Business Ethics as Rational Choice John Hooker Solution Manuals.pdf

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Type:

Solution Manual

Business Ethics as Rational Resource: Choice Edition:

1st Edition

Author(s):

John Hooker

Contents Part I – How to Use the Book The Book’s Approach Classroom Use Using the Expository Material Using the Exercises Using t he Case Studies A Note on Rational Choice Theory A Note on Moral Epistemology Part II – Exercise Solutions Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6

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Part I – How to Use the Book The Book’s Approach Business Ethics as Rational Choice is based on the premise that ethics can be learned in basically the same way as engineering or mathematics. It presents the theory and then asks students to work exercises until they learn how to apply it.

Ethical decision making, like any skill, is developed through structured practice.

The aim is to bridge the gap between theory and application. Approaching ethics from a purely philosophical perspective that presents Kant and Aristotle may fail to provide specific guidance in a messy real-world situation. Coming from a practical perspective that discusses real-life case studies may offer no principled method for analyzing them. The book attempts a rational reconstruction of normative ethics that is robust and precise enough to obtain results in real situations.

The book’s central theme is that ethical behavior is rational behavior, in a sufficiently broad sense of rationality. The book resists the popular tendency to equate rational behavior with rational self-interest. It argues that failing to consider the interests of others is irrational, not because it may eventually hurt one’s own interests, but because it is inherently illogical and self-contradictory.

This leads to specific conditions that a rational decision must meet. Students are asked to evaluate whether a given decision is ethical by subjecting it to these tests.

No theory can be understood or appreciated until it is forced to deal with the subtleties and surprises of real-world application. Think about Maxwell’s equations in physics, or the conservation of energy principle. They are easily stated, but science and engineering students spend years grinding through countless exercises before they can apply them usefully and appreciate their power. The proposed book likewise takes students through exercises that show how to apply ethical theory and gradually reveal its full meaning and implications. Students are cautioned that analysis of this kind rarely yields a final or complete solution, but it can allow one to make some progress toward resolving an issue, rather than going around in circles, as so often happens in ethical disputes.

The analyses in the book attempt to set an example of intellectual discipline.

They avoid invoking arguments that may sound convincing but do not apply the conditions of rational choice. Students are asked to follow this example. They quickly learn that they cannot simply sit around and exchange views, as they might have expected to do in ethics class, but must defend their views with intellectual rigor.

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Students may not initially prefer this approach. It is nothing like the ethics course they imagined. In time, however, they may come to realize that these concepts fill a gap in their conceptual equipment and provide them a vocabulary for discussing ethics. They may begin to give the material the kind of respect they give chemistry or mathematics. They may enjoy the intellectual challenge of solving ethical puzzles. They may find it satisfying to be able to work through dilemmas and actually make some progress toward a defensible conclusion.

To earn credibility, however, it is essential that the case studies and exercises be absolutely realistic. I pursued this goal throughout the book. The scenarios come from several sources, including my MBA students and executive education participants (I have a collection of some 200 dilemmas they submitted anonymously, although many of them are similar). I don’t clean up the scenarios to simplify the analysis or to make them more effective pedagogically. I take them as they come.

Classroom Use The book is not intended to be a comprehensive resource for business ethics instruction. It contains no full-length case studies and no sections dedicated to such specific problem areas as employee rights, sustainability, product safety, marketing ethics, accounting ethics, or whistle-blowing. It is focused on building skills that, in my view, are a prerequisite to everything else. Certainly ethics is much more than logic-chopping. It also rests on experience, judgment, and domain-specific knowledge, and case studies and problem-specific materials can play a role in developing these. Yet in ethics, as in finance or operations, judgment and experience are built on an analytic foundation. This text provides the materials for the foundation.

I developed the materials over several years for the ethics program at the Tepper School of Business at Carnegie Mellon University. They evolved from interaction with students at undergraduate, MBA, and executive levels. Based on this experience, I believe the book is suitable for the following classroom situations:

(a) A short business ethics course or module that is dedicated to skill building rather than the case study method. I use the materials in required and elective ethics modules at the undergraduate and MBA levels. The modules have varied in length from three to seven 80-minute sessions. (b) A full course in business ethics that focuses, at least in part, on decisionmaking skills. The book can be supplemented by case studies or problemspecific articles of interest to the class, which can now be analyzed in a structured way based using the framework in the book.

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(c) An ethics-across-the-curriculum program, for which the book provides a common set of ethical concepts and a wide variety of examples. A primary stumbling block to programs of this kind is that most faculty members have little background in ethics. The book presents the basic ideas with rigor and succinctness that faculty appreciate. I maintain an internal website for faculty in which I post analyses of course materials that colleagues have sent me, some of which appear in Chapter 6. They use the analyses in various ways, or perhaps not at all. They sometimes invite me to make guest appearances in their courses to lead discussions, ranging from 10 minutes to an entire class period. (d) An ethics module for executive education. I have used this material in several 1.5-day sessions that are part of larger executive training programs. Executive workshops tend to deal with a specific industry. My approach is to present the basic ideas with a few generic examples, and to move quickly to examples from the industry of interest—a few from the book, but most supplied by the participants. (e) A business communications or writing course. Ethical analysis provides the perfect laboratory to develop communication skills. Putting together an ethical argument hones the skills necessary to organize one’s thoughts and express them clearly. It helps students to analyze unstructured situations for which the domain-specific tools of finance and marketing courses are inadequate.

Using the Expository Material All of the main ideas are contained in Chapters 1-3, a total of only 32 pages, including exercises. A certain amount of lecture time is necessary to present this material and provide a foundation for discussing case studies. However, it is best to minimize lecturing in an ethics course, not least because students may interpret it as “preaching.” I try to cover everything in two to three 80-minute classes, including discussion and an economics game (see below). I then re-teach the material in the context of case studies.

The material is interleaved with a running example (Jennifer’s employment dilemmas) that is meaningful to students and can help sustain interest. There are several other examples as well.

Chapter 1- Introduction Although the core material of the book begins with Chapter 2, I believe it is essential to dispel several misconceptions that block learning of ethics and frustrate its application. This is the mission of Chapter 1. It begins by attacking the common notion that law enforcement makes society function, while ethics is something extra. Students can be invited to participate in the thought experiments

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on page 2. The lesson is that law enforcement can work only if we already have a consensus on basic notions of right and wrong. In Western civilization, we generate consensus primarily by generating rational consensus. This is the task of ethics. It explains why certain rules of conduct are logical and worthy of our consent.

We too often lack this kind of consensus, and the results are painfully obvious in the business world. This is illustrated by the recent Congressional testimony of major bank executives, following a massive taxpayer bailout of their institutions.

It was as though they and the interrogators were on different planets, each with a completely different conception of a bank’s responsibility to society.

Law enforcement alone cannot fix the problem, because it presupposes that we understand and agree on the principles behind the law. Some 250 years ago, William Blackstone wrote his famous Commentaries on the Laws of England to summarize a rationale for English common law that had been hammered out over the centuries. Our task as business ethics teachers is to provide this kind of rationale for the ground rules of business practice.

The rest of the chapter exposes five myths about ethics. Myths 1-4 revolve around the anti-intellectualism that people often bring to the field. This attitude is obviously deadly in an ethics course based on rational analysis. I don’t recommend dwelling long on these myths (this is too much like “preaching”), but it is worthwhile to mention them. The rest of the course refutes them by showing how ethics can be placed on a rational basis.

Myth 5, which deals with Adam Smith and the role of self-interest, is especially beguiling. So much as mentioning Smith’s view of altruism in the Theory of Moral Sentiments can provide a healthy shock. Someone may respond that Smith published The Wealth of Nations and its doctrine of the “invisible hand” after his book on moral sentiments, and it must therefore represent Smith’s settled views.

Actually, Smith published several revised editions of both books over a 15-year period. His final revision was of the Theory of Moral Sentiments in 1790, the year of his death. The book we read today is literally his last published word on economics and morals.

Chapter 2- Conditions for Rational Choice This is the core of the book, because it presents the three conditions for rational choice. Instructors will immediately recognize Kantian ethics, utilitarianism, and virtue ethics in the three conditions. However, it is essential not to equate the material presented here with conventional treatments and teach it accordingly.

The book attempts to restructure and unify the classical approaches, so that the resulting theory is rigorous enough to yield usable results in real cases. The theory will not serve its purpose and will leave students confused and

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disappointed if it is mixed with traditional formulations of deontological and utilitarian ethics.

For example, I recommend against mentioning Kant’s various formulations of the categorical imperative, at least until late in the course. The generalization test presented in the text is a completely reworked principle that clarifies and extends Kantian ethics. It is obviously inspired by the traditional literature, but it must be understood and justified on its own merits. Discussion of the classical formulations could be confusing to students.

The four corollaries of the generalization principle spell out some of its implications, and I refer to these corollaries from time to time in analyses of the case studies and exercises. There is also an analysis of fiduciary duty on which I rely through the rest of the book. This is a particularly important topic to discuss with MBA students and professionals.

Utilitarianism is likewise treated differently. It is consistency-based rather than a consequentialist theory, in keeping with the book’s theme that ethical choice is rational choice. To be rational I must choose ultimate ends, whereupon consistency requires me to assign intrinsic value to these ends, whoever may possess them. The section “Predicting the Consequences” (page 19) clarifies the nonconsequentialist nature of the theory. I postpone the issue of measuring utility to Chapter 3, to avoid distractions, but emphasize that common sense often settles the matter.

Virtue ethics lacks the crispness of the other two conditions but in a sense subsumes them. Virtue ethics asks us to act consistently with who we are, and if we are rational agents, the first two principles follow. I discuss Aristotelian virtues because they have this sort of grounding. Given that career choice can define who we are to a great extent, I recognize consistency with that choice as a virtue.

The chapter is careful to spell out how the three principles relate to each other.

The precedence of the generalization test and virtue ethics over utilitarianism follows directly from the theory. The precedence of the generalization test over virtue ethics is based on the idea that the generalization test is actually an application of virtue ethics in a context where its implications are clearer.

These ideas are abstract and must be explained primarily through examples, such as those presented in the text. Jennifer’s dilemma illustrates them in a context that students identify with personally.

Students may disagree with the theory—particularly the utilitarian principle, due to its failure to respect our society’s emphasis on self-interest. I welcome this kind of questioning and invite students to work out their own theory in parallel

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with the one I am presenting. I insist, however, that they adopt some principled method for making choices, and that they deal with the consequences of the theory they prefer. For example, if there is no obligation to maximize utility, then exactly why is it wrong to harm others? In general, questioning and pushback not only make the class more fun for everybody but can provide many teachable moments. It should be encouraged. When there is disagreement, we agree to disagree and move to the next topic. This creates intellectual tension that helps to maintain student interest through the course.

Chapter 3- Distributive Justice and Autonomy This chapter covers three ideas that would have overly complicated Chapter 2. One is a taste of utility theory, just enough to convince skeptics that serviceable utility calculations can be practical. It is best not to get bogged down in this material but to emphasize that even this elementary level of analysis is unnecessary in most cases. Common sense and practical experience are normally enough to apply the utilitarian test. The second idea is the Difference Principle of John Rawls, which I selected because it is the best-known nonutilitarian approach to distributive justice, and it meshes nicely with the general theory of the book. This requires departing somewhat from Rawls’ own analysis, particularly by dispensing with the concept of primary goods and by viewing the Difference Principle as a type of generalization test. Yet I retain the concept of the veil of ignorance, because it is a vivid way of illustrating what is meant by rational choice. I recommend asking students to play the economics game described in Exercise 8, popularly known as the “ultimatum game.” It dramatically illustrates a central lesson of the book—that we operate according to a broader sense of rationality than rational self-interest, one that in this case is captured by the Difference Principle. This is opposite the lesson normally drawn from the game, namely that we are too irrational even to serve our self-interest. The final idea of the chapter is the autonomy of rational agents, which is related to the Rawlsian Liberty Principle. This is only occasionally a key factor in business cases, as for example in advertising. It is central to Case 6.6 and Exercise 12 of Chapter 6.

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Using the Exercises The exercises begin immediately with the exposition of core ideas in Chapter 2 and continue through Chapter 6. It is essential that students be assigned a significant number of exercises if they are to learn the desired skills.

Students should complete the exercises by applying only the conditions of rational choice. It is not sufficient simply to state an opinion, or to supply arguments that may sound persuasive to them. Adherence to this rule imposes the discipline necessary to build analytical competence.

Instructors may be concerned that it is impossible to grade exercises objectively in ethics, where there is no “right” answer as in mathematics. Actually, grading the exercises is straightforward. The grader checks whether students cogently apply the conditions for rational choice. This is no harder than assigning partial credit in a mathematics exam, and perhaps easier. In large classes, it may be necessary for teaching assistants to grade exercises. I have found that they learn very rapidly (in 2 or 3 days) to assign grades in a consistent and objective fashion.

“Solutions” to all of the exercises are provided in this manual, but in most instances they are not intended to dictate the only correct approach. The solutions are meant to serve two purposes: • They illustrate some arguments that students might use. Most exercises can be approached in more than one way using the rational choice conditions. Students may discover arguments that are different from and even more convincing than those suggested in the solutions, just as in mathematics, students may discover a simpler or clearer solution than the one in the textbook.

• They provide the instructor suggestions for class discussion of the exercise.

Some of the solutions (marked by an asterisk) are provided to students online for self-study.

Common mistakes in exercises include: • The student states an opinion without argument.

• The student states various arguments that may sound persuasive rather than specifically applying conditions for rational choice.

• The student applies a “generalization test” that is not actually a generalization test, and similarly for the utilitarian test and virtue ethics.

• When applying the generalization test, the student (a) checks whether generalizing the act has consequences that are in some sense good or desirable, rather than checking specifically whether generalization is 7

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consistent with the rationale behind the act; or (b) fails to clarify the rationale and scope under which the test is applied, or applies to the wrong scope.

• When applying the utilitarian test, the student (a) checks whether the act maximizes utility for the agent or the company rather than for everyone; or (b) checks whether general adoption of the act, rather than the agent’s individual performance of the act, maximizes utility.

• When applying virtue ethics, the student (a) views loyalty to an organization, rather than to human beings with whom one has a personal relationship, as a virtue; (b) regards as virtues some qualities that are not virtues because they are not essential to humanity, such as patriotism; or (c) fails to identify all the virtues at stake.

Solution of the exercises often rests on some determination of fact. It is best not to question the student’s factual assumptions, even if they seem unreasonable, because this distracts from the main point of the exercise. However, the student must indicate which factual assumptions are made and how they are relevant to the argument.

The exercises change in character somewhat as the book progresses: • Chapters 2 and 3. Here most of the exercises are succinct. They follow each major section of the chapter and are designed to reinforce the concepts presented in that section. They can be assigned as homework and, in a large class, graded by teaching assistants. The last two exercises in Chapter 2 require some synthesis of the material across sections, but this skill is addressed primarily in Chapter 4. Exercises 2-4 in Chapter 3 can be omitted if the students are allergic even to elementary mathematics.

• Chapters 4 and 5. Each case study is followed by exercises of three types: (a) exercises that make sure students can follow certain steps of the analysis; (b) exercises that change the scenario slightly and ask students to modify the analysis as needed (this provides initial practice in synthesizing the material in previous chapters); and (c) a few exercises that describe different but related case studies for analysis de novo. The exercises at the end of the chapter ask students to analyze a variety of somewhat more challenging case studies, but hints are often provided. These exercises can be assigned as homework or treated in the same way as case studies (see below). The concluding exercises in Chapter 5 are supplied by MBA students and professional workshop participants.

• Chapter 6. Here exercises do not follow individual case studies. Rather, the exercises are collected at the end of the chapter and present additional case studies, often with rather elaborate hints to guide the student’s analysis. The exercises can be treated pedagogically in the same way as case studies in body of the chapter (see below).

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Chapter 7. There are no exercises because the chapter provides only an introduction to cross-cultural ethics. It supplies too little cultural background for students to analyze scenarios.

Using the Case Studies Chapters 4-7 consist almost entirely of case studies and their analyses. These are not the full-length case studies one normally encounters in business courses, but more compact statements that focus on the ethical issues. Some cases are condensations of full-length cases, while others are based on news reports, dilemmas submitted anonymously by students, the Arthur Andersen case study collection, or materials that my business school colleagues have provided me from their courses.

The book provides students a full analysis of the case studies, because otherwise they will have no idea what an analysis looks like. Nonetheless, a textbook analysis is of little pedagogical value unless students become immersed in the case by analyzing it themselves. Once immersed, they have an emotional investment in showing that their view is correct, and they can critique the textbook analysis where it differs from theirs (it will almost certainly differ). This provides the guided practice necessary for building ethical competence.

There are various ways to assign students a case study: • Ask a student, or a student team, to make an in-class presentation of the case and the textbook analysis. Then ask another student or team to critique the analysis. Following the presentations, the instructor can invite class discussion and ask for clarification when the students are unclear or unconvincing.

• Ask a student or team to analyze the issue in class, come to a conclusion, and explain exactly where the textbook analysis goes wrong. This is again followed by class discussion. The instructor can make sure that the students correctly represent the argument in the text and identify a specific weakness.

• Ask two students or student teams to debate the issue in class, and score their performance by the extent to which they apply the conditions for rational choice. The students can mine the analysis in the text for ideas as they prepare. The instructor and the class can then critique and/or or score the pro and con with the textbook analysis as background.

• Ask students to role play in class by dramatizing a discussion between the principals in the case, either by ad libbing or by enacting a prepared script.

Their performance can be evaluated by the extent to which they apply conditions for rational choice. The class can also critique or score the performance.

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There are doubtless other, more creative ways to bring the cases alive. Whatever method is used, ideally students could choose the cases they analyze, because this helps ensure that they are motivated to think about the issues.

The more complicated exercises can be discussed in class much as the case studies are. Because solutions are not provided, exercises can also be analyzed in writing. Some possibilities are • Ask students to write an essay that takes a position different from the textbook position, defend it, and explain where the text goes wrong.

• Ask a designated group of students to contribute to an ethics blog by arguing pro and con on a particular issue, and score their posts by the extent to which they cogently apply conditions for rational choice.

• Post several exercises on a blog site and ask the entire class to address issues that interest them, scoring their posts as above.

As with exercises, the case studies evolve in character as the book progresses: Chapter 4 – Initial Case Studies. These are selected to illustrate the conditions for rational choice at an elementary level. It is probably best for the instructor to take the class through at least some of these analyses, while inviting class discussion, rather than asking students to present them • Chapter 5 – MBA Student Dilemmas. These are somewhat more challenging cases submitted anonymously by my MBA students (with one exception). The case description follows the original very closely, to ensure realism. These cases are included because students identify personally with the issues presented. The issues tend to be somewhat limited in scope, however, dealing with personal dilemmas on the job rather than the company policy issues that higher management must address.

• Chapter 6 – Business Case Studies. These are full-scale case studies that raise company policy issues and require complex and lengthy analysis.

Instructors should not be deterred by the advanced level of the discussion, because it not only builds necessary skills but demonstrates that normative ethics is no less intellectually demanding than finance or operations. The cases also introduce a number of key concepts and subtleties that are not covered by prior cases.

• Chapter 7 – Cross-Cultural Ethics. The chapter illustrates cultural differences with several scenarios that focus on corruption. The underlying theme is that ethical norms around the world flow from different ontological conceptions of human nature. The puts the conditions for rational choice into perspective, inasmuch as they are based on a Western conception of human beings are autonomous rational agents.

The case studies can be assigned much as those in previous chapters, but •

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analyzed in the context of the local culture rather Western ethics. The distinction of rule-based and relationship-based cultures developed in the chapter can help students begin to understand the cultural differences.

Students of different cultural backgrounds can of course contribute their point of view. The chapter suggests a corollary of the generalization test that can provide some guidance to Westerners operating across cultures.

A Note on Rational Choice Theory The concept of rational choice advanced in the text should not be confused with rational choice theory in economics. It differs in two ways: • Rational choice theory in economics makes an empirical claim (or assumption) about how individuals actually behave, for purposes of economic modeling. Namely, they act to maximize individual welfare.

Rational choice in ethics is a theory about what constitutes ethical conduct. It makes no claims about how people actually behave.

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The concept of rationality in rational choice theory refers to rational self-interest, somehow defined. Rationality as defined here is a broader concept that need not coincide with self-interest.

A Note on Moral Epistemology The book is constructed around a particular conception of moral epistemology, although this is not explicitly discussed in the text. Because the task of ethics is to develop rational consensus on norms, ethical reasoning can be seen as a process of discovering proof strategies for establishing obligation. A proof strategy is a pattern of argument that we are willing to accept as rational.

Mathematics, another analytic and nonempirical field, can be viewed in a similar light. Historians of mathematics have remarked that the field advances primarily through the discovery of new proof techniques rather than new theorems. Some techniques are very general, such as proof by mathematical induction (recursion), and others are specific to a given problem area.

Progress in ethics can likewise be seen as the discovery of proof techniques that help us to build consensus. The generalization principle was a major advance because it is a versatile and powerful proof technique that might be roughly compared to mathematical induction. Other proof techniques, such as the Rawlsian Difference Principle, are not universally accepted, but the same difficulty arises in mathematics, as for example proofs based on the axiom of choice. Still other proof ideas are specific to a given problem area.

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The analogy between moral and mathematical epistemology can be pushed further. Proofs/arguments are often difficult to construct and require a great deal of ingenuity. There may be several proofs for a single result. It is easy to make a mistake and prove something false. It may take decades or centuries to build a body of knowledge in a given area. Most importantly, sustained training and practice are necessary for individuals to make use of this accumulated knowledge.

We recognize this fact in mathematics, but not in ethics.

The analogy may seem to break down over the fact that in mathematics, there is one right answer. It is impossible to prove incompatible theorems, whereas in ethics convincing arguments may exist for incompatible conclusions. However, the history of mathematics is littered with false proofs. This is partly because proof techniques at the time had not been developed with sufficient rigor. Such is the state of normative ethics today.

This view of moral epistemology is completely different from that of a “reflective equilibrium” in which one arrives at a set of principles that are consistent with moral intuitions in particular cases. Mathematics does not proceed in this fashion.

Conjectures can be refuted by counterexamples, but the counterexamples are themselves little theorems based on generally recognized canons of reasoning.

Some established theorems are counterintuitive, such as the prime number theorem, and are admired for this reason.

Likewise, the theory presented in the book can have implications that readers find counterintuitive. They may reject the arguments on this basis. However, as in mathematics, one cannot reject a proof simply because one doesn’t like the conclusion. One must identify the gap in the argument, as I ask students to do when they disagree with the case analyses in the text.

If a theory is to be useful for building rational consensus in ethics, it must arrive at conclusions that some find counterintuitive. If we currently lack consensus, it is because some of our intuitions are in conflict with each other and therefore with the conclusions of any given theory.

Reflective equilibrium is therefore a highly problematic basis for moral epistemology if normative ethics is to perform its social task of building rational consensus. An epistemology based on proof technique, however, engages this task directly.

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Part II - Exercise Solutions Suggestions for using these solutions are provided above under the heading “Using the Exercises.” An asterisk indicates that the solution is provided online to students.

Chapter 2 1.* Give a simple argument that breaking a promise, simply because it is convenient to do so, fails the generalization test. Note that one can break a promise only if it is possible to make a promise.

This is a clear application of Corollary 1 of the generalization principle.

Breaking promises merely for convenience undermines the practice of promise making, and therefore promise breaking. If people broke promises whenever convenient, any attempt to make a promise would be seen as a bad joke. Nobody would take it seriously. It is true a good many promises would continue to be “kept,” simply the promised behavior is something that people want to do anyway. But this would scarcely encourage anyone to believe promises. The promises themselves mean nothing; people are going to do whatever they find convenient, promise or no promise. The whole point of making a promise is that you will keep it when it is inconvenient to do so.

You might respond that you could still make a promise, and keep it or break it, even if nobody took you seriously. But this is not a promise. It is only your statement that you will act in a certain way. The reason for making a promise is that you want someone accept it. You may want that person to promise something in return, or to be reassured that you will take care of him/her in some way. This is impossible if no one believes promises.

2. Give a simple argument that lying, merely for convenience, fails the generalization test. Assume that the lie would achieve its purpose only if it is believed.

If people always lied whenever convenient, no one would believe the lies, and it would be impossible to achieve the purpose of lying. This violates Corollary 3 of the generalization principle.

Lying is more serious than students might think. The very possibility of communication presupposes a certain amount of veracity. Without communication, human life as we understand it is impossible.

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It is true that we can often gather information even from lies. We can observe the tone of voice and body language to guess what the person is really thinking. We can consider the person’s incentives to lie and judge statements on that basis. But this is not communication. It is merely a matter of drawing inferences from behavior, which we can do if there is no language or communication.

Communication presupposes that we can ordinarily believe what people say simply because they say it.

Telling the truth is actually a special case of promise keeping. If I tell you something, I implicitly promise that it is true. Lying breaks that promise.

Promise keeping is therefore fundamental to human existence.

3. As an ambulance driver, you normally use a siren and flashing lights only for an emergency. At the moment you are driving the vehicle to an important meeting with your boss that may determine whether you will be laid off due to budget cuts.

You lingered a bit too long at lunch before departing and therefore turn on the siren so that you can arrive on time. Suppose for the sake of argument that this is legal. Is it generalizable?

Suppose ambulance drivers always used the siren when they were in a hurry for personal reasons. One possible consequence is that motorists would become cynical and simply ignore the siren. You would be late for your appointment in any case. This defeats the purpose of your action, which therefore fails the generalization test (Corollary 3).

At the very least, strict controls on the use of siren and lights would be put into place. You would have to get clearance from authorities to use the siren, and its use would be monitored. One of your reasons for using the siren is doubtless that you can probably get away with it. The reasons for your action would no longer apply if everyone with the same reasons behaved similarly, and the generalizability test is again failed.

4.* The situation is the same as in the previous exercise, except that you are running late because of a very unusual traffic jam on the route. You can still arrive on time by using the siren. Is this generalizable? What exactly is the scope in this case? Hint: If you are willing to use the siren due to a traffic delay, would you be willing to use it for other kinds of delay? Why not?

You might argue that this is different from the previous exercise because in that situation, it was your fault that you were late. In the present case it is not your fault. You left ample time but were frustrated by a freak traffic jam. Yet why is this relevant? It is one of those arguments that may seem reasonable only to people who already agree with the conclusion. Nor does it apply the conditions for rational choice, in particular the generalization principle.

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You might respond that your behavior is permissible in this case because the circumstances are rare and therefore generalizable. If ambulance drivers always used the siren for personal reasons only when in a hurry and there is an unusual traffic jam, then arguably this would have little effect on your ability to carry out your ruse.

There are at least two problems with this argument. One, suggested by the hint, is that it draws the scope too narrowly. Is the traffic jam the reason for your action?

Or is it simply that you encountered an unexpected delay? You might have been late because of bad weather, or you misplaced your keys, or someone blocked you in the parking lot, or any of a thousand other reasons. This would seem to justify the siren no less than unexpected traffic. If not, then we need some reasonable explanation as to why not, an explanation that induces you to use the siren in one case but not in the others. I think it is unlikely that such an explanation is part of your thinking when you switch on the siren. Yet if ambulance drivers abused their privileges for personal reasons whenever they encountered an unexpected delay, we could expect the same sort of reaction just described. After all, most delays are unexpected.

Another problem with your behavior is that it is a lie, essentially for convenience.

You are falsely telling motorists that you are on an emergency call. Lying for convenience is ungeneralizable, as shown in Exercise 1.

5. While walking down Fifth Avenue in New York City, you see a $100 bill on the pavement. You take the money and spend it because you have no way of knowing who dropped it. This is legal, but is it generalizable?

Presumably the reason for keeping the money is that you found it, you have no way of learning who owns it, and you like free money. If everyone with these reasons behaved likewise, you would still have found the $100 and would be able to keep it. Presumably people are already quite careful not to drop money on the street, on the assumption that it will probably not be returned. Keeping the money is therefore generalizable.

