Ethical Theories in Business

by Teresa Fort; Updated September 26, 2017
Applying ethical principles while conducting business builds a sense of trust among all participants.

In an effort to establish some ethical guidelines for business, three normative ethical theories have evolved in Western capitalist societies. They include the stockholder theory, the stakeholder theory and the social-contract theory. These theories propose a set of ethical principles that can be easily assessed and expressed by the typical business person--not only by ethical philosophers.

The Stockholder Theory

The stockholder theory maintains that maximizing profits is the only goal of a business.

The stockholder theory asserts that the investors in a business essentially run the show. They advance capital to their managers, who make decisions exclusively for the sake of acquiring further wealth. The stockholder theory admits to no social responsibility: maximizing the return on investment is the only goal of the business. It supports a utilitarian theory that ensures optimal financial gain above all else.

The Stakeholder Theory

The stakeholder theory holds that a business should also take into consideration the needs and wants of its customers, suppliers, owners and employees. Though the ultimate goal of this model is also to maximize the firm’s financial success, the theory holds that the interests of the stockholders must sometimes be sacrificed in an effort to ensure a company’s survival. The stakeholder theory is based on Immanuel Kant’s philosophy that all people are to be treated with respect and consideration and allowed to participate by openly voicing their opinions as equal partners.

The Social Contract Theory

Maintaining the morale of employees can boost the wealth of a business.

John Hasnas, a professor of business at Georgetown University, suggests that the most widely accepted business theory is the social contract theory, based on the philosophies of 18th-century political thinkers such as Thomas Hobbes and John Locke, who each imagined what the world would be like without government. This theory claims that all business should be dedicated to improving the interests of humanity as a whole, by functioning in a manner that considers the well-being of consumers and employees--not just stockholders--without violating any rules of integrity. Under this theory a business must function with an obligation to "social welfare and justice." Though the social contract theory is not considered an actual "contract," it holds business ventures to very high standards by "imposing significant social responsibilities," writes Hasnas in his 1998 article, "The Normative Theories of Business Ethics: A Guide for the Perplexed."

Blending Theories

Doing the right thing, with the right intentions, is what being ethical is all about.

Oftentimes, says Hasnas and other theorists, a business will support ethical principles by combining the concepts from several theories as a way of establishing ethical guidelines that best suit their personal business goals, their workers, their suppliers and their customers.

About the Author

Teresa Fort began her writing career in 1992. She has successfully completed screenplays and a children’s book while also contributing her talent to numerous blogs and various print publications. Fort acquired her associate degree at San Diego Mesa College before studying English literature through Sonoma State University, in California.

Photo Credits

  • Jupiterimages/BananaStock/Getty Images