Solution Manual for Business Ethics Decision Making for Personal Integrity & Social Responsibility,

Solution Manual for Business Ethics Decision Making for Personal Integrity & Social Responsibility, 6th Edition By Laura Hartman, Joseph DesJardins, Chris MacDonald

IM Chapter 1: Ethics and Business Chapter Objectives After reading this chapter, you will be able to: 1.

2.

3.

4.

5.

6.

Explain three levels at which ethical decisions get made in business.

Explain the nature of business ethics as an academic discipline.

Explain why ethics is important in the business environment.

Explain why ethical responsibilities go beyond legal compliance.

Distinguish the ethics of personal integrity from the ethics of social responsibility.

Distinguish ethical norms and values from other business-related norms and values.

7. Describe ethical decision making as a form of practical reasoning.

Opening Decision Point—Wells Fargo and Facebook The Wells Fargo and Facebook cases can be used to introduce a range of topics that will emerge throughout this book. The case involves decision making at a number of levels, from individual entry-level employees (like many of our students), to branch managers, to mid-level management, senior executives, and the board of directors. The cases also include decisions individuals directly involved in wrongdoing as well as individuals who blew the whistle on wrongdoing. A good discussion can be generated by asking students to assign responsibility, both in terms of who is at fault (who is accountable?) and what could be one to prevent it from reoccurring (what caused it?).

We have added a new short case description involving Facebook to this Decision Point for several reasons. First, Facebook helps bring out the broader social and political dimensions of ethical decision making more directly. Students will see the difficulty in separating business decisions from broader social and ethical decisions. Second, the Facebook case also involves some examples of insiders who called out unethical activities. Despite the pressures in all organizations to conform, it is possible for individuals to stand up for their ethical beliefs.

Finally, Facebook and social media can be a more relevant example for many students than banking.

These discussions can easily lead into the decision-making model that will be introduced later in the chapter. What facts would be helpful to make these judgments of responsibility? What facts would change your decision? What facts confirmed your initial thoughts? Who are the stakeholders involved, ranging from entry-level employees, to customers, to stockholders, to competitors. What stake, exactly, do these groups have in this case? How were they harmed?

How, if at all, were their interests represented in the process?

These are also good cases with which to introduce the topics of corporate culture and leadership.

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How were the decisions made by individuals influenced by the surrounding culture, and how did that culture emerge at Wells Fargo? At Facebook? How free were employees at every level, including senior executives, to diverge from the prevalent culture? How might that institutional culture be changed? Who is responsible for institutional decisions? Which institutional policies and practices enabled this scandal? How might they be changed to avoid a reoccurrence?

Another topic that can be introduced involves professional responsibilities of bankers and financial professionals at Wells, and IT specialists at Facebook. This discussion can be helpful in setting the stage for Chapter 5 and the general topic of corporate social responsibility. A discussion of fiduciary duties can introduce several important questions. What responsibilities do managers, perhaps especially senior executives, have to stockholders? How might these responsibilities conflict with their responsibilities as financial professionals? Facebook case also can focus discussion on questions of the social and political responsibilities of both individuals and corporations.

Finally, this case can also introduce the question of government regulation within a market economy. What is the proper role for government agencies, both in terms offsetting standards to prevent misconduct and in enforcing sanctions after the fact? How does this influence the ―free market‖ system? In what sense are corporations ―citizens‖ of the countries in which they operate, and what responsibilities does that imply?

I.

Introduction: Getting Comfortable with the Topic

It is not uncommon for students to enter a business ethics class with some degree of doubt, confusion, and apprehension about the topic. This opening chapter aims to relieve those concerns by introducing business ethics as an unavoidable and nonthreatening part of business (and life).

The topic is introduced by reviewing some of the past and recent well-known scandals but also pointing out some well-known examples of commendable corporate ethics. It can be worthwhile to remind students of best case examples as a means to reminding them that business ethics does not assume that only the bad cases deserve attention.

We also remind students that business ethics is not limited to the type of major corporate decisions with dramatic social consequences. At some point every worker, and certainly everyone in a management role, will be faced with an issue that will require ethical decision making. We have also expanded this section to include a broader discussion of the role ethics plays in many life experiences outside as well as inside business.

This opening section identifies five general goals for a business ethics class: 1. Develop the knowledge base and skills needed to identify ethical issues.

2. Understand how and why people behave unethically.

3. Decide how we should act, what we should do, and the type of person we should be as individuals.

4. Create ethical organizations.

5. Think through the social, economic, and political policies that we should support as citizens.

II.

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We moved this section up to an early point in this chapter so that students can be more directly and immediately introduced to WHAT ethics involves and what it is. Some reviewers suggested that the previous organization spent too much time talking ABOUT ethics, before actually saying what it is. a. So what is the point of a business ethics course? Our general approach throughout this text is to explain ethics as a middle ground between those who understand ethics in absolutist and certain terms, and those who deny any reasonable or objective basis for ethical claims. This text neither preaches dogmatic ethical truths nor abandons hope for ethical progress and rationality. b. We include a discussion of Socrates and Thrasymachus. Rational decision making and persuasion versus imposing one‘s view on others. While students might initially see this as an aside, the crucial point is worth emphasizing—perhaps more so in light of recent U.S. political debates. This text (like Socrates) does assume that humans can be rational enough to settle disagreements by thinking them through and finding rational conclusions that bind all people. In any society in which people disagree (and where would that not be?), the alternative to rational discussion, persuasion, and ultimately an agreement is power/force (Thrasymachus). i.

As the title of this book suggests, our approach to business ethics will emphasize ethical decision making.

ii.

Historical Context: On one hand, ethics refers to an academic discipline with a centuries old history and we might expect knowledge about this history to be among the primary goals of a class in ethics.

1. Thus, in an ethics course, students might be expected to learn about the great ethicists of history such as Aristotle, John Stuart Mill, and Immanuel Kant. As happens in many other courses, this approach to ethics would focus on the informational content of the class.

*Chapter Objective 2 Addressed Below* iii.

Ethical Behavior/Normative Content: Yet, according to some observers, learning about ethical theories and gaining knowledge about the history of ethics is beside the point.

1. Many people, ranging from businesses looking to hire college graduates to business students and teachers themselves, expect an ethics class to address ethical behavior, not just information and knowledge about ethics.

2. After all, should not an ethics class help prevent future ethical scandals? Ethics refers not only to an academic discipline but to that arena of human life studied by this academic discipline, namely, how human beings properly should live their lives.

iv.

The Role of Influence… Yet, there is an appropriate caution about influencing behavior within a classroom.

1. Part of this hesitation involves the potential for abuse; expecting 5-3

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teachers to influence behavior may be viewed as permission for teachers to impose their own views on students.

2. Many believe that teachers should remain value-neutral in the classroom and respect a student‘s own views.

3. Another part of this concern is that there can be a narrow line between motivating students and manipulating students. a. There are many ways to influence someone‘s behavior, including threats, guilt, pressure, bullying, and intimidation. b. Some of the executives involved in the worst of the recent corporate scandals were very good at using some of these means to motivate the people who worked for them.

4. Presumably, none of these approaches belong in a college classroom, and especially not in an ethical classroom. [Teaching Note: This would be a good opportunity to discuss appropriate and inappropriate means for getting students to complete their homework assignments.