We occasionally hear stories of someone who finds a large cache of money, perhaps $100,000, and turns it into the police. We are impressed by the honesty of the act, which suggests it is the ethical thing to do. In this scenario, however, there is a chance (probably a good chance) that the owner can be identified and verified. It is unethical to keep someone else’s property if you can identify the owner, because violating property rights is ungeneralizable (as discussed as in Case 6.7).

6. You shop at a grocery that arranges milk bottles so that the oldest ones are in front and the freshest in the rear. You reach behind the older bottles to select the

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one at the very back. Your reason for doing so is to obtain the freshest milk.

Does your behavior pass the generalization test? If everyone reached for the back to obtain the freshest milk, then neither you nor they could obtain the freshest milk by doing so. The act is therefore ungeneralizable. Naturally, if the milk sells quickly and all of it is fresh, then there is no ethical problem with talking a bottle from the rear or anywhere else.

7. As you are about to board an aircraft, it is announced that the plane will be boarded by zones to expedite the process. However, you would like to board before your zone is called to make sure you can find space for your carry-on luggage in an overhead compartment. Is this generalizable?

If everyone with bags boarded first, regardless of zones, boarding first would not ensure space for the bags. The act is therefore generalizable under this rationale.

You might argue that you are boarding first to increase the probability that you will find luggage space, not to make it a sure thing. Boarding early would increase the probability even if all the others with bags board early. But would it?

Everyone else with bags would be trying to board early, and there would be a mob around the gate. You are would be as likely to end up behind them, and come out worse, as ahead of them. Another problem is that the airline staff may start enforcing the zones, as they sometimes do already at airports where this kind of behavior tends to be a problem. So the action remains ungeneralizable.

If most people are already ignoring the zones, doing likewise may be generalizable. However, there is a utilitarian issue (see Exercise 19).

8. While commuting home from work, you take a detour through a residential area to avoid a congested main artery. Because only a few drivers take the detour, it removes several minutes from your commuting time due to the light traffic. Is your action generalizable?

If all motorists wanting to avoid congestion took the alternate route, there would no longer be advantage in doing so. It is therefore ungeneralizable.

This does not imply that it is unethical in general to take the fastest route.

Generally, motorists already choose the route that is best for them, given the choices of other drivers. They tend to reach an equilibrium in which no driver has an incentive to reroute. This behavior is perfectly generalizable because it is already generalized. In fact, traffic engineers generally model traffic patterns on the assumption that drivers will find an equilibrium.

In this exercise, however, the residential route is faster because drivers are not seeking an equilibrium.

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9. In the previous exercise, suppose that a few commuters can drive through the residential area unnoticed, but if many cars used the detour, the traffic would become a noisy and hazardous nuisance in the neighborhood. Does this have a bearing on the generalizability of your action?

Even if many residential drivers would create a nuisance, this has no bearing on the generalization test. The test is not whether generalizing the choice to take the residential route would be desirable, but whether it is consistent with the reasons for the action.

10. In Exercise 8, suppose that you are taking the detour only because few people know the city as well as you do. If many people knew about the detour and were nonetheless avoiding it, you would follow their example. Is your action generalizable?

Here, your reasons for taking the detour are that you want to save time, you know about the route, and few others know. If everyone satisfying these reasons took the detour, you would still save time, and few people would still know about the route. In fact, it is likely that the action is already generalized. People are already taking the best route they know, and they still benefit from taking the best route they know.

11. Music shop temptation recording of Arnold Schönberg’s . While browsing in a music shop, you spot a CD Pierrot Lunaire. You love this piece, but you are absolutely certain that no one else within a thousand-mile radius can bear listening to this abstract atonal music. The shop is lax about security, and you can easily walk out with the CD without being noticed. You conclude that stealing the CD, because of your unique affection for what others regard as incomprehensible noise, is generalizable. Are you right?

The issue is one of scope. You are not stealing the CD because it is a recording of Pierrot Lunaire. If you had a fancy for some other unpopular recording, you would steal it for the same reason. So the generalization test is not what would happen if all lovers of Pierrot Lunaire stole it. You are stealing the CD because you like it and practically no one else does. So the test is what would happen if everyone who fancied an unpopular CD stole it. It is not hard to guess. The shops would not carry unpopular CDs, or would protect them from theft. So your theft is ungeneralizable. 12. Police have closed one lane of a highway due to an accident. A long queue of traffic has formed in the lane that remains open, because drivers slow down to view the accident.

However, a few drivers bypass the queue by driving along another lane up to the point of closure and then rely on polite drivers to let them

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merge at the front of the queue. Is this behavior generalizable? Assume it is legal. Presumably the reason for “cutting line” is to save time. If everyone who could save time by cutting line did so, it would no longer save time. So cutting line is ungeneralizable. The same behavior may be generalizable under another rationale. I might drive to the merge point because the police posted signs urging motorists to use both lanes up to the merge point (this is common where I live). It is just that most drivers are ignoring the signs. I would obey the signs regardless of any time saved or lost. In this case, the behavior is generalizable, because drivers would be able to use both lanes to the merge point if all others did. 13.* In the previous exercise, is it generalizable for a driver at the front of the queue to allow someone to merge?

Assume it is legal.

The answer depends on the rationales behind polite drivers and queue breakers. If the polite driver’s reason for yielding is simply to be polite, then yielding is generalizable. One could continue to be polite of all drivers yielded to queue breakers. However, if the reasons for yielding are that it is polite and yielding causes only minor delays for drivers in the queue, then yielding may not be generalizable. If universal yielding would encourage many drivers to cut line, then it would cause drivers in the queue to lose a great deal of time.

They might never get past the bottleneck, because queue breakers would always have priority. So if polite drivers would be unwilling to be polite under such conditions, their rationale in not generalizable. Suppose, on the other hand, that few drivers would be inclined to cut line even if everyone were willing to yield (which seems to be the situation where I live). Then yielding is generalizable, whether or not the time cost is part of the rationale. 14. You decide to play in an amateur tennis tournament because you know you are the best player in town and will certainly win the trophy and prize money. This is the only reason you are playing the tournament. Is your decision to play in the tournament generalizable? If not, under what sort of rationale would your entry in the tournament be generalizable? If all contestants were willing to enter the competition only if they could predict victory, then there would be no competition, and therefore no winner. Only one person can know he or she will win. Thus competing only because you are assured of winning is ungeneralizable.

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On the other hand, if you are willing to compete if you have a reasonable chance of winning, then your entry is probably generalizable. There may be several contestants with a reasonable chance of winning.

If you are willing to compete only if you are sure you will win, we may or may not have a problem. Others may be equally confident. However, if you reduce your risk tolerance to the point that the contest would not go forward if others were equally risk averse, then your policy is ungeneralizable.

The issue is important because it addresses the ethics of competition, a ubiquitous feature of business.

15.* You are considering whether your cable TV business should enter the market in Anywheresville, which presently has no cable service. You expect a few other cable companies will do the same. However, past experience in towns of this size shows that only one cable provider will survive. Your only reason for entering the competition is to drive the other companies out. Is a decision to enter this market generalizable?

This rationale may seem ungeneralizable because is impossible for all firms to be the only firm in town. But this is not the relevant test. The test is whether your firm can compete with the objective of defeating all the others, if all the others compete with the same objective. The answer is yes. Several firms can compete with the sole aim of driving the others out of business. Entering the market with this objective is generalizable.

However, if you are entering the market only because you will drive the others out of business, then the reasoning of the previous exercise applies. Willingness to compete only when you know you can crush the opposition is ungeneralizable.

You must be sporting enough to take on the competition when victory is not assured.

You might respond that you can “win” in Anywheresville even if there is no competition, which means the analogy with the tennis tournament breaks down.

Yet if your policy were generalized, there would be no cable TV competition anywhere (whence the name Anywheresville). To the extent that the business system on which you rely requires a competitive market, your policy is ungeneralizable.

16.* Damage expense.

Chris is a new hire at a manufacturing company, which pays his moving expenses. However, the movers seriously damage an expensive piece of furniture. The insurance covers only a small fraction of the cost. Chris mentions this to his boss Bob, who tells him to cover it by padding his expense account over the next few months. Chris is surprised by this suggestion, because 19

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in their previous conversations Bob has impressed him as having a high sense of business ethics. (a) Is it generalizable for Chris to pad the expense reports? Be sure to state the scope clearly. (b) Suppose coworkers tell Chris that this kind of padding goes on all the time at the company. Does this change the analysis?

One’s first reaction might be that the movers should cover the damage, a claim that is hard to assess because we don’t know the contractual obligations and type of insurance involved. Yet none of this is relevant to the question posed, which is whether Chris can ethically pad his expense account. To apply the generalization test, we must establish his reasons for doing so. Perhaps they are that (a) he wants the money, and (b) his boss is in some sense giving him “permission” to pad the expense report. It seems pretty clear he would never consider such a thing otherwise.

The problem is that padding the expense report is deceptive. Normally deception is ungeneralizable because it won’t work if everyone does it. Perhaps deception under the rationale that the boss gave “permission” is generalizable because bosses would not give such permission often enough to raise company suspicions.

But if this rationale is to make sense, it must explain why Chris is willing to deceive in this case and not in others.

Perhaps it is because if the boss is giving the OK, Chris can get away with the deception. But here the real reason is that he can get away with it. If employees always deceived when they could get away with it, the company would no longer let them get away with it.

Perhaps the reason is that if the boss gives the OK, then it is not really deception.

The company knows what is going on and is willing to tolerate a certain amount of expense padding to keep employees happy. This relates to part (b) of the exercise. If Chris learns that bosses and employees do this all the time, then he might reasonably infer that the company knows what is going on, and no one is deceived. In this case, however, we don’t need a rationale for deception, because there is no deception, and padding the expenses is ethical for this reason.

If Chris can’t confirm that padding is standard practice, however, then there is no particular reason to believe that nobody is deceived, and again we must ask why Chris would deceive in this case but not in other cases where he would benefit and can get away with it. There is no apparent reason, and padding the expenses is therefore ungeneralizable.

17. Upgrading the refinery.You are plant manager at a refinery that meets all environmental regulations. However, the mayor of a nearby community is pressuring you to install new technology that would reduce emissions below mandated levels. You respond that your plant is more cost-efficient than some of your competitors because they bore the cost of installing the new technology.

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Putting the equipment in your plant would erase this advantage and perhaps result in a plant shutdown. However, the mayor, who has taken a course in Ethics as Rational Choice, points out that your rationale is not generalizable. If all plants followed your example, then keeping the old technology would no longer make your plant the most cost-efficient. How should you respond?

Your reason for keeping the old equipment is that it makes your refinery more cost efficient than other refineries. The mayor claims this is ungeneralizable, because if all refineries kept the old equipment, none would be more cost efficient than the other.

You can respond, however, is that your real reason for keeping the old equipment is that you want to be no less efficient than other refineries. This is the correct scope, because you would be equally willing to keep the old equipment if doing so made you no more efficient but avoided becoming less efficient. This is generalizable, because your reason continues to apply if other refineries keep the old equipment to avoid becoming less efficient. Your decision is therefore generalizable under the correct rationale.

18. Ordinarily, an action that fails the generalization test would continue to fail if the scope were broadened. This is because a rationale is less likely to be generalizable when it applies to more people. However, there are exceptions.

Can you think of one?

Exercise 14 provides an exception. If I enter a tournament only when I am certain I will win, my action is ungeneralizable. But I enter a tournament when I have at least a reasonable chance of winning, a rationale that applies to more people, my action is generalizable.

19. In Exercise 7, does boarding early pass the utilitarian test?

If we consider only luggage storage, early boarding has no utilitarian effect.

The aircraft has the same limited space regardless of the boarding process.

However, the boarding zones are designed for faster boarding by allowing persons with window seats to board first. Each traveler who boards too early causes marginally more congestion because he or she must move aside for passengers assigned window seats. Boarding early therefore fails the utilitarian test in 20.* The accidental bank robbery .Chris is a relief branch manager for Commerce Trust Bank. His job is to fill in for regular branch managers while they are away. Today he is serving at a bank with several inexperienced tellers.

One of them, Carole, comes up $900 short at the end of the day. She is in a panic, because reporting a $900 shortage to headquarters would result in automatic termination of her job. On checking the transactions ledger, Chris finds that while cashing a check, Carole misread $100 as $1,000 and paid out the larger 21

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amount. Fortunately, the check holder is one of the bank’s best customers.

However, when Chris telephones the customer, he insists that he received only $100—even when Chris mentions that Carole would lose her job if the money were not returned. Carole is in tears, but Chris must somehow reconcile the ledger. His options are: (a) report the loss, (b) debit the customer’s account by $900, (c) place the amount in a suspense account and let the regular manager resolve the issue at a later time. Which option is likely to maximize utility?

Hint.

If (c) is selected, the regular manager must select (a) or (b).

Carole’s job loss would incur substantial negative utility, while the customer’s loss of $900 to which he was never entitled would cause much less harm. Given a choice, it is more utilitarian to retrieve the $900 from the customer. The problem is that if Chris were to debit the customer’s account, the customer would probably complain that there is no documentation for such a debit. The bank would be obliged to agree, and the real reason for the debit would come to light, resulting in Carole’s dismissal. Thus (b) probably reaps all the negative consequences of (a), plus offending a customer. Option (c) relieves Chris the burden of a making a decision, but imposes the same burden on the regular manager, and with no net utility effect on this score. The only issue is whether the regular manager is likely to choose the more utilitarian option (a). If not, Chris should choose (a) now, and otherwise it is OK (from a utilitarian point of view) to dodge the issue by choosing (c).

21. Back at the music shop.

CD recording of Arnold Schönberg’s You are again browsing in the music shop that has a Pierrot Lunaireon display (see Exercise 11) .

You were reluctant to steal it last time, but another thought has occurred to you. The shop will never sell this recording, because everyone else in the world hates this atonal stuff, and it can’t be returned to the manufacturer.

However, if you steal it, at least you will enjoy the music. Furthermore, as a penny-pinching student you can make better use of the $12 on the price tag than the shop owners. The rational thing to do is therefore to steal the CD, if you can get away with it. Is this correct?

This argument may show that stealing the CD passes the utilitarian test.

However, it fails the generalization test, as argued earlier, and it is therefore irrational.

22.* Irrevocable election .Steve is in his second year at a CPA firm. A firm partner discovers that Steve neglected to attach an irrevocable election form to one of last year’s tax returns. The form is necessary for the client to avoid a substantial tax liability in subsequent years. The partner reassures Steve that it is a fine point he would have not expected Steve to catch. The client shouldn’t have to pay a higher tax due to their mistake, but there is a way to fix it. The partner asks Steve to prepare the election form and attach it to their file copy of last year’s tax return. Then he is to prepare this year’s tax return as though the 22

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election form were submitted last year. There is no need to mention any of this to the client. If questions arise, they will show the IRS the file copy of the form and suggest that the IRS lost it in processing. Does the partner’s request pass the utilitarian test? Is it ethical?

It is hard to argue that this scheme fails the utilitarian test, assuming that the client will in fact treat the election as irrevocable. The client will pay no more taxes than necessary, the firm won’t lose a client, and the government will receive all taxes that it would normally receive from a client with this financial profile. There is of course a risk that the IRS will catch on to this scheme and force the client to pay a penalty as well as higher taxes. We can grant, however, that the expected utility loss due to the penalty and higher tax bill (given that discovery has fairly low probability) is less than the sure utility loss due to voluntary overpayment of taxes. We are supposing here that overpayment of taxes results in net utility loss, on the ground that excessive taxes harm the payer more than they benefit recipients. Submitting false tax forms, however, is a lie. Lying is ungeneralizable when the reason is simply one’s personal benefit (see Exercise 1). Steve might argue that the rationale is not simply self interest. Part of the reason for lying is to avoid penalizing a customer for his own mistake, and to ensure the customer pays only as much taxes as it owes when the paperwork is done correctly. The problem with this rationale is that Steve’s firm could avoid penalizing the customer by covering the overpayment out of its own pocket. Its rationale is self-interested after all, and the lie is therefore ungeneralizable. The firm should fess up to the mistake and cover the additional taxes. This may not maximize utility, because the firm’s loss is substantial. However, it passes the utilitarian text, because achieving greater utility is ungeneralizable.

23. Hard choice in Hondo.George is manager of an Ardnak Plastics plant in Hondo, Texas. It employs several hundred persons, a large fraction of the local workforce. George’s boss, Bill, telephones him from headquarters in El Paso with the news that the EPA will levy fines against Ardnak for excessive smokestack emissions at the Hondo plant. However, Bill won’t approve new scrubbers because the company can’t afford it. He points out that competitors have escaped EPA fines even though their emissions are higher.

Upon investigation, George learns that the competitors avoid fines by scheduling their heavy emissions at night, when the EPA isn’t running tests.

Meanwhile, Bill has been in touch with the Mexican authorities and mentions to George the possibility of relocating 15 miles south in Mexico, where environmental regulation is lax. This would necessitate hiring Mexican workers and devastate the economy of Hondo. He tells George that he must either avoid the fines or relocate. George therefore has three options: (a) dump the pollution at night, (b) relocate, or (c) resign, in which case his successor will choose (a) because it is the path of least 23

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resistance. Assuming that (a) is ungeneralizable, which of these three options pass(es) the utilitarian test?

The utilitarian contest is between (b) and (c), because (a) is ungeneralizable.

Choice (b) will devastate Hondo’s economy but provide Mexican workers with jobs they wouldn’t have otherwise, with the same environmental impact. Choice (c) has essentially the same utilitarian consequences as (a), because George’s successor will choose (a). The issue therefore boils down to whether moving jobs to Mexico results in greater utility than keeping them in Hondo.

George might protest that (c) is ungeneralizable because it leads to the ungeneralizable choice (a). In fact, the utilitarian analysis of (c) presupposes that (a) will result. This is appropriate for a utilitarian analysis, where only the consequences count. It doesn’t matter whether the consequences are mediated by the choices of others, as long as these choices are predictable. This is why the argument, “If I don’t do it, someone else will” works for a utilitarian analysis.

However, for purposes of applying the generalization test, passing the decision to another party is not the same as making the decision yourself, even when the other party’s choice is the same as yours. The generalization test is different in the two cases.

Let’s therefore apply the correct generalization test to (c). We note first that (a) is presumably ungeneralizable because it is illegal. Breaking the law for personal benefit is ungeneralizable because if it were universal practice, society would slide into anarchy and there would no law to break. However, choice (c) doesn’t require George to break the law. To apply the test to (c), we suppose that people always turn a decision over to another when the opportunity arises, they know that person will break the law, and they will benefit from the illegality. It is unclear that one must conclude this would undermine the law, because there is no reason to believe these circumstances are frequent. We must therefore compare the utilitarian consequences of (b) and (c), which again boil down to whether moving jobs to Mexico results in greater utility.

This is a tough call. Mexicans may start from on lower point on the concave utility curve and therefore benefit more from jobs than residents of Hondo.

However, the disruptive effect of a sudden shutdown in Hondo may offset this difference, because the resulting stress can cause illness, family breakup, and crime.

It is arguable that option (b) is unethical due to obligations to such stakeholders as employees and community. If so, then (c) is the only ethical option. The next manager is faced with the same dilemma and must again resign, unless top management relents and allows installation of the proper equipment.

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24. Retirement fund recommendation. John is a portfolio analyst for Metropolitan City Teachers’ Retirement Fund (MCTRF). His boss Mary has asked him to compare one of MCTRF’s external growth stock portfolio managers, Bill Fredericks, against Growth Unlimited (GU) and make a recommendation.

Mary sees some impressive numbers in GU’s performance over the last three years. In fact, John normally evaluates fund managers based on a three-year record. However, this time he is considering a different approach. Bill Fredericks was actually slightly ahead of GU last quarter. In addition, John and Bill have become close friends. Bill has helped John with several projects apart from growth stock investing and has arranged for John and his staff to attend some of Bill’s educational seminars without cost to MCTRF. Analyze John’s decision from a virtue ethics perspective. Which recommendation(s) pass the virtue ethics test?

There are at least two virtues at stake. One is friendship. If Bill is patronizing John simply for what he can get in return, then there is no true friendship and therefore no friendship obligation. But the case description gives a clear indication that their friendship is genuine. This kind of friendship can create a conflict of interest, and one might argue that John should find another fund manager. The friendship nonetheless exists and creates a legitimate loyalty obligation.

The other virtue is John’s professionalism as a portfolio analyst. A portfolio analyst makes recommendations based on investment characteristics, not loyalty to friends. It appears in this case that there may be a conflict between these virtues.

Due to the conflict, virtue ethics has nothing to say about this decision, and either recommendation passes the virtue test. The recommendation must be based on utilitarian factors and any obligations established by the generalization test.

25. Plant automation .George is a recent MBA who just joined a manufacturing firm’s Cedar Valley plant as its only cost accountant. Cedar Valley is a town of 20,000 people, and the plant is one of several owned by the firm. George’s boss Arthur tells him that management wants to automate this particular plant with robots as a pilot project, to help judge whether the other plants should be automated. Arthur admits that the community will be in an uproar due to the loss of jobs. However, the firm can save some of the jobs through retraining. Once George releases accounting information showing that the upgrade is necessary, the community will be less likely to resist. George points out that the report he sent to headquarters last year found that automation would not benefit the plant.

Yet Arthur points out that the report was based on cost assumptions, and these can be adjusted as necessary to make the bottom line come out differently. After all, market prices fluctuate, and there is no solid proof that one cost estimate is better than another. How does virtue ethics bear on this case?

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Loyalty is not an issue here, whether it be loyalty to company or to the community. Loyalty obligations are owed to individuals with whom one has a personal relationship, not to companies or to an anonymous population. The only obvious virtue at stake is George’s professionalism as an accountant.

Adjusting assumptions to reach a foregone conclusion is inconsistent with the norms of the accounting profession, but strictly speaking, these norms are based on professional ethics rather than virtue ethics. They are based on the profession’s promise and the public’s expectation of objectivity. The issue before us is whether this kind of behavior is consistent with who George is as a professional. Conceivably, an accounting professional could see himself as a functionary who cooks up numbers as necessary to satisfy the client, in which case there is no inconsistency. Be this as it may, it is pretty clear that George sees himself as an accountant in the usual sense—as someone who provides a true account of what is going on financially. Cooking the numbers is therefore inconsistent with virtue ethics, and if Arthur insists on it, consistency requires George to seek another position.

26. Missing travel documentation .Tim, a CPA, works for an auditing firm and has been placed in charge of an annual audit for Dalton Enterprises, a mediumsized firm with $20 million in assets. Mr. Dalton micromanages the family-owned firm except the finance area, which he leaves to his son Chauncy, recently appointed as VP of Finance. Chauncy’s duties include the appointment of auditors. Past audit reports have never been circulated outside the firm. They have been quite detailed, including all changes in general ledger accounts, because Mr. Dalton uses the reports for administrative control purposes. Tim notices that travel expenses are $20,000 higher this year, due to expenditures authorized by Chauncy. Most of these expenses are undocumented, but the firm’s controller seems unconcerned. Tim finally raises the issue with Chauncy, who questions why auditors would be skeptical of his honesty. He says that it is typical of “bean counters” to focus on minor issues while ignoring possibilities for major efficiency improvements. He ends the interview by asking, “What are we paying you guys for anyhow?” How does virtue ethics relate to Tim’s decision as to what to put in the report?

The whole point of certified public accountancy is to provide independent and reliable reports on finances. This provides transparency to investors and other interested parties. One might argue that in this case, the usual obligations don’t apply because Tim’s report won’t be circulated outside the firm. This argument, however, is both invalid and irrelevant. It is invalid because professional obligation requires CPAs to remain independent regardless of who reads their reports. It is what the professional promises and the public expects, and it is what Dalton Enterprises is paying Tim to do. The argument is irrelevant to our present concern because it addresses professional obligation rather than virtue ethics.

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Virtue ethics asks whether by sacrificing independence, Tim acts contrary to who he is as a professional. He underwent rigorous training and examination to learn the norms of certified pubic accountancy, writes “CPA” after his name, and spends all of his working hours applying these norms. It hard to imagine how he could conceive himself as anything other than someone who carries out the mission of a CPA. Virtue ethics therefore requires him to provide a full report, even if Chauncy terminates his contract.

27.* The good credit reference . Diversified Consolidated Corporation (DCC) is a supplier for North Manufacturing. As a credit officer at DCC, Kathy is responsible for about $1 million in credits to North. There are rumors that North is in deep trouble. The company has always paid on time and even lists DCC as a credit reference. Nonetheless, Kathy decides that a visit with North’s treasurer, Scott, is in order. They have developed a good working relationship over the years, and after a few drinks at lunch, Scott levels with her. He confesses that although North’s latest financial statements are technically correct, there has been a sudden reversal, and the company is talking to bankruptcy attorneys.

Scott is giving first priority to paying suppliers like DCC, because supplier credit is their only hope for survival. In fact, Scott has just placed a major order with DCC’s competitor Basic Products. If there is anything Kathy can do to convince Basic to extend credit, North may get over this hump and bring business back to DCC. Otherwise, North is probably headed for bankruptcy by the end of the quarter. Later that day, Kathy receives a phone call from her friend Mike at Basic Products. Suppliers often share credit information, and Mike asks about North. He has heard rumors, and he wants to make sure all is well before he commits to a major order. He is relieved when Kathy tells him that North continues to make its payments promptly. She asks him to hold the line a moment.

Her mind races as she thinks about whether to tell the rest of the story. How does virtue ethics interact with the other conditions for rational choice in this case?

Kathy has conflicting loyalties due to her personal relationships with both Scott and Mike. Both loyalties impose legitimate obligations, but because they conflict, virtue ethics provide no clear guidance. Kathy must decide on the basis of other criteria, and do so quickly.

It is hard to identify a professional obligation either to warn Mike or not to do so.

Giving a North a second chance could bring higher expected utility than warning an important client, because North will probably pay up, while its bankruptcy would result in enormous damage. If so, utility is maximized by saying nothing more to Mike. Yet saying nothing more is deceptive, because this (along with Kathy’s comment about prompt payments) would cause Mike to believe falsely that North has no credit problems. Perhaps she shouldn’t have said anything about the payments, but she has already said it and must deal with the consequences. Failure to complete the story is therefore ungeneralizable because 27

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of the deception involved. Fortunately, if she fails to reach this decision while on the phone, she can always call back. 28. Suppose that in Exercise 22, the partner thinks better of committing tax fraud. Instead, he tells Steve that the firm will cover the portion of the client’s tax bill that results from Steve’s mistake. However, it’s best that the client know nothing of this. Steve is therefore asked to send the client a copy of the tax form he would have prepared to carry out the partner’s first plan, rather than the form actually submitted to the IRS. The partner points out that his new plan complies with tax law and benefits the client, so it can’t be unethical. Is he right?

This is deception, pure and simple, for purposes of self interest. As such, it is ungeneralizable and unethical.

29. What is the ethical choice in Exercise 20?

We concluded earlier that either (a) or (c) satisfies the utilitarian test, the latter if the regular manager is likely to choose (b), and (a) otherwise. This is therefore the ethical choice unless (a) or (c) violates another condition for rational choice. Virtue ethics plays no role here, because George has no personal relationship with Carole or the customer. Even if George had loyalty obligations to Carole, none of the options would prevent her dismissal, and if he had loyalty obligations to the customer, selecting (a) or (c) would satisfy them. There is no apparent reason why reporting the error, or allowing the regular manager to report it, is ungeneralizable. Accurate reporting seems eminently generalizable, even if employees lose jobs as a result of reported mistakes. The ethical choice is therefore that dictated by utilitarian considerations.

Chapter 3 1. You wish to estimate the utility to you of earning the annual salaries in the left column of Table 3.1. You fix the utility of $10,000 arbitrarily at 15, and the utility of $40,000 arbitrarily at 25. You decide that you are indifferent between (a) receiving a sure salary of Q between $10,000 and $40,000 and (b) taking a

chance of receiving $40,000 with probability p and $10,000 with probability 1 − p, where Q and p are shown in the table. Calculate the utility of salaries $15,000, $20,000, and $30,000.

