At the End of This Chapter, Students Will Be Able To

At the End of This Chapter, Students Will Be Able To

Chapter 02 - Business Ethics

Chapter 2

BUSINESS Ethics

CHAPTER GOALS

Our objective in Chapter Two is to introduce self-regulation as a technique for achieving a more desirable role for business in society. We find that students often do not recognize the relationship between the free market, ethics and the law. Therefore, the instructor might remind the students that the law is probably most accurately regarded as a last resort after the market and self-regulation (ethics) have demonstrably failed. Therefore, ethics is not to be addressed in the abstract or as an afterthought. Rather, it should be at the heart of the students’ inquiries.

CHAPTER LEARNING OBJECTIVES

At the end of this chapter, students will be able to:

1. Describe in broad terms the scandals that have tarnished the business community

in recent years.

2. Describe the role of ethics in business decision making.

3. Discuss the leading ethical decision-making systems.

4. Discuss America’s current moral climate.

5. Distinguish between teleological and deontological ethical systems.

6. Distinguish utilitarianism and formalism.

7. Describe some of the forces that encourage unethical behavior in the workplace.

8. Explain the general purpose of ethics codes in the workplace.

9. Explain the general requirements of the Foreign Corrupt Practices Act.

CHAPTER OUTLINE

Part One—Introduction to Ethics

Self-regulation is one way in which society might achieve more desirable outcomes and business might occupy a more responsible role within society. Here we examine the ethical climate of business and the role of ethics in business decision making.

PRACTICING ETHICS: Baseball Bats encourage Subprime Loan Approvals. Maggie Hardiman, a former appraiser, describes the pressure to approve weak loan applications. Is the pressure to produce routine in American business practice, or is Hardiman’s experience an exception to the norm?

Subprime Mortgages: A New Corporate Scandal?

Corporate misconduct has been a staple of the news in this 21st century, and the subprime mortgage market crisis is a recent example that is reminiscent of the savings and loan crises of the 1980s.

PRACTICING ETHICS: By the Numbers. CEO of Qwest Communications, Joe Nacchio and other company bosses created a “culture of fear” and a “pressure-cooker” atmosphere, reportedly telling his employees in January 2000 that numbers (money) was what mattered at Qwest.

A.Ethics Theories

Business ethics broadly involves measurement of business behavior based on notions of right and wrong. To the business person, what is ethical is often nothing more than “what my feelings tell me is right.” That view has much support from existentialist philosophers. Existentialist philosophers believe that there is no inherent right or wrong; each person must reach his/her own conclusion about what is right and wrong.

PRACTICING ETHICS: Mike Ditka: “Wrong Is Wrong.” Are questions of wrong and right black and white? Is there no grey area?

Universal Truths?

Religion. Religions are ethical forces of great importance in society. Religions often have universal precepts which are supposed to guide a person’s life.

Religion at Work

Libertarianism. The view that morality springs from the maximization of personal freedom.

Virtue Ethics. A broader view in which the ultimate goal is to achieve a principled character. The assumption is that a person with such a character will reach ethical decisions instinctively.

“Concerned Owner Closes Bar’s Doors,” by April Goodwin

Teleology or Deontology—An Overview

Teleological ethics focuses on the consequences of a decision. A morally correct decision is that which produces the greatest good. Deontological ethics focuses on principle rather than outcomes. A deontologist would refuse to do an act that was morally wrong, even if that act might lead to the greatest social good.

Teleology

Utilitarianism. A brand of teleology in which the greatest good for the greatest number is the goal.

Deontology

Formalism. The epitome of deontology. Ethics is measured by the “rightness” of rules. The moral person is a person of goodwill and ethical decisions are based on what is right, not on the consequences of those decisions.

“A 50-year-old Construction Worker and Hero”

B.Using Utilitarianism and Formalism: Layoffs, Part I

The instructor might wish to revisit the Practicing Ethics entries at the beginning of this chapter at this point and ask the students to identify whether their responses reflected utilitarian or formalist reasoning.

A Mill Owner’s Compassion Rescues Thousands of Jobs After Devastating Fire,” by Richard Lorant

C.Layoffs—Part II

“Tale of Two Bankruptcies,” by Mary McGrory

“A Rare Recognition,” Des Moines Register

PRACTICING ETHICS: Career and Family, Are career and family goals ethically compatible?

