11 Business Ethics and CSR

11.1 What is Business Ethics?

Ethics is the branch of philosophy that studies what is morally right and wrong. Business ethics is the application of ethical reasoning to business situations — to the decisions managers make about employees, customers, suppliers, communities, the environment and the state.

Manuel Velasquez, in the standard textbook Business Ethics: Concepts and Cases, defines it as “a specialised study of moral right and wrong that concentrates on moral standards as they apply to business institutions, organisations and behaviour” (velasquez2014?). The Indian standard reference, C.S.V. Murthy’s Business Ethics and Corporate Governance, treats it as “the application of ethical principles to the conduct of business” (murthy2014?).

Three Working Definitions

Author	Definition	What it foregrounds
Manuel Velasquez	“Specialised study of moral right and wrong concentrating on business institutions and behaviour.”	Application of moral standards
C.S.V. Murthy	“Application of ethical principles to the conduct of business.”	Practical conduct
Andrew Crane & Dirk Matten	“The study of business situations, activities and decisions where issues of right and wrong are addressed.”	Decision focus

11.1.1 Why does business ethics matter?

The case for ethics is not only moral but also instrumental:

Legitimacy. A society grants firms the right to operate; ethical conduct keeps that licence intact.
Trust. Customers, employees, investors and suppliers do business with people they trust.
Risk management. Unethical conduct triggers fines, lawsuits and reputational damage that can swallow years of profit overnight (Enron, Satyam, Volkswagen Dieselgate).
Decision quality. Ethical reasoning improves the long-run quality of decisions by accounting for stakeholder reactions.

11.2 Sources of Ethical Thinking

Four classical ethical theories underwrite most business-ethics discussions (velasquez2014?; murthy2014?).

Four Ethical Theories — A Working Map

Theory	Test for an action	Anchor philosopher	Cue
Utilitarianism / Consequentialism	Greatest good for the greatest number	Bentham, J.S. Mill	“Outcomes”
Deontology / Rights	Action must respect duties and rights, regardless of outcome	Immanuel Kant	“Categorical imperative”
Justice / Fairness	Distribute benefits and burdens fairly	John Rawls — “veil of ignorance”	“Fairness”
Virtue ethics	Act as a person of good character would	Aristotle — “golden mean”	“Character”

A fifth lens — care ethics (Carol Gilligan, Nel Noddings) — emphasises relationships and the duty to care for those we are connected to.

flowchart LR
  C[Consequences<br/>Utilitarianism] --- D[Duties / Rights<br/>Deontology]
  D --- J[Justice<br/>Rawls]
  J --- V[Virtue<br/>Aristotle]
  V --- C
  C2[(Ethical decision<br/>= weigh all four<br/>against the case)]
  C2 -. .- C
  C2 -. .- D
  C2 -. .- J
  C2 -. .- V
  style C fill:#E3F2FD,stroke:#1565C0
  style D fill:#FFF3E0,stroke:#EF6C00
  style J fill:#F1F8E9,stroke:#558B2F
  style V fill:#FCE4EC,stroke:#AD1457

In practice, no single theory resolves every case. The textbook prescription is to triangulate — test the action against several lenses and look for convergence.

11.3 Stakeholder Theory

R. Edward Freeman’s stakeholder theory (1984) shifted the conversation from “the firm exists to maximise shareholder value” (Milton Friedman, 1970) to “the firm exists to create value for all its stakeholders” (freeman1984?; friedman1970?). A stakeholder is any individual or group that can affect or is affected by the achievement of the organisation’s objectives.

Primary and Secondary Stakeholders

Type	Who	Interest
Primary	Shareholders, employees, customers, suppliers, lenders	Direct economic stake
Secondary	Community, government, regulators, NGOs, media	Indirect — but can affect operating licence

The Friedman vs Freeman debate is a recurring stem in NTA papers. Friedman argues that “the social responsibility of business is to increase its profits” — within the law and ethical custom. Freeman replies that profit is a result, not a purpose; serving stakeholders well is what produces profit.

11.4 Corporate Social Responsibility (CSR)

Corporate Social Responsibility is the framework through which a firm goes beyond compliance with the law to consider its broader impact on society and the environment. The standard definition by the World Business Council for Sustainable Development: “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce, their families, the local community and society at large” (wbcsd2000?).

11.4.1 Carroll’s Pyramid of CSR

Archie Carroll’s 1991 four-level pyramid is the most-tested model (carroll1991?):

Carroll’s CSR Pyramid (Bottom → Top)

Level	Responsibility	Demand from society	Example
1	Economic	Be profitable	Earn a return that funds the next three levels
2	Legal	Obey the law	Comply with tax, labour, environment, competition law
3	Ethical	Do what is right, just, fair — beyond the law	Refuse predatory pricing even when legal
4	Philanthropic	Be a good corporate citizen	Voluntary contributions, community investment

The pyramid is cumulative: a firm cannot be philanthropic without first being economic, legal and ethical.

flowchart TB
  P[Philanthropic<br/>Voluntary giving] --> E[Ethical<br/>Beyond the law]
  E --> L[Legal<br/>Obey the law]
  L --> EC[Economic<br/>Be profitable]
  style P fill:#FCE4EC,stroke:#AD1457
  style E fill:#FFF8E1,stroke:#F9A825
  style L fill:#FFF3E0,stroke:#EF6C00
  style EC fill:#E3F2FD,stroke:#1565C0

11.4.2 CSR in India — Companies Act 2013, Section 135

India was the first major economy to make CSR spending a statutory obligation. Section 135 of the Companies Act, 2013 (effective from April 2014) requires every company that meets any one of the following thresholds to constitute a CSR committee, frame a CSR policy, and spend at least 2 per cent of average net profits of the preceding three financial years on CSR activities listed in Schedule VII (companiesact2013?).

