must soon follow. Yet today,
their fortunes are beginning to diverge. Capitalism, long sold as
the yin to democracy’s yang, is thriving, while democracy is
struggling to keep up. China, poised to become the world’s third
largest capitalist nation this year after the United States and
Japan, has embraced market freedom, but not political freedom.
Many economically successful nations—from Russia to
Mexico—are democracies in name only. They are encumbered
by the same problems that have hobbled American democracy in
recent years, allowing corporations and elites buoyed by
runaway economic success to undermine the government’s
capacity to respond to citizens’ concerns.
Of course, democracy means much more than the process of free
and fair elections. It is a system for accomplishing what can
only be achieved by citizens joining together to further the
common good. But though free markets have brought
unprecedented prosperity to many, they have been accompanied
by widening inequalities of income and wealth, heightened job
insecurity, and environmental hazards such as global warming.
Democracy is designed to allow citizens to address these very
issues in constructive ways. And yet a sense of political
powerlessness is on the rise among citizens in Europe, Japan,
and the United States, even as consumers and investors feel
more empowered. In short, no democratic nation is effectively
coping with capitalism’s negative side effects.
This fact is not, however, a failing of capitalism. As these two
forces have spread around the world, we have blurred their

responsibilities, to the detriment of our democratic duties.
Capitalism’s role is to increase the economic pie, nothing more.
And while capitalism has become remarkably responsive to
what people want as individual consumers, democracies have
struggled to perform their own basic functions: to articulate and
act upon the common good, and to help societies achieve both
growth and equity. Democracy, at its best, enables citizens to
debate collectively how the slices of the pie should be divided
and to determine which rules apply to private goods and which
to public goods. Today, those tasks are increasingly being left
to the market. What is desperately needed is a clear delineation
of the boundary between global capitalism and democracy—
between the economic game, on the one hand, and how its rules
are set, on the other. If the purpose of capitalism is to allow
corporations to play the market as aggressively as possible, the
challenge for citizens is to stop these economic entities from
being the authors of the rules by which we live.
THE COST OF DOING BUSINESS
Most people are of two minds: As consumers and investors, we
want the bargains and high returns that the global economy
provides. As citizens, we don’t like many of the social
consequences that flow from these transactions. We like to
blame corporations for the ills that follow, but in truth we’ve
made this compact with ourselves. After all, we know the roots
of the great economic deals we’re getting. They come from
workers forced to settle for lower wages and benefits. They
come from companies that shed their loyalties to communities
and morph into global supply chains. They come from CEOs
who take home exorbitant paychecks. And they come from
industries that often wreak havoc on the environment.
Unfortunately, in the United States, the debate about economic
change tends to occur between two extremist camps: those who
want the market to rule unimpeded, and those who want to
protect jobs and preserve communities as they are. Instead of
finding ways to soften the blows of globalization, compensate
the losers, or slow the pace of change, we go to battle.

Consumers and investors nearly always win the day, but citizens
lash out occasionally in symbolic fashion, by attempting to
block a new trade agreement or protesting the sale of U.S.
companies to foreign firms. It is a sign of the inner conflict
Americans feel—between the consumer in us and the citizen in
us—that the reactions are often so schizophrenic.
Such conflicting sentiments are hardly limited to the United
States. The recent wave of corporate restructurings in Europe
has shaken the continent’s typical commitment to job security
and social welfare. It’s leaving Europeans at odds as to whether
they prefer the private benefits of global capitalism in the face
of increasing social costs at home and abroad. Take, for
instance, the auto industry. In 2001, DaimlerChrysler faced
mounting financial losses as European car buyers abandoned the
company in favor of cheaper competitors. So, CEO Dieter
Zetsche cut 26,000 jobs from his global workforce and closed
six factories. Even profitable companies are feeling the pressure
to become ever more efficient. In 2005, Deutsche Bank
simultaneously announced an 87 percent increase in net profits
and a plan to cut 6,400 jobs, nearly half of them in Germany
and Britain. Twelve-hundred of the jobs were then moved to
low-wage nations. Today, European consumers and investors
are doing better than ever, but job insecurity and inequality are
rising, even in social democracies that were established to
counter the injustices of the market. In the face of such change,
Europe’s democracies have shown themselves to be so
paralyzed that the only way citizens routinely express
opposition is through massive boycotts and strikes.
In Japan, many companies have abandoned lifetime
employment, cut workforces, and closed down unprofitable
lines. Just months after Howard Stringer was named Sony’s first
non-Japanese CEO, he announced the company would trim
10,000 employees, about 7 percent of its workforce. Surely
some Japanese consumers and investors benefit from such
corporate downsizing: By 2006, the Japanese stock market had
reached a 14-year high. But many Japanese workers have been

