flowchart TB
P[Philanthropic<br/>Desired] --- E[Ethical<br/>Expected]
E --- L[Legal<br/>Required]
L --- EC[Economic<br/>Required]
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12 Business Ethics and Corporate Social Responsibility
12.1 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”. 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”.
TipWorking 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 |
| R.C. Solomon | “The study of moral judgments and standards as applied to the conduct of business and businesspeople.” | Standards |
NoteMorals vs Ethics vs Values vs Law
- Morals — personal beliefs about right and wrong, often shaped by religion or upbringing.
- Ethics — codified system of moral principles; applied morals.
- Values — enduring beliefs about what is desirable (honesty, fairness).
- Law — minimum behavioural standard enforced by the state; ethics typically exceeds the legal minimum.
12.1.1 Why does business ethics matter?
TipFive reasons business ethics matters
- Legitimacy — 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 (Enron 2001, Satyam 2009, Volkswagen 2015, Boeing 737 MAX 2018).
- Decision quality — ethical reasoning improves the long-run quality of decisions.
- Employee morale and retention — ethical workplaces attract and retain better talent.
12.2 Sources / Theories of Ethical Thinking
Four classical normative ethical theories underwrite most business-ethics discussions.
TipFour classical ethical theories
| Theory | Core question | Key thinker | Test |
|---|---|---|---|
| Consequentialism / Utilitarianism | Does the act produce the greatest good for the greatest number? | Jeremy Bentham (1789), J.S. Mill (1863) | Outcomes — cost-benefit, utility maximisation |
| Deontology / Duty-based | Does the act follow a moral rule that everyone should follow? | Immanuel Kant (1785) | Means — categorical imperative, universalisability |
| Virtue Ethics | Does the act express a virtuous character? | Aristotle (Nicomachean Ethics) | Character — golden mean between excess and deficiency |
| Rights-and-Justice | Does the act respect fundamental human rights? Is it fair? | John Locke, John Rawls (A Theory of Justice, 1971) | Rights — life, liberty, property; Justice — fairness, veil of ignorance |
NoteKant’s Categorical Imperative
Three formulations of Kant’s test:
- Universal Law: act only according to a rule you would will to be a universal law.
- Humanity: never treat people merely as a means; always also as an end.
- Kingdom of Ends: act as if you were legislating universal principles for a community of rational beings.
TipOther normative frameworks
- Ethical Egoism — act in your own long-term self-interest (Ayn Rand).
- Social Contract Theory — Hobbes, Locke, Rousseau, Rawls; firms operate under an implicit contract with society.
- Integrative Social Contracts Theory (ISCT) — Donaldson & Dunfee (1999) — hypernorms (universal) + community norms (local).
- Care Ethics — Carol Gilligan; ethics rooted in relationships and care.
- Religious / Indian ethics — Dharma (Bhagavad Gita, Mahabharata, Manusmriti), Buddhist Eightfold Path, Jain anekantavada, Islamic Shariah business norms (riba prohibition, halal).
12.3 Approaches to Business Ethics
TipThree approaches to business ethics
| Approach | Belief | Implication |
|---|---|---|
| Immoral management | Active disregard of ethics | Cheating is fine if it makes money |
| Amoral management | Ethics is irrelevant to business | “Business is business” |
| Moral management | Ethics is the bedrock of decisions | Builds long-term value |
The moral management posture is the modern norm; the amoral posture is Milton Friedman’s narrow line (“the business of business is business”); the immoral posture is what cases like Enron embody.
12.4 Three Levels of Business Ethics
TipThree levels (Carroll)
| Level | Concern |
|---|---|
| Macro / Systemic | The ethics of the economic system itself — capitalism, socialism |
| Meso / Corporate / Organisational | Ethics of the firm — values, culture, codes, governance |
| Micro / Individual | Ethics of personal behaviour — bribery, gifts, conflict of interest |
12.5 Kohlberg’s Stages of Moral Development
Lawrence Kohlberg (1958, 1981) — six stages in three levels:
TipKohlberg’s six stages
| Level | Stages | Moral motivation |
|---|---|---|
| Pre-conventional | 1. Obedience and punishment; 2. Self-interest (instrumental exchange) | Avoid punishment; what’s in it for me? |
| Conventional | 3. Interpersonal accord (good-boy/good-girl); 4. Authority and social order | Conform to expectations; obey law |
| Post-conventional | 5. Social contract; 6. Universal ethical principles | Principle-based, even against law |
The Heinz dilemma is Kohlberg’s most-quoted test of moral reasoning.