Section 135 — Applicability Thresholds

Trigger (any one)	Threshold
Net worth	₹500 crore or more
Turnover	₹1,000 crore or more
Net profit	₹5 crore or more

Schedule VII activities include eradicating hunger, education, gender equality, environmental sustainability, rural development, contributions to PM-CARES and the National Sports Fund. The 2019 amendments made unspent CSR transfers compulsory and introduced penalties for non-compliance.

11.4.3 Triple Bottom Line

John Elkington’s Triple Bottom Line (1994) reframes CSR around three “Ps”:

The Triple Bottom Line — 3 Ps

Bottom line	Concerned with
People	Social impact — employees, community, fair labour practices
Planet	Environmental impact — emissions, water, waste, biodiversity
Profit	Economic impact — financial performance, taxes, jobs

A firm that is sustainable must perform on all three (elkington1997?).

11.5 Practice Questions

Q 01 Theories Easy

Which ethical theory judges an action by its consequences?

ADeontology
BUtilitarianism
CVirtue ethics
DJustice theory

View solution

Correct Option: B

Utilitarianism (Bentham, Mill) — "the greatest good for the greatest number". Deontology (Kant) judges by duty; virtue ethics by character; justice theory by fairness of distribution.

Q 02 Kant Medium

The "categorical imperative" is most associated with:

AAristotle
BImmanuel Kant
CJohn Rawls
DJeremy Bentham

View solution

Correct Option: B

Kant's categorical imperative — act only according to a maxim that you could will to become a universal law — anchors deontological ethics.

Q 03 Friedman Easy

"The social responsibility of business is to increase its profits." This view is associated with:

AR. Edward Freeman
BMilton Friedman
CArchie Carroll
DJohn Elkington

View solution

Correct Option: B

Milton Friedman's 1970 New York Times essay is the source. Freeman (1984) gave the rival stakeholder theory.

Q 04 Carroll's Pyramid Medium

Match Carroll's CSR levels with the demand from society:

(i)	Economic	(a)	Be a good corporate citizen
(ii)	Legal	(b)	Be profitable
(iii)	Ethical	(c)	Obey the law
(iv)	Philanthropic	(d)	Do what is right, beyond the law

A(i)-(b), (ii)-(c), (iii)-(d), (iv)-(a)
B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
C(i)-(d), (ii)-(a), (iii)-(b), (iv)-(c)
D(i)-(c), (ii)-(d), (iii)-(a), (iv)-(b)

View solution

Correct Option: A

Bottom-up: Economic (be profitable) → Legal (obey law) → Ethical (do right beyond law) → Philanthropic (good citizen).

Q 05 Section 135 Medium

Under Section 135 of the Companies Act, 2013, the minimum CSR spend is:

A1% of net worth
B2% of average net profit of the preceding three financial years
C5% of turnover
D10% of net profit

View solution

Correct Option: B

Eligible companies must spend at least 2 per cent of the average net profit of the immediately preceding three financial years on CSR activities listed in Schedule VII.

Q 06 CSR Threshold Medium

Which of the following is not an applicability threshold under Section 135 of the Companies Act, 2013?

ANet worth ≥ ₹500 crore
BTurnover ≥ ₹1,000 crore
CNet profit ≥ ₹5 crore
DNumber of employees ≥ 1,000

View solution

Correct Option: D

The three triggers are net worth ≥ ₹500 cr, turnover ≥ ₹1,000 cr, or net profit ≥ ₹5 cr. Employee count is not a trigger.

Q 07 Stakeholder Easy

Stakeholder theory in business ethics is most associated with:

AMilton Friedman
BR. Edward Freeman
CManuel Velasquez
DArchie Carroll

View solution

Correct Option: B

R. Edward Freeman's 1984 book Strategic Management: A Stakeholder Approach is the foundational text.

Q 08 Triple Bottom Line Easy

The triple bottom line concept (People, Planet, Profit) was popularised by:

AJohn Elkington
BArchie Carroll
CMichael Porter
DEdward Freeman

View solution

Correct Option: A

John Elkington coined the phrase in 1994 and developed it in Cannibals with Forks (1997).

Quick recall

Business ethics = moral standards applied to business decisions. Standard text: Velasquez; Indian standard: Murthy.
Four classical theories: Utilitarianism (Bentham/Mill), Deontology (Kant), Justice (Rawls), Virtue (Aristotle).
Friedman vs Freeman: shareholder primacy vs stakeholder theory.
Carroll’s CSR pyramid: Economic → Legal → Ethical → Philanthropic.
Section 135, Companies Act 2013: triggers — net worth ₹500 cr / turnover ₹1,000 cr / net profit ₹5 cr; spend ≥ 2% of avg net profit (last 3 yrs); Schedule VII lists eligible activities.
Triple bottom line (Elkington, 1994): People · Planet · Profit.