Part Two—Managerial Ethics: Evidence and Analysis

A.America’s Moral Climate

Corporate corruption, mistreatment of war prisoners in Iraq, steroid use by professional athletes, etc. cause us to question our society’s decency. A 2006 survey of high school students revealed that in the past year, 60 percent had cheated on a test, 82 percent lied to their parents about something significant, and 28 percent had stolen something from a store. Over half thought that cheating is common among successful people. However, serious violent crime, pregnancy and abortion among females under age 18 has declined in recent years.

“Sex or Cell Phone?,” – Source: Bill Hoffman, “Cell Users Put Sex on Hold.”

College Students

In one poll, 95% of undergraduate business students admitted to cheating in high school or college. Another survey found that 75% of college students have cheated on either a test or paper. About 35% admit to internet-based cut-and-paste plagiarism; 10% admit buying papers online.

PRACTICING ETHICS: My Cheating Isn’t Really Cheating. 47 of the 64 accounting students at a prominent Midwestern university cheated on a take-home exam, and then tried to minimize, justify, or rationalize their behavior.

Corporate Conduct

A Gallup poll reveals that for decades Americans have had little faith in the ethics of businesspeople. Other surveys have shown consistent results. However, in a 2007 Harris Poll, the corporate community earned more confidence than organized labor, law firms, the press, and Congress.

B.Why Do Some Managers Cheat?

Moral Development

Psychologist Lawrence Kohlberg has attempted to show empirically that moral judgment improves with both age and education. He has identified what he believes to be six universal stages in moral development. At the highest stages, individuals make independent moral judgments on moral issues.

[N.B.: This site was no longer available by the time of the preparation of this manual. For an alternative site discussing Kohlberg and his theory, see

Feminine Voice. In response to Kohlberg, Carol Gilligan argues that males and females have different approaches to morality and that females would be unlikely to reach the highest levels of ethical morality in Kohlberg’s schematic.

System I/Moral Minds? While Kohlberg’s analysis has been labeled “System II”, recent evidence suggests that another set of forces, “System I” impacts the moral judgment process. System I involves intuition – instinctively judging an action to be morally right or wrong using our inborn moral faculty.

Organizational Forces

Studies show that organizational forces are also influential on workplace ethics. A 2004 survey found a large majority of CEOs believe that corporate ethics standards have risen since the recent outbreak of corporate scandals. Surveys of employees likewise suggest that some improvement has occurred.

[N.B.: At the time of the printing of this manual, this site had been moved to

The Boss

Substantial research supports the view that bosses are crucial in setting the ethical climate in an organization.

Flirting to Get Ahead

[

Ethics Teachers? One academic holds that “managers are the ethics teachers of their organizations.” Recent events suggest that many of the examples have not been positive ones.

[N.B.: This is a mirror site of

Keep on Cheating? Some corporate executives have found ways to continue to receive substantial compensation even on or after leaving their corporate employment.

Bank Robber to Boardroom Source: “How Troubled Past Finally Caught Up with James Minder,” by Vanessa O’Connell

Part Three—Business Ethics in Practice

A.Introduction: Ethics Codes

Corporate codes of conduct have long been a tool for organizations committed to ethical behavior. In the wake of the scandals at Enron and WorldCom, Congress passed the Sarbanes-Oxley Act (SOX), which now requires publicly-held corporations to adopt a code of ethics for senior financial management or explain why they have not done so. Whether the new attention to corporate ethics codes will prove beneficial remains to be seen, beyond the sympathetic judicial treatment a corporation’s compliance with its own corporate ethics code may have in the event of criminal charges.

Building an Ethical Culture at General Electric General Electric requires each business unit to provide a quarterly report regarding employees’ completion of required ethics training and agreement to GE’s ethics guide. The training is contextual and attempts to immerse employees in discussions regarding actual ethical dilemmas they might face on the job.

B.Bribery Abroad

Multinational firms face an especially difficult situation because bribery is an accepted way of doing things in many cultures. Failing to pay bribes would place these firms at a disadvantage economically.