What teaching methods respect students? Which disrespect them?

Why? Contrast this to managerial influence: Are there some inappropriate ways for managers to get workers to complete a task?]

5. But not all forms of influencing behavior raise such concerns. There is a major difference between manipulating someone and persuading someone, between threats and reasons. This textbook resolves the tension between knowledge and behavior by emphasizing ethical judgment, ethical deliberation, and ethical decision making.

6. We agree with those who believe that an ethics class should strive to produce more ethical behavior among the students who enroll. a. But we believe that the only academically and ethically legitimate way to do this is through careful and reasoned decision making. b. Our fundamental assumption is that a process of rational decision making, a process that involves careful thought and deliberation, can and will result in behavior that is both more reasonable and more ethical. c. Role of a Course: Teaching ethics must, on this view, involve students thinking for themselves. d. Ethics as Practical Reason: This section is an introduction to a topic that will be explore in more depth in the next chapter as we develop the decision-making model.

Practical Reason: We have described ethics as practical and normative, having to do with our actions, choices, decisions, and reasoning about how we should act. Ethics is therefore a vital element of practical reasoning and is distinguished from theoretical reasoning.

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Theoretical reasoning is the pursuit of truth, which is the highest standard for what we should believe. The Scientific Method provides one model of theoretical reason.

According to this tradition, science is the great arbiter of the facts and truth. The scientific method can be thought of as the answer to the fundamental questions of theoretical reason: What should we believe?

The question arises, is there a comparable methodology or procedure for deciding what we should do and how we should act?

There are guidelines that can provide direction and criteria for decisions that are more or less reasonable and responsible. Ethical theories are patterns of thinking, or methodologies, to help us decide what to do.

Practical reason is reasoning about what we should do. It involves walking through a series of steps in making a decision about what to do, in order to make a reasonable decision.

III.

Business Ethics as Personal Integrity and Social Responsibility—We moved this section up to an earlier spot in this chapter to allow a continued discussion and exploration of the goals and nature of ethical reasoning. A major theme of this section is to help students understand that ethics involves decisions made at both an individual and an organizational level. It can be helpful to ask students to reflect on the types of questions that are asked in other business courses in such fields as Management or Organizational Behavior/Studies. a. Social circumstances are another element of our environment that impact our ethical decision making and behavior. i.

Social Context: An individual may have carefully thought through a situation and have decided what is right, and then may be motivated to act accordingly. But the corporate or social context surrounding the individual may create serious barriers to behave in that way.

1. As individuals, we need to recognize that our social environment will greatly influence the range of options that are open to us and can significantly influence our behavior.

2. People who are otherwise quite decent can, under the wrong circumstances, engage in unethical behavior while less ethically motivated individuals can, in the right circumstances, do the ―right thing.‖

Decision Point Management and Ethics We introduce this Decision Point early as a simple example to help students see more directly and immediately how ethics will have practical consequences in business.

Imagine that you are examining this chapter‘s opening scenario in one of your classes on Organizational Behavior or Managerial Finance. What advice would you offer to Sodexo? What judgment would you make about this case from a financial perspective? After offering 5-5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

your analysis and recommendations, reflect on your own thinking and describe what values underlie those recommendations.    

What facts would help you make your decision?

Does the scenario raise values that are particular to managers?

What stakeholders should be involved in your advice?

What values do you rely on in offering your advice? b. Ethical Leadership: i.

Business leaders therefore have a responsibility for the business environment that they create; what we shall later refer to this environment as the ―corporate culture.‖ The environment can therefore strongly encourage or discourage ethical behavior.

ii.

Ethical business leadership is precisely this skill: to create the circumstances within which good people are able to do good, and bad people are prevented from doing bad.

iii.

The Enron case provides an example. The Decision Point included below (taken from a previous edition of this book) described the case of Sherron Watkins, an Enron vice president. She seemed to understand fully the corruption and deception that was occurring within the company, and she took some small steps to address the problems within the Enron environment. But when it became clear that her boss might use her concerns against her, she backed off. The same circumstances were involved in connection with some of the Arthur Andersen auditors. When some individuals raised concerns about Enron‘s accounting practices, their supervisors pointed out that the $100 million annual revenues generated by the Enron account provided good reasons to back off. The ―Sherron Watkins‖ Decision Point, below, exemplifies the culture present at Enron during the heat of its downfall and this example might be used as a class discussion topic or even a paper assignment topic.

*Chapter Objective 3 Addressed Below* c. The Ethical Question: Ethics involves what is perhaps the most monumental question any human being can ask: How should we live? i.

Ethics is, in this sense, practical, having to do with how we act, choose, behave, and do things.

ii.

Philosophers often emphasize that ethics is normative, which means that it deals with our reasoning about how we should act.

iii.

Social sciences such as psychology and sociology also examine human decision making and actions, but these sciences are descriptive rather than normative. When we say that they are descriptive, we refer to the face that they provide an account of how and why people do act the way they do; as a normative discipline, ethics seeks an account of how and why people should 5-6

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act, rather than how they do act. d. How should we live? This fundamental question of ethics can be interpreted in two ways. i.

―We‖ can mean each one of us individually, or it might mean all of us collectively.

1. In the first sense, this is a question about how I should live my life, how I should act, what I should do, and what kind of person I should be. This meaning of ethics is based on our value structures, defined by our moral systems; and, therefore, it is sometimes referred to as morality. It is the aspect of ethics that we refer to by the phrase ―personal integrity.‖ If morals refer to the underlying values on which our decisions are based, ethics refers to the applications of those morals to the decisions themselves.

2. In the second sense, ―How should we live?‖ refers to how we live together in a community. This is a question about how a society and social institutions such as corporations ought to be structured and about how we ought to live together. This area is sometimes referred to as social ethics and it raises questions of justice, public policy, law, civic virtues, organizational structure, and political philosophy.

3. In this sense, business ethics is concerned with how business institutions ought to be structured, about whether they have a responsibility to the greater society (corporate social responsibility or CSR), about making decisions that will impact many people other than the individual decision maker.

4. We refer to this broader social aspect of ethics as decision making for social responsibility.

5. Teaching Note: The following hypothetical case can be used to highlight the distinction between the ethics of individual integrity and the social justice. Imagine an HR manager who is hiring two employees. Assume that the top two candidates, one male and one female, are equally qualified and that the HR manager wishes to hire both. Assume that the HR manager himself will get evaluated, in part, by how well he controls compensation expenses. As a result, he has both a professional and personal responsibility to pay the lowest salary that is necessary to get the candidate to accept the position. At the last interview, the manager asks each about their salary expectations.

Imagine that the female candidate asks for a salary that is substantially below what the male asks. He knows that the male may not accept the job offer at a lower salary and knows that the female is willing to accept the lower offer. What responsibility does the HR manager have for paying equally qualified employees? If the manager pays the female less, would you characterize him as sexist? Is this decision unfair workplace discrimination? Imagine now that the HR manager is 5-7

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a woman? Would this change your judgment? A good discussion can follow on how particular social contexts can shape decisions and, despite the best intentions of individuals involved, result in socially undesirable consequences. e. Ethical Decision Making: Within a business setting, individuals will constantly be asked to make decisions affecting both their own personal integrity and their social responsibilities. i.