The utility u(Q) of receiving a sure salary ofQ is the expected utility

(1− p) u(10,000) +pu(40,000)

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where p is the probability for which you are indifferent between (a) receiving Q for sure and (b) receiving 40,000 with probability p and 10,000 with probability 1 − p. So

(15,000) = (1−0.35)u(10,000)+(0.35)u(40,000)=(0.65)(15)+(0.35)(25) = 18.5 u u(20, 000) =(1 −0.6)u(10,000)+(0.6)u(40,000)=(0.4)(15)+(0.6)(25)=21 u(30, 000) =(1 −0.85)u(10,000)+(0.85)u(40,000)=(0.15)(15)+(0.85)(25)=23.5 2.* The previous exercise does not yield utilities for $5,000 and $50,000.

However, you are indifferent between (a) receiving $10,000 for sure and (b)

receiving $40,000 with probability p and $5,000 with probability 1 − p, where p = 1/3. Use this to calculate the utility of $5,000. Hint. Suppose, in general, that you fix utilities for salaries Q1 and Q2 (here, $10,000 and $40,000, respectively) and wish to calculate the utility of some salary Q that is less than $10,000. If you are indifferent between (a) receiving Q1 and (b) a lottery in which you receive Q2 with probability p and Q with probability−1p, then this allows you to solve for u(Q) in terms of u(Q) 1 and u(Q).

2 Following the hint, we equate the utility Q of1 with the expected utility of the lottery involving Q and Q2:

u(Q1) = (1− p)u(Q) + pu(Q2) Solving for u(Q), we get

u(Q= )

u(Q1)− pu(Q2) u(10,000)−(1/3) u(40,000) 15−(1/3)(25) = =10 = 1−(1/3) 1− p 2/3

So the utility of receivingQ = 5,000 is 10.

3. Suppose you are indifferent between (a) receiving a salary of $40,000 for sure and (b) a lottery in which you receive $50,000 with probability p and $10,000

with probability 1 − p, where p = 0.9. Use this fact to calculate the utility of $50,000.

Following the pattern of the previous exercise, we equate the utility Q2of with the expected utility of the lottery involving Q 1 andQ :

u(Q2) = (1− p)u(Q1) + pu(Q) Solving for u(Q): 29

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u(Q)=

u(Q2)−(1− p)u(Q) u(40,000)− (0.1)u(10,000) 25− (0.1)(15) = = 2619 1= p 0.9 0.9

So the utility of 50,000 is 2619 .

4. Plot your utility curve using the results of the previous three exercises.

The curve appears below.

5.* A drug is discovered that cures all mild cases of diabetes but has no effect on severe cases. It is therefore prescribed only for patients who have mild cases.

Does this policy satisfy the Difference Principle?

There are two relevant groups: patients with mild cases and those with severe cases. Patients with severe cases are the worse-off group regardless of how the drug is prescribed, and their welfare is the same under any allocation policy. Any policy therefore satisfies the difference principle. If there are not enough does for all cases, the utilitarian principle requires that only mild cases be treated. 6. Suppose the drug in the previous exercise cures all mild cases but has only a small positive effect on severe cases. The drug is in short supply, and to make the 30

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best use of it, it is prescribed only for patients with mild cases. Does this policy satisfy the Difference Principle?

Patients with severe cases are again the worse off group under any allocation policy. This time, however, they are slightly better off with the drug than without it. A policy of treating only mild cases therefore violates the difference principle. 7. Some provincial governments conduct daily lotteries.

Studies have found that those who buy the lottery tickets are the poorest people in the province. Does this type of lottery satisfy the difference principle?

There are two relevant groups: citizens of the province who are inclined to buy lottery tickets and those who aren’t. The former group is worse off whether or not tickets are sold. If tickets are sold, however, they are slightly worse off on the average than they would have been otherwise, because the province pays out to winners only a portion of the ticket receipts. So the lottery violates the difference principle.

8.* An economics game .A popular economics game teaches an important lesson in rationality. You are granted $100 along with the option of donating any portion of the grant (from $0 to $100) to an anonymous person. That person, to whom the donor is anonymous, is given the option of accepting or rejecting the donation. If the gift is rejected, both parties forfeit the money. No collusion is allowed. Clearly, rational self-interest requires that you donate a very small positive amount (say, one cent) and that the recipient accept it. If you donated zero, the recipient could reject it without penalty, but it is irrational to turn down even one cent. Actual behavior is quite different. The average donation tends to be in the range of $30–40, and close to half give away $50. This behavior is normally cited as a demonstration that people are irrational. Yet this follows only if rationality is interpreted in the narrow sense of rational self-interest. How can the observed behavior, particular the behavior of those who donate half the money, be seen as entirely rational from a Rawlsian perspective?

If we suppose that donors and recipients are equally well off on the average before playing the game, the donors who donate half their money follow the Rawlsian difference principle precisely. They maximize the welfare of the worstoff group by making both groups (donors and recipients) equally well off on the average.

Chapter 4

1. Suppose that when John Pepper discovered the espionage, he also discovered that very similar information appeared in the business media the day before the trash bins were raided. How does the analysis change?

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P&G might argue that searching the trash bins was not espionage because it collected only publicly available information. Yet for purposes of the generalization test, it is the rationale that matters. The public availability of the information was not one of the reasons that the spies raided the bins. In fact, they believed that the information was not available. Whether or not their action can be called espionage, it remains ungeneralizable, for the same reasons discussed in the text.

P&G might also insist that its data collection activity didn’t harm Unilever, because the media had already released the information. This argument may show that P&G’s actions pass the utilitarian test. However, they remain ungeneralizable.

2. In the previous exercise, suppose that shortly after the Unilever story appeared, other media outlets reported that the journalist paid a Unilever insider for the information, and the insider was fired.

The purpose of this exercise is to help students recognize irrelevant facts. The media reports show that Unilever didn’t release the information voluntarily. Yet this has no bearing on the consequences of P&G’s action, nor on the generalizability of its rationale.

3.* Suppose that P&G acquires secret Unilever marketing plans from an attached file that a Unilever employee mistakenly sends to a P&G employee.

In this scenario, P&G doesn’t deliberately set out to gather information, but receives it by accident. Suppose that companies always made use of secret information they accidentally receive from competitors. This doesn’t undermine the company’s ability to receive information, because competitors are presumably already quite careful not to release confidential information to competitors. Nor does it undermine the usefulness of the information. Using the secret information is therefore generalizable, provided it is legal.

Exploiting the information may fail to maximize utility, however, because it may result in more harm to Unilever than benefit to P&G. Yet isn’t harming the competitor the whole point of business? Harming the competitor may in fact be ethical even when it reduces utility, if failure to harm the competitor is ungeneralizable. The business system on which a company relies for its existence may presuppose that companies are willing to compete (within certain rules) even if it reduces net utility. In the present case, however, it is unclear that failure to exploit accidentally obtained secret information would undermine the competitive business system if generalized. It seems enough to compete on the basis of product quality and price, within a framework of rules. If so, then using the secret information is unethical when it results in less utility than not using it.

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4. In the previous exercise, suppose that the attached file is deliberately sent to P&G from a disgruntled Unilever employee who was fired for some other reason.

In this scenario, the information is released by an unethical act. It doesn’t follow, however, that using the information is unethical—unless it is illegal.

Using the information appears to be generalizable for much the same reasons as in the previous exercise. It is therefore ethical as long as it maximizes utility and is legal, again for reasons cited in the previous exercise. 5. Is all spying wrong? For example, is spying on another country for national security generalizable? This is a fairly straightforward application of the generalization test. Let’s suppose that one country spies on another, perhaps to determine whether it is developing nuclear weapons. The reason for the espionage is national security. Would a country be able to improve national security by spying, if all countries that could enhance security by spying did so? It is hard to see why not. Presumably countries that can benefit from spying already do it, or at least those that than can afford it, and at least some of them continue to improve national security by spying. Spying for national security can also result in greater net utility, although this obviously depends on the circumstances and the spying country’s intentions. There are doubtless methods and forms of spying that are unethical, but spying for national security can be ethical under the right conditions.

6.* Spy or customer? Business Equipment Corporation (BEC) has developed a new technology that will enable it to launch a fax machine superior to anything now on the market. Kyle, product manager at BEC, goes into panic when he reads that Hiyota, a competitor, plans to release a new high-quality fax machine before BEC’s product will be ready. Kyle must find out what the machine can do as soon as possible, so he can give the production department new specifications if necessary. He asks his marketing consultant Lynn to make an appointment with a Hiyota sales representative and pretend to be a customer. During their discussion, she will obtain copy samples and learn as much as possible about product features, pricing, and marketing strategy. Lynn is hesitant about the ruse and doesn’t want to waste the sales rep’s time. However, Kyle insists that it is perfectly legal because no trade secrets will be stolen. People do this sort of thing all the time, and it is Hiyota’s responsibility to make sure information doesn’t leak out before the product hits the market. Besides, sales reps are accustomed to unproductive sales pitches, and who knows, the rep may convince Lynn to buy the new Hiyotas for her company.

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This is not a case of spying, because the information gathered is already available to the public, at least through sales representatives. However, posing as a customer may be unethical on the ground that it is deceptive. One might also argue that there is an implicit understanding that the sales representative is releasing advance information in exchange for Lynn’s genuine interest in buying the product.

Taking the second argument first, it is hard to establish an implicit agreement of this sort. For one thing, suppose that unknown to Lynn, all the information presented by the sales representative had just been published in a major trade magazine. Would we say that the sales rep had violated an agreement by failing to provide advance information? Of course not.

The deception argument is more potent, because it seems clear that Lynn is acting under false pretenses. Deception is causing someone to believe something you know is false. If Lynn had no intention of deceiving the sales rep, then she would be willing to announce up front that she has no interest in buying the equipment but is trying to gather information about it.

Lynn can respond, however, that her appearance without such an announcement doesn’t cause the sales rep to believe that she is a legitimate customer. It only fails to cause the rep to believe that she is not legitimate. She is reticent about who she is because she doesn’t want to cause the sales rep to form the (true) belief that she is there solely to obtain information. She only wants him to come to no conclusion on the matter. Kyle’s remark that people commonly do this sort of thing is perhaps intended only to rationalize the behavior, but it is actually relevant. If this kind of posing occurs form time to time, it may in fact not cause the sales rep to form any particular belief about Lynn’s motives (she represents a marketing agency, after all). He is willing to go ahead with the sales pitch anyway.

Kyle also remarks that Lynn’s firm may end up buying Hiyota equipment. So even if Lynn causes the sales rep to believe falsely that her firm intends to buy fax machines, she doesn’t cause the rep to believe something she knows is false.

There is a legitimate point here that must be taken apart. Recall that causing someone to believe something you know is false is deception and is normally ungeneralizable. Yet causing another to believe something that you believe is false (which we might call duplicity) is also ungeneralizable, for the same reason.

The purpose of duplicity is to get the other party to believe what you say. If people were always duplicitous whenever it could benefit them, no one would have any credibility, and the reason for the duplicity would be undermined.

However, we can grant that Lynn doesn’t even believe that her firm won’t buy Hiyota equipment. She really has no belief one way or the other, because she hasn’t thought about it. So even if her presence causes the sales rep to believe

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falsely that her firm intends to buy fax machines, she is guilty of neither deception nor duplicity.

This sounds pretty neat, until the sales pitch actually starts. The sales rep may ask specific questions about the needs of Lynn’s company. Some questions may be innocuous, such as the kind of features her company requires in a fax machine.

But others may inquire about why the company wants to purchase new fax machines. At this point Lynn must either come clean or start making up answers.

It is hard to maintain that fabricating reason X for buying fax machines (an outand-out lie) would not cause the sales rep to believe something Lynn believes is false. She believes that it is not the case that her firm intends to buy fax machines for reason X. Lynn’s interview with the sales rep may therefore be generalizable, but only if she is prepared to come clean as soon as the conversation requires her to start making things up.

Virtue ethics may also be relevant. In the P&G case (Case 4.1), we concluded that digging through the competitor’s trash to obtain marketing information is contrary to what being a marketing professional is all about. Perhaps the same can be said for impersonating a customer to gather information. The analogy is not precise, however. In the P&G case, the information sought is purely marketing strategy and has nothing to do with the marketer’s mission of identifying products that meet the needs and wants of the customer. However, information about how competing products are designed to satisfy these needs and wants is at least tangentially relevant. It may provide some clues as to what the customer wants, at least as judged by the competition. Then one can provide useful alternatives, perhaps by taking the product a step further or providing higher quality. So we don’t have a clear case that Lynn’s activity would violate virtue ethics.

7. It is argued above that returning a damaged car violates the sales agreement because the car is not in the same condition as when the agreement was made.

Suppose Joe refutes this by pointing out that even if there had been no accident, he would not have returned the car in precisely the same condition. The few miles to the restaurant would put some wear and tear on the automobile, but no one would say that the agreement was breached. Thus the fact that the car is returned in an altered condition is insufficient to show that the agreement is breached.

What is the flaw in this refutation?

Juan expects Joe to put a small amount of wear and tear on the car before it is delivered. So there is no reason to believe the sales agreement assumes that this won’t occur. On the other hand, Juan by no means expects Joe to damage the car before delivery. The sales agreement therefore assumes that Joe will deliver the car with no damage beyond any that existed when the dealer inspected the car.

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8.* There is a small chance that Juan will get in serious trouble with his boss when it is later discovered that the trade-in car is damaged. How might Joe argue that this does not affect the outcome of the utilitarian test?

Joe can grant that Juan could get in trouble, but maintain that the probability of this occurring is low enough that the resulting expected disutility (probability times the harm done to Juan) doesn’t offset the disutility of pointing out the damage.

9. Suppose Joe grants that if sellers always delivered damaged goods when the damage is inconspicuous, buyers would check carefully. But he, in particular, would still be able to deliver the damaged car, because the dealer would have already checked the car carefully and would not check again. Let’s suppose Joe is right about this. Why does his action still fail the generalization test?

It violates Corollary 4 of the test.

10. You engage a real estate “agent” (actually, broker) to help you find a house in an unfamiliar city and give her the price range. She only shows you houses that are at the upper end of the range, because her commission is a fixed percentage of the sales price. Does her conduct conform to professional ethics?

The point of this exercise is not so much to arrive at a particular conclusion as to recognize the nature of professional obligation and how to identify it.

Professional obligation is the duty to maintain standards of behavior that one’s profession has led the public to expect. This is a question of fact that can only be settled by finding out what people have actually been led to expect from the profession. One might argue that the public expects real estate agents to show clients a representative selection of properties. Agents have the knowledge to do so, and it is one reason that clients pay the substantial cost of engaging an agent.

Agents therefore have professional duty to keep this implied promise.

Yet the evidence for this interpretation is ambiguous. For example, the Code of Ethics of the U.S. National Association of Realtors is comprehensive and detailed but contains no specific language about showing clients a representative sample of properties. It contains (at the beginning of Article 1) the general statement

When representing a buyer, seller, landlord, tenant, or other client as an agent, realtors pledge themselves to protect and promote the interests of their client.

Providing a representative selection of properties may be one way to serve the client’s interests, but one could reasonably argue that if so fundamental a principle were generally recognized as part of professional duty, the Code of Ethics would mention it explicitly.

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There is also some question as to whether a real estate agent is seen as a professional in the same sense as a doctor or lawyer. There are no degree requirements for a real estate agent in the U.S. beyond a high school diploma, although agents are generally required to take some additional coursework (perhaps 50 hours) and pass a state exam. Even this is primarily intended to make sure that agents know the relevant laws, much like a driver’s exam. (There may be stricter requirements for what is often called a “broker” in the U.S., namely someone who owns a brokerage.) In addition, it is easier to recognize an incompetent agent than an incompetent doctor or lawyer before damage is done, and therefore less need for the same degree of professionalism. For example, if the agent is showing only expensive houses, this is obvious enough to the client, who can terminate the agency agreement and find another agent at any time.

There is consequently no compelling case that your agent’s behavior is in violation of professional ethics, although it may be unethical for other reasons.

Perhaps it should be a violation of professional ethics, and perhaps real estate agency should be generally recognized as profession, but this is another matter.

Mark,Pricey 11.* an insurance insurance. salesman, is concerned about the product he sells most. It is a “whole” life policy that provides death benefits, retirement savings, and a fund that can be accessed in an emergency. The problem is that it is not a good deal for the young families who buy it from him.

They would do better to buy a “term” life insurance policy, which provides only a death benefit, and use the savings to buy an annuity. On the other hand, term insurance and annuities are much less profitable for the company, and the sales commission is therefore much less. Mark’s commission on a whole life policy is 110% of the first year’s premium. Mark can support his family only by selling a substantial number of these policies. Is Mark living up to professional and other ethical obligations?

Let’s first look at Mark’s professional obligations. The point of the exercise is not so much to arrive at a particular conclusion as to recall what professional obligation is and how to identify it. Establishing professional obligation involves resolving an issue of fact as well as ethics: what has the profession led the public to expect from its members? To illustrate the idea, I will argue that there are no clear expectations of this kind for insurance salespeople. However, you may be able to make a cogent case for the opposite conclusion.

Insurance salespeople must obtain a license by taking some coursework and passing one or more exams that cover insurance regulations. However, the primary purpose for the exam is to make sure that they are aware of insurance laws, much like driver’s exam. There are stricter requirements for insurance representatives who wish to be certified as financial advisors, but Mark is apparently not one of these. There are also fairly clear professional expectations 37

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for insurance brokers (see Case 4.3), but Mark is not a broker. He is a “captive” salesman for a particular company.

The U.S.-based National Association of Insurance and Financial Advisors (NAIFA) has adopted a brief code of ethics, which may suggest that insurance sales is regarded as a profession. Yet even if we grant this, the code of ethics doesn’t clearly rule out Mark’s behavior. It contains the language I believe it to be my responsibility… to present accurately and honestly all facts essential to my clients’ decisions.

Mark could present all the technical facts related to term and whole life policies without making it clear that a whole life policy is a bad deal for his client. In any case, it’s unclear that NAIFA defines insurance industry standards. It claims 60,000 members, only about 14% of 435,000 U.S. insurance salespeople in 2008 (according to the Bureau of Labor Statistics).

The ultimate criterion is whether the public regards insurance sales as a profession that has promised to conduct itself in certain ways. I can find little evidence that people view insurance salespeople as much different from salespeople in general.

They should obey regulations, know their product, and describe it honestly, but this is true of any salesperson. It is hard to make a convincing case, then, that Mark is bound by specific professional obligations, although he is of course bound by ethical obligation in general. Perhaps insurance sales should be recognized as a profession with its own generally accepted code of ethics, but this is another matter.

It remains to address a more fundamental question posed by the exercise: is Mark’s line of work inherently unethical because job success requires him to sell his customers the wrong product?

Whole life policies make sense in some circumstances, but my reading of expert consensus is that they are not worth the cost for most people. Insurance companies incentivize their sale with large commissions because they are profitable. Mark seems to agree with this assessment but continues to sell whole life policies to support his family. I am going to assume that this is not because clients are demanding them. It is because Mark is conveying the message that they are a wise investment.

At least on the face of it, the ethics of Mark’s situation is straightforward. He is causing some of his clients to believe something he knows is false, namely that a whole life policy is the best deal for them. This is deception, and deception for the sake of personal benefit is ungeneralizable. Because Mark’s job seems to require this kind of behavior, he is obligated to find another job.

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Mark might respond that compromise is unavoidable in any job. No one can be ethically pure, including writers of ethics textbooks, and purity should therefore not be expected. If Mark is reminding us that “ought implies can” (see page 19 of the text), then he is right. If it is impossible to be flawless, then there is no obligation to be so. Yet it is possible to avoid deceiving clients. It may be difficult or inconvenient, but it is possible.

Mark might go on to say that one cannot achieve anything significant in life without compromises. Perhaps one can remain pure by secluding oneself in a monastery, but to accomplish something in the real world, one must operate in the real world. He appears to be saying that “the end justifies the means.” Achieving something worthwhile justifies a few transgressions along the way. Yet as discussed in the text (pages 17-18), the end doesn’t justify an unethical means. If living outside a monastery requires unethical behavior, then one is obligated to don the frock. A fair number of people have done so for precisely this reason.

Actually, a certain amount of “compromise” may be ethical, or at least generalizable, if achieving a worthy goal is part of the rationale. It is impossible to make a blanket statement about this, because generalizability depends on the precise circumstances and rationale. We can, however, apply the generalization test to Mark’s dilemma.

Mark’s goal is to help clients obtain financial security. In an economy where the public safety net is inadequate, it is important that families make their own arrangements. He convinces them to do so. The company won’t let him play this role without misleading clients somewhat, but it is better for them to have overpriced protection than none at all.

Let’s apply the generalization test. We assume that Mark’s reason for misleading clients is that it is the only way he can help them obtain financial security.

Suppose all insurance salespeople who wish to help clients obtain financial security misled them if necessary to play this role. It seems evident that this wouldn’t undermine the possibility of helping clients. Almost by definition, insurance salespeople already mislead clients when necessary, because otherwise they would have lost or resigned their jobs. Nonetheless they help their clients obtain financial security. Misleading clients under this rationale therefore seems generalizable.

We must check two more things, however. Does Mark’s rationale have the correct scope, and if so, does it really apply to his situation? If it has the correct scope, he would reject dishonesty if there were an honest way to achieve his aims.

Suppose a public interest organization offers him a job to promote understanding of life insurance, but it would result in a significant pay cut. He and his family could make out, but just barely. Mark’s rationale is as stated only if he would take the job. This seems unlikely, but let’s give him the benefit of the doubt.

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On the other point, however, it is very doubtful that Mark’s stated rationale even applies to his situation. Pushing whole life policies is not the only way he can assist people to obtain financial security. For one thing, he can seek certification as a financial advisor and get out of his low-level sales job. His rationale therefore cannot be as stated, and it doesn’t matter whether it is generalizable. In fact, we have failed to find any plausible rationale for Mark under which his deception is generalizable.

12. It is often said that if there is risk associated with a medical product, there should be full disclosure of that risk. Can you defend this claim using the conditions for rational choice, even when disclosure is not required by law?

Failure to disclose hidden risks is deceptive and therefore ungeneralizable.

Selling a product of any kind implies that it is safe to use, apart from any obvious hazards. If I sell you a chain saw, I don’t have to tell you that it could cause injury if you are not careful with it. But I also lead you to believe that, so far as I know, there is no tendency for the chain to fly off in your face. If I know otherwise, then I am deceptive, because I cause you to believe something I know is false. Similarly, if I sell you a medical product, I lead you to believe that it is safe to use as directed, apart from obvious hazards. I don’t have to tell you that you may cut your finger on a scalpel, but to avoid deception I must inform you of any possible side effects of a drug.

13. A pharmaceutical company has developed a remarkably effective headache remedy and is deliberating whether to market it over the counter or as a prescription drug. Over-the-counter sales would be more profitable and would reach far more headache sufferers. However, the medication doesn’t ease migraine headaches, the most severe type of headache. In fact, clinical trials suggest that for 10% of migraine sufferers, use of the medication results in twice as many headaches as before. The effect seems to be permanent, or at least to last as long as the trials. An over-the-counter label could carry a warning to migraine sufferers, but many of them don’t realize that their headaches are migraines. If the drug required a prescription, doctors would dispense it only to patients without migraines. Would over-the-counter sales satisfy the Difference Principle? Hint. There are two groups to compare when applying the Difference Principle: those with severe cases and those with mild cases.

Regardless of whether the drug is prescribed or over-the-counter (OTC), the worst-off group will be migraine sufferers. If the drug is prescribed, they will all have the same migraine headaches as before. If it is sold OTC, nearly all will have the same migraines as before, but a few will have twice as many, because they will fail to read the warning label or fail to realize that their headaches are migraines. This results in lower average health. OTC sales therefore fail to maximize the welfare of the worse-off group and violate the Difference Principle.

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14.* A new flu medication can act as a cure or as a vaccine, but a curative dose is 10 times larger than a vaccination. The cure and the vaccine always work.

Half of healthy persons who don’t receive the vaccine will get the flu. The medication is in short supply. Health authorities can use all of it as a cure or all as vaccine, or some combination of the two. What allocation maximizes utility?

What allocation(s) satisfies the Difference Principle? Hint. Utility is measured by the number of persons who don’t get the flu. There are potentially four groups to consider when applying the Difference Principle: treated sick patients, untreated sick patients, vaccinated healthy patients, and unvaccinated healthy patients. The benefit to a group can be measured by the probability that a person in that group will get the flu.

First, the utilitarian calculation. If the measure of utility is the number who don’t get the flu, utility is obviously maximized by using all of the medication as a vaccine. There is no way we can improve the utility of those who already have the flu.

We get the same result if we assume that curing the flu increases utility. Ten doses of vaccine relieve the suffering of 5 flu cases on the average, because half of healthy people get the flu. Ten doses used for a cure can relieve the suffering at most one flu case. So it still maximizes utility to use all the doses as vaccine.

Now let’s apply the Difference Principle. The four groups of people can be labeled A, B, C, D as in the table below.

Have the flu Healthy

Treated Not treated A B C D

If some doses are used as vaccine and the rest as a cure, the probability of a person in each group will get the flu is as follows:

Have the flu Healthy

Treated Not treated 1 0

1 1/2

Those with a probability of 1 are worst off. If all doses are used as vaccine, we have only groups B and C, and if all doses are used as a cure, we have only groups A and D. In all three cases, the worst-off group has a probability of 1 of getting the flu. So all allocations of the drug satisfy the Difference Principle.

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This time, the analysis is different if we acknowledge that curing the flu makes people better off. The table becomes Have the flu Healthy

Treated Not treated p 1 0 ½

because sick persons who are treated count as some fraction p of a flu case, where p < 1. Group B is the worst off in every scenario except when everyone with the flu is treated, in which case we have only groups A and D. Either could be the worse-off group, depending on the value of p, but in either case the worse-off group is in better shape than group B. So the welfare of the worst-off group is maximized by using all the doses as a cure, precisely the opposite of the utilitarian solution.

15. In the previous exercise, suppose that the vaccine works only half the time.

What allocation maximizes utility? What allocation(s) satisfies the Difference Principle?

Now, ten doses of vaccine relieve the suffering of 2.5 flu cases on the average, because half of healthy people get the flu, and the vaccine works half the time. Ten doses used for a cure can relieve the suffering at most one flu case. Again, it maximizes utility to use all the doses as vaccine.

As for the Difference Principle, the table becomes

Have the flu Healthy

Treated Not treated 1 1 0 ¼

Again, people in the worst-off group have probability 1 of getting the flu in any allocation. So all allocations of the drug satisfy the Difference Principle.

If curing the flu makes people better off, the table becomes

Have the flu Healthy

Treated Not treated p 0

1 ¼

Again, the Difference Principle is satisfied only by using all the doses as a cure.

16. A million persons nationwide have a chronic disease. A thousand of them have a rare, severe form of the disease that is fatal, and the rest have a mild form that gives them a headache once a week. A new bioengineered drug can cure a 42

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mild case or convert a severe case to a mild case. The drug is hard to manufacture and in short supply, and a severe case requires very large doses.

There is enough to treat all the severe cases or all the mild cases, but not both.

How should the drug be allocated to satisfy Rawlsian ethics?

If all mild cases are treated, the worse-off group has a fatal disease. If all severe cases are treated, everyone has a mild case, and so the welfare of the worst-off group is improved. The Difference Principle requires treating the severe cases.

The same remains true if there is an option of treating some sever cases and using the remaining drug for mild cases.

17. In the previous exercise, suppose that severe cases are not fatal but only cause headaches twice a week. Everything else is the same. What is the ethical allocation? Hint. Examples such as this one suggest that a purely Rawlsian allocation may be inappropriate when the utilitarian cost is too high. This is an active research issue in ethics, particularly in the health area.

If all mild cases are treated, the worse-off group has two headaches week. If all severe cases are treated, the worse-off group has one headache a week. The Difference Principle again requires treating all severe cases, even though far more people could be treated, resulting in far more utility, if it were allocated to mild cases as well.