left behind. A nation that once prided itself on being an “all
middle-class society” is beginning to show sharp disparities in
income and wealth. Between 1999 and 2005, the share of
Japanese households without savings doubled, from 12 percent
to 24 percent. And citizens there routinely express a sense of
powerlessness. Like many free countries around the world,
Japan is embracing global capitalism with a democracy too
enfeebled to face the free market’s many social penalties.
On the other end of the political spectrum sits China, which is
surging toward capitalism without democracy at all. That’s good
news for people who invest in China, but the social
consequences for the country’s citizens are mounting. Income
inequality has widened enormously. China’s new business elites
live in McMansions inside gated suburban communities and
send their children to study overseas. At the same time, China’s
cities are bursting with peasants from the countryside who have
sunk into urban poverty and unemployment. And those who are
affected most have little political recourse to change the
situation, beyond riots that are routinely put down by force.
But citizens living in democratic nations aren’t similarly
constrained. They have the ability to alter the rules of the game
so that the cost to society need not be so great. And yet, we’ve
increasingly left those responsibilities to the private sector—to
the companies themselves and their squadrons of lobbyists and
public-relations experts—pretending as if some inherent
morality or corporate good citizenship will compel them to look
out for the greater good. But they have no responsibility to
address inequality or protect the environment on their own. We
forget that they are simply duty bound to protect the bottom
line.
THE RULES OF THE GAME
Why has capitalism succeeded while democracy has steadily
weakened? Democracy has become enfeebled largely because
companies, in intensifying competition for global consumers
and investors, have invested ever greater sums in lobbying,
public relations, and even bribes and kickbacks, seeking laws

that give them a competitive advantage over their rivals. The
result is an arms race for political influence that is drowning
out the voices of average citizens. In the United States, for
example, the fights that preoccupy Congress, those that
consume weeks or months of congressional staff time, are
typically contests between competing companies or industries.
While corporations are increasingly writing their own rules,
they are also being entrusted with a kind of social responsibility
or morality. Politicians praise companies for acting
“responsibly” or condemn them for not doing so. Yet the
purpose of capitalism is to get great deals for consumers and
investors. Corporate executives are not authorized by anyone—
least of all by their investors—to balance profits against the
public good. Nor do they have any expertise in making such
moral calculations. Democracy is supposed to represent the
public in drawing such lines. And the message that companies
are moral beings with social responsibilities diverts public
attention from the task of establishing such laws and rules in
the first place.
It is much the same with what passes for corporate charity.
Under today’s intensely competitive form of global capitalism,
companies donate money to good causes only to the extent the
donation has public-relations value, thereby boosting the bottom
line. But shareholders do not invest in firms expecting the
money to be used for charitable purposes. They invest to earn
high returns. Shareholders who wish to be charitable would,
presumably, make donations to charities of their own choosing
in amounts they decide for themselves. The larger danger is that
these conspicuous displays of corporate beneficence hoodwink
the public into believing corporations have charitable impulses
that can be relied on in a pinch.
By pretending that the economic success corporations enjoy
saddles them with particular social duties only serves to distract
the public from democracy’s responsibility to set the rules of
the game and thereby protect the common good. The only way

for the citizens in us to trump the consumers in us is through
laws and rules that make our purchases and investments social
choices as well as personal ones. A change in labor laws making
it easier for employees to organize and negotiate better terms,
for example, might increase the price of products and services.
My inner consumer won’t like that very much, but the citizen in
me might think it a fair price to pay. A small transfer tax on
sales of stock, to slow the movement of capital ever so slightly,
might give communities a bit more time to adapt to changing
circumstances. The return on my retirement fund might go down
by a small fraction, but the citizen in me thinks it worth the
price. Extended unemployment insurance combined with wage
insurance and job training could ease the pain for workers
caught in the downdrafts of globalization.
Let us be clear: The purpose of democracy is to accomplish
ends we cannot achieve as individuals. But democracy cannot
fulfill this role when companies use politics to advance or
maintain their competitive standing, or when they appear to take
on social responsibilities that they have no real capacity or
authority to fulfill. That leaves societies unable to address the
tradeoffs between economic growth and social problems such as
job insecurity, widening inequality, and climate change. As a
result, consumer and investor interests almost invariably trump
common concerns.
The vast majority of us are global consumers and, at least
indirectly, global investors. In these roles we should strive for
the best deals possible. That is how we participate in the global
market economy. But those private benefits usually have social
costs. And for those of us living in democracies, it is imperative
to remember that we are also citizens who have it in our power
to reduce these social costs, making the true price of the goods
and services we purchase as low as possible. We can accomplish
this larger feat only if we take our roles as citizens seriously.
The first step, which is often the hardest, is to get our thinking
straight.
Robert B. Reich, former U.S. secretary of labor, is professor of