Each decision made by a business manager involves not only a personal decision but also a decision on behalf of, and in the name of, an organization that exists within a particular social, legal, and political environment.

ii.

Whatever decision business managers make, they will have taken a stand on an ethical issue, at least implicitly.

iii.

The actions each one of us takes and the lives we lead give very practical and unavoidable answers to fundamental ethical questions.

Decision Point Ethics After an Oil Spill The following answers are lengthier than those that follow in the rest of this Instructors‟ Manual in order to give a bit of guidance at the outset.

Ethics After an Oil Spill In 2011, an oil pipeline owned by the energy company Enbridge sprung a leak near the town of Wrigley in the Canadian Northwest Territory. The citizens of Wrigley maintain a traditional style of life that depends on the health of local forests and waterways. Environmental protection is not just a question of principle for the people of Wrigley; it is a matter of survival. Enbridge devised a detailed cleanup plan—a complex technical document 600 pages long. When the company offered $5,000 so that the community could hire its own experts to evaluate the plan, locals were offended by such a tiny payment. This was a significant blow to Enbridge‘s image, coming shortly after another Enbridge pipeline ruptured in Michigan. And at the same time, Enbridge was in the midst of trying to win approval for a new project in the face of opposition from environmental groups.

The company faced a number of difficult issues in the wake of the Wrigley spill. First, Enbridge had to clean up the spilled oil. Then, they had to consider the issue of remediation—the restoration the polluted land back to something like its original state. Further, there was the question of compensation to the local community for the pollution and loss of use of some of their traditional hunting grounds. All of this was set against a backdrop of controversy surrounding the impact that oil pipelines have on the lands and communities through which they run.

What do you think motivated the company‘s decision to offer the community $5,000 to hire its own expert? Why do you think the community was insulted? If you were the company‘s local manager, what would you have done?

This case provides an opportunity to accomplish several introductory goals. In the most general 5-8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

terms, this discussion helps in exploring with the students prior to Chapters 2 and 3 the source/origins of our values or strongly held beliefs, what encourages us to make the decisions that we make, the ―whys‖ behind our choices.

One can use the case as a means for discussing decision making: What options are available to Enbridge? How would it decide? What factors are relevant to the decision? What is a rational decision? Ask students to take various points of view—Enbridge, its financial advisor, the city‘s mayor, Wrigley‘s citizens—and contrast likely alternative decisions.

One can also use the case to subtly introduce various perspectives on ethics: What is the difference between doing something ethically required and doing something heroic or charitable?

On what grounds do you reach your own opinion about Enbridge? What type of company is it, and what is its corporate character?

This case also allows for an introduction to the basic debate about corporate social responsibility: What responsibilities does a company have to the community in which it is located? For whose benefit ought a company be operated? Enbridge is a publicly traded corporation. How might the factors considered in its decision making change if it were privately controlled?

What facts would be helpful to you, as an outsider, in evaluating the company‘s behavior after the spill?

It would be helpful to know the business‘ financial situation before the oil spill, the company‘s environmental record prior to the spill, any prior relationship the company had to Wrigley, what alternatives were available and how feasible each would be. In addition, did the firm have a mission statement, or any other obligations to Wrigley or others that the students believe should be upheld? What are other possible sources of ―obligations?‖ What values are involved in this situation? How would Enbridge answer that question, internally? How would the people of Wrigley answer that question, if asked?

There are a number of different ethical values involved in this situation. Challenge the students to explore their origins and examine what Enbridge should consider as the responsible party in the spill, what are its contractual obligations, its social responsibilities, its rights/duties and the rights/duties of the people of Wrigley. What is the fair thing to do, what is the loyal and kind thing to do in this situation, and what might a ―virtuous‖ company do under these circumstances?

What is reasonable for the people of Wrigley to expect from Enbridge?

Did Enbridge have obligations that went beyond cleaning up the area directly affected by the spill from the company‘s pipeline? Were they obligated to offer the $5,000? Consider the suggestion made by a member of the community that Enbridge should donate money to build a swimming pool or hockey arena for local kids. Would a donation of this kind help to satisfy the company‘s obligations to the community?

Enbridge‘s actions were considered insulting by the community, even though it had no contractual or other legal obligation beyond the cleanup laid out in its plan. The spirit of Enbridge‘s offer was not taken as sufficient to address the community‘s concerns about the oil spill. Ask students to hypothesize about the reasons for the community‘s dissatisfaction and to brainstorm about actions the company might have taken to satisfy these concerns. If they were Enbridge managers faced with the task of recommending such actions to the company‘s board, 5-9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

how would they make their case? f. Application of Ethical Decision Making: Consider two approaches to the above Enbridge scenario in the Decision Point, ―Ethics After an Oil Spill.‖ i.

The more social-scientific approach common in management or business administration classes would examine the decision by exploring the factors that led to one decision rather than another or by asking why the manager acted in the way that he did?

ii.

A second approach to Enbridge steps back from the facts of the situation to ask what should the manager do, what rights and responsibilities are involved? What good will come from this situation? Is Enbridge being fair, just, virtuous, kind, loyal, trustworthy?

iii.

This normative approach to business is at the center of business ethics.

Ethical decision making involves the basic categories, concepts, and language of ethics: shoulds, oughts, rights and responsibilities, goodness, fairness, justice, virtue, kindness, loyalty, trustworthiness, and honesty.

*Chapter Objective 4 Addressed Below* g. Ethics as Normative: To say that ethics is a normative discipline is to say that it deals with norms, those standards of appropriate and proper (or ―normal‖) behavior. i.

Norms establish the guidelines or standards for determining what we should do, how we should act, and what type of person we should be.

ii.

Norms appeal to certain values that would be promoted or attained by acting in a certain way.

iii.

Normative disciplines presuppose some underlying values.

h. What are Values? We can think of values as the underlying beliefs that incline us to act or to deicide one way rather than another. i.

A company‘s core values are those beliefs and principles that provide the ultimate guide to its decision making.

ii.

We can recognize many different types of values: financial, religious, legal, historical, nutritional, political, scientific, and aesthetic. Individuals can have their own personal values, and importantly, institutions also have values.

iii.

Talk of a corporation‘s culture is a way of saying that a corporation has a set of identifiable values that establish the expectations for what is ―normal‖ within that firm.

iv.

These norms guide employees, implicitly more often than not, to behave in ways that the firm values and finds worthy.

v.

One important implication of this guidance, of course, is that an individual‘s 5-10

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or a corporation‘s set of values may lead to either ethical or unethical result.

The corporate culture at Enron, for example, seems to have been committed to pushing the envelope of legality as far as possible in order to get away with as much as possible in pursuit of as much money as possible. vi.

One way to distinguish these various types of values is in terms of the ends they serve.

i. Ethics Values versus Other Values: How are ethical values to be distinguished from these other types of values? i.

Ethical values serve the ends of human well-being. Acts and decisions that seek to promote human welfare are acts and decisions based on ethical values. Controversy may arise when we try to specify more precisely that which is involved in human well-being.

ii.