18. Suppose the boss compromises and allows you to describe the list of performance results as a “sample” of results (it is, after all, a sample consisting of all but one). Does this change the analysis?

Presenting a sample implies two things: it is representative sample, and it is a fairly small subset of the population. This “sample” is representative in the sense that it presents typical performance, but it is unrepresentative in the sense that it fails to present the full range of performance. So the matter is not so clear.

Ultimately, the issue is whether it would lead readers to believe something you know is false—namely, that all the funds performed well. Let’s grant that it would not.

However, the “sample” is not a sample in any reasonable sense. Anyone who presents all but one of the results and calls it a “sample” is obviously playing some kind of game (and a rather childish one at that). The presentation therefore remains deceptive, and the same analysis as in the text applies.

Some students might concede that the word “sample” is misleading, but not in any way that is relevant to the financial decisions of your customers. The customers may get the wrong impression about the number of finds the bank offers, but it is the performance of the funds that matters. The numbers presented indicate the true performance of most of the banks’ funds, indeed, all but one of them. OK, if

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this is true, why not report all of the numbers? It is evident that the boss wants to omit the bad number precisely because this will help persuade customers in invest in the bank’s own funds. He may be wrong, but the intent is still to deceive, which is ungeneralizable.

At this point, an astute member of the class may observe that the deception argument could apply to the boss but not to the subordinate. Perhaps the subordinate works closely with customers and is certain that reporting or not reporting the bad number will have no effect on customer beliefs or behavior.

The subordinate tried to tell the boss about this, but the boss refused to budge. He continued to believe that reporting the bad number would influence customer investments. The boss is therefore guilty of deception but the subordinate is not.

It is an interesting exercise to go back through the argument in the text and see where it breaks down under this scenario.

19.* Suppose the boss compromises some more and allows you to report only the average performance of the funds. Does this change the analysis?

Presenting an average sometimes is misleading, particularly when it is very different from the median. For example, if every house in my on my street costs $100,000 except for one that costs $10 million, it would be misleading to report the average property value on my street without further explanation. Here the median is $100,000, while the average is much higher. In your case, however, the average fund performance is probably not far from the median, and it is hard to see anything misleading about it. Getting the boss’s permission to report the average would therefore resolve a difficult ethical dilemma. .Bernie 20.

On sale walks next into week an electronics store and tells Sam, the salesman, that he is looking for a particular model of flat-screen TV. The model is in stock and will in fact go on sale for 15% off the following week. However, Sam does not mention the upcoming sale to Bernie, because Sam’s commission would be proportionately less. Is this ethical?

Sam’s behavior is clearly generalizable. If salespeople never tipped off customers about upcoming bargain prices, to collect a higher commission, them they would still be able to collect a higher commission this way. Nor is Sam’s reticence deceptive. Failure to say a discount will be offered next week doesn’t cause the customer to believe there will be no discount next week. One might claim that Sam has “selfish motives,” but a selfish motive doesn’t by itself make an act right or wrong.

We might find a utilitarian problem with Sam’s behavior. He could save the customer more money that he would lose himself by tipping off the customer about next week’s bargain. However, this is a zero sum game as far as the money goes. What the customer gains, Sam and the store must lose. Perhaps the 44

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company can better afford to lose the money than Sam or the store, but we don’t know this.

On the other hand, if Sam has some particular reason to believe that this customer would gain more in utility from a price break than others would lose, perhaps because the customer needs the screen for a struggling small business, then Sam may have a utilitarian obligation to tip off the customer. We have to check whether doing so is generalizable. If all sales people tipped off customers about upcoming sales when it would result in greater utility, would companies react by withholding such information from salespeople? Sam knows more about this than I do, and it’s his belief system that is relevant. If it is consistent with his understanding of the business that the store would continue to let him in on upcoming sales, then tipping off the customer in this case is generalizable, and therefore obligatory because it maximizes utility. . EliteCheap 21.* Furniture stuffing Manufacturing has a reputation for highquality upholstered furniture. Hard economic times have hit, however, and the company must cut costs quickly. Top management orders that from now on, an inferior grade of padding will be used in the upholstery, on the expectation that customers won’t notice the change at the time of purchase. Is this an ethical decision?

Nothing in the exercise says that Elite Furniture has explicitly promised the customer high-quality padding, in advertising or promotional literature. This allows us to focus on whether merely creating a reputation obligates the company to live up to the reputation. One might think that by creating this reputation and not living up to it, the company is deceptive. It causes customers to believe something it knows is false. True, quality was high when the company created its reputation, and creating the reputation was therefore not deceptive. Yet reducing the quality without warning can be deceptive if customers reasonably expect to be updated on the situation. If I tell you that a shop is open at night and later learn that it is closed, you would expect me to let you know if possible. Deliberate failure to do so is deceptive. In the case of furniture, however, customers wouldn’t reasonably expect the company to alert them to lower quality. Companies never do that.

Although there is no case for deception, we can apply the generalization test directly to the company’s decision to reduce quality. Suppose that companies always reduced quality below normal in hard economic times, for the sake of cutting costs. Would they still be able to cut costs? Well, yes, they could still cut costs, but they might lose more sales as well. Some of the customers now in the store are buying furniture because they think the quality is still high. If manufacturers always reduced quality in hard economic times, at least some of these customers would know better and perhaps stay home.

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So if Elite’s reason for reducing quality is truly just to cut costs, its action is generalizable. But this is its true reason only if it is willing to reduce quality when customers are aware of what is going on, or at least as many customers as would be aware of it if companies always reduced quality in hard times. So Elite’s decision passes the generalization test under the rationale of cutting costs if the company is willing to reduce quality when it results in lower costs and lower sales to this extent.

A related but distinct issue is whether the company should warn the customer about the reduction in quality—or whether we should say caveat emptor (let the buyer beware). The problem with relying entirely on caveat emptor is that commerce as we know it presupposes a certain amount of trust on the part of the buyer. This issue comes up in Case 6.5, which concludes that the seller’s actions are ungeneralizable if they presuppose a level of trust that would not exist if all sellers behaved similarly. So the test is whether Elite could achieve its purposes if customers were less trusting; specifically, if they knew that the quality is lower.

The conclusion is therefore very similar to the above. Elite can ethically reduce quality and say nothing about it if it is willing to do so when its customers know about the reduction in quality, or at least as many customers as would know about it if all merchants reduced quality in hard times.

22. Uncrushable Volvos. At a monster truck rally in Vermont, a huge “Bear Foot” truck drove over the roofs of several cars and crushed all but a Volvo.

Volvo’s advertising agency recreated this scene for a highly acclaimed television commercial. Engineering analysis confirms that the Volvo is strong enough to support the truck, and the other cars are not. However, the agency reinforced the Volvo and partially sawed through the roof supports of the other cars. The agency claimed that this was necessary for production purposes. The State of Texas sued Volvo for consumer fraud based on deceptive advertising. Is it deceptive advertising, in the sense that it misleads customers about the product?

Is it deceptive in some other way? Can the ad be altered in some small way to make sure it is not deceptive?

The case description grants that everything the ad might lead customers to believe about Volvos is true. It is therefore not deceptive advertising. The ad is, however, deceptive because it leads viewers to believe that the demonstration is genuine. This misconception can be avoided by a message on the screen that says something like “dramatization of an actual test.”

23. Delayed delivery.Don is production scheduler at Fitzgerald Machine Company, where a large order is scheduled to go out Friday. The customer calls, however, and asks Don to delay the delivery at least a week beyond Friday, due to a labor dispute at the customer’s plant. On authorization from his boss, Don complies with the request on the condition that the customer will remit the amount 46

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due Friday, as specified in the original contract. The customer agrees to these terms, and Fitzgerald sends a bill payable Friday. The next day, Don learns from the production manager that the order won’t be ready until at least a week beyond Friday. Don does not mention this to the customer and collects the payment Friday as agreed. Is this deceptive? Is it ethical?

There is deception only if Don causes the customer to believe something that Don knows is false. When Don renegotiated delivery and payment terms, he did perhaps cause the customer to believe that the order would be ready on time. But at that point, Don himself believed the order would ready be on time. So far, there is no deception. The question is whether Don’s subsequent failure to update the customer causes him to continue believing the order will be on time (see Exercise 21). Perhaps, if the customer expects Don to update him on this. But nothing in the case suggests that the customer would have such an expectation.

So there is no deception.

Neither is there breach of the agreement, because the agreement is not contingent on the assumption that the delivery will be ready on time.

A possible ground for questioning Don’s action is a utilitarian one. Don may have specific reason to believe that collecting the payment before delivery creates a hardship for the customer, with no equal benefit to his own company, perhaps due to the labor dispute. If so, Don may have a utilitarian obligation to ask management for permission to give the customer a break. However, nothing in the case description suggests this is true.

If Don has a long-term personal relationship with the customer, virtue ethics requires Don at least to level with the customer about what is going on. It is unclear whether friendship obligations require Don to ask management to authorize a delay in payment.

24. Taking credit. Janice is Chief of Research and Development. Her boss asked her some time ago to design software that would solve certain problems at the company, but she has been too busy to think about it. However, her assistant John invents a creative solution on his own initiative and shares it with Janice, in hope of boosting his meager salary. Janice is impressed by his proposal and tells John that she is going to take credit for the idea. If he objects, she will downgrade his performance evaluation, but if he cooperates, she will give him a promotion and a substantial raise. Is her action ethical?

Taking credit for someone else’s idea, simply to boost one’s career, is normally deceptive and ungeneralizable. Rewarding John for the idea does not change the fact that Janice is deceiving her superiors.

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There may be an understanding in the company that managers are given credit for and rewarded for the ideas of their subordinates, who are in turn rewarded by their managers. Perhaps everyone assumes that ideas are not necessarily generated by the managers who take credit for them. In this environment, Janice’s action could be ethical. But if this is the situation, it is unclear why Janice would have to warn John about “cooperating.”

25.* Poor morale.Stacy graduated near the top of his business school class and takes a job at a growing CPA firm. Despite his ability and training, Stacy finds himself unable to deal with several assignments. He gradually learns that there has been heavy turnover at the senior level, and as a result he is assigned tasks that require a more experienced accountant. He begins to receive reprimands for his blunders, one delivered loudly in front of coworkers. The firm eventually hires a psychologist to interview staff and determine the reason for growing turnover at all levels. The staff complain of poor working conditions and low morale. When the partners read the psychologist’s negative report, they take it personally, and there are rumors they will put the firm up for sale. Nonetheless, the firm continues to interview for its vacant staff positions. The partners ask all those who are interviewing candidates to present the firm in a positive and favorable manner. Stacy is unsure how candid he should be with his interviewees.

Actually this issue arises whenever employees interview job candidates, because there is a negative side to every job. The issue is how candid the employee should be. The obligation to be truthful may seem to conflict with one’s duty to the firm.

First, let’s look at the obligation to be truthful. Candidates doubtless expect interviewers to put the firm in a positive light. They are not misled when no one mentions the irritations that go with every job. However, Stacy’s firm is having unusual problems. If the candidate goes through a round of interviews, and there are no signals of unusual problems with the firm, then the candidate has been misled. Every interviewer who failed to provide a signal is a contributing cause of this misperception. A signal need not be an explicit indictment of the firm, but there should at least be some hints. Stacy’s failure to provide hints would therefore be deceptive and unethical.

Stacy’s superiors might argue that he has a duty to promote company interests, because this is implicit in his employment contract. True, but because the contract doesn’t spell out exactly what this means, we must rely on expectations that employees and employers generally share for what employment entails.

Certainly, everyone would expect an employee to avoid mentioning job irritations that people normally don’t mention in such a context. Stacy surely understood this when he took the job, and it is therefore an implicit term of his employment contract. However, it is hard to identify a common understanding that employees should avoid dropping hints about unusual personnel problems. Stacy therefore

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has no contractual duties that conflict with his obligation not to mislead the candidate.

26. A pizza puzzle. Sharon is Restaurant and Food Services Manager for Marigold Inn. She is concerned about a decline in room service orders, the highest margin portion of her operation. After some marketing research, she concludes that guests are ordering pizzas from outside the hotel because they cannot believe a hotel restaurant can make an authentic pizza. She therefore proposes the following to George, General Manager of the inn. She will put Napoli Pizza brochures in the rooms, with a phone number having a different prefix than the hotel number. Calls to this number will reach a special phone in room service, which will be answered, “Napoli Pizza, authentic Italian pizza from old, family recipes.” Hotel personnel will don a “Napoli Pizza” hat and coat when delivering the pizza in boxes marked “Napoli Pizza.” The hotel chef, Luigi, will in fact make the pizzas according to an old family recipe. How should George respond to this proposal? If it is unethical, how can the plan be modified to make it ethical?

No gimmick that causes the customer to believe that the Napoli Pizzas are authentic can be deceptive on this account, because the pizzas are authentic. However, a gimmick can cause customers to believe other things that Sharon and George know are false, such as the idea that Napoli Pizza is independent of the hotel. This is deception. It may not be misrepresentation in a legal sense, but it is deception nonetheless and therefore ungeneralizable. We therefore ask whether Sharon will cause any customers to believe that Napoli Pizza is unconnected with the hotel. The business about the phone number is problematic. Perhaps no one will notice the prefix, but if so the ruse has no point. Sharon is changing the prefix precisely because she believes it will deceive, and it is therefore unethical. Asking hotel employees to don pizza uniforms is innocent enough if the point is to deliver with flair rather than mislead. If guests walk past an obvious “Napoli Pizza” sign in the lobby, they know what is going on. The hotel has Luigi, an authentic Italian chef. A marketing person with Sharon’s imagination should be able to take advantage of this—honestly. George should proceed accordingly. Students might argue that Sharon’s approach is a “white lie” and therefore OK. “White” presumably means that the lie is harmless. But telling white lies is as ungeneralizable as telling any kind of lie, if the lie must be believed to serve its purpose. If everyone told white lies when convenient, the lies would no longer work. At this point students may be thinking that ethics guys like me take all the joy out of life. Flattery and surprise birthday parties require a little dishonesty, but we enjoy them anyway. I agree that some practices may derive their spice from

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being on boundary of the unethical, but they are on the boundary, not across it.

Flattery relies not on deception but on a certain amount of ambiguity as to whether the flatterer really means it—and on the fact that we like to pretend it’s true anyway. We can tell when flattery becomes dishonest rather than kind.

Surprise birthday parties are tolerated because we mislead our friends only for this socially sanctioned purpose, which makes them generalizable.

27. Unmentioned plans.It is October, and Boris is in his third year at a large accounting firm. He finds the job less than satisfactory due to his heavy workload. He therefore applies for several MBA programs and expects to enroll in one of them next fall. Meanwhile, a firm partner in charge of staff development, Julie, tells him about five-month internships at the firm’s overseas offices. The requirements for the assignment include language fluency and longterm career potential at the firm. Julie says she can probably get him the assignment at the Moscow office due to his fluency in Russian. Boris is excited about the opportunity because he has relatives in the Moscow area. He decides not to tell Julie about his MBA plans.

To make the case interesting, let’s suppose that Boris doesn’t actually apply for this position, because an application might oblige him to indicate in some fashion that he satisfies the requirements (in particular, long-term potential for the firm).

This would be deceptive and unethical. Rather, let’s suppose that it is completely up to Julie to decide whether Boris meets the requirements and to make a recommendation on that basis.

One argument immediately comes to mind. Boris might say that it is Julie’s responsibility to ascertain whether he has long-term potential for them firm, and if she fails to ask the right questions, that is her problem, and Boris is off the hook.

The problem with this argument is the last step. Granting that Julie has a duty to vet Boris for the position, it doesn’t follow that Boris has no responsibilities.

Let’s apply the generalization test. Boris’s reason for failing to give advance notice of his departure is to enjoy a company benefit that would otherwise be unavailable. That benefit could be a raise, promotion, or special assignment as in this case. Suppose all employees failed to give notice of departure months in advance when this would allow them to take advantage of a company benefit.

Probably, they would still be able to enjoy the benefit. It is unlikely that companies would start requiring employees to give advance notice or imposing legal penalties when they fail to do so. Companies would too seldom have a way of determining when employees knew they would be leaving. So far, there is no ethical problem with Boris’s behavior.

There could be a utilitarian issue. Departure without substantial advance notice could do considerable harm to a company without benefiting the employee and others to an equal degree, perhaps because the employee is deeply involved in a

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project. In such cases, employees should alert the company—but not before they themselves are sure they are leaving, because otherwise they could trigger adjustments that are costly and unnecessary. In the present case, Boris’s selection for the position could prevent the company from developing valuable Russian contacts it could gain through a long-term employee. The case description doesn’t indicate, however, that giving the Russian assignment to Boris would cause any particular harm to the company, and it would certainly benefit Boris and his relatives. Boris therefore has no utilitarian obligation to tell the company his plans.

There is something special about this particular company benefit, however. One of the express requirements for the position is that the employee should have long-term potential for the firm. Normally, taking a job implies an assurance that the applicant at least believes he or she meets the job requirements. If I take a job as a truck driver but can’t drive a truck, I am dishonest with my employer.

However, there is a difference between meeting a requirement in the sense of an inherent qualification (ability to drive a truck) and a condition imposed by the company. Suppose the company’s want ad lists commercial experience as a requirement for the job. I can drive a truck very well and am fully capable of doing the job, but I have no commercial experience. If the company hires me without asking about my experience, then I am not dishonest in taking the job, because there is no implicit promise that I have commercial experience.

This appears to be the situation for Boris. He is eminently qualified for the Russian position. He doesn’t meet all the stated conditions, but the company selected him without asking questions. His taking the position therefore doesn’t imply dishonesty.

As in many such cases, however, Boris must be prepared to come clean if necessary. If Julie approaches Boris to make plans for a project on his return, Boris shouldn’t pretend he is going to be around to carry them out. This is deceptive and unethical. If he doesn’t want to be put in this position, or if the utilitarian consequences would be negative, he should come clean now.

Julie is brand manager for 28.* The incredible shrinking potato chip package. potato chips. Due to an abrupt rise in the price of potatoes, she must raise the unit price 15% to maintain the already-slim margins. She hits on the idea of reducing the package contents 13% but retaining the current price. This would result in the same revenue as before if unit sales don’t change. She suspects that customers who would balk at a higher price won’t notice that the bag is slightly less full. Her boss assures her that “package shorting” is standard practice in the industry and may well have the intended effect. It is also legal, because the package will indicate the correct net weight. The boss leaves the decision to Julie, and she must decide whether package shorting is a deceptive practice.

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The situation is similar to that of Exercise 21, but here the rationale is somewhat different. Package shorting is not something one can do every day. It is a transition from one package and price to another. It can be implemented for a particular product only two or three times at most. So the rationale for package shorting must explain why it is used at one particular time rather than another.

Julie’s reason for package shorting at this particular time is that costs have just gone up significantly, the company needs to cut costs, and the company wants to maintain sales as much as possible. So the generalization test asks whether brand managers could achieve these purposes if all of them used package shorting whenever costs go up.

Note that this doesn’t imply that all companies are going to downsize the potato chip package at the same time Julie does. If they did, Julie could presumably maintain the same market share she had before, and the policy would be generalizable. Rather, we must suppose the other companies may use package shorting at a different time, because the trigger for the action may occur at a different time. Because this is now universal practice rather than simply common practice, we must assume that many customers are on the alert. When they see that Julie’s packages contain less, they will switch brands, and Julie may not be able to maintain market share. The argument is not airtight, because it is hard to predict how savvy customers would be under this scenario. What matters is whether Julie can rationally believe that she would not lose customers under a universal practice of package shorting.

Julie may respond that when the cost of potatoes rises for her, it rises for everyone, and the generalization test should recognize that her rationale for package shorting applies to her competitors at the same time. OK, her rationale is generalizable if an essential part of the rationale is that the increase in commodity price applies to her competition as well. It companies downsize packages only whether they are faced with a common commodity price increase, customers will have no reason to switch brands.

Yet this is neither an intelligible rationale nor Julie’s rationale. It is not an intelligible rationale because the company’s goal is to cut costs while maintaining sales. If it can achieve this by package shorting, it doesn’t matter whether the competition is facing the same increase in commodity prices. In fact, there is an even stronger motivation to use package shorting if the competition doesn’t face an increase in prices. Even if this rationale is intelligible, it is not Julie’s rationale, because the scope is wrong. Her discussion with her boss involved no mention of whether the competition is faced with the same rise in potato prices.

There is no reason to suppose that her boss would not want her to downsize the packages if the competition were paying lower potato prices. In fact, he would be even more insistent.

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We conclude that the matter rides on whether Julie’s understanding of the market allows her to believe that she would retain her customers if all companies used package shorting in response to any significant rise in costs. If so, her action is generalizable and ethical. Otherwise it is not.

Actually, there is an intelligible rationale under which package shorting is clearly generalizable: one’s competitors are in fact going to use package shorting. In other words, it is a defensive measure against simultaneous package shorting by others. This is generalizable, because if all companies that know their competitors are about to downsize packages did the same, they would all be able to cut costs and maintain market share, because customers would have no reason to switch brands. This is probably not Julie’s rationale, because there was no mention of competitive strategy in her discussions with her boss, but it could be her rationale in another scenario. Note, however, that this can be Julie’s rationale only if she uses package shorting only when she knows the competition is doing the same.

29. Better is good enough .Kirk is being groomed for the controller’s position in a medium-sized manufacturing firm. While attending a monthly financial meeting, he listens intently as the company’s chief engineer explains that the firm’s new plant, now on the drawing board, will require an upgrade of the current waste disposal system if it is to meet industry standards. However, the existing facilities are in compliance with minimum legal requirements, even if some environmental activists are pressuring the government for tougher standards. Bob, company president, points out that the closest competitor in the business has waste treatment facilities that are even inferior to theirs. He is therefore not in favor of further expenditures in this area. Most managers at the meeting express strong agreement, and the discussion moves to another topic.

Kirk soon begins reflecting on whether this is the right firm for him. Hint: First analyze the president’s decision, and then Kirk’s personal decision.

Beginning with the president’s decision, it appears generalizable. The factors in the decision appear to be (a) the facilities are already in compliance with the law, (c) they are more advanced that those of some competitors, and (c) the legal requirements provide a level environmental protection that, if applied worldwide, would be consistent with a profitable business environment (although one can perhaps make a case for stricter requirements). The object is to avoid the expense of an upgrade. Suppose manufacturers never upgrade under these circumstances.

It seems clear that the plants would still be able to avoid the extra expense.

Condition (c) is important, because the decision may not be generalizable otherwise. If the company is operating in a country with weak laws, generalizing its level of pollution worldwide could degrade the environment to the point that the world economy can no longer support the industry’s current profit level. The

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company would lose money rather than meet its goal of saving money. This is discussed further in Case 6.7.

While the company’s level of pollution seems generalizable, a serious ethical problem remains. Pollution can harm people by causing illness and even death.

The relevant measure for the utilitarian test is how much harm is caused by effluent from this particular company, as opposed to polluters in general. It is clear that some degree of harm results. Even if it is impossible to trace the effects of a particular polluter, the casualties increase with the number of polluters.

Every polluter therefore has a marginal effect, and we must assume that this company’s waste creates some amount of illness or hardship that would not occur if it upgraded the equipment. The utilitarian test is whether the expected cost of better equipment would outweigh the resulting reduction in casualties. The expected cost includes all possible negative effects on the company and its stakeholders, such as loss of sales, layoffs, and company bankruptcy.

The company can get a rough idea of this by comparing the cost versus the positive impact of upgrading all comparable equipment in all plants. Accountants and environmental experts may be able to provide estimates of this kind. Ball park figures are probably good enough. It may be necessary to put a disutility value on human life to make the comparison, but this is frequently done in policy analysis (see the discussion on page 32 of the text). If upgrading equipment with available technology results in greater net utility, there is an obligation to do it.

If the utilitarian principle doesn’t require the company to upgrade, Kirk’s dilemma goes away. Otherwise, he must make a decision. Because the argument for an upgrade is a utilitarian one, he must ask whether his own employment at this company increases environmental harm. Or, perhaps “if he doesn’t do it, someone else will.”

Actually, it could go either way. Kirk must assess whether changing jobs would have a positive overall effect. It needn’t be large effect, but to impose an obligation, it must be an effect that he can clearly establish. Clear cases do exist.

If Kirk were working for a drug cartel, he might conclude that his talent and contribution are not fully replaceable, and his departure to a less destructive industry would definitely result in at least a small reduction in net harm. If Kirk has no reason to draw a definite conclusion, then there is no utilitarian obligation for him to change jobs.

Virtue ethics plays a key role here. Perhaps Kirk entered a manufacturing career to create value for people. If he finds himself contributing to a firm that causes unnecessary harm, he may view himself as a fraud, as working against who he is.

In this case consistency requires him to leave the firm, even if it will make no utilitarian difference. Case 6.7 discusses this further.

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Career choices deserve a more thorough ethical analysis than is provided in the text. Thoughtful students may point out that quitting one’s job for public health work in a third-world country may increase net utility, but this is not generalizable. If everyone took this kind of sacrificial job, there would be no one left to paint houses or deliver the mail. Actually, changing jobs to increase utility at the margin is generalizable under a carefully constructed rationale. It is possible for everyone to maximize utility, because presumably the optimum is an equilibrium solution in which everyone maximizes utility at the margin. There would be enough people in third-world health services so that there is no need for house painters to switch careers. However, a generalizable rationale must include such elements has individual talent and motivation. Virtue ethics must also be respected.

30.* Another type of discrimination.

Paula is Brand Manager for a line of soap used to scrub floors. Her assistant Terry is uneasy about the fact that Paula’s plan calls for advertising spots that feature unattractive actors. In her view, this kind of ad promotes harmful stereotyping of less-attractive people. Paula defends her plan by citing an article in a top marketing journal, which reports research showing that sales are enhanced when attractive people appear in ads for glamorous products and unattractive people appear in cooking and cleaning ads. Terry, however, carried out a project in college in which she reviewed over 1,000 studies of societal attitudes toward physical appearance. She found a strong bias against unattractive people, who are discriminated against in employment and education even when equally qualified. Can she make an ethical case against Paula’s advertising plan?

This case arises in a U.S. cultural context in which stereotyping is socially unacceptable, although the social norms are generally more concerned with race, gender, ethnic origin, and sexual orientation. Paula wants to see the norms broadened to include physical attractiveness (itself a trait that is very much culturally defined). The text does not provide the tools for an adequate cultural analysis, but we can look at the element that most concerns Paula: employment and educational discrimination. This is an issue of distributive justice, and a Rawlsian analysis may yield some insight.

The Rawlsian Difference Principle (as we interpret it) requires that a company adopt a policy that, if generalized to all companies, would maximize the welfare of the least advantaged group—where a group is defined as the smallest collection of people for which the policy’s effect can be predicted. In this case, we might define the relevant groups to consist of more attractive people and less attractive principle, because the ads presumably have a predictable effect on these two groups. Here “more attractive” and “less attractive” are defined to be what viewers of the ads consider to be more or less attractive. Paula has strong evidence that unattractive people are the less advantaged group, which means that company policy must aim to maximize the welfare of this group.

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Paula claims further that cleaning ads would result in less discrimination against unattractive people than would exist if such ads, industry-wide, portrayed more attractive persons in cleaning jobs. If the company cannot rationally deny this claim, them the conclusion is pretty straightforward. The ads are a violation of the Difference Principle. To make a case for a violation, Paula must therefore present evidence of her claim that the company cannot rationally reject. The case description doesn’t indicate that she has this kind of evidence, but perhaps she can find it.

Some may object that this is political correctness run amok. There are so many protected groups that one can scarcely take any action without stepping on someone’s toes. However, the Difference Principle is grounded on basic fairness, not political correctness. It is based on the fundamental idea that we cannot agree on a social contract that makes the least advantaged worse off than necessary, because any of us could be in their shoes. This applies whether or not the least advantaged are recognized by political correctness norms.

