Milten Friedman's Theory

a) In the view of Friedman‟s theory, company‟s action was justifiable. Its directors had no right to
withdraw the product, as it was profitable and legal.

However, to make profit, it must be done in the right way such as:

i. Have a concern on the consumer must not be seen as a deviation from profit.

Friedman said that even if companies do deviate from their profit driven mission, it
does not mean that they are simply foregoing their main intention of setting
business. There are companies that aim for stakeholders well-being and yet they
are successful, since stakeholders believe in the companies practice and thus
they will support the company. The companies still maximize profit even though
they may have to pull back the product from the market due it safety reasons.

ii. Profit alone is not a complete measure of corporate performance

Friedman believes that profit is not the sole indicator of corporate success. Company
with good corporate social responsibility reputation can also put the companies on
the forefront of excellent companies.

iii. Performance must always be achieved within the limit of the law and ethical
custom.

Even thought by continuing selling the product could maximizes company‟s profit,
it is more ethical for the company to stop selling the product as they know that it is
not safe to consume.

b) John Rawls proposed a concept, which he called the veil of ignorance, for determining which
social customs were just and which were unjust. Explain John Rawls theory of “Veil of
Ignorance.”

Rawl‟s Veil of Ignorance

 Is an imaginative device for considering what counts as just and fair in a state of
society.

 When a society is formed and no one knows anything about each other‟s position
or Background such as ethnic group, race, or gender, then all are ignorant.
 If people do not have a clue about what is going on around them and among them,
then they are ignorant.
 They have knowledge, no information on each other; therefore, they would have to
agree on rules which are fair and just without biases a special interests.

 The veil of ignorance criterion is as follows: a rule is just if everyone would agree to
it given that they were made ignorant of their position in society.
 That is, the just society would be chosen by people who had set aside
considerations of their own gender, wealth, race parentage, etc. Ideally this rule
eliminates personel bias from the choice and thus guarantees the fairness of rules.
 Kohlberg

Level 1 Stage 1 (obedience and punishment driven)

What is right and wrong is determined by what is
Pre-conventional punishable. Moral action is essentially the avoidance
of punishment

Stage 2 (Self-interest driven)

What is right and wrong is determined by what brings
rewards and what people wants. Other people‟s wants
and needs come into the picture, but only in a
reciproal sense.
Level 2 Stage 3 (interpersonal accord and conformity
driven)
Conventional Being moral is being „a good person in your own eyes
and those of others‟. What the majority thinks is right
is right by definition.

Stage 4 (authority and social order obedience

driven)
Being good means „doing one‟s duty‟-showing respect
for autority and maintaining the social order. Laws are
unquestionably accepted and obeyed.

Level 3 Stage 5 (social contract driven)

Individuals are viewed as holding different opinions
Post-conventional and values. Laws are regarded as social contracts
rather than rigid dictums. Although laws should be
respected, individual rights can sometimes supersede
these laws if they become too destructive or
restrictive.

Stage 6 (universal ethical principles driven)

Moral action is determined by our inner conscience,
and may or may not be in agreement with public
opinion or society‟s laws. Moral reasoning is based on
abstract reasoning using universal ethical principles.
Ethical action are not instrumental or a mean to
something else: they are an end in themselves.
 Islamic Perspective

a) The Axioms are:

Unity - related to the concept of tawhid
Equilibrium - related to the concept of adl(a sense of balance)
Freewill - man‟ ability to act without external coercion
Responsibility-Man‟s needs to be accountable for his action
Benevolence –lhsan : an action that benefits persons (without any obligation)

b) Some of the Business lssues/ Strategies in relation to the above axioms:

Bribery
Haram/halal business
Falsification of documents
Strategy of cost cutting

The Unity Axiom: Application: the case of discrimination among employees on the
Basis of race, color, sex or religion is inconsistent with Allah‟s purpose for
creating mankind.

The Responsibility Axiom Application: ln the case of briberry as an accepted culture, a Muslim
businessman cannot blame external pressures foe behaving unethically by accepting bribe. He
bears the ultimate responsibility for his own actions.

The Freewill Axiom Application: ln the case of falsification of documents, a Muslim must be
conscious the Allah sees and knows what one does as He is our Creator:

According to Al Ghazzali, there are four elements in the nature of man: the sage, the pig, the dog
and the devil.

The sage (intellect and will) = Aql

 Intellect and will are the fundamental rational faculty in human which enables him/her to
generalize and form concepts.
 Will fights these forces and tries to control and divert them into its right channels in order to
make them useful to the self. If succeed, the devils in human is weakened and and rendered
ineffective and harmony conductive to the realization of the ideal born.

The pig (lust and gluttony), = Ash – Shahwa

 Lust and gluttony are forces instigated by the devil.
 If it controlled and kept in moderation, qualities such as chastity, contentment , tranquility, piety,
cheerfulness and modesty are result.

The dog (anger) = (Al – Ghadab)

 The anger and ferocity are forces instigated by the devil
 If controlled, qualities such as courage, generosity, endurance, fortitude, forgiveness are result.
 The devil (brute character). = (Shaitaniyya)
 Brute which incite these 2 animal elements in human to rebel against the Aql.
 The evil tendency get strong when it rebel against Aql and overcome it and it gains complete
ascendency (influence) over them.
 All other faculties then become subsenient to the devil and even reason becomes the slave of
the passions, anger and lust.