12.6 Ethical Issues in Functional Areas
TipEthical issues across business functions
| Area | Common ethical issues |
|---|---|
| Marketing | Misleading advertising, deceptive packaging, hidden defects, price fixing |
| Finance / Accounting | Earnings management, insider trading, creative accounting (Enron, Satyam) |
| HRM | Discrimination, harassment, workplace safety, wrongful termination, surveillance |
| Production / Operations | Product safety, environmental discharge, working conditions, supplier sweatshops |
| IT / Data | Data privacy, surveillance, intellectual property, algorithmic bias |
| International business | Bribery (FCPA, UK Bribery Act, India PoCA), cultural relativism, transfer pricing |
| Environment | Pollution, climate, depletion of natural resources (Bhopal 1984, Exxon Valdez 1989) |
12.7 Corporate Social Responsibility (CSR)
CSR is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families, the local community and society at large (World Business Council for Sustainable Development).
Howard R. Bowen, Social Responsibilities of the Businessman (1953), is the foundational text — Bowen is called the “Father of CSR”.
TipTwo opposing views
- Classical / Friedman view (1970, NYT Magazine): “The social responsibility of business is to increase its profits” — within the rules of the game. Anything more is theft from shareholders.
- Stakeholder / Modern view (R. Edward Freeman, 1984): firms must serve all stakeholders — shareholders, employees, customers, suppliers, communities, the environment — not only shareholders.
12.8 Carroll’s Pyramid of CSR (1991)
Archie Carroll proposed the four-tier pyramid of CSR:
TipCarroll’s CSR Pyramid (1991)
| Tier (bottom to top) | Responsibility | Society’s expectation |
|---|---|---|
| 1. Economic | Be profitable | Required |
| 2. Legal | Obey the law | Required |
| 3. Ethical | Be ethical beyond the law | Expected |
| 4. Philanthropic | Be a good corporate citizen | Desired |
NoteDavis’s Iron Law of Responsibility
Keith Davis (1960): “In the long run, those who do not use power in a manner society considers responsible will tend to lose it.”
12.9 CSR Triggers and Models
TipCSR models worth knowing
| Model | Author | Core idea |
|---|---|---|
| Trusteeship Model | Mahatma Gandhi | Wealth-holders are trustees for society; surplus belongs to community |
| Pyramid of CSR | Carroll (1991) | Economic → Legal → Ethical → Philanthropic |
| Triple Bottom Line | John Elkington (1994) | People · Planet · Profit (3 P’s) |
| Shared Value | Porter & Kramer (HBR, 2011) | Companies create economic value by creating social value |
| Stakeholder Theory | R.E. Freeman (1984) | Firm must balance interests of all stakeholders |
| Bottom of the Pyramid | C.K. Prahalad (2004) | Profit and poverty-reduction by serving the bottom 4 billion |
| Creating Shared Value (CSV) vs CSR | Porter & Kramer | CSV is core business; CSR is often peripheral |
12.10 India’s CSR Law — Companies Act 2013 (Section 135)
India is the first country in the world to mandate CSR by law. Section 135 of the Companies Act, 2013 (effective 1 April 2014).
TipApplicability — who must spend on CSR
A company is liable if in the immediately preceding financial year it had:
- Net worth ≥ ₹500 crore, OR
- Turnover ≥ ₹1 000 crore, OR
- Net profit ≥ ₹5 crore.
TipSpend requirement
- At least 2 % of average net profits of the preceding 3 financial years must be spent on CSR.
- A CSR Committee of the Board (3 directors, at least 1 independent) must be constituted to formulate, recommend and monitor the CSR policy.
- Activities must be from Schedule VII of the Act.
- From FY 2020-21, unspent CSR funds (other than those for ongoing projects) must be transferred to a specified fund (e.g., PM CARES, PM National Relief Fund) within 6 months of the financial year end. Unspent amounts for ongoing projects go to an Unspent CSR Account with a scheduled bank.
- Companies (Amendment) Act 2019 made CSR spend mandatory (earlier was comply-or-explain) with penalties for default.
TipSchedule VII — illustrative CSR activities
- Eradicating hunger, poverty and malnutrition; promoting healthcare, sanitation, safe drinking water.
- Promoting education, employability, vocational skills.
- Promoting gender equality, women’s empowerment, old-age homes, day-care.
- Environmental sustainability, ecological balance, conservation, climate action.
- Protection of national heritage, art, culture.
- Benefit of armed forces veterans, war widows and dependants.
- Training to promote rural sports, paralympic sports, Olympic sports.
- Contribution to PM National Relief Fund / PM CARES, PM National Research Foundation.
- Contributions to incubators / research in publicly-funded institutions (IITs, IISERs).
- Rural development; slum-area development.
- Disaster management — relief, rehabilitation, reconstruction.
NoteOther Indian CSR frameworks
- National Voluntary Guidelines (NVG-SEE) issued by Ministry of Corporate Affairs, 2011.