31. Whistle-blower accepts a deal.

An auditor employed by a pharmaceutical company submitted documentation to the Food and Drug Administration (FDA) to support the approval of new drugs. He later suspected inaccuracies in the information he provided for one particular drug and, upon investigation, discovered that the project director in fact falsified data. When he reported this to his superiors, the company board of directors offered the auditor a deal. If he will not interfere with the FDA’s imminent decision to approve the drug, the company will discontinue the drug and request the FDA to withdraw approval due to “mistakes in marketing projections.” The aim was to avoid the bad press that would result from public knowledge of the falsification. The auditor accepted the deal, the company kept its word, and the project director quietly resigned. No further scandals of this sort have occurred. Was the auditor’s decision ethical?

Our first observation is that the auditor need not worry about whether the company will keep its word. If company fails to withdraw the drug from the market, it has reneged on the deal, and the auditor can still report the “irregularities” (a euphemism because the data aren’t just “irregular,” they are false.)

The company could, of course, withdraw the application before the FDA approves it. This is tantamount to retracting any claims made in the application, and any issue of deceiving the FDA would become moot. However, we must address the proposal made to the auditor, even if the company has better alternatives.

One might argue that asking the FDA to rescind approval (I’m not sure what this means or why the FDA would do it) likewise moots the issue of deception. If so, the analysis to follow must be modified.

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Let’s first assess the utilitarian situation. Blowing the whistle externally could do a great deal of harm to the company and its stakeholders, and the drug will not be sold in any case. I will assume the auditor knows the company well enough to know that this is a unique occurrence, and that the company will take steps to prevent future occurrences. So there is no net utility cost in failing to inform stockholders and the public about the snafu. I therefore assume that cooperating passes the utilitarian test, which means it is obligatory unless it violates some other condition of rational choice.

The most obvious question is whether professional obligation requires the auditor to report the false data to the FDA before it issues approval. As in all matters of professional obligation, this is an issue of fact, not ethics. I am no expert on auditing and can’t provide a confident answer. Perhaps some students in the class have experience in this area and can address the issue. There may also be a legal obligation that binds the auditor directly, as distinguished from the company and its officers. If so, then it would be very hard to justify breaking the law in this case, because violating the law for utilitarian reasons is normally ungeneralizable.

If we assume that cooperating with the company conforms to legal and professional obligations, it is probably consistent with virtue ethics. The auditor’s mission is to promote transparency, which involves bringing false reports to light.

He accomplished this mission, at least within the company, and the company responded with a promise to withdraw the drug.

Next we must consider the issue of whether the FDA or stakeholders are being deceived. The company’s statement about mistakes in marketing projections is a lie and deserves serious ethical scrutiny. However, the auditor is making no such statement and apparently has no role in endorsing it. His action is to refrain from reporting the irregularity to the FDA, and we must ask whether this alone constitutes deception.

We therefore ask whether the auditor’s failure to blow the whistle causes stakeholder or officials at the FDA to believe that the submitted data were not falsified. We can say thus much: the company’s compound act of submitting false data and failing to correct them when irregularities come to light causes FDA officials, if not other stakeholders, to believe something the company knows is false (see the discussion at the top of page 11 in the text, where making a promise and breaking it is treated as a compound act). The responsible officials at the company are therefore guilty of deception. However, this analysis doesn’t apply to the auditor, because the auditor didn’t submit the false data and therefore didn’t take part in a compound act that misleads the FDA or stakeholders. There is no ground for saying that by failing to blow the whistle externally, the auditor is deceptive.

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We conclude that the outcome rides on an analysis of the legal and professional obligations in this case.

32.* Family plans. Barbara has been with Apex for four years and is now controller. Apex will merge with another firm on July 1, two weeks from now, and the ensuring staff cuts will be announced on August 1. The new company will need only one controller. Barbara hears through the grapevine that Sam, controller at the other company, is perceived favorably by management but will probably be dismissed, perhaps because he has been at the firm less than a year.

In the meantime, Barbara has dealt with the increasing burden of caring for her parents. Her father has cancer and is expected to live six months. Her mother needs frequent support. In addition, Barbara is expecting her first child in a few months. She plans to take a short maternity leave and return to work. She believes that she can balance her personal and professional life, but she wonders if she should make her boss aware of her situation before August 1.

Barbara clearly has a loyalty obligation to her family. She may have relationships with company managers that imply loyalty obligations, but there is no indication of such in the case description, and she has only been at the company four years in any case. Virtue ethics therefore obligates Barbara to take care of her family first, subject to generalizability, and worry about utilitarian considerations later.

The case description seems to suggest that, unlike Sam, she can keep her job (due to seniority) even if she loses the controller’s position, and she would therefore be financially able to support her family. Thus if retaining the controller’s position would make it impossible to give proper care to her parents and baby, she must sacrifice the position. This means she should tell her boss about her situation now, because advance notice generally results in greater utility.

However, it is very hard to assess what is necessary to meet family obligations. If she judges that she could care for her family as company controller, but her performance on the job would suffer, then more analysis is required.

You may be thinking that the company shouldn’t consider such matters as maternity leave in the first place when making personnel decisions. Perhaps, but the issue before us what Barbara should do, not what the company should do.

Let’s assume that there are no contractual obligations for Barbara to inform the company at this time about her situation (particularly her upcoming maternity leave). We must decide whether it is deceptive for her to withhold this information, because deception is ungeneralizable. Does Barbara’s silence cause company managers to believe that she is not going to request maternity leave or have extraordinary family obligations in the near future—particularly as they weigh her appointment as controller? It is conceivable that during discussion, her superiors could form a belief that there are no such obstacles to Barbara’s performance on the basis of the fact that she has not said anything about them.

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But this is speculation, and Barbara is at least as rational in believing that her silence will not cause anyone to form a belief they didn’t already have. We therefore have no case for deception.

As for the utilitarian test, it seems pretty clear that overall expected utility is higher if Sam takes the controller’s job, because he will probably take better care of the company, and she will take better care of her family. So Barbara is obligated to forgo the position, unless this violates generalizability.

The issue is quite general. Is it ethical for me to compete for a position if I know the other person is probably better? That is, I know the expected utility is higher if the other party takes the position, although I don’t know that the actual outcome will be better. To show that it is ethical for me to compete under these circumstances, I must show that not doing so is ungeneralizable. Suppose that people competed for jobs only when rationality allows them to believe that expected utility is higher if they get the job. I might argue that this would reduce the effectiveness of competition. Fewer people would compete, and the competitive process would discover fewer capable people, thus perhaps defeating the purpose of creating higher expected utility.

This argument seems valid up to a point. If I am quite sure that the other person is more effective, then perhaps I shouldn’t compete for the job (competing at sports, etc., is another matter). However, if I can say only that his employment would result in higher expected utility, but have some degree of doubt about the actual outcome, then it is OK for me to enter the running, because not to do so is ungeneralizable.

So if Barbara is quite sure that Sam will contribute more than she, then she should not compete for the job. I’m not sure whether being silent about her personal burdens is tantamount to competing for the job. In any event, I suspect Barbara can have little certainty that Sam will outperform her. Perhaps the odds are on his side, but she has more experience, and there is a fair chance she would excel.

In summary, if Barbara can meet her family obligations as controller, she has no obligation to reveal her personal situation at this time.

Chapter 5

1. You can still ask whether deceiving the customer is generalizable if loyalty to coworkers is one of his reasons. What is the answer?

If salespeople always deceived customers when loyalty to their coworkers is at stake, then customers would be on the alert whenever they suspect there is loyalty 59

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to coworkers—as, for example, in a small firm. The deception wouldn’t work and is therefore ungeneralizable.

2.* Suppose your customers study the software and conclude that it is adequate for their purposes. You know better, because you are more familiar with problems that arise after installation. However, you say nothing about this, and the customers continue to believe that the software is adequate. Is your silence ethical?

There is no clear case for deception here, because you say nothing to cause customers to believe that the software is appropriate for their needs. They already believe this, based on their own study of the situation. If the customer expects you to express any reservations, then we might say that you cause the customer to continue believing something you know is false, which is deceptive and ungeneralizable (see Exercise 21 of Chapter 4).

However, let’s grant that the customer doesn’t expect this. Even if there is no deception, we must apply the generalization test directly. Your objective is to make a sale. Suppose that sales representatives in your business always failed to correct the customer’s misperceptions about the suitability of software, but without causing them to have these misperceptions. The question is whether you would still be able to make the sale, or whether the customer would start asking you questions, at which point you would be obligated to answer truthfully. If you can rationally believe, based on what you know about the business, that customer behavior would not change (perhaps because customer reps already fail to correct customer misperceptions), then your silence is generalizable. The more critical test in such cases is often the utilitarian one. Selling the customer the wrong product is not only nonutilitarian in most instances, it is plain bad business. It alienates customers and creates a sour reputation. However, to make the case hard, we are supposing that the utilitarian choice is to sell the software.

Loss of the account would result in layoffs and possible bankruptcy for your company, whereas if the company can get over the present hump, it will have the means to upgrade the software, give this customer what it needs, and mend its reputation. A third factor is virtue ethics. Although we are granting that there are no loyalty obligations to individuals in the client firm, due to the lack of long-term personal commitment, a sale of this kind may require establishing some kind of personal working relationship with the customer (this is explored further in Case 6.3). It may be necessary to discuss several points and work out a number of details during a series of conversations. This requires that the parties work together and communicate as human beings, rather than just exchange technical information. This, in turn, requires a certain amount of candor. Relating authentically with

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others is an essential part of being human, and therefore a virtue. If the customer were a stranger passing through the checkout queue at Wal-Mart, virtue ethics would not oblige you to tell him he is buying the wrong software. At the other extreme, if the sale requires an intimate working relationship in which you get to know the other person quite well, candor is the only choice. You must decide where on this continuum your situation lies and act accordingly.

3. You buy a number of expensive items at a store. On arriving home and looking over the itemized receipt, you realize that the cashier forgot to ring up a Sony DCR-HC46 MiniDV Digital Camcorder with Optical Zoom, which retails for $599.95. What should you do?

There is a sales contract between you and the store. You have not met the terms of the contract until you pay the agreed-upon price. Violating a sales agreement merely to save money is ungeneralizable. You are therefore obligated to remit $599.95. The fact that the store neglected to ring up the amount is irrelevant. The cash register receipt doesn’t list the $599.95, but the receipt is a receipt, not a contract (the store in fact failed to receive the $599.95). Nothing in the sales contract provides that you owe only what the cashier rings up at a particular time.

4.* Suppose that in the previous exercise, the cashier forgot to ring up a 50¢ pack of gum rather than the camcorder. What should you do? Why should the value of the item make a difference? Hint. Sales agreements can be modified with mutual consent.

You can’t simply say that you can forget about 50¢ because it is a small amount.

You owe 50¢, be it a small or large amount, because it is part of your sales contract with the store. However, if you were to contact the store manager about this, she would almost certainly tell you to forget about it. In other words, you and she would agree to modify the sales contract, which is perfectly ethical. But because she would almost certainly agree to modify the contract, you can reasonably claim that you already have agreement. To say that “the manager agrees to forget about the 50¢” means essentially, “if I were to ask the manager about it, she would say I don’t owe the 50¢.” If you have reason to be certain about this, then you have not violated a sales contract.

There is a lesson here. We can’t forget about ethical obligations simply because they are small. All obligations are equally binding. You can forget about the 50¢ because you are not obligated to pay it, not because it is a small amount. This is a particularly important lesson for virtue ethics. We have an intuitive feeling that abandoning a friend is just as serious in a small matter as when the stakes are high, that character reveals itself in small things as well as large. So it does.

5. Suppose your boss invites you to bring your wife along at company expense.

What should you do?

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Despite the boss’s invitation, bringing your wife is contrary to company policy. It would therefore be a breach of your employment agreement and ungeneralizable on that basis. If the boss were instructing you to bring your wife, that could be a different matter, but he is only inviting you to do so. You must therefore decline.

I can’t think of a reason why you must offend the boss by telling him why you are declining, unless he asks. Utility is served by offering a true but diplomatic excuse for your wife.

6. Suppose the travel agent asks you who the third party is. What should you say?

We have already established that you have no obligation to inform the company of what your boss is doing. If a company official were to ask you this question directly, you might be bound to answer, on the ground that as an employee you are contractually obligated to respond to requests from superiors for information related to the company. However, the travel agent has no authority to request information from you about other employees, and you have no obligation to respond. There is no need to lie by saying you don’t know who the third party is. Just change the subject. 7. No oversight at the brokerage.

I was a retail stockbroker working on a team that catered to high net worth speculative investors. One night I had some spare time, so when our team risk report arrived, I decided I could do a favor for the teammate who normally signed off on risk reports and take care of it myself. I was astonished to find that she had not done any oversight for weeks. As a result, we had been in violation of New York Stock Exchange regulations for quite a while, and dozens of client accounts were illegally overextended. Three accounts had no equity left, and our firm was stuck with hundreds of thousands of dollars of customer losses. My teammate had signed off on all of the daily risk reports, attesting to our accounts being in good standing. This was a shock, given that we were a tight-knit group. The problem had to be corrected, but I didn’t want to be the one to expose it. Revealing the lapses would embitter my manager and teammates and perhaps invite reprisals. It would do nothing for my advancement and would poison the collegial atmosphere of our team. I wanted to look the other way and let someone else discover the problem. Did I have an obligation to speak up? Hint: How does this case differ from the above?

This case differs from the above in that monitoring risk is this employee’s direct responsibility, while monitoring expense accounts was not a responsibility of the employee in the previous case. He has a contractual obligation to correct any violation of the company’s risk policy. Also, as a member of the team, he is responsible for the contents of the team report. Finally, there are specific legal obligations to report violations of securities regulations. I am not an expert on this, but some members of the class may be able to provide details.

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8. Reporting cheaters. While an undergraduate student I witnessed three friends cheating on an exam. If caught, they would be expelled from school, which could bar them from finding a good job or getting into another school. They were smart, and the exam was relatively easy, but they cheated nonetheless. Should I have turned them during the exam or just let it pass and talk to them about it later?

There could be a utilitarian obligation for turning in a cheater, if letting an ignorant student get away with cheating would cause more harm than administering punishment. There is no clear evidence of this in the case, however.

Failure to turn in the cheater is generalizable. The reasons for not turning in a cheater are presumably to avoid getting involved in a messy situation, and to avoid harming the cheater’s career. Another possible reason is to avoid the cheater’s wrath, if the indictment cannot be submitted anonymously. All of these can be achieved if students never turned in cheaters. (In fact, students rarely report cheaters as it is.)

Young students often use the term “friend” loosely to mean someone they hang out with (Facebook “friends” are an extreme case of this phenomenon). However, if there is truly a friendship obligation based on virtue ethics, this obligation overrides any utilitarian calculation. Because failure to report is generalizable, the student should not report a (true) friend even to maximize utility, except in the occasional case where “tough love” better serves friendship. He may, however, be obligated to try to convince the friend to change his ways.

Schools often have “honor codes” that oblige students to report cheaters. If a student signs such a code, this could be interpreted as a promise to comply with its terms. No honor code is mentioned in the exercise, however, and such codes deserve more ethical scrutiny than they normally receive.

On the other hand, reporting cheaters is also generalizable. The student has no ethical obligation to report or not to report, unless one option has a clear utilitarian advantage, or unless there is a true friendship obligation, in which case the student should talk to the friend rather than report him.

9. In the previous exercise, would it make a difference if the penalty for cheating were milder?

This could affect the utilitarian calculation and therefore the ethical outcome.

10.* Suppose the supplier representative phones you a couple of days before the game to say that he can’t make it, but he will have his company purchase the 63

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tickets for you and your girlfriend. Is it ethical for you to accept the tickets? Why would the timing of the ticket purchase make a difference?

The timing could make a difference to the utilitarian calculation. The ticket purchase money comes out of someone’s pockets, perhaps those of stockholders or employees. If they lose more utility than you gain, then the company shouldn’t buy tickets for you. However, if the tickets are already purchased as in the original scenario, the cost is sunk, and the tickets should not be wasted.

As it happens, the exercise gives no indication of a clear utility loss if the company buys tickets for you. So accepting them passes the utilitarian test.

Professional obligation is a little different now, because the tickets are intended as an outright gift rather than an outing with the sales rep. While company policies on gifts differ, modest gifts (perhaps with a company logo) are often permitted.

Yet if these hockey tickets are as expensive as in my city, we are talking about a fairly substantial gift. The first step is to check if your company has a gift policy.

If not, professional obligation probably indicates declining the tickets unless there is a clearly established and accepted practice in the industry of accepting gifts of this size, and there is no evidence that these gifts affect purchase decisions.

11. Suppose you have already made a long-term contract with a competing supplier, and there is no chance you will source from the supplier who invites you to the game. Yet he is unaware of this, and he phones you a couple of days before the game to invite you and your girlfriend. You reveal the situation, but he tells you not to worry about it. The company has already bought the tickets, and he and his wife would like to enjoy the game with you. Should you and your girlfriend go along?

The fact that your company has settled on another supplier doesn’t change the outcome of the ethical tests applied in the text. If you failed to mention your company’s decision, accepting the tickets could lead the supplier to believe otherwise, and this would be deceptive and unethical. However, you told him all about this. Perhaps the supplier should have asked you for an update on the situation before spending his company’s money, but we are not talking about what he should do. So accepting the tickets is OK, in fact obligatory (unless you are otherwise engaged) on utilitarian grounds.

12.* If you decided not to use the salary information for negotiation, would you nonetheless have an obligation to tell the company you discovered it?

It is hard to find an obligation solely on contractual grounds. Employees are not contractually obligated to take an action simply because it might benefit the company. Telling all of your friends about the company’s great products could benefit the company, but there is no contractual obligation for you to do this.

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However, there is probably a utilitarian obligation to help the company avoid harmful repercussions of releasing sensitive information, assuming of course that the risk incurred by reporting the problem doesn’t offset this. Because the obligation is based on maximizing utility, it applies even if you have no connection to the company.

Assisting others in need is often seen as supererogatory rather than obligatory.

We believe we have no duty to “go out of our way” to help a stranger, even if it may be laudable to do so. Actually, this is wrong on utilitarian grounds. If we see injured parties on the highway, it is our duty to be a “good Samaritan” and take reasonable action to help out.

13. A free online news service requires users to register by providing certain information, such as address, gender, age, and salary bracket. The Web site promises that the information will remain confidential. Despite this promise, the news service provides the information to some of its advertisers, with no strings attached. Is this policy generalizable?

This is a breach of promise solely for the benefit of the news service, and as such it is ungeneralizable and unethical. Sometimes, ethics is simple.

14. Suppose a sealed note is mistakenly placed in your office mailbox. You open it and start reading before you realize it is addressed to your coworker Brad, who is married with three kids. It is a passionate message from a lover in another division of the company with whom Brad is having an affair. They evidently exchange love notes through company mail. Is it OK, or even obligatory, to inform his wife about this? Don’t just say, “Of course not, it’s none of my business.” Provide an argument based on the conditions for rational choice.

Violating confidentially is normally ungeneralizable, but this is not a violation of confidentiality. One can’t violate confidentiality without having someone’s confidence, which is not the situation here.

Some may say that the wife “deserves” to know what is going on, but I don’t know what this means. We need an argument. Failure to intervene in such situations seems totally generalizable under almost any rationale. Virtue ethics could be relevant if one is a close friend of Brad, but even then, it is hard to say what kind of response friendship would require in such a case.

Meanwhile, the utilitarian argument is overwhelming. The downside risk of meddling in this affair is massive, as it could destroy a family, while the upside is modest at best. The expected net utility is far below zero.

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The intuition that this is “none of my business” is related to our concept of privacy. Privacy is a complex topic that deserves more astute analysis than it generally receives. Privacy obligations seem to be based on the fact that privacy is necessary to protect intimacy, and intimacy is necessary for family life to succeed. Privacy would be a possible topic for class discussion, although younger students seem to see little need for it.

15.* A revealing plant visit. I visited a manufacturer’s facility to investigate its ability to scale up our manufacturing process for widgets. We didn’t sign a confidentiality agreement before entering the plant. During the tour, we passed a production line that manufactured gadgets for a competitor.

Gadgets are unrelated to widgets, but the competitor had long undersold us on gadgets, and we had been trying to reduce our manufacturing costs.

The representative who was showing us around was unaware that this company was our competitor and proceeded to tell us all about the gadget product line and its performance level. Should I have stopped him?

To focus on the underlying ethical issues, let’s suppose it would be legal for you to use any information you gathered during the plant tour. It’s not hard to show, as in Case 4.1, that industrial espionage is ungeneralizable even when it is legal. In the present case, however, there is no spying. The information is delivered to you, and your dilemma is whether to accept it. Let’s suppose you decide to accept the information, and your reasons are (a) it is useful to your company, and (b) the information is made available to you. You would never spy on a company to obtain information. This seems generalizable, because it is rare for information to be made available to competitors, and companies therefore wouldn’t lose their incentive to invest in innovation. Furthermore, companies would be no more careful about leaking information than they are now, because they already have every incentive to protect their information. I have problems, however, understanding your rationale and its scope. Under exactly what circumstances are you willing to take information, and why?

Suppose that while visiting a competitor’s headquarters, you notice a technical drawing on your host’s desk and memorize its contents. You protest that you wouldn’t do such a thing, and yet this information is made available to you. You respond that the owner didn’t intend to make it available. Yet I don’t see why this matters for your purposes, and even if it does, the company in the case study didn’t intend to make the information available to you, either. I think this lies at the root of my misgivings about your action. You seem to be confused about why you are willing to use the information in this case and not others. It is a borderline case because your rationale is just on the verge of intelligibility, but not quite there. Unless you can identify an intelligible rationale that describes your willingness to use information, your action is unethical.

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16. The above analysis rests on the assumption that there is no implied promise to continue servicing clients past the legal period of the contract (unless such a promise is made orally). However, our analysis of Jennifer’s job decision claims that there is an implied promise to work longer than the two-week notice period.

Why are the two situations different? Hint. Under what conditions would the agreements involved lose their point?

Service contracts most definitely have a point if the parties observe exactly the written terms and nothing more. However, the point of offering and accepting a job is to settle on who will work for whom. If the employee feels free to observe only the written terms of the contract and quit before starting work, this is not settled.

17. Filching printer paper.

When I take business school classes, I prefer to have a hard copy of the notes that are distributed electronically by the professors.

Because there is typically a long line of students at the school printer, I print my notes at home. This not only makes better use of my time but reduces ink consumption and wear and tear on the school printer. However, class notes require a great deal of printer paper, and I would like to take home a pack of the paper that is stockpiled near the school printer. I would use it only for printing class notes. Given that I would consume the same paper if I printed the material at school, is there an ethical problem with this?

Taking the printer paper without permission is theft, and theft is ungeneralizable.

Printing the same material at school is not theft because you have permission to use the paper. The consumption of paper is the same in either case, but this is irrelevant. What matters is whether you have permission to consume it.

Taking someone else’s property without permission is ungeneralizable because if it were generalized, there would be no institution of property, and therefore no property to take.

18. Vacation allowance . My previous employer allowed 10 vacation days a year, which could be used at any time without management approval. In addition there were five personal days, for which there were very specific restrictions. They could be used only to take care of a sick child, attend a funeral, or complete the sale of real estate. My boss, however, told me to use personal days as though they were vacation days. In fact, he said I should use personal days first, because they could not be rolled over from year to year as vacation days could. Was it OK to follow his advice?

The analysis is similar to that of Exercise 16 in Chapter 2.

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19. Unqualified intern. While a systems engineer at a bank, at one point I shared a cubicle with Michael, a summer intern. I got to know him quite well, and we became friends. Near the end of the summer, I learned from my supervisor that he was going to recommend Michael for a permanent position. I was naturally happy for Michael, but disconcerted at the same time. Over the summer I had learned that Michael didn’t have the ability for the job. In fact, I had to assist him with his internship duties several times over the summer. Should I have informed my supervisor that Michael was unqualified?

The utilitarian test is pivotal. If Michael takes the job, both the company and Michael are likely to suffer. You can probably prevent this by sharing your reservations with your supervisor. You are therefore obligated to do so unless this would violate generalizability or virtue ethics.

There is no reason to believe that advising one’s superior on the qualifications of coworkers is ungeneralizable. Virtue ethics plays a role here because of your friendship with Michael, but it is far from clear that friendship requires you to allow Michael to take a job in which he is likely to fail. Friendship probably did, however, oblige you to talk to Michael about his suitability for the job. You might have persuaded him to apply elsewhere.

I was working as a contractor for a 20. Playing someone else’s shell game. company that had several concurrent projects with the same client. Each project had a budget, and some had more money left in the budget than others. The company would face a penalty for each budget it exceeded, and it would collect a bonus whenever it came in under budget. While I was working on project A, the company asked me to charge some of my expenses to project B. Presumably the penalty is greater than the bonus, or else there would be no incentive for the contractor to transfer expenses from one account to the other. In any case, the company’s actions are deceptive and unethical. The issue is whether you should follow instructions. The analysis can go along the same lines as in Case 4.5 21. Too much sophistication.

I was a relatively new associate in the sales and trading division of a major investment bank. One of our tasks was to value and manage risk for structured securities, which can be a very complicated affair. My particular job was to help prepare materials used by a sales force that sells lessrisky securities to such traditional investors as insurance companies, pension funds, and fixed-income mutual funds. Riskier securities were sold to hedge funds. At one point I realized that a relatively obscure valuation approach commonly used for another product could help traditional investors understand specific types of risk associated with their investments. I wrote some materials to describe the approach, but my director told me not to share them with the sales force. He said that he didn’t want traditional investors to start viewing their 68

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securities in this way. It would complicate the sales process and make it harder to create demand for new deals. However, I thought we owed it to our clients to provide a more sophisticated risk valuation method. Hint. Note that this case concerns a company decision, rather than the decision of this individual.

The basic question is whether the bank has an ethical obligation to provide the client the best possible valuation method. Generally speaking, there is no obligation to provide customers with the best possible product, as long as there is no misrepresentation. Wal-Mart isn’t unethical because it doesn’t sell the best shirts in the world.

We can ask if there is a professional obligation for financial advisors to provide the best possible investment advice. There have been efforts to put the industry on a professional footing. In the United States, for example, the National Association of Personal Financial Advisors has promulgated a code of ethics that states in part, “Dealings and recommendation with clients will always be in the client’s best interests.” However, it is hard to say that there are generally recognized professional standards for sales people at “investment banks” (investment banking is actually only a small part of their business). The banks seem to have a different conception of their responsibilities than some of their customers have. This is one reason that large banks have recently the subject of legal action, notably Goldman Sachs.

The issue therefore boils down to a utilitarian choice. A more sophisticated valuation method may result in wiser investment and increase overall net utility.

Yet if it alienates customers, they may end up receiving inferior advice elsewhere, and there is no net improvement. To show that the bank has an ethical obligation to take your advice, you would have to provide solid evidence that your proposal would result in greater overall benefit.

22.* Fraud in Armenia. I was a Peace Corps volunteer in a small Armenian mining town. I spent a year trying to learn the language and local customs, and in the process I got to know the owner of a local poultry farm. Aside from the mine, this farm was the largest employer in town, with roughly 300 employees, although many of them worked only part time due to bad management. I estimated that if the farm were managed properly, it could employ another 300. I began meeting with the farm’s accountant and discovered that he owned a computer, at which point I began to teach him to use Excel. After a time he began to realize the value of what I was teaching, and he stopped his heavy drinking before and during our sessions. Although there was plausible deniability, I got the strong impression that he wanted to prepare multiple sets of books: one for under-the-table investors in the United States, one for the relatively corrupt Armenian government, and a true version for resource management. I concluded that if I taught him enough to upgrade the poultry operation, he would use the same knowledge to commit fraud. Should I discontinue my efforts?

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The Armenian’s fraud is clearly unethical because it is deceptive. The question here, however, is whether it is ethical to keep teaching this guy how to use Excel and thereby make the fraud possible. We can’t simply say it is unethical because it makes an unethical act possible. Otherwise if the guy gets sick, it would be unethical for a doctor to give him penicillin.