The well-being promoted by ethical values is not a personal and selfish well-being. After all, the Enron and Madoff scandals resulted from many individuals seeking to promote their own well-being.

iii.

Ethics requires that the promotion of human well-being be done impartially.

Ethical values are those beliefs and principles that impartially promote human well-being.

Decision Point: Mark Zuckerberg: A Good Leader This Decision Point can be used to help students understand the ambiguities involved in describing someone as a ―good‖ leader. By most accounts, Zuckerberg has been a very successful and effective leader of Facebook (Meta). But the question of his being a good and ETHICAL leader remains open.

IV.

Why Study Business Ethics a. The ―Separation thesis‖ described a common which holds that ethical standards are separate from the standards that apply in business activities. This view holds that business has its own rules that govern how the game is played and, therefore, business is exempt from ordinary ethical judgments. b. This separation thesis is represented prominently in Milton Freidman‘s famous essay, ―The Social Responsibility of Business is to Increase its profits.‖ This very common perspective can be seen in many cases discussed throughout this text and should be contrasted with the ―stakeholder theory‖ described in Chapter 5. c. Relationship between economic and moral values: How should we conceive of the relationship between business and market activity, on the one hand, and ethical concerns, on the other? This is not a new question, but one that can be found since the very dawn of modern capitalism.

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i.

The relationship between Adam Smith‘s two books, The Wealth of Nations and The Theory of Moral Sentiments, can be seen as representing this question.

ii.

The issue of the relationship of economic and moral values is addressed in the study of business ethics.

*Reality Check: Psychological Egoism* provides a brief philosophical refutation of a common assumption that underlies much of the skepticism about business ethics, including the separation thesis. That assumption is the view that all human behavior is motivated by selfish interest, otherwise known as ―psychological egoism.‖ This view is implicit in much thinking about the separation thesis and is often, mistakenly, attributed to Adam Smith. d. As recently as the mid-1990s, articles in such major publications as The Wall Street Journal, the Harvard Business Review, and U.S. News and World Report questioned the legitimacy and value of teaching classes in business ethics. e. Leaders realize that they can no longer afford this approach in contemporary business. The direct costs of unethical business practice are more visible today than perhaps they have ever been before. f. The first decade of the new millennium was riddled with highly publicized corporate scandals, the effects of which did not escape people of any social or income class. Moreover, we saw the economy begin a downward spiral into one of the largest financial crises of the last 80 years. g. These lending and trading efforts encouraged bad debt to appreciate beyond levels that the market could bear. The inevitable correction caused real estate values in most markets to decline sharply, domestic credit markets to freeze, and the federal government to intervene with a rescue package. h. Economic turmoil incites misconduct; there is a significant bump in observed workplace misconduct during times of economic challenges. Some money-saving strategies deployed by struggling companies, such as compensation/benefit reductions and hiring freezes, have been found to increase misconduct by more than 35%. *Chapter Objective 1 Addressed Below* i. To understand the origins of the shift from whether ethics or values should play a role in business decisions to the almost frantic search for how most effectively (and quickly!) to do it, consider the range of people who were harmed by the Wells Fargo scheme: Customers, employees, investors, competitors, and the communities in which these people live. j. Expansion of ethically responsible business decision making: Ethically responsible business decision making must move beyond a narrow concern with 5-12 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

stockholders, and consider the impact that decisions will have on a wide range of stakeholders. In a general sense, a business stakeholder will be anyone affected, for better or worse, by decisions made within the firm. k. Reasons to be concerned with ethical issues: Beyond specific legal obligations, contemporary business managers have many other reasons to be concerned with ethical issues.

III.

i.

Unethical behavior not only creates legal risks for a business, it creates financial and marketing risks as well.

ii.

Managing these risks requires managers and executives to remain vigilant about their company‘s ethics.

iii.

A firm‘s ethical reputation can provide a competitive advantage, or disadvantage, in the marketplace and with customers, suppliers, and employees.

iv.

Managing ethically can also pay significant dividends in organizational structure and efficiency.

v.

Trust, loyalty, commitment, creativity, and initiative are just some of the organizational benefits that are more likely to flourish within ethically stable and credible organizations

Ethics and the Law

*Chapter Objective 5 Addressed Below* a. The law provides an important guide to ethical decision making. Legal norms and ethical norms are not identical nor do they always agree. However, when new quandaries arise, one must be able to rely on ethics since the law might not yet—or might never—provide a solution. i.

Some ethical requirements, such as treating one‘s employees with respect, are not legally required though they may be ethically warranted.

ii.

Conversely, some actions that may be legally permitted, such as firing an employee for no reason, would fail many ethical standards.

b. Law as Social Responsibility: A commonly accepted view, perhaps more common prior to the scandals of recent years than after, holds that a business fulfills its social responsibility simply by obeying the law. i.

From this perspective, an ethically responsible business decision is merely one that obeys the law; there is no responsibility to do anything further.

ii.

Individual businesses may decide to go beyond the legal minimum, but these choices are voluntary and a matter of corporate philanthropy and charity.

c. Ethics Programs and Officers. Over the last decade, many corporations have established ethics programs and have hired ethics officers who are charged with 5-13 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

managing corporate ethics programs. i.

Ethics officers do a great deal of good and effective work, but it is fair to say that much of their work focuses on compliance issues.

ii.

The Sarbanes–Oxley Act created a dramatic and vast new layer of legal compliance issues.

d. Compliance? Is compliance with the law all that is required to behave ethically? *Reference: ―Reality Check—Transparency International: Perceptions of Foreign Bribery by Sector‖* *Chapter Objective 6 Addressed Below* i.

Example: Consider one law that has significant impact of business decision making: the Americans with Disability Act. This law requires employers to make reasonable accommodations for employees with disabilities. But what counts as a disability and what counts as a reasonable accommodation? Over the years, claims have been made that relevant disabilities include obesity, depression, dyslexia, arthritis, hearing loss, high blood pressure, facial scars, and the fear of heights. Whether or not such conditions are covered under the law will depend on a number of factors, including how severe the illness is and how it affects the employee‘s ability to work. Imagine that you are a corporate human resource manager and an employee asks that you make reasonable accommodations for her allergy. How would you decide if allergies and hay fever are disabilities under the Americans with Disabilities Act?

e. Rules versus Case Law: The law offers general rules that get specified in case law.

Most of the laws that concern business are based on past cases that establish legal precedents. There is no unambiguous answer to the conscientious business manager who wishes simply to obey the law. i.

Some theories of corporate social responsibility suggest that if a corporate manager is told that she has a responsibility to maximize profits within the law, a competent manager will go to her corporate attorneys and tax accountants to ask what the law allows. Most cases of corporate scandal mentioned at the start of the chapter involved attorneys and accountants who advised their clients that what they were doing could be defended in court.

f. It would seem a manager has a responsibility to ―push the envelope‖ of legality in pursuit of profits. Because the law is ambiguous, because in many cases it simply is not clear what the law requires, business managers will often face decisions that will rely on their ethical judgments. g. Responsible decision making requires that we do step back to reflect upon and consciously choose the values by which we make decisions.