The Foreign Corrupt Practices Act (FCPA) makes it illegal for American companies (and managers) to offer bribes to foreign officials in an attempt to secure business. “Grease” payments to expedite what should be routine governmental action and payments legal in the host country are not prohibited. Civil and criminal penalties are provided for violations.

Controversy.

Controversy exists over the FCPA because it preserves the ethics of American businesses but harms their competitiveness internationally. Now, however, other nations are recognizing that corruption is a great risk to the global economy. International initiatives also exist, such as the OECD Anti-Bribery Convention, the United Nations Convention against Corruption, and the Inter-American Convention.

[N.B.: This is a revised address since the printing of the text.]

United States Corruption. The U.S. ranked 19th in the 2006 Gallup Worldwide Corruption Index which asked residents in 101 nations whether they believed corruption was widespread in business and/or government in their nation.

Bribery in Practice. Bribery appears to be a routine costs of daily life in some countries. China executed the former head of its food and drug agency in 2007 for accepting $850,000 in bribes from Chinese pharmaceutical companies. In the U.S. there seems to be a remarkable new zeal in attacking bribery.

Practicing Ethics: Bribe the Terrorists? Banadex, a division of Chiquita Brands International, paid bribes to Colombian rebels over a period of years, thought necessary to protect employees and company property at its Colombian operations. One group receiving these bribery payments was the AUC, designated in 2001 that continued for a year after the 2003 alleged discovery by Chiquita of AUC’s designation – making such payments unlawful. During the time of Chiquita’s payments to AUC, approximately 4,000 Colombians were killed in the banana-growing region of Colombia. According to an OAS investigation, rifles and ammunition reached the terrorists with Banadex’s assistance.

C.Corporate/White-Collar Crime

As clearly evidenced in recent years, corporate crime is widespread: Martha Stewart, the Enron Bosses,, Tyco’s Dennis Kozlowski, WorldCom’s Bernard Ebbers, and Adelphia’s John Rigas are all among those convicted. The 2007 Pricewaterhouse Coopers Global Economic Crime Survey found that over 43 percent of the 5,400 companies surveyed worldwide reported having been victims of at least one substantial economic crime during the two previous years. Internal fraud controls alone do not stop misconduct.

Is Theft Sometimes OK? Source: Greg Wilcox, “It’s All Relative,” The Des Moines Register, December 12, 2005, p. 6A.

Punishment. In response to the recent spate of big business crime, Congress strengthened certain federal criminal laws by passing the 2002 Sarbanes-Oxley Act (SOX). Congress had previously enacted federal sentencing guidelines in an effort to discourage both white-collar and street crime and to address a general belief that many of the criminals are not punished even if caught.

SOX compliance costs can be quite high, but even critics have found some benefits in the increased government oversight.

Sentencing Federal sentencing guidelines, issues by the United States Sentencing Commission, provide ranges within which judges are advised to impose sentences. The guidelines are designed to provide greater predictability and consistency in punishment. However, recent Supreme Court decisions have undercut the power of the guidelines by restoring federal judges’ authority to deviate from them.

Jerome Kerviel, the “Mad Trader,” Source: Nicola Clark and David Jolly, “Fraud Costs Bank $7.1 Billion,” The New Tork Times, January 25, 2008; David Gauthier-Villars and Carrick Mollenkamp, “Portrait Emerges of Rogue Trader at French Bank,” The Wall Street lJournal, January 31, 2008, p. C1.

Too Much? Some critics argue that SOX and other government action in response to the corporate scandals have gone too far and believe a more open market is better protection.

Using Ex-Cons to Scare MBAs Straight , BusinessWeek, May 5, 2008, p. 58 [Reprinted by permission].

D.Whistle-Blowing

While former Merck sales manager, H. Dean Steinke, received a large share in the settlement of his whistle-blower lawsuit under the False Claims Act, his actions are unusual. A recent survey found that 73 percent of full-time American employees observed wrongdoing on the job, but only about 36 percent of those employees actually reported that wrongdoing to bosses. Sarbanes-Oxley encourages whistle-blowing in the private sector through required whitele-blowing hotline for employees who want to report accounting and auditing complaints.