We teachers face this issue. Some of our students will use what we teach for unethical purposes. Some may even use knowledge of ethics to defend unethical practices with clever arguments.

This seems to be a case where a utilitarian test is more useful than a generalization test. Nearly any teaching activity passes a generalization test. The purpose of teaching, let’s say, is to impart knowledge. Would this be possible if everyone taught spreadsheets to unscrupulous students? Certainly. It would be possible even if everyone taught bomb science to terrorists.

However, teaching bomb science to terrorists is likely to reduce utility, while teaching ethics to MBAs may increase it. In the case of the Armenian student, you must judge whether his new knowledge will do more harm than good.

23. Blaming the subcontractor.

I worked for EPI, a contractor that specialized in the construction of manufacturing plants. EPI does most of its own work but subcontracts for electrical and instrumentation systems. Engineers at EPI prepare the drawings, estimate the required hardware, and issue subcontracts to the most competitive bidder. The subcontractor, generally a small company, orders the hardware three or four months in advance, because of long lead times.

It then completes the construction under the supervision of EPI engineers. Upon reaching the construction site, I found that the installation drawings were wrong, and as a result the subcontractor had not procured some of the hardware. I reported this to George, top boss at the site, who instructed me to correct the drawings and hand over a list of additional hardware items to the subcontractor’s foreman. I was to tell the foreman that these items should have been ordered by the subcontractor. George explained that I must make it appear that the items were included in the initial hardware list, so that EPI could avoid paying the hefty cost (about $70,000) of expedited delivery of these items. In other words, George wanted me to cover up EPI’s mistake and get the subcontractor to pay the additional cost. Hint. First evaluate George’s action and then address the decision his subordinate must make.

Here, again, the boss asks a subordinate to lie. It is the most common theme in ethical dilemmas that MBA students submit to me. Case 4.5 and Exercise 20 are examples. The analysis is similar to that of Case 4.5.

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24.* Inside information? Mr. Martin was, until recently, head of investor relations at Verband, a Fortune 500 company. He had risen steadily through company ranks, due to his infallible judgment and ability to tell the company story in a most marvelous way. This was not an easy task, as Verband had a habit of covering up its blunders. The company had major discrepancies in its accounts and, in particular, lied to stockholders over the years about the lack of progress in its overseas operations. However, Martin was adept at putting the company in the best light while diverting attention from any discrepancies. The private banking division at EuroBank, however, had been scrutinizing Verband carefully on behalf of its clients. The research team contacted Martin numerous times with penetrating questions, which he always skillfully deflected. The research team was so impressed that they recommended that EuroBank try to hire Martin. Due to a very generous offer and rumors that Verband was looking for a buyer, Martin transferred to EuroBank. He quickly became as successful as he had been at Verband. On one occasion, the head of private banking offered a wealthy client with large holdings in Verband a presentation by a former Verband insider, who of course was Martin. Martin prepared the presentation carefully so as to use only data in the public domain to reveal the serious discrepancies in Verband’s statements. Revelation of anything more would have violated his contractual confidentiality obligations to Verband. The difference between Martin and any other analyst is that, as a former insider, he knew exactly where to look for the discrepancies. Following the presentation and a series of follow-up meetings with Verband management, the client sold his large holdings, causing the share price to plummet. Verband was subsequently taken over at a much reduced price.

Martin and his colleagues at EuroBank are convinced that his presentation to the client was entirely proper. After all, Martin’s judgment is infallible.

It is hard to say, without knowing more about the circumstances of the case, whether Mr. Martin’s revelations maximize utility. We therefore grant that the pass the utilitarian test.

Verband’s conduct is ungeneralizable, but this alone doesn’t show that Martin’s exposure of their conduct is generalizable. The test must be applied directly to Martin’s action. Martin’s conduct at Verband is also highly questionable, because he misled investors. But this, again, is not the issue before us—at least initially.

For present purposes we can view confidentiality as an agreement: you give me information, and in exchange I agree not to reveal it. Violation of confidence is unethical because it breaks this agreement, and breaking agreements is ungeneralizable. The issue here is whether Martin actually violated confidence by pointing out a pattern in publicly available information.

Clearly he did. He knows about the pattern in the public documents because of information he received in confidence from Verband. How to connect the dots is information over and above the dots themselves. If it were not, then there would

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be no point in mentioning it! If an analyst with Martin’s level of expertise could connect the dots without inside knowledge, then perhaps Martin is not violating confidence but is only providing expertise. Yet this is apparently not the situation. So pointing out the pattern is a violation of confidence.

However, one might argue that the confidentiality obligation doesn’t apply here because the information is about Verband’s unethical behavior. The issue is what kind of information is covered by a confidentiality agreement. If I work for a company that takes me in its confidence, there is at least an implied confidentiality agreement, but it clearly doesn’t cover all information—for example, knowledge of accounting fraud. Absent any clear understanding that it covers conduct generally recognized as unethical, one might argue that I made no promise to keep this kind of conduct a secret.

On the other hand, suppose a friend says to me, “I will tell you who my extramarital lover is if you won’t reveal it to anyone.” If I agree to hear the information, I am clearly promising not to reveal it—even though it is about unethical behavior (or so we will suppose for present purposes). If people never kept confidentiality promises about unethical behavior, I would not have been able to obtain the information in confidence.

In some cases, however, I shouldn’t promise confidentiality in the first palace. If so, my “act” of promising confidentiality is not an act because it has no coherent rationale. There is no need to maintain consistency, because there is no consistency to maintain. So when I make a promise I shouldn’t have made, the fact that I made the promise doesn’t obligate me to keep it—although other factors may obligate me to keep it, such as a utilitarian calculation, which may show that it would harm the other party to break the promise.

As for Martin, he continued to work for Verband and cover up its practices long after he was aware of their questionable nature. So perhaps it is like the extramarital affair. He is implicitly promising to keep the questionable information confidential. Furthermore, if corporate officers never kept confidentiality about questionable behavior, Martin might not have been able to obtain such information in confidence.

However, I think we can make a case that that Martin should not have implicitly promised confidentiality for unethical actions in the first place. Given this, he has no obligation to keep his confidentiality promise, unless breaking it is unethical on some other ground. We have already concluded that there is no clear utilitarian case against revealing the information. As for virtue ethics, nothing in the case suggests that Martin has personal relationships at Verband that would inspire loyalty obligations. Rather, he seems to be a smooth operator who looks out for himself. Revealing the information may be illegal, but we can assume that Martin is well apprised of the relevant laws. Martin is therefore ethical in

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revealing confidential information of unethical behavior at Verband, to the extent it is legal to do so.

This means that Martin can ethically reveal some additional dots as well as connect the dots that are already public. He chose not to do so, perhaps to stay on the safe side of the law. There may also be a utilitarian argument against revealing additional dots, because it could inspire allegations of improper behavior and create unnecessary problems, when Verband’s shenanigans can be well enough exposed without taking such risks. We conclude that Martin’s ethical judgment, though far from infallible, is correct in the present case.

Chapter 6

1. Too much pressure. Hank Kolb was put in charge of quality assurance at a plant where practices were not up to par. The most immediate issue facing him was what to do about some pressurized cans of lubricant that had just been shipped out. The cans had been overpressurized by faulty equipment. When this was discovered, one of the production supervisors vented the excess by hand without taking measurements to make sure the pressure was within tolerances.

One option was to recall the cans and check them systematically, but this would be an expensive and time-consuming process, and it would antagonize customers.

Should Kolb recall the cans? Hints. See Case 6.2 for guidance on how to analyze this case. The utilitarian test can perhaps be applied by the use of statistical sampling to estimate the cost of possible injuries. Kolb could recall a random sample of the cans for this purpose. However, you must ask whether statistical sampling alone can enable Kolb to promise safety, as required by the generalization principle, or whether a complete recall is necessary. Statistical sampling presupposes that uncontrolled defects are random.

The utilitarian test balances the utility cost of making a product safe against the expected disutility of injuries. This requires an estimate of the probability of injuries, as explained in Case 6.2. Unfortunately, Kolb has no basis for assigning a probability to injury, because he doesn’t know the pressure in the cans. So we must go back to the foundations of the utilitarian test, which is at root a rationality test. To be rational, one must define goals and take actions that are designed to achieve the goals. Presumably one of the company’s goals in this case is to provide customers with usable cans of lubricant, which implies that the pressure is within tolerance. But if no one at the company really knows how much pressure is in the cans, it is impossible to say that the company has designed its actions to meet this goal. One can’t design actions for any purpose if without knowing what one is doing. One remedy would be to recall some of the cans, enough to form a statistically significant sample, and check the pressure. This may allow Kolb to estimate the

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probability that any of the cans could cause problems, and then he could apply the first utilitarian test described above. If this procedure causes so much delay that other customers would be using the cans in the meantime, the only rational course of action is to recall all the cans and pressurize them to specs.

A recall may incur less disutility than Kolb thinks. It delays production and irritates customers, but it also shows customers that the company is serious about safety and quality.

The generalization test can also be applied. As noted in Case 6.2, selling a product implies a promise that it is safe, but one can promise only what is under one’s control. The cans are not under Kolb’s control, because he doesn’t really know what is in them. Again, he could recall a sample of the cans and measure the statistical probability of a dangerously overpressurized can. If it is vanishingly small, then he has control and can promise safety. Otherwise he must recall all the cans to make sure the pressure is under his control.

2. Fraud at Interspeed Corporation. Interspeed Corporation had just gone public, and Senior Vice-President for Sales Arthur Goodwin was keen to meet annual revenue targets. The fourth quarter target, for example, was $3 million, but the books showed only $1.9 in revenue. Goodwin decided he had to do something. He persuaded Solunet Inc. to take delivery of $1.2 million in inventory and hold it until another Interspeed customer bought it shortly after the new year began. Solunet was allowed to return the goods to InterSpeed if it couldn’t sell them to the third party. Goodwin counted the $1.2 million as revenue and so pushed fourth-quarter revenue to $3.1 million, slightly above the target. Goodwin’s conduct was a clear violation of GAAP. Solunet didn’t actually buy the goods, because it didn’t commit itself to paying for them. So there was no revenue to report. As it turned out, the customer Goodwin counted on wouldn’t buy the inventory. So Goodwin arranged for another company, IWay, to buy or lease the equipment. When I-Way could not come up with the money, Goodwin transferred funds to I-Way, which leased the goods from a leasing agent. The leasing agent bought the goods from Solunet, which used the money to pay Interspeed, completing the circle.

Goodwin kept digging himself into a hole. In another incident, he forged a signature on an altered contract to create the impression that Interspeed had made a $6.4 million sale. Before it was all over, he had overstated the company’s revenues by 60%, or $9 million. In a June 2006 Federal jury trial, Goodwin was convicted of securities fraud for his activities at Interspeed. He was sentenced to 30 months in jail, followed by a three-year supervised release. The Securities and Exchange Commission (SEC) also brought a civil action against Goodwin for the same offenses. In May 2007, he settled with the SEC by agreeing never to serve as an officer or director of a public corporation and by turning over $100,521 in earnings that resulted from his fraud. The payment was waived on grounds of financial hardship.

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It doesn’t take rocket science to show that Goodwin’s conduct was unethical. In fact, the business scandals we hear so much about may give the false impression that it is normally easy to recognize the right decision. We hear about these scandals precisely because they make a sensational story of egregious wrongdoing. Many real-life decisions are murky and difficult to sort out even when one has the best of intentions. In the Interspeed case, for example, there are several hypothetical scenarios in which the right decisions would not be so clear: 1. Interspeed would be forced into bankruptcy if it didn’t show additional revenue in the current period, but it has very good prospects for the future.

2. In addition to the previous scenario, Interspeed makes products that save lives.

3. There is a signed contract in which the third party agrees to buy the goods at the beginning of the new year.

4. Interspeed offers Solunet a percentage of the final sales for buying the product before the end of the year and passing it on to the other customer at the beginning of the new year.

Your task is to analyze the case under each of these scenarios.

Hints. For Scenario 1, look at the conditions under which income smoothing can be ethical in the analysis of Case 6.1. Scenario 2 asks in effect whether the end justifies the means, an issue discussed in Chapter 2. You must test the generalizability of fudging numbers when saving lives is part of the rationale (i.e., part of the scope). Note that saving lives is part of the scope only if Interspeed would avoid fudging numbers if its existence as a company were at stake, but lives were not. You may assume that the scheme in Scenario 4 is consistent with GAAP. Let’s first deal with the issue that Goodwin actually faced. Exactly why was it unethical for him to fabricate revenue? Because it was deceptive, and deception is not generalizable. The purpose of Goodwin’s deception was to convince Wall Street that Interspeed had achieved its revenue target. If companies always fudged revenue numbers whenever they deviated from the target, then no one would believe the numbers, and Goodwin wouldn’t convince anyone of anything.

Question 1. Imagine that Interspeed’s low revenue in the current period is a temporary thing. There are large orders in the pipeline, and prospects for the company are bright. Yet if Interspeed reports the bad news now, investors and lenders will abandon the company, and it will go under. One might argue that a little income smoothing would be more honest, as discussed in Case 6.1. The case analysis concludes that that income smoothing can be ethical if (a) it is intended to provide investors a truer picture of the firm, (b) it is legal, (c) it will result in a net increase in benefit for stakeholders, (d) it is consistent with GAAP, and (e) GAAP standards are strict enough that stakeholders would be able to infer

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the true state of the firm if all firms used smoothing within GAAP. Goodwin’s income smoothing failed (a), (b), and (d). It probably failed (c) as well, inasmuch as Interspeed went out of business in 2001. However, if prospects for the firm were much better than the current quarter suggests, and investors might really be misled into abandoning the firm, then smoothing could be ethical—provided there is a way to do it that is both legal and within GAAP. Goodwin’s smoothing methods were neither.

Question 2. This question asks whether the end can justify the means—whether deceptive reporting can be justified by the harm it would prevent. Let’s try to imagine a situation in which a company, say PharmaLife Pharmaceuticals, could save lives by fudging numbers. PharmaLife has just released a new anti-malarial drug that could save thousands of lives in developing countries. However, clinical trials have been expensive, and unless the company shows some sales this quarter, key investors will have to pull out, and production will shut down. Some other company will acquire rights to the intellectual property and may even produce the drug, but this could take a year or more, and in the meantime thousands of children will die needlessly. PharmaLife is appealing to foundations for emergency relief, so far without success. So, management cooks the books in a way that would normally be unethical due to the deception involved. They argue that the end justifies the means.

Chapter 2 of the text points out that the end can never justify an unethical means.

The utilitarian principle cannot override the other conditions for rational choice, because it asks us to select the act that maximizes utility, and behavior that violates the other conditions is not an act. This means that it is wrong to deceive even to save a million lives, if this kind of deception is ungeneralizable. This may seem ridiculously strict, but if we make exceptions to the conditions whenever we think something more important is at stake, what good are the conditions? They apply except when they don’t apply.

Actually, deception is sometimes generalizable. Suppose, for example, that the secret police of an oppressive regime are seeking out dissidents for torture and execution. You know where some of them are hiding. When the police come to your house and ask where they are hiding, you say you don’t know. This is a lie, but it is generalizable. The purpose of the lie is to withhold information from the police. If everyone who could withhold information for this purpose did so, they would still be able to withhold information by lying, even though the police would guess they are lying. Lying to the police in this case is ethical, not because the importance of saving lives overrides generalizability, but because lying for this reason is generalizable.

One might argue that deceiving the public about PharmaLife’s revenue, solely for the sake of saving lives, is generalizable. Maybe this is such a rare occurrence that if companies always deceived in such cases, investors would not be on guard

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for deception, and the deception would work. OK, but a generalizable rationale must not only be generalizable, but must in fact be a rationale, and it must be PharmaLife’s rationale.

For saving lives to be a rationale for deception, there must be something in the rationale that explains why this and not other things (such as profitability) justify deception. I think PharmaLife is OK on this one, because it has made saving lives its overriding utilitarian goal. As long as it sticks to this goal consistently, it has a rationale for making an exception to the deception rule. But this means that ParmaCare must really put saving lives first in everything it does.

Furthermore, if saving lives is really PharmaLife’s reason for deception, it must be the only reason PharmaLife is fudging the numbers. If GlaxoSmithKline offered to produce the drug immediately if granted cost-free license to the IP, then to be consistent, PharmaLife should hand over the license, tell investors the truth about its finances, and shut down if necessary. So in this rarified hypothetical situation, saving lives may be a generalizable rationale, but only if PharmaLife is prepared to prove that saving lives is truly its overriding goal.

Question 3. This question asks whether Goodwin’s scheme is ethical if there is a signed contract for a third party to buy the goods from Solunet after the beginning of the year. There is nothing new here. The sale will not be made until next year, and the revenue should be counted next year. Anything else is contrary to GAAP and therefore deceptive, because investors expect revenue to be reported according to professional standards. The only reason for shipping the goods to Solunet is to engineer a subterfuge. As argued above, deception in this kind of case is ungeneralizable and unethical.

Question 4. Here we have a deal in which Solunet agrees to buy the goods now, and InterSpeed promises a Solunet percentage of the sale revenue if Solunet resells them. I take this to mean that Solunet assumes the risk. If it cannot resell the goods, then it is stuck with them. If it does resell them, it gets a “commission” from InterSpeed that in effect provides Solunet a markup. As I understand it, this is in accord with GAAP, because Solunet assumes the risk of the sale. Of course, the revenue should be offset by the commission InterSpeed expects to pay.

Because the maneuver is at least technically in accord with GAAP, one cannot claim that it deceives investors on the grounds that it departs from GAAP. The ultimate generalization test, however, is whether this kind of financial reporting would achieve its intended effect if all companies behaved likewise. If the intent is to cause investors to make a financial assessment that is better than they would make if companies always engineered this kind of third-party transaction when it would bring them up to target, then this kind of reporting is ungeneralizable and unethical. However, if reporting revenue in this way actually presents a truer picture of the firm, and this is the intent, then investor judgments might be about

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the same if they knew that firms regularly used this kind of scheme to give a truer picture of the firm. So if the firm is making a good faith effort at accurate reporting, then this could be the kind of ethical income smoothing discussed above. In particular, it satisfies (a) because it is intended to provide investors a truer picture of the firm, and (d) because it accords with GAAP. I will assume (b) it is legal and (c) it will result in a net increase in benefit for stakeholders. I just suggested that (e) GAAP standards are strict enough that stakeholders would be able to infer the true state of the firm if all firms used this kind of smoothing within GAAP. To be ethical in smoothing income, the decision maker must arrive at the same judgment based on his or her understanding of the business world. In conclusion, Arthur Goodwin’s conduct is unethical because it fails both the utilitarian and generalization tests. Income smoothing can be ethical under certain strict conditions, but Goodwin’s method of income smoothing does not meet these conditions, even if the survival of the firm is at stake. The situation does not change if a third party has contracted to buy the inventory transferred to Solunet. There are extreme hypothetical conditions under which deceptive revenue reporting could be ethical, but showing that this would save lives does not necessarily justify it. At a minimum, the firm must also be prepared to show that saving lives is its top priority, for example by its willingness to shut down and turn the product over to another firm if this would accomplish the same end ethically. If Solunet buys the inventory now with the prospect of receiving a commission from InterSpeed on resale, then InterSpeed can report this revenue (minus the commission) in the current period without violating GAAP. But to be ethical, this kind of reporting must meet the strict conditions for ethical income smoothing just mentioned. In particular, it must give a truer picture of the firm’s financial status and be intended to do so.

3.* Celebrity endorsement .L&L Advertising just signed a contract with movie star Lance Willard for celebrity endorsements of Bud’s Best bacon. The president of the firm assigns the account to Annie, who soon learns the awkward fact that Lance has just become a vegetarian. The president assures her that all legal requirements for the endorsement are satisfied, but Annie is uneasy and consults the American Advertising Federation’s Advertising Ethics and Principles. It states that “advertising containing testimonials shall be limited to those of competent witnesses who are reflecting a real and honest opinion or experience.”

When Annie interviews Lance, he assures her that Bud’s Best has been his favorite brand of bacon since he was a kid. However, he learned during a recent medical checkup that his cholesterol is dangerously high, and his doctor advised him to avoid such high-cholesterol foods as bacon and eggs. He decided to avoid all meat, for good measure. Annie diplomatically asks Lance if he is comfortable endorsing bacon. Lance responds that his conscience is clean, because he will describe only the taste and quality of the product, which he genuinely believes are 78

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tops, and say nothing about whether bacon is healthy. If consumers are going to eat bacon, they may as well eat the best. Besides, many persons can eat a reasonable amount of bacon without adverse health effects. It is up to consumers to decide what kind of diet is right for them. Is it ethical for L&L to use Lance’s endorsement? Is it ethical for Lance to give it? We can begin with how professional ethics applies, because the case provides some evidence.

Lance seems to meet the stated criteria for an endorsement. I suppose anyone who has eaten bacon over a period of time, and paid attention to it, is “qualified” to give an opinion. There is no reason to doubt that Lance’s opinion is genuine. His endorsement is therefore consistent with professional ethics. The endorsement may nonetheless seem dishonest because Lance doesn’t eat bacon himself. Granted, he won’t say anything in the ad about the health effects of bacon, but the mere fact that he is endorsing the product implies that he is willing to use it. An analogy may help. Suppose an automotive expert endorses Toyotas but recently stopped driving because his eye doctor warned him that his astigmatism could make it dangerous. We probably wouldn’t say his endorsement is dishonest, because he would be willing to drive but for his eye condition. Similarly, if Lance would be willing to eat bacon if he had normal cholesterol, then perhaps we can say he is honest for the same reason. The analogy may seem inexact because we accept the auto expert’s endorsement on the strength of his expertise, where Bud really has no real “expertise” in bacon. OK, suppose a movie star with the same eye condition endorses Toyotas. The star has driven many cars but is no expert. I don’t think we would view the movie star as dishonest as long as he or she would be willing to drive without the eye condition. This indicates that we don’t infer that the star actually drives. However, if the movie star has sworn off driving because it is dangerous in general, we could have a problem.

Expertise could be relevant if the expert refuses to drive on principle, because in this case we would probably accept the testimony as honest based on the expertise alone. A non-expert celebrity, however, probably must be willing to drive in principle to avoid dishonesty. The conclusion seems to be that Lance’s endorsement is ethical if he would be willing to eat bacon if his cholesterol were normal. Otherwise, it is misleading and therefore unethical. If Anne is aware of Lance’s attitude, then she, too, is unethical in airing Lance’s endorsement, because she causes viewers to believe something she knows is false.

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There is uncertainty in this analysis, but the uncertainty is due to a question of fact, not ethics. It is uncertain whether viewers will infer from Lance’s endorsement that he eats bacon himself.

23.The MasterDept lockbox problem . MasterDebt, a credit card company, receives thousands of payment checks from cardholders every month. The company wants to exploit float so as to earn as much as possible in interest and fees. Float is the time lapse between the deposit of a payment check and crediting the amount to MasterDept. Cardholders pay interest on any outstanding balance, and MasterDebt wants to maximize float to collect more interest from them, and perhaps late fees as well. The plan is to maximize float by establishing lockboxes in several cities. Cardholders in each region will be instructed to send their checks to a certain lockbox, perhaps a distant one to maximize float. The company is considering six cities as possible lockbox locations, each of which carries a certain annual fixed cost. The company asked its technical staff to select lockbox locations and assignments that maximize the difference between interest earned from float and the cost of the lockboxes. The solution is far from obvious, but the lockbox problem can be formulated as an uncapacitated facility location problem, a well-known mathematical model used in operations research.

Solution of the problem reveals that the location of the lockboxes makes a substantial difference in net benefit to the company. Lockbox location problems have been solved for many years but raise ethical issues. The interest gained by MasterDebt is interest lost by its customers. One can ask whether MasterDebt has the right to collect this interest at the customer’s expense. But this is only an assertion, not an argument. Even if we accept it, we must decide how much delay is artificial. Two days? Three days? There are also legal issues involved, partly due to new credit card regulations recently enacted in the United States. We take it for granted that credit card companies should abide by regulations. Let’s focus here on what would be their ethical obligations without specific laws governing the float period. Your task: arrive at an ethical lockbox location and assignment policy. Hint. Delay in processing checks incurs social costs because it introduces uncertainty, makes it more difficult for people to manage cash flow, and may result in less-than-optimal use of their funds. The interest earned by the credit card company due to delay may be a rough indication of these social costs, which can be balanced against the cost of locating lockboxes close to customers.

Utility might be roughly maximized by modifying the facility location model so that it minimizes the sum of the interest cost to consumers and the cost of the lockboxes. You should also apply the generalization principle and virtue ethics (think about why we have financial services professionals).

Let’s begin with a utilitarian analysis. One effect of maximizing float is to increase the credit card interest charges and late fees, because cardholders must pay finance charges for a few additional days after they write the check, and their checks are more likely to be late. Cardholders could conceivably write the check earlier to offset this delay, because they could anticipate the delay and write the 80

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check before the funds become available in their accounts. However, we can suppose they generally won’t do so, since otherwise MasterDebt would see no advantage in maximizing float.

The issue is how these larger fees affect utility. Credit card interest rates and fees have sparked controversy for some time. Critics have claimed that the rates are usurious, and they would in fact be illegal in many states were it not for a U.S. Supreme Court ruling (Marquette v. First Omaha Service Corp., 1978) that a credit card issuer can charge everyone in the U.S. rates that are legal in its home state. The issuers therefore incorporate in states that have no interest rate cap.

One could look at the arguments behind these state laws, which are presumably designed to maximize utility. If they are convincing, one might make a case that high rates and fees are bad for overall utility and higher ones even worse.

Another problem with extended float is the general inefficiency that results from delayed processing. Customers must plan ahead to make sure that their account will contain sufficient funds several days after they write the check. This introduces more uncertainty, makes it more difficult to manage cash flow, and may result in less than optimal use of their funds. The effect is small, but it is an effect nonetheless. The utilitarian solution is therefore to balance the company’s cost of locating lockboxes close to customers against the social cost of excessive float, and find the happy medium.

Maximizing float appears to be generalizable. If customers pay more in finance charges if one company maximizes float, then there is no reason to doubt that customers would continue to pay more in finance charges if all card issuers maximized float. The company would therefore continue to achieve the purpose of its action if all companies with the same purpose acted similarly. Maximizing float could be a breach of contract, which is ungeneralizable. Customers who sign up for a MasterDebt card may justifiably assume that the float time is in line with that of other companies. MasterDebt might violate this agreement if it increased the float time. There is probably no breach of contract in the legal sense, because the fine print that accompanies the credit card application probably states that MasterDebt can change the terms any time it wants (after notification, which is provided here). However, from an ethical point of view there could be an implied promise about the float time. Certainly, if the lockbox is moved to Tashkent or Mogadishu, and the float time is three weeks, then there is a strong case for breach of an implied agreement. Yet it is hard to argue for an implicit understanding that the float time is two days rather than four days. So I think we have to say that maximizing float is generalizable if the increase in float is a day or two.

Maximizing float is problematic virtue from a virtue ethics point of view. In fact, one might argue that fast and efficient processing is an essential part what of what this profession is all about. It hard to understand what MasterDebt managers

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think their profession is for, if it is OK for them to gum up the payments system with long floats.

In summary, maximizing float passes the generalization test if it does not increase float more than a day or two. It does not, however, pass the utilitarian test, and it appears to be in conflict with what being a financial services processional is all about.

As for the issue of how much float is too much, the utilitarian test governs.

Lockboxes should be located so as to balance the cost of more lockboxes against the social cost of long floats. The solution of MasterDebt’s capacitated facility location model could be a rough approximation of the optimal tradeoff.

The credit card industry raises more general ethical issues. As already noted, there are utilitarian issues with its high interest rates and late fees. Critics have also claimed that aggressive promotion of credit cards, particularly to young people, encourages a debtor society that will pay an economic price in the future.