- National Guidelines on Responsible Business Conduct (NGRBC) revised in 2019 — 9 principles.
- BRSR (Business Responsibility and Sustainability Reporting) mandated by SEBI for top 1 000 listed companies (from FY 2022-23, replacing BRR).
12.11 Sustainability and ESG
Modern CSR has evolved into Environmental, Social and Governance (ESG) reporting and Sustainable Development Goals (SDGs).
TipUN Sustainable Development Goals (SDGs)
Adopted by UN in September 2015, the 17 SDGs with 169 targets replaced the 8 MDGs and apply to all countries until 2030. Examples: No Poverty (1) · Zero Hunger (2) · Quality Education (4) · Gender Equality (5) · Climate Action (13) · Peace, Justice and Strong Institutions (16).
TipESG pillars
- Environmental — carbon emissions, energy use, water, waste, biodiversity.
- Social — labour standards, diversity, community impact, customer welfare.
- Governance — board independence, transparency, anti-corruption, executive pay.
12.12 Practice Questions
Q 01
Father of CSR
Easy
The "Father of CSR", whose 1953 book *Social Responsibilities of the Businessman* gave the field its name, is:
View solution
Correct Option: A
Howard R. Bowen, Social Responsibilities of the Businessman (1953). Carroll proposed the CSR pyramid; Friedman wrote the classical critique; Freeman is stakeholder theory.
Q 02
Kant
Medium
The Categorical Imperative — "Act only on that maxim which you can will to become a universal law" — is by:
View solution
Correct Option: B
Immanuel Kant (1785, *Groundwork of the Metaphysics of Morals*) — deontological ethics. Bentham/Mill = utilitarianism; Rawls = justice.
Q 03
Utilitarianism
Medium
"The greatest good for the greatest number" is the central rule of:
View solution
Correct Option: B
Utilitarianism — Bentham and Mill. A consequentialist theory: evaluate acts by their outcomes.
Q 04
Aristotle
Medium
Aristotle's *Nicomachean Ethics* is the foundational text of:
View solution
Correct Option: C
Aristotle's virtue ethics focuses on character and the *golden mean* between excess and deficiency.
Q 05
Rawls
Hard
John Rawls's "veil of ignorance" thought experiment is used to derive:
View solution
Correct Option: A
Rawls (*A Theory of Justice*, 1971) — behind the *veil of ignorance* (not knowing your position in society) rational people would choose principles of just distribution.
Q 06
Kohlberg
Medium
Kohlberg's framework of moral development has how many stages?
View solution
Correct Option: D
Six stages grouped in three levels: pre-conventional, conventional, post-conventional.
Q 07
Carroll
Easy
In Carroll's CSR Pyramid (1991), the bottom (foundational) tier is:
View solution
Correct Option: D
Carroll's pyramid bottom-to-top: Economic → Legal → Ethical → Philanthropic.
Q 08
Friedman
Medium
Milton Friedman's 1970 essay argued that:
View solution
Correct Option: B
Friedman's classical thesis, NYT Magazine (1970): "The social responsibility of business is to increase its profits" — provided it stays within law and ethical custom.
Q 09
Stakeholder
Medium
The seminal *stakeholder theory* of the firm (1984) is by:
View solution
Correct Option: A
R. Edward Freeman, Strategic Management: A Stakeholder Approach (1984).
Q 10
Triple Bottom Line
Medium
"People, Planet, Profit" — the *Triple Bottom Line* — was coined by:
View solution
Correct Option: B
John Elkington (1994) coined Triple Bottom Line / 3Ps. He later said in 2018 the concept needed a recall, given its widespread misuse.
Q 11
Section 135
Easy
India's mandatory CSR provisions are contained in:
View solution
Correct Option: B
Section 135 of the Companies Act, 2013 — India is the first country to legally mandate CSR (effective 1 April 2014).
Q 12
CSR Spend
Medium
Under Section 135, an eligible company must spend at least:
View solution
Correct Option: B
2 % of average net profits of the preceding 3 financial years.
Q 13
CSR Applicability
Medium
Which of the following triggers CSR obligation under Section 135?
View solution
Correct Option: A
Any one of: Net worth ≥ ₹500 cr OR Turnover ≥ ₹1 000 cr OR Net profit ≥ ₹5 cr in the immediately preceding FY triggers Section 135.
Q 14
Trusteeship
Medium
The *Trusteeship* model of business — wealth-holders as trustees for society — is associated with:
User solution
Correct Option: A
Mahatma Gandhi's Trusteeship — wealth-owners are trustees of their surplus for the larger society. Tata Group operationalised many principles of Gandhian trusteeship.