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**Teaching Note: This would be an appropriate point to delve more deeply into the contrast between ethics and law. Take any well-known business law case, describe the factual background, and then ask students to take the point of view of those who argue that the social responsibility of business is to maximize profit within the law. From that perspective, before the outcome of the legal case is known, what ought the business manager do? Then have students read the judicial decision and examine whether they could have known what the law required before the decisions was made. *Chapter Objective 7 Addressed Below* Discussion of Opening Decision Point Wells Fargo and Facebook: Individual Misconduct, of Failure of Culture?

The Wells Fargo and Facebook cases provide an opportunity to examine individual decision making within an institutional context. Explicit institutional policies and practices such as compensation schemes, performance bonuses, and sales targets, or more subtle institutional practices such as ―eight is great‖ slogans, can influence how individuals make decisions. A helpful class exercise is to ask students to reflect on what motivations they believe lead to decisions at each level of employment: entry-level, branch managers, senior executives, and board members.

This case also provides an occasion to reflect on the role of external stakeholders, including the press and government agencies.

End of Chapter Questions, Projects, and Exercises 1. Other than ethical values, what values might a business manager use in reaching decisions?

Are there classes in your college curriculum, other than ethics, which advise you about proper and correct ways to act and decide?

Challenge the students to integrate knowledge and material from their other courses. In particular, challenge them to articulate any behavioral norms that are implicit in such classes as finance, accounting, and economics. Ask students to explain how the norms embedded in these classes differ from ethical norms.

2. Why might legal rules be insufficient for fulfilling one‘s ethical responsibilities? Can you think of cases in which a businessperson has done something legally right, but ethically wrong? What about the opposite—are there situations in which a businessperson might have acted in a way that was legally wrong but ethically right?

Direct students to discussion about ethics and the law. This question can also be used to draw parallels between legal and ethical distinctions between what is ―required/obligatory‖ and what is ―permitted.‖ 3. What might be some benefits and costs of acting unethically in business? Distinguish between benefits and harms to the individual and benefits and harms to the firm.

Students may need to be challenged to move beyond economic and financial benefits and harms.

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4. Review the distinction between personal morality and matters of social ethics. Can you think of cases in which some decisions would be valuable as a matter of social policy, but bad as a matter of personal ethics? Something good as a matter of personal ethics and bad as a matter of social policy?

Lead a class discussion about the nature of personal morality and matters of social ethics based on relevant current events or leaders. Again, consider the hypothetical case of the HR manager mentioned at II.d.5 as a means to highlight this distinction. Other cases might involve individuals who are charged with certain professional responsibilities—lawyers, auditors, and physicians.

5. As described in this chapter, the Americans with Disabilities Act requires firms to make reasonable accommodations for employees with disabilities. Consider such conditions as obesity, depression, dyslexia, arthritis, hearing loss, high blood pressure, facial scars, and the fear of heights. Imagine that you are a business manager and an employee comes to you asking that accommodations be made for these conditions. Under what circumstances might these conditions be serious enough impairments to deserve legal protection under the ADA? What factors would you consider in answering this question? After making these decisions, reflect on whether your decision was more a legal or ethical decision.

Refer students to the relevant section in the chapter on the Americans with Disabilities Act. In order for circumstances such as obesity, depression, dyslexia, arthritis, hearing loss, high blood pressure, facial scars, and the fear of heights to be serious enough impairments to deserve legal protection under the ADA, the impairment must substantially limit one or more major life activities. When the law is ambiguous, as is always so in case law, any decision will be made in part on the basis of personal values.

Such examples help counter the misleading view that many students adopt that the law is a set of rules that provide unambiguous guidance. In turn, this helps instructors move students beyond the perspective that all one needs do is ―obey the law.‖ 6. Do an Internet search for recent news stories about oil spills. Do any of those stories report behaviors that seem especially wise or unwise on the part of the oil companies involved? Do you think that controversies over big pipeline projects like the Keystone Pipeline alter how people evaluate the ethics of oil-spill cleanups?

Students can find information about the risks Enbridge‘s pipelines still pose in these news articles: https://www.wpr.org/hundreds-participate-hearing-enbridges-proposed-oil-and-gas-pipelineproject https://www.mprnews.org/story/2018/05/31/minnesota-faith-leaders-team-up-against-line-3oil-pipeline 7. Construct a list of all the people who were adversely affected by Bernie Madoff‘s Ponzi scheme. Who, among these people, would you say had their rights violated? What responsibilities, if any, did Madoff have to each of these constituencies?

The concept of ―stakeholders‖ will be introduced in Chapters 2 and 3; therefore, this question is to help students get started thinking about the nature of ―stakeholders.‖ Ask 5-16 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

students to list the stakeholders in the Madoff situation. An interesting side discussion can be generated by asking students to describe how all of these stakeholders were harmed, and whether or not they view the losses faced by some individuals or organizations (e.g., The Elie Wiezel Foundation for Humanity) differently than those faced by others (e.g., hedge funds or individual celebrities).

8. What difference, if any, exists between ethical reasons and reasons of self-interest? If a business performs a socially beneficial act in order to receive good publicity, or if it creates an ethical culture as a business strategy, has the business acted in a less than ethically praiseworthy way?

This question introduces the concepts of corporate culture and social responsibility, which will be discussed in Chapters 4 and 5.

9. During the recession of 2008–2009 and again during the COVID-19 pandemic, many reputable companies suffered bankruptcies while others struggled to survive. Of those that did remain, some opted to reduce the size of their work forces significantly. In a business environment during those times, consider a company that has been doing fairly well, posting profits every quarter and showing a sustainable growth expectation for the future. However, the general ill ease in the market has caused the company‘s stock price to fall. In response to this problem, the CEO decides to layoff a fraction of his employees, hoping to cut costs and to improve the bottom line. This action raises investor confidence; consequently, the stock price goes up. What is your impression of the CEO‘s decision? Was there any kind of ethical lapse in laying off the employees, or was it a practical decision necessary for the survival of the company?

Students should list and consider each of the stakeholders impacted by the company‘s decision and analyze the business decision in the context of the business‘ social responsibilities.

10. Every year, Ethisphere Magazine publishes a list of the world‘s most ethical companies. Go to their website; find and evaluate their rating methodology and criteria; and engage in an assessment (i.e., provide suggestions for any modifications you might make or a more or less comprehensive list, and so on). http://ethisphere.com/wme/

IM Chapter 2: Ethical Decision Making: Personal and Professional Contexts Chapter Objectives After reading this chapter, students will be able to: 1. Describe a process for ethically responsible decision making.

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2. Apply this model to ethical decision points.

3. Explain the reasons why ―good‖ people might engage in unethical behavior.

4. Explore the impact of managerial roles on the nature of our decision making.

Opening Decision Point Am I about to Lose My Job? With this case, the general introduction of Chapter 1 is brought down to the very practical level of individual decision making. This scenario is based on an amalgam of two actual situations in which our own MBA students have found themselves, so this can be used to introduce students to a situation that they themselves could face. As such, this is a good opportunity to flesh out the decision-making procedure introduced in Chapter 1. A helpful start might be to simply walk through the decision-making procedure applied to this case: What facts would you need to know? What are the ethical issues involved? Who are the stakeholders?