public policy at the University of California, Berkeley. This
article is adapted from his book, Supercapitalism: The
Transformation of Business, Democracy, and Everyday Life
(New York: Alfred A. Knopf, 2007).
Rebuilding America
Capitalist Monkey Wrench
Susan Adams, 04.12.10, 12:00 AM ET
Jay Coen Gilbert sips lemonade at a Cosí sandwich shop in
suburban Philadelphia and explains how he got the idea to turn
traditional profit-seeking American business upside down. "We
wanted to find a way to marry the power of markets with the
purpose and mission of the nonprofit sector," he says. His
weapon for change: a four-year-old nonprofit called B Lab, the
B standing for "benefit," as in benefiting workers, the
community and the Earth--possibly at the expense of
shareholders. The hope is that being a B corporation will carry
so much cachet it will make up for whatever a disaffection for
the bottom line might cost in access to capital. To get the label,
a company must pass a test that measures social and
environmental impact, pay an annual fee based on revenues and
amend its articles of incorporation to promise it will value do-
gooding as much as, if not more than, making money.
Coen Gilbert set up B Lab in Berwyn, Pa. in 2006 with two
friends from his undergraduate days at Stanford, Bart Houlahan
and Andrew Kassoy. So far it has certified 287 companies. They
range from Seventh Generation, a $150 million (sales)
Burlington, Vt. maker of green household products, to
ShoreBank, a $2.5 billion (assets) Chicago community
development lender.
"There's nothing wrong with making money," Coen Gilbert, 42,
concedes. A lanky entrepreneur from New York City, he made a

pile in 2005, when together with Houlahan, 42, he sold And 1, a
$250 million Paoli, Pa. basketball footwear and apparel
company. Kassoy, 40, reaped his own fortune at Michael Dell's
private investment group, MSD Capital. And 1 had used
Chinese factories certified by a monitoring group, had paid their
U.S. employees well and donated 5% of profits to charity. But
when they sold the company, the new owners tossed out the
public-spirited efforts. To get B Lab going the three put up $1
million of their own. Coen Gilbert, who has both an idealist's
fervor and a marketer's flair, recruits new companies. Houlahan
handles operations and company certification, Kassoy capital
markets and policy.
Since American corporate law is a state-by-state affair, the legal
side of what B Lab does gets complicated. In 19 states the law
says shareholders must come first. B Lab encourages companies
in those states to reincorporate in the 31 states where the law
allows businesses to follow B Lab's precepts. On this gray
March day Coen Gilbert has already driven his Prius to
Harrisburg and back to try to persuade Pennsylvania legislators
to back a pro-B corp measure.
Ultimately, he wants B corps to get the kinds of tax breaks and
contract preferences nonprofits and minority-run companies
enjoy. Some of that is happening. The Yale School of
Management is offering graduates who work at B corporations
the same tuition forgiveness as those who join nonprofits,
and Salesforce.com gives B corporations a 75% break on its
software. Eventually the B brand might mean something to do-
gooder consumers.
Prospective B corporations submit a 180-item questionnaire,
covering everything from audits of overseas factories to
charitable giving to carbon footprints. A nine-member group
processes the questionnaires and stages periodic follow-up
audits. Only 18% of those who have completed the assessment
have made the grade.
The Rockefeller Foundation has given B Lab $1 million, on top
of $1 million in seed capital it donated in 2007, to develop a

new rating system--a sort of Moody's for social and
environmental effect. Wealth advisors and private banks are
hungry for such a standard, says Antony Bugg-Levine, a
managing director at Rockefeller: "Credible ratings unlock a
whole new source of capital."
But can it unlock wealth? So far all the B corps are privately
held, and none has revenues exceeding $200 million. David
Vogel, a business ethics professor at the Haas School at UC,
Berkeley, who has written extensively about corporate
responsibility, doubts the potential is that great. "It's a
moderately nice thing," he says, "but it won't be transforming
American business."
Local Living Economies: The New Movement for Responsible
Business
By Judy Wicks
President of the White Dog Cafe and
Co-Founder of Business Alliance for Local Living Economies
A socially, environmentally and financially sustainable global
economy must be composed of
sustainable local economies. Yet, tragically, from American
“Main Streets” to villages in developing
countries, corporate globalization is causing the decline of local
communities, family businesses,
family farms, and natural habitats. Wealth and power are
consolidating in growing transnational
corporations that wield alarming control over many important
aspects of our lives – the food we eat,
the clothes we wear, the news we hear, and even the government