Q 15
Iron Law
Hard
The *Iron Law of Responsibility* — "those who do not use power responsibly will lose it" — was articulated by:
View solution
Correct Option: A
Keith Davis (1960) — the Iron Law links corporate power to corporate responsibility.
Q 16
BOP
Hard
"Fortune at the Bottom of the Pyramid" — profit and poverty alleviation by serving the world's poorest 4 billion — is by:
View solution
Correct Option: A
C.K. Prahalad, The Fortune at the Bottom of the Pyramid (2004).
Q 17
SDGs
Medium
The UN Sustainable Development Goals (SDGs), adopted in September 2015, have:
View solution
Correct Option: B
17 SDGs · 169 targets · 2030 horizon. They replaced the 8 MDGs (2000–2015).
Q 18
Shared Value
Hard
"Creating Shared Value" (CSV) — creating economic value by creating social value — was articulated in 2011 by:
View solution
Correct Option: B
Porter & Kramer, HBR (2011) — "Creating Shared Value". CSV embeds social value in the firm's *core* business, unlike traditional peripheral CSR.
Q 19
BRSR
Hard
The Business Responsibility and Sustainability Report (BRSR) is mandated by SEBI for:
View solution
Correct Option: B
Top 1 000 listed companies by market cap, mandatory from FY 2022-23 (replacing the BRR). BRSR aligns with the 9 NGRBC principles.
Q 20
Match Concepts
Hard
Match the CSR/Ethics model with its author:
| (i) | Pyramid of CSR | (a) | Freeman |
| (ii) | Stakeholder Theory | (b) | Carroll |
| (iii) | Bottom of the Pyramid | (c) | Elkington |
| (iv) | Triple Bottom Line | (d) | Prahalad |
View solution
Correct Option: A
Pyramid — Carroll (1991); Stakeholder — Freeman (1984); BOP — Prahalad (2004); Triple Bottom Line — Elkington (1994).
12.12.1 Advanced Format Questions
AR 1Assertion-ReasonHard
A: Companies Act 2013 Section 135 mandates CSR spending of 2% of average net profit for qualifying firms.
R: India became the first country to legally mandate CSR spend.
View solution
Correct Option: B
AR 2Assertion-ReasonMedium
A: Carroll's CSR Pyramid has economic at base, philanthropic at top.
R: Legal responsibilities sit above economic but below ethical in Carroll's pyramid.
View solution
Correct Option: B
S 1Statement-basedMedium
CSR Schedule VII activities include: (i) Education. (ii) Health. (iii) Environment. (iv) Rural development.
View solution
Correct Option: A
S 2Statement-basedHard
Ethical theories: (i) Utilitarianism (Bentham, Mill). (ii) Deontology (Kant). (iii) Virtue ethics (Aristotle). (iv) Justice (Rawls).
View solution
Correct Option: A
12.13 Quick Recall
ImportantQuick recall
- Ethics is applied moral philosophy. Morals = personal beliefs; Values = desirable enduring beliefs; Law = enforceable minimum.
- Four ethical theories: Utilitarianism (Bentham, Mill — outcomes) · Deontology (Kant — duty / categorical imperative) · Virtue (Aristotle — character / golden mean) · Rights & Justice (Locke, Rawls — veil of ignorance).
- Also: Ethical egoism (Rand) · Social contract (Hobbes/Locke/Rousseau/Rawls) · ISCT (Donaldson-Dunfee) · Care ethics (Gilligan) · Indian dharma traditions.
- Three approaches: Immoral · Amoral · Moral management.
- Kohlberg — 6 stages in 3 levels: Pre-conventional · Conventional · Post-conventional.
- CSR Father: Howard Bowen (1953). Friedman 1970 — “social responsibility of business is to increase profits”.
- Carroll’s Pyramid (1991): Economic → Legal → Ethical → Philanthropic.
- Davis’s Iron Law (1960) — power and responsibility.
- Other CSR models: Gandhi’s Trusteeship · Freeman’s Stakeholder (1984) · Elkington’s Triple Bottom Line — People, Planet, Profit (1994) · Prahalad’s Bottom of the Pyramid (2004) · Porter-Kramer’s Creating Shared Value (HBR 2011).
- India CSR — Section 135 Companies Act 2013 (effective 1 April 2014). Trigger: Net worth ≥ ₹500 cr OR Turnover ≥ ₹1 000 cr OR Net profit ≥ ₹5 cr. Spend 2 % of avg 3-year net profits. CSR Committee of 3 directors (1 independent). Schedule VII list.
- NGRBC 2019 (9 principles); BRSR mandatory for top 1 000 listed (FY 2022-23 onwards).
- UN SDGs — adopted September 2015, 17 goals, 169 targets, by 2030. ESG = Environmental, Social, Governance.