This case also can be used to demonstrate that people face a variety of ethical demands, ranging from the personal concern with truthfulness, to an individual responsibility to friends, to the demands of professional responsibility. This is a good example of a classic moral dilemma: An individual is faced with competing and incompatible ethical claims.

This case also provides an opportunity to discuss the ethical basis of some professional duties and examine why some might confuse this with the separation thesis. In this situation, it might appear to be ordinary ethical responsibilities of truthfulness and personal integrity conflict with a person‘s business responsibilities to hold information in confidence. But the duty of confidentiality might best be explained as an example of another ordinary ethical responsibility, namely, promise-keeping and the fiduciary responsibility of professionals.

Finally, the case can also be used to reinforce the understanding that ethics does not always involve unambiguous conclusions. There may be no single ―right‖ answer (why, otherwise, would the individual involved feel the pull of a dilemma?), but various more-or-less reasonable decisions.

I.

Introduction a. Putting Ethics into Practice: Ethics requires not simply decision making but accountable decision making. i.

Even if a person does not consciously think about a decision, their own actions will involve making a choice and taking a stand.

1. Example: If you find yourself in a situation similar to the discussion case, how would you think your way through it?

b. Ethical Decision Making in Everyday Life: This chapter examines various elements involved in individual decision making and applies those concepts to the decisions individuals make every day in business. The chapter also explores: i.

Ways ethical decision making can go wrong.

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ii.

II.

Ways effective business leaders can model the most effective ethical decision making.

A Decision-Making Process for Ethics a. What is the Ethical Decision-Making Process? i.

We explore the application to the opening Decision Point—How would you decide what to do in the case at the beginning of the chapter?

**Teaching Note: This discussion should be tied back to Chapter 1 and students should be reminded that an ethics course strives to help them think for themselves. Always in the background are the dual pitfalls of dogmatism, which imposes one correct ethical view on all, and relativism, which denies that there is any correct ethical view. This decisionmaking process provides the middle ground between dogmatism and relativism. *Chapter Objective 1 Discussed Below* b. Step 1: Determine the Facts of the Situation.

Teaching Note: In earlier editions, we assumed that determining facts would be a relatively uncontroversial activity. This edition devotes greater attention to the challenges that arise in determining the facts, many of which have been on display in recent political situations, including reactions to the pandemic. Two new features help in this regard: A new Decision Point on Alternative Facts, Fake News, and Conspiracy Theories provides an occasion to reflect on the critical reasoning skills that go into determining the facts.

We also include a new Reality Check on ―Doing your own research.‖ This phrase became popular during the COVID-19 pandemic when some skeptics declined the vaccine or doubted the seriousness of the virus on the grounds that they were doing ―their own research.‖ i.

It is essential to make an honest effort to understand the situation and to distinguish facts from mere opinions.

ii.

Perceptual differences surrounding how individuals experience and understand situations can explain many ethical disagreements. Knowing the facts and carefully reviewing the circumstances can go a long way toward resolving disagreements at an early stage.

iii.

Example: Let us turn to the discussion case. What facts would be useful to know before making a decision? Suppose you do know what will happen to this local office? Would that make a difference? Suppose you knew specific details of the questioner‘s life, such as family financial situation. How would your decision change as any of these facts changed? Can you imagine a 5-19

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situation in which what looks like an ethical disagreement turns out to be a disagreement over the facts? iv.

Role of Science (and Theoretical Reason) in Ethics: 1. An ethical judgment made in light of a diligent determination of the facts is a more reasonable ethical judgment that one made without regard for the facts. A person who acts in a way that is based upon a careful consideration of the facts has acted in a more responsible way—ethically and rationally more responsible—than a person who acts without deliberation.

2. The sciences, and perhaps especially the social sciences, can help us determine the facts surrounding our decisions. As a business example, consider what facts might be relevant for making a decision regarding child labor. Consider how the social sciences of anthropology and economics, for example, might help us understand the facts surrounding employing children in the workplace within a foreign country.

3. Applying this strategy to a business operation would encourage business decision makers to seek out perhaps alternative or somewhat less traditional methods of fact gathering to ensure that they have compiled all of the necessary data in processing the most ethical decision.

We include a new text box ―How to Establish the Facts‖ to summarize the relevant questions one should ask when working to establish the facts of any situation. Students might be asked to apply these criteria to some current situation in which the facts are in dispute. c. Step 2: Identifying the Ethical Issues Involved. i.

It is crucial to recognize a decision or issue as an ethical decision or ethical issue. It is easy to be led astray by a failure to recognize that there is an ethical component to some decision.

ii.

It is important to ask questions about the ethical implications of a decision or issue: How does one determine that a question raises an ethical issue at all? When does a business decision become an ethical decision?

iii.

―Business‖ or ―economic‖ decisions and ethical decisions are not mutually exclusive. Just because a decision is made on economic grounds does not mean that it does not involve ethical considerations as well.

iv.

Being sensitive to ethical issues is a vital characteristic that needs to be cultivated in ethically responsible people.

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1. How will our decisions impact the well-being of the people involved?

2. To the degree that a decision affects the well-being—the happiness, health, dignity, integrity, freedom, respect—of the stakeholders, it is a decision with ethical implications.

3. Shall we also consider then the environment, animals, future generations? There are often ethical implications for these entities, as well. In the end, it is almost impossible to conceive of a decision we might make that does not have at least some impact on the wellbeing of another. v.

Normative myopia, or shortsightedness about values, can occur in business contexts when one is unable to recognize ethical issues. Normative myopia does not occur only in businesses, as the Reality Check below displays.

*Reference: ―Reality Check—Is There an Ethics of Writing Papers?‖* *Reference: ―Reality Check—Fooling Ourselves‖* vi.

Inattentional blindness can result from focusing failures when we happen to focus—or we are told specifically to pay attention to a particular element of a decision or event—and we miss all of the surrounding details, no matter how obvious.

vii.

Change blindness occurs when decision makers fail to notice gradual changes over time, such as when Arthur Andersen auditors did not notice how low Enron had fallen in terms of its unethical decisions. One of the means by which to protect against these decision risks is to ensure that decision makers seek input from others in their decision processes.

d. Step 3: Identify and Consider All of the ―Stakeholders‖ Affected by the Decision. i.

―Stakeholders‖ in this general sense include all of the groups and/or individuals affected by a decision, policy, or operation of a firm or individual.

ii.

Considering issues from a variety of perspectives other than one‘s own, and other than what local conventions suggest, helps make one‘s decisions more reasonable and responsible.

*Reference: ―Figure 2.1—Stakeholder Map‖* iii.

Shifting one‘s role is helpful in considering the effects of a decision on others.

1. Rather than being in the position of the person who is being asked 5-21

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about the potential job loss, what would you think of this case if you were the person facing the loss of a job? How does that impact your thinking? What would your judgment be if you were the person who was asking? iv.

Key Test of Ethical Legitimacy: Whether or not a decision would be acceptable from the point of view of all parties involved.

1. If you could accept a decision as legitimate no matter whose point of view you take, that decision would be fair, impartial, and ethical.

2. Example: If you acknowledge that you would not violate confidence no matter which person you were, then that is a strong indication that the decision to keep confidence is a fair or ethical one.