we rely on to protect the common
good. By working cooperatively, locally-owned businesses and
conscious consumers can create an
alternative to corporate globalization that brings power back to
our communities by building
sustainable local economies – living economies that support
both natural and community life.
Socially Responsible Business Movement
Over the last ten to fifteen years, the socially responsible
business (SRB) movement has made great
strides in raising consciousness about the responsibility of
business to serve the common good,
rather than simply increasing profits for the benefit of
stockholders. The triple bottom line of
people, planet and profit has become a new measurement of
performance for a growing number of
companies that consider the needs of all stakeholders –
employees, community, consumers, and the
natural environment, as well as stockholders – when making
business decisions. Yet, problems have
continued to worsen around the globe. All natural systems are
in decline, global warming is
accelerating, wealth disparity is increasing, and wars over
dwindling natural resources pose a growing
threat. Clearly a new strategy for building a just and sustainable
global economy is crucially needed.
Old Paradigm of Continuous Growth
While the SRB movement has brought improvement in business
practices for many companies,
overall business success is still measured by the old paradigm
of continuous growth and maximized
return on investment. Stockholder expectations and a “grow or
die” mentality move companies to
expand their brand nationally, competing with and often

eliminating, community-based businesses
around the country, and eventually internationally. In the end,
even progressive companies are often
forced to choose undesirable exit strategies when they become
too large for purchase by employees,
family members or neighboring businesses with a commitment
to the local community. The forced
buy-out of Ben & Jerry’s, a movement leader and innovator of
the multiple bottom line, by the
international conglomerate Unilever in the fall of 1999 was a
wake-up call for those who had looked
to that company for innovative leadership.
Many other model companies in the SRB movement have
recently been sold to multinational
corporations, adding to the concentration of wealth and power
that the movement was intended to
combat – Odwalla to Coca-cola, Cascadian Farms to General
Mills, and most recently eighty percent
of Stonyfield Farms to the parent company of Dannon yogurt.
The sale of these businesses
collectively demonstrates that companies committed to
continuous growth and national branding,
though financially successful and even environmentally
friendly, end up detracting from, rather than
contributing to, the creation of a democratic society where
ownership, power, and prosperity are
widely shared.
Building an Alternative
While there is important work being done to reform the
corporate system by consumer groups and

companies within the system such as Stonyfield and Ben &
Jerry’s, a second front of the SRB
movement has emerged. Rejecting the notion that corporate
rule is inevitable, the Local
Living Economy movement is building an alternative to
corporate globalization – a
decentralized global network of local living economies
composed of independent, locally-
owned businesses. The new movement focuses attention on
issues of scale, ownership and place,
which the SRB movement has largely ignored. The Local
Living Economy movement also
demonstrates the importance of working cooperatively outside
of individual companies, often with
competitors, to build whole local economies of triple bottom
line businesses.
Businesses in local living economies remain human-scale and
locally-owned, fostering direct,
authentic and meaningful relationships with employees,
customers, suppliers, neighbors and local
habitat, adding to the quality of life in our communities.
Decentralized ownership spreads wealth
more broadly and brings economic power from distant
boardrooms to local communities where
there is a short distance between business decision-makers and
those affected by the decisions.
Rather than depending on large corporations for basic needs,
which gives up economic power and
adds to the environmental costs of global transport, living
economies produce basic needs – food,
clothing, shelter and energy – locally and sustainably. This
builds community self-reliance, provides
new opportunities for ownership and job creation, and keeping
capital within the community. What

is not available locally is sourced from community-based
businesses and small farms in other regions
and countries in an exchange that benefits the communities
where products and resources originate.
Global interdependence is based on trust, mutual respect, and
reciprocity, rather than exploitive
resource extraction and sweatshops.
Local living economies spread business models, not brands.
Rather than expanding in the
conformist, cookie-cutter style of the industrial era,
entrepreneurs seek to diversify, creatively
addressing the needs of their community through new business
ventures that increase local self-
reliance and sustainability. Many new business opportunities
lie within the “building blocks” of local
living economies – local food systems, renewable energy,
alternative transportation, locally designed
and made clothing, recycling and reuse, green building, holistic
health care, eco-friendly cleaning
products, independent retail, local arts and culture,
neighborhood tourism, and independent media.
Addressing the deeper needs of their communities, local
business owners can provide more fulfilling
jobs, healthier communities and greater economic security in
their bioregions. Success can mean
more than growing larger or increasing market-share, it can be
measured by increasing happiness
and well being, deepening relationships, and expanding
creativity, knowledge, and consciousness.
Role of Investors
To provide sufficient capital for growing local living
economies, the old paradigm of measuring
success simply by maximized profits must also change for
investors. Traditionally, investors seek