Retribution. Despite these actions, whistle-blowers often pay a high price for their decisions to go public.

INTERNET EXERCISE AND SUPPLEMENT

Answers to Internet Exercise (p. 75)

1.a.Their answer: Like Socrates, most psychologists would agree that ethics can be taught. Research has found that “dramatic changes occur in young adults in their 20s and 30s” with regard to the problem-solving strategies they use to deal with ethical issues; that the extent of the change correlates with the number of years of formal education; and that deliberate educational curricula can influence the awareness of moral issues and the judgment process. See

b.Discussion

Student Project:

Locate a website that in some fashion discusses business ethics or raises an ethical issue in a business context. For example, you could find a news article about a particular business or industry that is facing some ethical challenge; or you could find some article that discusses business ethics or some aspect of business or corporate ethics or responsibilities; or you might find the home page of some business that you think illustrates some ethical value (either positively or negatively). Explain the ethical issue raised. Provide ethical arguments for resolving it in at least two different ways.

Supplemental Web Addresses:

(MarkkulaCenter for Applied Ethics, Santa ClaraUniversity)

(ethikos and Corporate Conduct Quarterly)

(EthicsCenter for Engineering and Science)

(Credo of a Good and Skilled Manager)

ANSWERS

Answer to Baseball Bats Question (p. 45)

Discussion, but see ethics data later in chapter, particularly “Organizational Forces” data relating to pressure to cheat and workplace misconduct.

Answers to By the Numbers Questions (p. 47)

1. Discussion. Chris McDonald, on his Business Ethics Blog [ reminds us that seeking good numbers – the profit motive – does not necessarily explain unethical behavior.

2. a.Discussion. Dialysis provide and Fortune 500 company, DaVita, practices significant elements of workplace democracy. CEO Kent Thiry says: “We feel our approach adds more value to the American health system, not just in savings but also in transparency and accountability. I firmly believe that every company can be a democratic community.” Traci Fenton, WorldBlu founder and CEO, says: “If more Fortune 500 companies operated democratically, it could mean less corporate malfeasance, happier employees, and a more stable economy.” Source: Traci Fenton, “Even Big Companies are Embracing a Democratic Style,” Chrstian Science Monitor, May 6, 2008 [

b.Discussion.

Answers to Mike Ditka Questions (p. 48)

1.a.Discussion

b.Discussion. Students may discuss here the morality of marriage. The instructor should try to get students to articulate why they believe as they do and then move them into a broader discussion of whether they believe all moral issues fit soundly into the categories of right and wrong, with no middle ground.

2.Our laws reflect our social values—or the social values of the majorities of our various legislative bodies over time, as well as the judicial interpretations of legislative policy. Are laws also reflect social values articulated in our Constitution, as interpreted over time by our Supreme Court. Thus, recognition of gay marriage could be a logical extension of previously enunciated legal policy and nevertheless not be what today’s society views as morally proper. Consider that Plessy v. Ferguson was “legally sound” for many decades, but clearly not what many believed was “morally proper.”

Answer to Religion at Work Questions (p. 49)

  1. The Wall Street Journal reports that an increasing number of schools are offering courses addressing spirituality and self-fulfillment in the workplace. Scholars claim people are yearning to lead more “integrated” lives, and that we want to pursue jobs that express our personal values and make contributions to society. Columbia and Stanford are among the schools giving attention to workplace spirituality. See Ronald Alsop, “M.B.A. Track/Focus on Academics, Careers and other B-School Trends, “ The Wall Street Journal, January 11, 2005, p. B6.
  2. As seen in a 2007 Pew survey, throughout much of Africa, Asia, and the Middle East, large majorities feel that faith in God is a necessary foundation for morality and good values, while in the relatively wealthy and secular nations of Western Europe, the majority belief is that morality is possible without religious faith. Source: The Pew Global Attitudes Project (Thursday, October 4, 2007) [

Answers to Concerned Owner Closes Bar’s Doors Questions (p. 47)

1.a.Some points to raise with students might be whether it was ethical to suddenly put the employees out of work, whether “happy hours” are ethical (another, more common, pricing policy), whether it is ethical to own and run a bar in the first place.