3. Example: Or consider Enbridge‘s decisions after the oil spill in Wrigley, as described in Chapter 1. Considering only its obligation to its shareholders might lead to a decision to satisfy only the minimum legal requirements for cleaning up the site, to avoid additional costs that would negatively impact profits. However, a decision that considers only the shareholders‘ point of view would not be a responsible decision. The spill also affected the residents of Wrigley, who are heavily dependent on the forests and waterways in the area for their livelihood and ways of life.

Decision Point: Who Matters, After an Oil Spill?

Students are asked to think back to the Decision Point in the first chapter, ―Ethics After an Oil Spill.‖ One of the key challenges Enbridge faced involved determining the identity of its key stakeholders. To whom does the company owe obligations in the wake of the oil spill? But once the company has identified its stakeholders, then what?

Challenge students consider the relatively easy example of a group that is directly affected: the residents of the tiny town of Wrigley, and to determine what the company owes to this group.

The following questions are included in this Decision Point to facilitate student reflection or discussion of Enbridge‘s obligations to this stakeholder group:    

Are the residents of Wrigley owed a cleanup effort that restores the area to its state prior to the spill, or should the cleanup process only go as far as the law demands?

Are the people of Wrigley owed a speedy cleanup? How speedy—and at what cost?

Do they have a right to participate in the decision making, or just to be kept informed?

Does Enbridge have an obligation to go beyond repairing the damage from the spill and contribute to community development projects, such as a ―swimming pool or a hockey arena or something for the kids,‖ as suggested by one resident? v.

A major challenge to ethical decision making is that decisions involve the 5-22

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interests of multiple stakeholders and each alternative will impose costs on some stakeholders and offer benefits to others. *Reference: ―Reality Check—Recognizing the Value of Stakeholder Trust‖* e. Step 4: Consider the Available Alternatives. i.

Creativity in identifying options—also called ―moral imagination‖—is one element that distinguishes good people who make ethically responsible decisions from good people who do not.

ii.

Consider both the obvious and subtle options with regard to a particular dilemma.

1. When reviewing the Enbridge circumstances, ask yourself how Enbridge might utilize moral imagination in its response to various stakeholders affected by the oil spill, particularly the townspeople of Wrigley.

2. Or consider the case of disclosing confidential information. Can you think of alternative resolutions that neither lie nor disclose information?

3. Moral imagination might be something simple like explaining that it is not your place to answer but providing contact information for someone who could.

f. Step 5: Compare and Weigh the Alternatives. i.

Create a mental spreadsheet that evaluates the impact of each alternative you have devised on each stakeholder you defined.

ii.

Place oneself in the other person‘s position. Understanding a situation from another‘s point of view, making an effort to ―walk a mile in their shoes,‖ contributes significantly to responsible ethical decision making.

iii.

Predict the likely, the foreseeable, and the possible consequences to all the relevant stakeholders.

iv.

Consider ways to mitigate, minimize, or compensate for any possible harmful consequences or to increase and promote beneficial consequences.

v.

Consider how the decision will be perceived by others: 1. Would you feel proud or ashamed if The Wall Street Journal printed this decision as a front page article? Could you explain the decision to a 10-year-old child so the child thinks it is the right decision? Will the decision stand the test of time?

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2. Would your behavior change if other people knew about it?

Typically, it is the irresponsible decisions that we wish to keep hidden. vi.

Some alternatives might concern matters of principles, rights, or duties that override alternatives.

*Reference: ―Reality Check—Seeking Guidance?‖* vii.

One additional factor in comparing and weighing alternatives requires consideration of the effects of a decision on one‘s own integrity, virtue, and character.

1. Understanding one‘s own character and values should play a role in decision making.

2. A responsible person will ask: ―What type of person would make this decision?‖ What kind of habits would I be developing by deciding in one way rather than another? What type of corporate culture am I creating and encouraging? How would I, or my family, describe a person who decides in this way? Is this a decision that I am willing to defend in public?‖ 3. An honest person might not even think about retaining the iPod; keeping it for oneself is simply not an option for such a person.

g. Step 6: Make a Decision. i.

Our ability to learn from our experiences creates a responsibility to them: 1. Evaluate the implications of our decisions.

2. Monitor and learn from the outcomes.

3. Modify our actions accordingly when faced with similar challenges in the future.

h. The value of this approach: Other approaches to ethically responsible decision making are possible, and this approach will not guarantee one single absolute answer to every decision. But it is a helpful beginning in the development of responsible and ethical decision making. *Reference: ―Figure 2.2—An Ethical Decision-Making Process”* Decision Point Applying the Decision-Making Model This extended case applies the decision-making model to a case that most students will easily 5-24 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

understand: the decision to pay a higher that legally required minimum wage to workers in the fast food industry.

III.

When Ethical Decision Making Goes Wrong: Why Do ―Good‖ People Engage in ―Bad‖ Acts? a. Individuals do not always make the responsible, autonomous decisions of which they are capable. i.

There are many ways in which responsible decision making can go wrong and many ways in which people fail to act in accordance with the ethical judgments they make.

ii.

Sometimes people can simply choose to do something unethical. We should not underestimate the real possibility of immoral choices and unethical behavior.

iii.

Sometimes well-intentioned people fail to choose ethically.

b. Why do people we consider to be ―good‖ do ―bad‖ things? What factors determine which companies or individuals engage in ethical behavior and which do not? *Chapter Objective 3 Addressed Below* c. Stumbling Blocks: There are many stumbling blocks to responsible decision making and behavior, which are either cognitive or intellectual. i.

A certain type of ignorance can account for bad ethical choices. Sometimes that ignorance can be almost willful and intentional.

1. After you read the email from the person facing a job loss, you might rationalize to yourself that no one will ever know if you tell, that no one is really going to be hurt. Or, you might rationalize that you really do not know what will happen in the future, who does after all? Therefore, you can truthfully say that you do not know.

2. You might try to justify the decision by telling yourself that you are only doing what anyone else would do in this circumstance.

3. You might even choose not to think about it, ignore the email, and try to put any guilty feelings out of your mind.

ii.

Sometimes we only consider limited alternatives.

1. When faced with a situation that suggests two clear alternative resolutions, we often consider only those two clear paths, missing the fact that other alternatives might be possible.

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2. Responsible decision making would require that we discipline ourselves to explore additional methods of resolution. d. Having a simple rule to follow can be reassuring and comfortable to many decision makers. i.

Example: Assume you are a business manager who needs to terminate a worker in order to cut costs. Of course, your first thought may be to uncover alternative means by which to cut costs instead of firing someone, but assume for the moment that cutting the workforce is the only viable possibility. It may be easiest and most comfortable to terminate the last person you hired, explaining, ―I can‘t help it; it must be done, last in/first out, I have no choice . . .‖

ii.

Using a simple decision rule might appear to relieve us of accountability for the decision, even if it may not be the best possible decision.

1. That is, you did not ―make‖ the decision; the rule required the decision to be made.

e. We also often select the alternative that satisfies minimum decision criteria, otherwise known as ―satisficing,‖ even if it might not be the best. f. Other stumbling blocks are a question of motivation and will power. i.

As author John Grisham explained in his book, Rainmaker, ―Every (lawyer), at least once in every case, feels himself crossing a line he doesn‘t really mean to cross. It just happens.‖

ii.