the highest and quickest return on investment. But should we
not also measure a return by long-
term social and environmental improvement? In a living
economy, investors seek a “living return” –
one partially paid by the benefits of living in healthy, vibrant
communities.
By law, publicly owned companies are required to put the
financial interests of stockholders above
the needs of all other stakeholders. Therefore, even “socially
responsible” funds, though screening
out weapons manufacturers and tobacco companies, invest in a
system that values profits over
people and the planet. By choosing stock market investments,
citizens take capital out of local
economies, and give more power and control to boardrooms in
far away places, where the well
being of local communities is not a priority. By investing our
savings in community funds that loan
money at affordable rates to small businesses, neighborhood
projects, and housing developments,
we receive a living return of improving the quality of life in our
own communities. Rather than
looking for a maximum return, investors who accept a living
return help grow sustainable,
community-friendly businesses that contribute to building a just
and sustainable global economy in
the long term.
Toward a Positive Future
Unlike publicly held corporations, independent companies are
free to make decisions in the interests
of all the stakeholders. Local business owners are likely to

understand that it is in their self-interest
to run their companies in a way that benefits their own
neighborhood and natural environment.
Adam Smith’s “invisible hand” of the market works well when
the self-interest of the business
decision-maker is clearly tied to the well being of the
community.
Through corporate globalization our unsustainable Western
culture, which takes more natural
resources and gives off more pollution than the earth can
restore, is being spread globally. Corporate
monoculture has no sense of place and the same chain stores
and consumer goods are seen around
the world. Locally owned independent retailers such as
bookstores, coffee shops, craft stores, dress
shops and restaurants give each town and city unique local
character. Family-owned hardware stores,
drugstores and department stores provide personal relationships,
quality jobs, and civic engagement
that are missing in national chains.
In a system of local living economies, cultural diversity
flourishes, local languages are preserved and
what is indigenous to a region is valued for its individuality.
Unique indigenous products – from
wine and cheese, to art and automobiles (sustainably powered,
of course) – are traded in an intricate
global web of small-to-small, win-win relationships, which
celebrate what it is to be human.
Lastly, and perhaps most importantly, large corporations have
historically used militaries to protect
their ability to exploit natural resources and cheap labor in less
developed countries, which is often
the underlying cause of war. Through equitable and sustainable

use of natural resources, local food
and energy security, decentralized power and control, and
celebration and understanding of cultural
differences, local living economies will gradually build the
foundation for lasting world peace.
Around the world, people are speaking out against the
destructive role of corporate globalization in
our lives – from indigenous uprisings in Mexico and farmers
strikes in France, to attacks on
McDonalds in India and mass protests in Seattle, Washington,
Prague and Genoa. Many people,
especially the young, have lost all faith in business as a positive
force, and need a new vision for the
constructive role business can play in our communities.
Progressive business leaders are uniquely
positioned to articulate this new vision, span the gap between
the left and right, and direct the
energy of concerned citizens, entrepreneurs and young people
toward creating a positive future for
our world.
The Local Living Economies Movement is about:
∼ Maximizing relationships, not maximizing profits
∼ Growth of consciousness and creativity, not brands and
market-share
∼ Democracy and decentralized ownership, not concentrated
wealth
∼ A living return, not the highest return
∼ A living wage, not the minimum wage
∼ A fair price, not the lowest price

∼ Sharing, not hoarding
∼ Life serving, not self-serving
∼ Partnership, not domination
∼ Cooperation based, not competition based
∼ Win-win exchange, not win-loose exploitation
∼ Family farms, not factory farms
∼ Bio-diversity, not monocrops
∼ Cultural diversity, not monoculture
∼ Creativity, not conformity
∼ Slow food, not fast food
∼ Our bucks, not Starbucks
∼ Our mart, not Wal-Mart
∼ Love of life, not love of money
Judy Wicks is the president of the White Dog Cafe in
Philadelphia. She also co-founded and co-chairs the Business

Alliance for Local Living Economies (BALLE), a network of
business groups in North America that create living
economies in their regions. Judy is also co-chair of the
Sustainable Business Network of Greater Philadelphia, the
BALLE network in her region. More information about BALLE
(www.livingeconomies.org), the Sustainable
Business Network (www.sbnphiladelphia.org) and the White
Dog Cafe (www.whitedog.com) can be found online.

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