6. Insider trading.On November 17, 2008, the SEC filed charges against Mark Cuban for insider trading. The SEC complaint said that Momma.com, an Internet search engine firm, gave Cuban advance notice of a stock offering at belowmarket price, on the condition that he would keep this information confidential.

Cuban already held a good deal of stock in the company and predicted that the new offering would bring down the market price. As a result, he sold all of his stock. The market price in fact fell the day after the offering was announced to the public. Cuban’s early sale allowed him to avoid losses of $750,000. An SEC official stated, “Mamma.com entrusted Mr. Cuban with nonpublic information after he promised to keep the information confidential. Less than four hours later, Mr. Cuban betrayed that trust by placing an order to sell all his shares. It is fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market.” Mark Cuban (allegedly) broke the insider trading law, which is unethical because breaking the law is normally ungeneralizable. But is there anything inherently wrong with insider trading?

Would it be ethical if it were legal?

Hints. Several arguments have been advanced against insider trading. Do valid applications of the conditions for rational argument underlie any of these arguments?

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It reduces utility. If the trade affects the stock price, a major stockholder can dump his holdings just before bad news is released to the public. This could depress the stock price even more and harm the company. Yet some economists argue that insider trades make everyone better off in the long run because the market has more and earlier information about the company, which leads to more rational investment. If an insider trade has no effect on the stock price, then the trade benefits the trader and 82

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presumably hurts no one. (Remember that the utilitarian test is not whether a general practice of insider trading maximizes utility, but whether a particular investor’s trade does so.)

It results in an “unlevel playing field” or, to quote the SEC official, is “fundamentally unfair.” Should we treat investment as a competition or sports event that has to be “fair” in some sense? Some argue that if inside trading were standard practice, fewer ordinary investors would buy stocks, because insiders would reap a greater share of the rewards of investing, and less capital would be raised. (Note that the generalization test doesn’t ask whether the market would be less efficient, but whether one can rationally believe that inside traders would still be able to achieve their purpose of making more money.)

It is misappropriation of company information, which is shareholder property, and is therefore essentially theft. Can information about company plans be viewed as property?

It violates fiduciary duty when the insider is a company officer, because insider trading can harm the company more than it benefits the trader.

This doesn’t apply to Mark Cuban, but is it a valid argument for company officers?

It redistributes wealth unjustly because it benefits wealthy inside traders at the expense of small investors.

Let’s begin with a utilitarian analysis. If an insider trade has no effect on the stock price, then at least on the face of it, it passes the utilitarian test. The trade benefits the trader and hurts no one and so increases utility. If the trade affects the stock price, things could go either way. A wealthy inside investor who knows that the company has a great idea can help make it all happen and create utility. On the other hand, a major stockholder who dumps his holdings just before bad news is released to the public could depress the stock price even more and make things worse for the company, creating disutility that outweighs his own gain. Even here, some people argue that everyone is better off in the long run because the market has more and earlier information about the company, which leads to more rational investment. There is no reason to believe that Mark Cuban’s sale affected the stock price, and so it passes the utilitarian test. To apply the generalization test, we ask whether an inside trader could achieve his purposes if everyone with the same reason for insider trading practiced it. His reason is presumably that he is privy to company information that allows him to make greater gains by buying or selling company stock. Some argue that if inside trading were standard practice, fewer ordinary investors would buy stocks, because insiders would reap a greater share of the rewards of investing, and less capital would be raised. But the issue is not whether the market would be less efficient. It is whether the market would be damaged so much that the inside trader couldn’t achieve his purpose of making more money. Insider trading is generalizable if it is rational to believe that this wouldn’t happen. As it happens, 83

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economists argue about whether generalized insider trading is even economically inefficient. Some prominent thinkers say it is a good idea. Given this, it can hardly be irrational to deny that generalized insider trading would defeat the purpose of insider trading.

Two additional arguments have the character of generalization tests. One is that insider trading is wrong because it is misappropriation of company information, which is shareholder property. Misappropriation of property is similar to theft and is ungeneralizable for much the same reasons. Yet it is unclear why information about company plans is property. It is valuable and can be “sold” by charging money for access to it, but one cannot transfer ownership of the information as one can do for property. A company trade secret is indisputably property, and an insider might invest on the basis of knowledge of it, but it is unclear why this is misappropriation. The full value of the trade secret is still available to the company, and perhaps even greater value, due to the insider’s investment.

A second argument against insider trading is that it violates fiduciary duty. It applies only to traders that have fiduciary duty to the company and so would not apply, for example, to Mark Cuban. It is a generalization argument, because fiduciary duty is based on a promise to the owners (“I will take good care of your company”), and breaking a promise simply for personal gain is ungeneralizable.

If an inside trade hurts the company more than it benefits the trader, then it fails the utilitarian test and is unethical for that reason alone. So we can restrict our attention to trades that benefit the trader more than they hurt the company. Does fiduciary obligation require the trader to sacrifice in order to benefit the company, even when the sacrifice is greater than the benefit to the company?

It all boils down to what the insider has explicitly or implicitly promised to do for the owners, and this can be vague. If the “sacrifice” implies a net reduction in the insider’s wealth, as opposed to forgoing an opportunity to increase wealth, then I think we normally would say there is no obligation to make the sacrifice.

Sacrificing wealth in this sense is tantamount to a reduction in compensation, and a manager has no contractual obligation to accept less compensation to save the company money. This doesn’t mean, by the way, that a manager can stay home on Fridays because his contribution to the firm on Fridays is less than the cost of driving to work. Showing up for work is a contractual duty in its own right.

The situation is less clear if the insider’s sacrifice is to pass up a chance to make more money. If an executive can make a windfall on an inside trade that slightly damages the firm, it is hard to say it is unethical to do so, due to the vagueness of the fiduciary promise. An obvious way to remedy this vagueness is to include an insider trading clause in executive contracts. One might also argue that the executive has a fiduciary duty to go to the board and ask for clarification on insider trading policy, if it is not clear in the contract.

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Let’s return for a moment to the SEC officer’s statement quoted above. He said that Mark Cuban’s inside trading was fundamentally unfair, presumably because it gave him an advantage over ordinary investors. None of the ethical tests we have examined establish this, or justify an implied analogy with a game or “playing field.” He also said that Cuban betrayed trust by acting on insider information. If this is a reference to fiduciary duty, then it is off point, because Cuban had no fiduciary duty to Momma.com.

So it is unclear how Cuban “betrayed trust.” One might argue that by promising to keep the information confidential, Cuban made an implied promise not to sell on the basis of this information. Perhaps, but there is no evidence of such an implied promise in the case description.

So far we have found little reason to oppose insider trading on an ethical basis, except when it demonstrably harms the firm more than it benefits the trader.

Virtue ethics, however, has something to say. It requires that we act consistently with who we are as human beings. Qualities that are essential to our humanity are virtues, and it is irrational to sacrifice them, unless it is for the sake of preserving another virtue. Loyalty is traditionally seen as one of the virtues.

If a firm is in trouble, an insider selloff could be seen as a breach of loyalty. The famous Enron saga poses the issue clearly. Top executives sold off their Enron holdings just before making announcements that sent the stock price to rock bottom and left thousands of employees with worthless retirement portfolios.

Angry employees insisted that the executives should have borne some of the sacrifice, even if this wouldn’t have helped the company. The captain should have gone down with the ship. The loyalty at stake here is not loyalty to the company, which is not a virtue in the relevant sense. We can be fully human without loyalty to companies, and even without companies, for that matter.

However, when employees work shoulder to shoulder with their bosses to create a company, a loyalty bond forms between them—or should, at any rate. Loyalty is part of what makes human life worth living. To forget about loyalty in a time of trouble is irrational because it is inconsistent with one’s humanity.

If there are no loyalty bonds between executives and their associates, this argument doesn’t work. But in this case virtue has already been compromised. If relationships in the company are based solely on economic incentive with no genuine human connection, then people have already lost part of their humanity.

There is also an issue of honor and professional mission. An executive who has a sense of mission in his/her career will feel reluctant to save or make a bundle by manipulating stocks in a way that employees and other investors can’t.

Executives who are simply in it for the money and prestige won’t have this problem, but then again there is already something missing from their lives. The

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captain need not go down with the ship but should want to be the last on the lifeboat.

To conclude, insider trading is unethical if it is illegal. If an insider trade is legal, then it is ethical if it has no effect on the company’s stock price and does not compromise loyalty or professional honor. In particular, Mark Cuban’s selloff would have been ethical if it were legal. If an insider trade affects stock price, it is unethical if it harms the company more than it benefits the trader. If it benefits the trader more than it harms the company, then it is ethical if the trader has no fiduciary obligation to the owners. If there is a fiduciary obligation, then the trade is ethical if the trader benefits only by avoiding a loss, and there is no breach of loyalty. Otherwise, the trade may be unethical, depending on the nature of the fiduciary obligation, which should be clarified with the board of directors if necessary.

A breach of loyalty or professional honor is hard to define precisely but can be an important factor. It occurs when an executive has a sense of loyalty to employees or professional mission and nonetheless manipulates stocks for personal benefit in a way that employees and other investors can’t. If there is no sense of loyalty or mission, then already something vital is missing.

Given this analysis, a case for criminalizing insider trades would have to rest on utilitarianism or fiduciary duty, not on a “level playing field” argument. The utilitarian case is hard to make, because economists disagree over the economic efficiency of insider trading. However, public resentment of insider trading, due to a perception that it is unfair, would figure into the utilitarian calculation.

Fiduciary duty also provides a weak basis for criminalization, because there are no clear cases where fiduciary duty proscribes insider trades, unless they demonstrably harm the company more than they benefit the trader, in which case we fall back on the utilitarian argument.

A type of fairness argument I did not discuss would maintain that a public policy of allowing insider trading violates the Rawlsian difference principle. That is, by giving insiders a financial advantage over ordinary investors, it creates inequality that is not justified by the fact that it is necessary to makes everyone better off.

This is something that could be discussed with students.

7.* Consulting for Carnegie Foods . The Pet Food Division of Carnegie Foods operates the world’s second largest pet food cannery at Allentown, Pennsylvania.

It ships to five regional distribution centers, which serve such customers as WalMart (40% of its business), BJs, Target, Costco, and others. Despite inventory levels that are substantially higher than the industry average, the company has experienced difficulty maintaining the service levels its customers want. WalMart, in particular, demands a high service level, and it usually gets what it wants due to its market dominance. Adroit Consulting has been engaged to 86

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advise the Pet Food Division on how to manage its supply chain to reduce inventory and improve service. One option that is being pushed internally is to install a two-tier system in which a holding warehouse is placed between the cannery and the distribution centers. Adroit must evaluate this proposal as part of its recommendations. In the meantime, Carnegie Foods has authorized its chief information officer (CIO) to acquire Advanced Planning and Scheduling (APS) software to manage its supply chain. Due to limited resources, the company will not implement APS and Adroit’s recommendations simultaneously, and Adroit must advise which to do first. The case raises at least two ethical issues: • Should Adroit advise Carnegie to use APS, perhaps at the cost of losing a customer? Supply chain systems like APS are well developed; it is very possible that once Carnegie implements APS, it will have no further need for Adroit’s supply chain recommendations.

• Is it ethical to provide Wal-Mart better service than other clients simply because Wal Mart has the clout to demand it—even though Wal-Mart is paying the same price as the others, or even less?

Let’s begin with the issue of how Adroit should advise Carnegie Foods. To make the situation more concrete, suppose that Emma Embiyay is the head consultant on this project and has the authority to sign off on Adroit’s recommendations. If her decision results in a loss of business for Adroit, her supervisors will learn about this. It is hard to anticipate their reaction. They may write an unenthusiastic performance review at the end of the year, they may pass over her in the next round of promotions—or they may respect her for her professionalism.

This brings us to a utilitarian analysis. Although we don’t know how exactly Emma’s personal utility would be affected by a recommendation in favor of APS, the expected utility is what counts, and it is probably negative. Whatever the outcome, however, her personal utility will almost certainly be outweighed by the large positive utility for Carnegie Foods and its customers of using APS. Remember that the utilitarian test examines the net utility of all concerned.

The utilitarian test therefore requires Emma to recommend APS, unless this violates another condition for rational choice. It may, for example, be contrary to Emma’s fiduciary duty to Adroit and its owners. This is not a utilitarian consideration, however, and we will take it up under the generalization test in a moment.

Am I asking Emma to be a martyr? Not necessarily. Maybe she can get creative and dream up some additional work that Adroit can do for Carnegie Foods, even while recommending APS. This is consistent with the utilitarian criterion, because everyone will benefit. Practical damage control of this sort is a good

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idea in general, and it is perfectly ethical in most cases. It may even be obligatory if it increases overall utility.

This analysis presupposes that Carnegie Foods will actually take Emma’s advice, and she cannot be sure of this. But again it is the expected utility that counts, and the expected utility of recommending APS will be large and positive if there is some probability that Carnegie will take the advice.

An interesting dilemma arises if Carnegie will implement APS first no matter what Emma recommends. Perhaps the CIO is really sold on this system and is likely to get his way. Emma might reason that because the utility outcome for Carnegie is the same regardless of what she advises, she may as well recommend against APS and protect her career. This would boost her personal utility, because her supervisors would not blame her for the loss of business, and it would therefore maximize total utility. This argument is correct. In this scenario, giving bad advice passes the utilitarian test. However, it must pass the other tests as well.

We just observed that recommending APS may violate fiduciary duty even if it maximizes utility. Yet as explained in Chapter 2 of the text, fiduciary duty is based on a promise to the owners and applies to board members and top executives of the company. The primary obligation of other employees is to perform the contractual duties associated with their positions and comply with instructions from superiors. Even if fiduciary duty governs here, it is unclear that the fiduciary promise obligates corporate officers to take actions that would be unethical for the owners themselves to take. We must first therefore determine whether giving bad advice is unethical on other grounds.

Let’s move on to the generalization test. One might argue that giving bad advice fails the test because it is a form of deception. By giving bad advice, Emma causes the Carnegie Foods executives to believe that it is her professional opinion, when it is not. This is ungeneralizable because if everyone did it, it wouldn’t work. If consultants always fudged advice when it would benefit themselves and their firm, the Carnegie executives would be on to this, and they wouldn’t be deceived.

Emma is subject to this argument only if her purpose is to deceive. If she wants to persuade Carnegie to postpone ASP, then she wants to deceive them into thinking that this is her honest opinion. But if she doesn’t care whether Adroit loses a customer, but only wants to escape the blame for it, then deception is not part of her agenda. We might respond that even under this cynical assumption, Emma’s bad advice is ungeneralizable, because her underlying purpose is to promote her career. If consultants always falsified advice when it would promote their careers, they would have no credibility, and nobody would hire them.

Emma would have no career to promote.

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This is not so obvious, however. Even if consultants always fudged their advice when it promoted their careers, there would be many occasions on which they would have no particular stake in whether the advice is A or B. The consultants would remain credible on such occasions, and perhaps this is enough to induce clients to hire them. The clients would just be careful to discount advice when it serves the interests of the consultants. In fact, the real world of consulting is sometimes not so unlike this.

So we conclude that Emma’s bad advice is ungeneralizable if her intent is to influence Carnegie Foods to accept it, but it may pass the generalization test if she is only interested in escaping blame for losing a customer.

Deliberately giving bad advice is a clear violation of virtue ethics. It is inconsistent with who Emma is as a professional. A consultant, by definition, is someone who tries to give good advice. By doing otherwise, Emma would be living a lie.

If this is the only virtue at stake, then the choice is clear. Emma must always give her clients the benefit of her best judgment. However, she might argue that loyalty to the firm is also at stake. Even if fiduciary duty doesn’t constrain her to protect the interests of the firm, as argued above, perhaps loyalty does.

If there is really a competing virtue, then the virtue ethics test no longer delivers a clear verdict against giving bad advice. But loyalty to an abstract entity like a firm is not a virtue. One can be fully human without even belonging to firm, much less being loyal to one. To make a loyalty case, Emma would have to talk about loyalty to the human beings she works with, her team.

This is a hard case to make. If everyone’s jobs were at stake, then the pull of loyalty would be a factor to consider—although even in this event, it is unclear that loyalty to a team demands betrayal of the team’s purpose. But only Emma’s career prospects are really at stake. It is her decision to make. If Adroit loses this customer, her team will be assigned to another task, but she may be held accountable.

To conclude, we are assuming that APS is best for Carnegie Foods and that Emma knows it. Given this, the utilitarian test requires her to recommend implementation of APS first, despite possible negative consequences to her career and Adroit. This is consistent with her fiduciary duty to the firm’s owners.

A generalization argument requires the same, unless Emma’s purpose is not to persuade Carnegie to take her advice but only to avoid blame for losing a client.

But whatever the outcome of the generalization argument, virtue ethics requires Emma to give Carnegie the benefit of her best judgment. Loyalty to the firm does not override this result.

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Emma’s failure to give the best advice therefore violates at least one condition of rational choice, very probably violates two, and violates all three unless Emma’s motives are quite cynical. She must tell the truth and risk losing a client.

However, it is perfectly ethical—and perhaps obligatory—for Emma to mitigate the harm to herself and her firm by trying to find other ways that Adroit can be of service.

If Carnegie is likely to implement APS first regardless of Emma’s advice, then the utilitarian argument may break down. However, the generalization and virtue arguments remain valid, and her obligations are the same.

We now take up the matter of how to deal with Wal-Mart. The issue is only implicit in this case but has become a headache for many suppliers. To make things concrete, let’s suppose that Wal-Mart demands service levels that Carnegie Foods cannot possibly deliver to all its customers. It can therefore satisfy Wal-Mart only by giving it preferential service.

Two lines of argument immediately come to mind. One is that it is unfair to provide superior service to a customer simply because it has the clout to demand it. If Wal-Mart paid a higher price, then fine, but it doesn’t, and it may even pay a lower price. The vendor is forced into preferred service by the monopoly power of Wal-Mart, which is contrary to the spirit of the free market.

The opposite argument begins by pointing out that businesses have preferred customers all the time. If a vendor offers a special deal to attract a preferred customer, it is because that customer has something the vendor wants (such as large volume). The vendor offers something more to get something more. This is what business is all about.

Both arguments sound convincing. To make some progress, let’s apply the conditions of rational choice.

To run a utilitarian analysis, let’s make the reasonable assumption that if WalMart doesn’t get the service it wants from Carnegie Foods, it will get equally good service from some other supplier, say Dog Eat Dog Foods. This is because Wal-Mart can get anything it wants. So, refusing to give Wal-Mart superior service has no effect on the utility created by Wal-Mart and enjoyed by its customers. It has a negative effect on Carnegie and a positive effect on Dog Eat Dog. If these two factors balance each other, then the utilitarian test has nothing to say.

It is plausible, however, that Carnegie’s loss of 40% of its business will result in more harm to itself than good to the competitor. Dog Eat Dog will benefit from the additional business, but cutbacks at Carnegie will have multiple repercussions—layoffs, strained families, and decline of the community. If Dog

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Eat Dog were more efficient than Carnegie, then the economy might benefit from this kind of “creative destruction” (to use Joseph Schumpeter’s phrase), and things might be better overall if Carnegie loses the business. But we may suppose that with Adroit’s help, Carnegie is going to be as efficient as anyone else.

We therefore have a utilitarian argument that if Carnegie must give Wal-Mart better service than its other customers to keep Wal-Mart’s business, it should do so—unless this violates some other condition of rational choice, which we now examine.

To apply the generalization test, we ask whether Carnegie could achieve the purposes of providing Wal-Mart better services than other customers—namely, keeping Wal-Mart’s business—if all Wal-Mart customers did so. I don’t see why not. Wal-Mart already gets superior service from many of its suppliers (who knows, maybe all), and this doesn’t prevent them from keeping Wal-Mart as a customer.

One of the arguments I initially considered claimed that it is an abuse of the free market for a near-monopolistic firm to demand better service just because it has the clout to do so. Granted, Wal-Mart may be ethically compromised by the way it exercises power. But Wal-Mart’s conduct is not the issue here.

As for Carnegie’s conduct, generalizing it may well have an effect on the market system. If all suppliers to Wal-Mart caved in to its demands, this may transform a free market to a less efficient near-monopoly. But the efficiency of the resulting system is irrelevant to the generalization test. The test is whether Carnegie could still achieve the purpose of its action—keeping Wal-Mart’s business—and evidently it could. One might compare Wal-Mart to Microsoft in this respect. Most computer users cave in to Microsoft’s monopolistic ambitions for the sake of software compatibility, and this probably results in lower quality software for most users. But it does not defeat the purpose of caving in, namely to use compatible software.

We conclude that there is nothing wrong with Carnegie’s showing favoritism to Wal-Mart, if this is necessary to keep Wal-Mart as a customer. Consequently there is nothing wrong with Adroit’s helping Carnegie to do so.

8. Writers’ strike. On November 5, 2007, the Writers Guild of America, representing 12,000 writers, struck the Alliance of Motion Picture and Television Producers. A key issue in the strike was the writers’ demand for residuals from distribution of their work in “new media”—Internet downloads, Internet Protocol TV (IPTV), streaming video, smart phones, and on-demand cable/satellite programming. The Writers Guild asked for 2.5% of gross income from new media. Writers are normally paid a percentage of future revenues, but excluding 91

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those from new media. Is it ethical for a recording studio to keep making money on their work without compensating them? Hints. It is not enough simply to say that fair compensation is whatever the market dictates. Any such claim should be defended by appeal to the conditions of rational choice. The outcome may depend on some factual issues. To deal with this, analyze the case under the four scenarios in Table 6.2, where the propositions (a) and (b) are: (a) There is reason to believe that paying writers the 2.5% would create more overall utility, because they are currently underpaid and spend much of their time making ends meet by other means. (b) There is reason to believe that the movie/television industry as a whole would not be profitable enough to attract investors if all executives paid writers the 2.5%.

The conditions for rational choice are designed to analyze particular decisions by particular people. So to fix the issue, let’s suppose that motion picture executive Barry Scone, Chairman and CEO of MBM Studios, is negotiating a contract with his writers. Let’s assume that Scone has the power to decide whether the contract will provide no royalties for new media, or 2.5% royalties, and make the decision stick.

It will help to clarify the arguments to suppose the writers are starving artists— well, not literally starving, but they are just scraping by and have to drive a taxi to make ends meet. The assumption can be relaxed after setting out the arguments.

In ethics, it often helps to start with a more extreme case.

The utilitarian test tells Scone to pay the 2.5% royalty if it would increase overall utility. Perhaps MBM is doing well enough that the additional payout would reduce profits but leave the company basically healthy. Perhaps the starving artists are much further down the concave utility curve than the affluent stockholders, so that a 2.5% transfer would create more utility for the writers than it would take from the owners. Furthermore, higher compensation for the writers would allow them to quit driving cabs and have the time to write scintillating and uplifting dialog for the movies, rather than what they are writing now. If all this is true, then Scone should pay the 2.5% because it would increase overall utility.

At this point students may ask, since when is MBM a welfare agency?

Corporations are supposed to create utility by selling profitable goods and services, not by transferring wealth. This is only a claim, not an argument, but it is related to a generalization argument one might use.

The argument goes like this. Let’s test the 2.5% payout for generalizability.

Let’s suppose that the rationale is to increase overall utility by paying writers more. If movie executives always paid higher compensation when it would increase overall utility, then arguably the movie business would no longer be profitable enough to attract investors. I don’t know this to be true, but let’s

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suppose it is. In other words, the profitability and therefore the existence of the movie business rely to some extent on exploitation of writers—keeping them far enough down the utility curve that it would always increase overall utility to pay them more. The real world is often like this. Then if all movie executives paid a higher rate, it would be impossible to increase overall utility by paying 2.5%, because there would be no movie studios to pay the 2.5%. Nobody would buy their stock. Note that the point here is not that overall utility would decrease if all movie executives paid a higher rate (perhaps so, perhaps not). The point is that it would be impossible (or so we are supposing) for Scone to achieve the purpose of paying the higher rate if all movie executives did the same. This means the 2.5% payout is not generalizable. This seems to capture whatever is valid in the “argument” that firms are not welfare agencies.

If paying 2.% is ungeneralizable, it is not an action (because it has no coherent rationale) and is therefore not required by the utilitarian principle. So Scone is consistent in refusing to pay the 2.5%.

This implicitly assumes that Scone has only two alternatives: either pay the writers 2.5% in new compensation, or pay them only what he is paying now. A third alternative is to decide that he doesn’t want to be in a business that exploits writers in this way, and look for another job. This alternative must be subjected to the utilitarian and generalization tests along with the other two alternatives. If Scone has good reason to believe that he can create more utility by a career change, and the change doesn’t violate generalizability, then he should do it. His departure probably won’t create any more utility at MBM, because his replacement will probably do the same thing that Scone is obligated to do in that job. But his work in another field could do more good than his work at MBM. It depends on his training, the opportunities available, his ability and motivation to change jobs, and so forth.

Note that Scone must change jobs if he has reason to believe that he could create more utility elsewhere. The tests for rational choice require only that the reasoning behind the action be consistent. If he has no particular reason to believe he could contribute more in another job (whether or not he actually knows it to be false), then he can be rational in declining to work elsewhere, because there is no inconsistency in this thinking. Note also that nothing here implies that everyone (who is smart enough) should maximize utility by becoming a heart surgeon, on the ground that heart surgeons create more utility by saving lives— even if we all have reason to believe this is true. If everyone became a heart surgeon because it saves lives, we would have too many heart surgeons and no one left to build the operating room and make the scalpels.

In other words, becoming a heart surgeon simply to maximize utility is ungeneralizable. However, switching to a job for which one is particularly qualified and in which one is particularly interested, in order to increase overall utility, may be generalizable.

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Finally, the above utilitarian argument is predicated on the assumption that writers are starving artists who must drive cabs to pay the bills. Perhaps they are better off than this. If Scone doesn’t have reason to believe that paying them residuals on new media would increase overall utility, then he is not obligated to do so, even if he can do so without violating generalizability.

To conclude, the issue is whether it is ethical and/or obligatory to pay writers 2.5% royalties on residuals on new media. The ethical situation depends on whether statements (a) and (b) in the exercise are true. The situation is summed up in the table below.

(b) is false

(b) is true

(a) is true

There is an obligation to pay It is unethical to pay the 2.5%, even the 2.5%. though it would benefit everyone on the average. However, it may be permissible or even obligatory to get out of the business to avoid being in this position; see the text for details.

(a) is false

It is ethical to pay the 2.5% It is unethical to pay the 2.5%. and ethical not to pay it.

The particulars of the situation may, of course, impose additional obligations.

There may be prior contracts or commitments, or events during the negotiation process may require certain kinds of action.

The arguments can change dramatically if workers are severely deprived, as in a sweatshop. Basic needs, freedom, or human dignity may be at stake in such cases, and it may ungeneralizable to deny these to anyone. It may also be possible to apply the Rawlsian Liberty Principle, which states that a just policy must result in the greatest basic liberty for everyone. Extreme economic hardship may be inconsistent with basic liberty. Even aside from the Liberty Principle, one might argue that there is something inherently irrational about extreme inequality, such as we see around the world today. This urgent issue is on the research frontier of ethics, and perhaps in the near future we will arrive at a principle that can be defended on the basis of rational choice.

9. Retrocession. A large private bank employs relationship managers (RMs) who work with high net worth individuals. The RMs help their clients to manage their substantial wealth, avoid taxes, and so forth. When the clients invest in certain funds, the fund owners remit retrocession payments to the bank as a reward.

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Consequently, the bank provides its RMs a financial incentive to recommend funds that provide retrocession. In theory, this need not create a conflict of interest for the RMs, because it could incentivize them to recommend a fund with retrocession only when there is a choice among equally attractive investments. It is widely suspected, however, that some RMs bias their recommendations to favor investments that yield them a higher commission. Is it ethical for the bank to provide this kind of incentive?