Type of Justice

b) i) Compensatory Justice – concerned with finding a just way of compensating people for what
they lost when others wronged them. The amount of compensation should be somehow
proportional to the loss suffered by the person being compensated. This justice is relevance to
organizations facing huge lawsuits involving products that are alleged to have caused harm to
human health. Theories of strict liability assign more of the responsibility to the manufacturer.

ii) Distribute justice – concerned with a fair distribution of society‟s benefits and burdens. This
justice is concerned with the proper distribution of the goods and services society has available
through its major institutions including business organisations.

iii) Retributive Justice – concerned with just imposition of punishments and penalties upon those
who do wrong. The wrongdoer should be punished, especially if the wrong was done
intentionally, so that justice is served and the wrongdoer‟s behavior is changed or he or she is
removed from society. Business is affected by this type of justice in the area of punitive
damages. Punitive damages are awarded over and above compensatory damages and have
no limit.

INDEPENDENCE OF MIND
Explanation : The state of mind that permits expression of a conclusion without being affected by
influences that compromise profesional judgment, allowing an individual to act with integrity, and
exercise objectivity and profesional skeptism.

INDEPENDENCE IN APPEARANCE
Explanation : The avoidance of facts and circumtances that are so significant that a reasonable
and informed third party, having knowledge of all relevant information, including safeguards
applied, would reasonable conclude a firm‟s or a member of the assurance team‟s integrity,
objectivity or profesional skeptism had been compromised.
 I) DEONTOLOGY
 Focus on the motivation of the decision maker. Actions are based on obligations and duty.
The duty of the decision maker is to comply with acts, rules and regulations. The decisions are
ethical if based on motives, and the motives and obligation of decision maker is to comply and
adhered to acts, rules and obligations.

II) UTILITARIAN/CONSEQUENCE/TEEOLOGY

 Focus on the consequences of the action. Ethical decisions are based on outcomes or
consequences. The decisions are ethical if they provide more goodness/pleasure than
pain/badness to majority stakeholders.

III) JUSTICE AND FAIRNESS

 The decisions are ethical if they are fair to all the stakeholders. Everybody is treated equally
before the law and that rules are impartially applied. No preferences is given to any person
 THEORIES

AGENCY THEORY

 Agency relationship identifies the relationship between principal and agent.

 The principal appoints the agent to perform some services on their behalf and delegate some
decision making authority to the agent.
 Problems may arise because the agents and the principal may have different interests.
Therefore, principal has to monitor and control the activities of the agent.
i. by appoint board of directors to monitor the managers‟ activities.
ii. obtain external auditors to verify the assertions made by management in the financial
statements.

TRANSACTION THEORY

 The firm is seen as corporate governance structure. This theory sees CG for purposes of
facilitating transactions: a structure.
 The aim is to reduce the transaction costs of conducting a particular activity.
 That is if there is a good CG, so lesser costs companies would spend for unnecessary
transactions (e.g. Sue in court for bad acts, exorbitant costs!)
 Transaction costs can be divided into pre and post transaction costs to ensure the interest of
parties involved are protected (Daniel et al, 1997).
 Pre transaction costs are the cost a firm incurs before transacting with other economic actors
(other firms/employees of the firms). Examples of pre transaction costs: bargaining, trading,
searching, and negotiating the contract.
 As the contract goes on, companies have to incur post agreement costs (monitoring and
administering costs) to maintain such agreement
 The importance of this theory is it provides efficiency-based guidelines to determine which
governance structure would be appropriate for which type of task and tries to align a
governance structure with transactions required for the performance of the tasks.

STEWARDSHIP THEORY (Keyword: Shareholder)

 Managers act as stewards whose motives are aligned with the objective of their principles to
maximize the company‟s profit.
 They are not motivated by their self interest.
 As such, the managers are believed to carry their duties in good faith for the sake of the owners
and they should sit in the board to contribute their expertise in pertinent areas.

STAKEHOLDER THEORY (Keyword: Stakeholder)

 Holds that every corporation was created not only to serve its shareholders but also to serve a
diverse range of people who have a legitimate stake in the organisation‟s outcomes and
performance.
 As such, managers should not only focus on profit but also to respond to the interest of all
stakeholders groups such as contribute to the welfare of the society, promote clean and healthy
environment.
THE DIFFERENCE BETWEEN THE STAKEHOLDER THEORY AND THE SHAREHOLDER
THEORY IN CORPORATE GOVERNANCE

Stakeholder Shareholder

Firms must manage to optimize the The owners (shareholders) expect the
stakeholder‟s satisfaction, and thus the management to act in good faith, exercise
company is created to serve more than care & skills to fulfill the objectives of the
just its shareholders, customer wants owners that is to maximize profits.
quality product, human rights group
demands for no-child labor factory, the The proponents of this theory claim that
neighborhood demands for clean water. this shareholder wealth model is
consistent with ethical behavior as when
Thus the managers must morally the business has superior financial
respond to the interest of the stakeholders performance then the wealth trickles into
the society thus, maximizing social
performance. The focus is PROFIT