On the face of it, a utilitarian perspective argues against incentivizing RMs to promote funds that provide retrocession to the bank. This may boost utility for the bank, but presumably capital allocation is more efficient when guided by disinterested advice than when distorted by conflicts of interest, and this is the dominant factor in the calculation. The bank may have no clear evidence on this point, but given the amount of money at stake, it is rationally constrained to research the issue (see the discussion on page 19 of the text), at least by consulting the literature. If the bank’s analysts find no decisive evidence that incentives distort rational investment, the utilitarian principle doesn’t oblige the bank to change its ways.

As for professional obligation, the payment and acceptance of retrocession seem to be widely accepted in the industry, as is incentivizing RMs accordingly.

Perhaps the profession should correct this situation, but it hasn’t, and as a result there is no clear professional duty to avoid such practices.

There is an obvious issue of virtue ethics for the RMs. To remain true to their calling, they must not be influenced by incentives provided by their employer.

Incentives to sell the bank’s own products can create an even more intense conflict of interest, because the RM’s advancement in the firm may ride on it.

However, does this mean that the bank’s owners and/or officers are in violation of virtue ethics? The owners/stockholders presumably aren’t investment advisors and therefore don’t have the same kind of virtue-based obligation as the RMs. Also, it is unclear why obliging RMs to make a choice on this issue is itself a violation of virtue ethics. However, the executives who create the conflicts of interest are finance professionals. Running a bank that distracts RMs from their role as advisors seems inconsistent with who they are professionally. Executives have a fiduciary duty to the owners, but if it is unethical for the owners to create conflicts of interest (on grounds other than virtue ethics), then it’s unclear why the executives are obligated to take actions on behalf of owners that are unethical for the owners to take. On the other hand, if it is ethically permissible for the owners to create conflicts of interest, then executives who find this to be in conflict with their profession identity should seek employment elsewhere.

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Let’s move on to a generalization test. Incentivizing RMs to promote investments that are more profitable for the bank is clearly generalizable (if it is not deceptive), and is in fact more or less generalized already. The reason for the incentive is to increase bank profits. The bank can increase its profits by providing incentives even though other banks frequently offer them, and it would presumably continue to do so if other banks always offered them.

One might argue, however, that the bank deceives customers by incentivizing RMs to give less than optimal advice, and this is not generalizable. It is causing at least some customers to believe falsely that the bank is recommending investments most profitable to the customer rather than to the bank. However, we really don’t know this. First, the RMs may not be influenced by the incentives to recommend inferior funds. Second, the funds that provide retrocession may be as good as any other. To be rational in continuing its policy, however, the bank must again research the issue. If it finds that RM incentives cause customers to select investments that the bank knows are inferior, then it is deceptive and unethical.

The deciding factors (for the bank’s owners/stockholders) are therefore factual issues, which the bank is obligated to address: (a) the effect of conflicts of interest on the efficiency of capital allocation, (b) the relative profitability of funds that provide retrocession, and (c) the tendency of RMs to be influenced by the conflict of interest in a way that harms customers. In addition, bank executives who create the conflicts of interest may act inconsistently with virtue ethics.

10.* Tax avoidance. The private bank mentioned in the previous exercise has a number of European clients for whom it provides substantial tax savings. By exploiting loopholes in complex tax laws, the bank allows some of its wealthy clients to avoid the high tax rates prevalent in their home countries. In some cases, clients pay only a small fraction of the tax they would otherwise owe. Yet these clients achieved their success due, in part, to services provided by their home country. They benefited from an excellent state-funded education and from a stable and productive economy that is highly subsidized and regulated by the state. Is it ethical for the bank to provide this kind of advice? Hint. First analyze the taxpayer’s obligation, and then address the bank’s dilemma. Keep in mind that a private bank that fails to provide competitive tax advice is at a severe disadvantage for attracting clients.

First we address the wealthy taxpayer’s situation. For the sake of definiteness, let’s assume that these taxpayers are paying a much smaller fraction of their income in taxes than less affluent people. We also assume that they have the option of paying higher taxes, perhaps by not transferring assets to a tax haven.

The utilitarian calculation depends on what the taxpayers do with the money they don’t pay in taxes. If they use it as productively as the government would use it, they are off the hook from a utilitarian point of view. It is hard to quantify how 96

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productively money is used by governments or individuals, but there are some clear cases. If the government is relatively efficient, then squandering saved tax money on sixteen vacation homes that no one else uses could present an ethical problem. On the other hand, if the government is wasteful and corrupt, then donating the money to medical research passes the utilitarian test with flying colors.

In fact, the utilitarian principle may require wealthy taxpayers to avoid paying the taxes and invest the money wisely—unless this is unethical on other grounds. It is not hard to find an investment vehicle or charitable cause that makes better use of funds than most governments.

Many people have a sense, however, that wealthy people have a duty to pay their “fair share” of taxes. The issue is not whether the government has a duty to make them pay a certain share, although perhaps it does. The issue is whether they have a duty to pay it when they could legally avoid doing so.

The issue may not arise if the tax avoider invests the money in pro bono causes at least as beneficial as government programs. Let’s assume, then, for the sake of argument that the money is not donated to charity but is disposed of in a way that is not clearly less productive than government spending. Note, incidentally, that one can’t satisfy this condition simply on the ground that purchasing a $500,000 yacht “provides jobs.” The people working these jobs consume labor and resources that could benefit many more people than one wealthy family.

Given this assumption, let’s see if the generalization test can establish a duty to pay taxes above the legal minimum. It is widely assumed that, currently, wealthy people pay the absolute minimum in taxes. If so, a practice of radical tax avoidance is already generalized and therefore generalizable. However, do we really know that a substantial fraction of people who could benefit from tax havens do so? If not, then this kind of tax avoidance could precipitate tax reform or higher tax rates if universalized, thus defeating its purpose. (The G20 nations are already taking steps to get rid of tax havens.) So we can’t conclude that tax havens are generalizable without some research.

The more fundamental issue for this case, however is distributional. Regressive taxes transfer wealth to the less well off to the wealthy and therefore may violate the Rawlsian Difference Principle. A wealthy individual who pays a small tax rate adopts a policy that, if generalized, could result in less utility for the least well-off than if everyone paid a more nearly proportionate share. In fact, this seems likely. If it is, then legally underpaying violates the Difference Principle.

The taxpayer can avoid this violation only by investing saved tax money in a way that will benefit the least advantaged at least as much as the government does.

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To conclude, we have not established an obligation for the wealthy taxpayer to pay taxes above the legal requirement, even when the tax obligation is small relative to income. However, there is an obligation to invest the saved tax money in causes that create as much benefit to the least advantaged, and to society as a whole, as paying it to the government. (Purchasing yachts and vacation homes that “provide jobs” doesn’t meet this obligation.) In addition, paying a small tax bill could be ungeneralizable even if the wealthy taxpayer uses the money as productively as the government, although this requires some research. We now address the bank’s dilemma. To make the issue interesting, let’s suppose that the bank’s wealthy clients are squandering their saved tax money on gold- plated bathtubs and seven star hotels, rather than as prescribed by the analysis above. The last sentence of the exercise settles the utilitarian issue right away. If the bank doesn’t give competitive tax advice, its customers will get the advice elsewhere, and the effect is the same. So giving such advice is consistent with the utilitarian principle. In fact, there may be an obligation to provide the advice— unless this violates another condition for rational choice—because otherwise the bank and its stakeholders may suffer. Giving this kind of tax advice also seems generalizable. Although tax havens may disappear if all wealthy taxpayers took advantage of them, it is unclear that the actions of private wealth advisors would bring about this effect. Private wealth advisors almost universally gave this kind of advice for many decades during which tax havens showed no tendency of drying up. The Difference Principle, however, has more bite. The test is not whether one particular bank causes the least advantaged to be worse off than necessary. If this were the test, the bank could argue, as for the utilitarian test, that if it doesn’t assist customers with tax avoidance, some other bank will be happy to oblige. Rather, the test is whether the bank’s policy, if generalized, would cause the least advantaged to be worse off than necessary. As it happens, the bank’s policy is already generalized, and it may well have this effect. True, if banks were unwilling to advise clients on radical tax avoidance, some wealthy taxpayers would find out how to do it anyway—but not all. The private banking business in general therefore runs afoul of the Difference Principle, which means that an individual bank that follows the offending policy does likewise. This puts banks in a difficult ethical position. A long-term solution for the industry as a whole is to assist the G20 in its efforts to do away with tax havens, so that radical tax avoidance is no longer legal and banks are no longer pressured to facilitate the practice. This would also bring the industry as a whole more in line with its utilitarian (as well as Rawlsian) duty, because radical tax avoidance as a general practice almost certainly reduces net utility. In the meantime,

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however, an individual bank that provides this kind of advice is in violation of the Difference Principle.

11.* The Empire Globe Corporation .Susan Bond is Corporate Economist at Empire Globe Corporation, a chemicals company. CEO John Treadstone created the position so that he could have someone to help him with economic analysis of market trends and company proposals. Bond was attracted to the company by Treadstone’s professed philosophy of creating a partnership with stakeholders.

He created a “Partnership Conduct Team,” consisting of four experienced managers, to develop ethical guidelines that exceed legal requirements and monitor compliance with them. Ten years ago, Treadstone located a processing plant in economically depressed Feldport, Oklahoma, against the advice of his staff, because he believed the company could create an effective partnership with the local players. In fact, they were so eager to attract jobs that the bank offered financing at discounted rates, the town council granted a five-year exemption from real estate taxes, the union (reluctantly) negotiated a no-strike clause, and the power company agreed to a low rate.

The Feldport plant has recently become an issue, however. As the special concessions expired, profit margins at the plant began to shrink. Treadstone set out to obtain similar concessions for the next few years. He indicated that if the company could not obtain adequate return on its capital investment, it would be obliged to relocate. The company managed to obtain most of what it wanted. The town agreed to a partial tax concession, the union ceded a cap on wages and reinstated the no-strike clause, and the bank provided further financing at belowmarket rates. However, Empire has not yet obtained the 4.25 cents per kwh rate it wants from the power company. To address this, Treadstone scheduled a negotiation session with the power company, involving himself, Bond, and Jim Doran, the VP for finance.

It is the day before the session. Bond is already concerned that the company is demanding excessive concessions from the community, but her discomfort grows when she receives a late-afternoon message from Treadstone. It states that he and Doran won’t be present for the meeting, due to a commitment in Washington, DC, and that she is on her own. Furthermore, there’s a change in strategy. She must obtain a rate of 3.80 cents per kwh.

The next morning, Bond cancels the meeting and contacts Ted Bates in the finance department to ask for data that might justify demanding a lower rate. Ted lets slip in the conversation that Empire has just landed a lucrative contract with the Defense Department that calls for a 25% increase in production at Feldport.

She realizes that this was the agenda for the Washington meeting and that the threat to relocate is a bluff. She first tries to reach Doran, head of the negotiating team, but he finds himself too busy to talk about the issue. She finally calls

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Treadstone, who acknowledges the Defense contract when Bond brings it up.

Bond asks him about his commitment to partnership, whereupon Treadstone responds that the low rate is necessary to justify his bid to Defense, and the added production will mean more jobs in Feldport. Besides, there is nothing wrong with making a profit, and they have obligations to their stockholders.

Bond asks what happens if she is unable to get the 3.80 cents per kwh rate.

Treadstone responds, “Susan, negotiating means getting agreements. Anything else on your mind?”

Hints. The negotiation principles discussed in Case 6.3 may be useful. A utilitarian analysis can also be central to this case.

The analysis of Case 6.3 concluded that negotiators have no obligation to reveal what terms are necessary for an acceptable deal. In fact, there is an obligation not to reveal too much, because otherwise negotiation breaks down. Therefore, Empire Globe has no obligation to reveal that it will stay in Feldport even if it can’t get a rate of 4.25 cents (or 3.80 cents). Susan Bond is within her rights to conceal this fact.

On the other hand, stating that Empire will leave the community if it can’t get a certain rate is a lie. This isn’t misrepresentation in the sense that it incorrectly states what the community will receive in a deal, but it is a lie nonetheless and ungeneralizable and unethical on that basis. Treadstone may insist that it is not really a lie but just sales talk, because the other side knows better than to take it too seriously. It is like saying, “this is my best offer” just before making a better one. Perhaps, but if this is really the situation, Empire must at some point move on its next offer, and cut out this nonsense about relocating the plant. If the power company strongly resists (which seems likely), perhaps that point has arrived. If Susan wants a negotiating angle, she can mention the defense contract (which will shortly become public anyway, if not already) and the new jobs it will provide.

She can say that meeting the terms of the contract requires cost-cutting, which I gather is true.

Another factor is the utilitarian outcome. If the company drives a hard bargain (honestly or dishonestly) that results in a predictably less than optimal overall outcome, then it violates the utilitarian test. Some will respond that it is the role and duty of business to get the best deal it can, come what may. This is the way the system works, and so forth. But where is the argument? If this is a generalization argument, we can evaluate it as such. Suppose that businesses always drive a hard bargain but only up to the point where overall utility predictably begins to suffer. Would this defeat the objectives of negotiating in this fashion, which perhaps are to make a good profit in a market system while maximizing utility? Almost certainly not. In fact, there is a theorem in macroeconomics that says the price arrived at in a perfectly competitive market

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maximizes the sum of producer and consumer surplus, and thus in some sense maximizes utility. The theorem makes strong and perhaps unrealistic assumptions, but it nonetheless reflects an underlying reality than a market system can work when all parties to negotiation come out ahead. In fact, this may be one reason it does work.

Susan has the difficult task of negotiating honestly while convincing Treadstone that her performance is acceptable. Nobody said that ethical conduct is always easy. True, if it is simply impossible for Susan to stay on as negotiator if she plays it clean, then the utilitarian argument evaporates. Someone else will step in and drive the hard bargain that is bad for the community, and so she may as well do it herself, as far as utility is concerned. Yet, if staying on requires Susan to be deceptive, she cannot ethically go through with it. It is time to think about a different role in the company, or a different company altogether. There is also the matter of virtue ethics, as in Case 6.3. Complex negotiations with community stakeholders may require that the parties relate to each other authentically as human beings. If so, Susan cannot continue in a role that requires otherwise.

12. Opt in or opt out. Countries typically use an opt-in or opt-out approach to organ donation. Opt-in countries give people an opportunity to sign a donor card to grant permission to us their organs. Opt-out countries assume that people give permission unless they fill out a form or make a phone call to revoke consent.

Johnson and Goldstein report that organ donor consent is much higher in opt-out countries. If permission to donate is the default, people tend to let it stand. They are much more reluctant to give permission by overriding a default. Table 6.3 shows the rates for European countries. (The Netherlands’ relatively high opt-in rate is due to an aggressive public campaign.) In the United States, an opt-in country, 85% of people “approve” of organ donation but only 28% grant permission. The article states that more than 45,000 people in the United States died in 1995 while awaiting a donor organ. It suggests that many lives could be saved by switching to an opt-out policy.

Because opting out requires some effort in Europe, one may ask whether the inconvenience of opting out explains the low rates. Johnson and Goldstein conducted an online survey of 161 U.S. respondents, who were asked to assume that they had just moved to a new state. Question 1 asked them if they would opt in to organ donation if given the opportunity. Question 2 asked if they would opt out. Question 3 asked how they would respond if required to choose whether to donate (with no default). The results (Table 6.4) show that only half as many people donate when required to opt in. Defaults therefore remain a key factor even when no effort is involved.

Is it ethical to use an opt-out system to save lives? Or is it dishonest? A rational agent would presumably make the same choice regardless of the default. The low opt-out rate suggests that an opt-out system plays on psychological factors that

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distort the agent’s true intent. There are substantial opt-in/opt-out differences for online privacy, selection of insurance coverage, and the level of pension savings.

Hints. There are several possible explanations for why people opt out, such as: 1. It is too much trouble to opt out.

2. People don’t want to think about the choice because of its emotional content.

3. People overlook the matter, perhaps because it is in “fine print,” they are busy, or some other reason.

Analyze the issue under each scenario.

Let’s begin with a utilitarian analysis, which is independent of the reason people opt out. If we assume that life is an overriding value, an opt-out organ donation policy clearly passes the utilitarian test, because it saves lives. In fact, an opt-out policy is obligatory (unless it is unethical on other grounds) because it results in greater utility. The data show that the much higher permission rate of opt-out countries results in a somewhat higher donation rate. This is despite some evidence that physicians are reluctant to use the organs, on the suspicion that the donor did not really intend to give permission.

However, utilitarian arguments can never override the other conditions of rational choice. An action that fails the generalization test, for example, is unethical even if it saves thousands of lives.

To apply the other tests, we will examine each of the possible motivations for opting out that are mentioned in the exercise.

1. It is too much trouble to opt out. There is no apparent reason that opting out of organ donation must be inconvenient. People could simply check a box when renewing their driving license. However, the data suggest that by making it inconvenient, the government saves many lives. If we give high priority to life, the government could maximize utility by imposing a rather onerous burden on those who want to opt out. The issue here is whether this passes the generalization test.

Again, to clarify the matter, we are assuming for the moment that inconvenience is the only deterrent to opting out. The option is conspicuous, and everyone is aware of it. Given this, it is hard to see how an opt-out policy fails the generalization test. Imposing inconvenience is a form of taxation: it takes something of value from people, in this case primarily time. Taxation of a suitable kind—at reasonable rates, for legitimate purposes, democratically enacted, and properly administered—normally passes generalization tests. It can achieve its purposes if generalized, and in fact it is already generalized.

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Inconvenient opting out imposes a tax on individuals who do not contribute to the medical system by a willingness to donate organs. If it meets the criteria for ethical taxation in general, it should pass the generalization test.

2. People don’t want to think about it. We now assume that opting out may or may not be inconvenient, but inconvenience is not the reason people fail to do it.

They fail to opt out because they don’t want to think about the issue.

The online survey mentioned earlier suggests that when opting out is convenient, people do so at about the same rate they deny permission when there is no default.

If so, people don’t avoid thinking about the issue after all, and we can skip this case. However, the survey isn’t very convincing, because the survey questions were not for real. It’s easy to be generous with your organs when it is all makebelieve. So let’s assume that a significant number of people fail to opt out because they don’t want to think about the issue.

“Not wanting to think about it” can be interpreted two ways. One is that people consciously determine that making a deliberate choice incurs too much emotional cost and therefore let the default stand. This is actually a form of inconvenience and can be analyzed as above. But suppose people unconsciously avoid the issue because of its emotional content. They fail to deliberate at all on the matter and therefore give up their agency.

Under these circumstances, an opt-out system treats a non-decision as though it were a decision. It takes organs from people on the pretext that they have given permission, when in fact they have not decided whether to give permission. They may have consented as far as the law is concerned, but the issue is whether such a law is ethical.

One may say that people who don’t opt out “deserve” to be treated as though they gave permission, but this simply begs the question. How do we determine what people “deserve”?

Rawls’ idea of deciding behind a veil-of-ignorance principle may be helpful. It states, roughly, that a policy must be one to which I can consent, before knowing who I am, and can regard as rational no matter who I turn out to be. The opt-out policy fails this test by hypothesis. We are assuming that many people will end up donating organs when they would not have consented if they had deliberated on the matter. So the policy is, by definition, one I may not find rational when I learn who I am.

The basic problem is that the opt-out policy subverts rational decision making by relying on an emotional response. It therefore violates autonomy. This does not mean that appealing to emotion is always wrong; only when it allows an

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emotional response to masquerade as rational choice. Issues of this kind also arise in advertising (see Case 6.4).

A similar argument may apply to some other opt-out policies, such as those involving insurance coverage or pension savings. Insurance companies, for example, commonly increase coverage by default unless the customer objects.

Here there is less emotional content, however, and the following may be more relevant.

3. People overlook the matter. People may fail to opt out of organ donation because the opportunity to do so is inconspicuous, or the option is presented at a time when they are preoccupied with other matters. An inconspicuous option maximizes utility because it saves lives, but we can ask whether it is generalizable.

In this case, it is harder to argue that an opt-out policy, in and of itself, denies agency. If I fail to read the fine print, or if I am distracted by other matters, this could be the result of rational choices about how to allot my time and energy. If the government presents me the option only when I am being whisked to the emergency room in an ambulance, then we obviously have a problem. But this is really an instance of the previous case, where emotion supplants rational choice.

Let’s suppose, then, that there is no denial of agency, which means that the veilof-ignorance argument used above falls apart. A generalization test is still required. To make the problem more concrete, let’s suppose the application for a driving license renewal contains a small check box, buried on page 3 of fine print, that allows me to opt out of organ donation. The situation is similar to that of fine print in a contract, and it is useful to analyze this more general case.

Contract law normally holds one responsible for reading all the fine print. A utilitarian justification for this policy is that if people could escape a contract by claiming they didn’t read it, the contractual system would bog down. However, suppose a particular contract places a key provision in the fine print. For example, an apartment rental contract says in fine print on page 5 that the rent doubles if the tenants watch TV. One might argue that this is ungeneralizable, because misleading contracts of this sort can achieve their purposes only because key provisions are not routinely hidden. Otherwise the tenant would have checked the fine print and refused to sign the contract. To put it differently, this ruse is possible only because there is a certain level of trust on the part of customers, and this level of trust would not exist if contracts always played such tricks.

One can apply this argument to special classes of contracts, such as driving license applications, which we can for present purposes view as an agreement between the driver and the state. Hiding the organ donor option in fine print achieves its intended effect (i.e., a low opt-out rate) only because contracts don’t 104

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always bury important provisions in fine print. This is a form of deception, which in this case (and in most cases) fails the generalization test.

The standard move at this point is to try to narrow the scope of the policy to make it generalizable. Let’s say that we normally don’t hide key provisions of a contract, but only when thousands of lives could be saved by doing so. The high stakes therefore become part of the rationale.

We must first make sure that this modified rationale is a rationale. For this it must meet three conditions. (a) It is truly the reason for the action; if lives were not at stake, the people wrote the contract would not hide key provisions. We can grant this. (b) The rationale must have some logical bearing on the choice to deceive (it need not be a good reason for deception, only a reason). Saving lives is a very highly ranked utilitarian value and therefore, by definition, logically related to decision making. (c) There must be some logical ground (convincing or otherwise) for allowing saved lives to justify deception but not a larger class of circumstances. This condition is also met. It is consistent to allow saved lives to justify deception when lesser goals do not, because lesser goals are lesser.

If we deceived to improve the quality of sushi, for example, we would be rationally committed to deception to achieve any goal that is equally or more important, in which case deception would be so prevalent that it would not work.

The modified rationale therefore qualifies as a rationale, but it doesn’t generalize.

If people always hid important provisions in the fine print when lives are at stake, people would examine the fine print when they know lives are at stake, and the trick wouldn’t work. It is true that when people renew a driving license, they don’t know lives are at stake and do not read the fine print. But strictly speaking, the generalization test is not whether this particular action could achieve its purposes if the action were generalized, but whether the action could achieve its purposes in general if it were generalized (Corollary 4 of the generalization test).

It could not.

Suppose, however, that we hide key life-saving provisions in fine print only when people don’t know that lives are at stake, as in the case of the license renewal.

The fact that they don’t know lives are at stake becomes part of the rationale.

This “rationale” is perhaps generalizable, but it is no longer a rationale. It fails condition (b). The fact that people don’t know lives are at stake has no logical connection with whether we should save lives by hiding a key provision of the contract. The purpose is to save lives. Why should we care whether people know they are at stake, as long as we save them?

This does not say that it is never ethical to save lives by deception. There are cases in which it is ethical—not because saving lives overrides the generalization

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test (it never does), but because deception for a particular purpose may sometimes pass the test.

Nor does it say that there is no ethical way to increase the supply of organs for transplant. People may donate in equal numbers if given a choice with no default, as suggested by the survey discussed above. Even if not, it is ethical to offer people incentives to donate (or disincentives for refusal to donate, as when opting out is inconvenient). It may even be ethical to require them to donate. One must consider each proposal on its merits.

Virtue ethics is not directly relevant to a policy matter like the opt-out/opt-in issue, but it is certainly relevant to individuals who have a role in implementing the policy. A physician, for example, may decide that it is a violation of professional integrity to transplant an organ when permission was given only by default. This is a difficult choice, and physicians apparently come down on both sides.

To conclude, opt-out policies for organ donation can be ethical, even when their inconvenience deters people from opting out—provided the policies satisfy general criteria similar to those for ethical taxation. However, opt-out policies are not ethical if the opt-out rate is reduced by emotional factors or by the fact that opportunities for opting out are inconspicuous. This remains true even when many lives are at stake.

Thus a country that deliberately makes it hard to opt out does not, by virtue this fact alone, impose an unethical policy. However, if people are also deterred from opting out by the emotional content of the matter or the inconspicuousness of the option, the opt-out policy is unethical. The former can be fixed only by eliminating the default altogether. The latter can be fixed by making the option conspicuous. Even when the default must be eliminated, there may be other, ethical ways to save equally many lives.

.BobPreserving 13.

Littman isaowner culture of a series of galleries and a major client of Artifacts, an importer of ethnic arts. While having lunch with Mary, a manager at Artifacts, he is introduced to Len. A buyer for Artifacts, Len has traveled widely in South America in search of native artwork. One of his major sources is the Amazonia people, whom he has gotten to know quite well, even learning their language. Bob is very interested in Amazonia basketry and indicates that he would like to place a series of large orders, provided the Amazonia will make certain changes in the patterns and colors of their baskets to suit the tastes of his customers. A deal of this magnitude would be highly profitable both for Artifacts and the Amazonia. Mary is enthusiastic about the idea. She proposes that Len return to South America and convince the Amazonia to modify their designs, which should be a minor matter given their obvious skills.

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Amazonia basket designs are not just pleasing patterns. Symbolism plays a central and powerful role in many traditional cultures. The design elements that displease Bob contain symbols that denote important events in the group’s long history. Even if the Amazonia agree to change their designs, he fears that they may not appreciate the risk of losing their symbolic tradition and the long-term impact on their culture. To make matters worse, meeting the production quotas would require that both men and women work on the baskets. Basket weaving is an integral part of a woman’s role in Amazonia culture and never undertaken by men. The honor of preserving and celebrating the history of their people inspires women to spend a lifetime mastering the intricate designs. If Len explains all this to Mary, should she ask him to take this assignment? If she does, how should Len deal with the request?

Hint. A principle stated at the beginning of the next chapter may be helpful in analyzing this case.

Chapter 7 states a corollary of the generalization test that can be applied to crosscultural situations:

An action is unethical if its general adoption in the host culture would undermine a practice it presupposes.

Mary’s proposal could violate this principle. Amazonia culture developed and preserved its basket weaving tradition because of its symbolism and the central role that women play as guardians of the tradition. If both the symbolism and the female exclusivity are removed, the cultural energy they provide could dissipate, and Amazonians may no longer be inspired to invest the years necessary to learn the art. The practice could degrade or disappear in a generation or two. This may occur long after Artifacts has lost interest in Amazonian cultural output, but it nonetheless violates the generalization principle. The general adoption of this kind of artifact production Amazonia society would undermine the cultural practice that makes the production possible. It may also have negative utilitarian effects due to resulting disintegration and dysfunction in Amazonia society. This has happened often enough around the world.

Because the company’s immediate interests are not affected by long-term decline of Amazonia culture, Mary may not find this argument compelling. Len must decide what to do about it. If he participates in the scheme, he would himself be in violation of the generalization and utilitarian principles. In addition, he is likely to have developed a strong personal bond with some of Amazonia people, particularly having spent enough time with them to learn a difficult indigenous language. He will rightly feel a strong loyalty obligation not to participate in activity that could compromise their future, even if they themselves are not convinced the activity is harmful. Len’s decision is more difficult because the arguments are somewhat speculative. No one can predict how Amazonia culture will change. Nonetheless, it is what he can rationally believe that counts, and 107

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there is every indication that within his belief system, participating in Mary’s system violates all three conditions of rational choice.

The utilitarian principle asks Len to seek alternatives. Perhaps he can identify other peoples to help meet demand with their own artifacts and take pressure off the Amazonia. Perhaps he can convince Bob Littman that customers will value the idiosyncracy of Amazonia symbolism, particularly if its meaning is explained to them. If all this fails, his connections in the region may allow him to find alternative employment.

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