Sometimes, it is simply easier to do the wrong thing.

*Reference: ―Reality Check—The Ethics of Cheating‖* g. Unfortunately, we do not always draw the lines for appropriate behavior in advance, and even when we do, they are not always crystal clear. i.

As Grisham suggests, it is often easy to do a little thing that crosses the line, and the next time it is easier, and the next easier still.

ii.

People also sometimes make decisions they later regret because they lack the courage to do otherwise.

iii.

It is not always easy to make the right decision; you might lose income, your job, or other valuable components of your life.

iv.

Courage is also necessary when responding to significant peer pressure.

v.

We tend to give in to peer pressure in our professional environments, both 5-26

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because we want to ―fit in‖ and to achieve success in our organizations, and also because our actual thinking is influenced by our peers. h. Why Make Unethical Decisions? i.

Environment: Sometimes the corporate or social environment is rife with ethical challenges and unethical decisions.

1. Example: The enormous amounts of corporate executive compensation, lack of oversight of corporate executive decisions, significant distance between decision makers and those they impact, financial challenges, and a set of ethical values that has not yet caught up to technological advances.

ii.

We can benefit from unethical acts, from gaining something as simple as an iPod, to something as significant as a salary package of $180 million.

Decision Point Ethical Oil: Choose Your Poison In the fall of 2011, a Canadian organization called EthicalOil.org started a public-relations campaign aimed at countering criticism of commercial development of Canada‘s oil sands.

Extracting oil from these sands does immense environmental damage. EthicalOil.org seeks to counter such criticism by pointing out the alternative: choosing not to buy oil harvested from Canada is effectively choosing oil produced by nondemocratic Middle-Eastern countries with very bad records of human rights abuses. This decision point asks students to discuss the ethical trade-offs between different choices, neither of which is perfect. Students are given the following questions to ask themselves: 

Imagine you have the choice, as a consumer, between buying gas for your car that comes from a country where oil extraction does vast environmental damage, and buying gas from a country where the profits from that oil help support a dictatorship with a history of human rights abuses. Which gas will you buy? Why? Are you willing to pay a bit extra to get oil that is more ethical, whatever that means to you?



Imagine that you are responsible for securing a contract to provide gas for your company‘s fleet of vehicles. If the choice is available to you, will you choose the most environmentally friendly gas? Or the gas least associated with human rights abuses? Or will you just go with the cheapest gas available? Consider whether the choice between buying gas that harms the environment and gas that contributes to human rights abuses exhausts the alternatives in these scenarios. Are there other courses of action available to the individual car-owning consumer? To the manager responsible for procuring gas for the company fleet?

Stress the importance of considering the answers to these questions before you are actually faced with a decision. i. Making Ethically Responsible Decisions: is a serious challenge we all face 5-27 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

throughout life. i.

The easiest thing to do would be to remain passive and simply conform to social and cultural expectations, to ―go with the flow.‖

ii.

To live a meaningful human life, we must step back and reflect on our decisions, assuming the responsibility of autonomous beings.

j. Ethical Individuals: Some individuals do not succumb to temptations and may not even deliberate in the face of an ethical dilemma. i.

Many people have developed a certain type of character, a set of ethical habits that will encourage them, without deliberation, to act ethically.

ii.

Developing such habits, inclinations, and character is an important aspect of living an ethical life.

**Teaching Note: (See Reality Check earlier in the chapter, ―Fooling Ourselves.‖) IV.

Ethical Decision making in Managerial Roles a. Social Context: Decision making can be greatly influenced by the social context in which it occurs. Social circumstances can make it easier or more difficult to act in accordance with one‘s own judgment. i.

Within business, an organization‘s context sometimes makes it difficult for even the best-intentioned person to act ethically, or it can make it difficult for a dishonest person to act unethically.

ii.

Responsibility for the circumstances that can encourage ethical behavior and can discourage unethical behavior falls predominantly to the business management and executive team.

b. Integrity‘s Role: The decision-making model introduced in this chapter develops from the point of view of an individual who finds herself in a particular situation.

Personal integrity lies at the heart of such individual decision making: What kind of person am I, or do I aspire to be? What are my values? What do I stand for? Compare Aaron Feuerstein and one of the Enron executives: What type of person are they?

What are their wants, interests, beliefs, and values? c. Personal and Professional Decision Making: The ethical implications of both must be considered within the business setting. d. Social Roles: Every individual fills a variety of social roles, and these roles carry with them a range of expectations, responsibilities, and duties. i.

Social roles include friend, son or daughter, spouse, citizen, neighbor, and others.

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ii.

Institutional roles include manager, teacher, student body president, and others.

iii.

Decision making in these contexts raises broader questions of social responsibilities and social justice. *Chapter Objective 4 Addressed Below* e. Consider: How different roles might impact your judgment about an ethical dilemma. i.

Your judgment about the job loss might differ greatly if your close friend was facing termination, or if you were a manager.

f. Organizational Roles: In a business context, individuals fill roles such as accountants, managers, executives, and board members, who have the ability to create and shape the organizational context in which all employees make decisions. i.

Individuals, therefore, have a responsibility to promote organizational arrangements that encourage ethical behavior and discourage unethical behavior.

g. The following three chapters develop these topics: i.

Chapter 3 will provide an overview of how some major ethical traditions might offer guidance both to individual decision makers and to those who create and shape social organizations.

ii.

Chapter 4 will examine topics of corporate culture, ethical organizations, and ethical leadership.

iii.

Chapter 5 examines corporate social responsibility, the ends toward which ethical organizations and ethical leaders should aim.

Opening Decision Point Revisited What Would You Do? After applying the decision-making scenario to this situation, one helpful way to reflect on the decision is to imagine revisiting the case sometime after the fact, when the pressure of making an immediate decisions has passed. Looking back on the case, what policies or practices might be adopted going forward that might avoid such situations? Would your policies include sanctions for anyone who violated confidence to answer such a question.

Questions, Projects, and Exercises 1. Consider your own personal values and explain where they originated. Can you pinpoint their derivation? To what degree have you chosen your own values? To what degree are your own values products of your family, your religious or cultural background, or your age? Does it 5-29 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

matter where values originate?

The Life Goals assignment (which was passed down from other colleagues to one of the authors) works well in place of this particular question. It is included at the end of this chapter in this IM as Appendix A. Students might also be asked to distinguish from among their own values, those that are easily changed from those that would be unlikely ever to change. While much of this discussion may involve topics in psychology, it can easily be directed to questions of moral psychology, learning theory, and through that to the development of moral character and virtues.

2. Identify an activity that is outside of your ―zone of comfort‖; in other words, do something that you might not otherwise do, experience something that you might not otherwise experience, because the activity would otherwise be something with which you would be uncomfortable. This activity does not need to be something enormous or intimidating; but instead it could be something as basic as being the first to apologize after an argument, or agreeing to dress up for a masquerade party when you might not usually feel comfortable doing so. You might offer to cook dinner for a friend, when that would normally be an uncomfortable arrangement; or you might ask a question in class, or offer to lead a presentation, if those are things something that make you uncomfortable.

It is important that you consider your expectations (i.e., how do you think you will feel, what do you think it will be like?) before engaging in this activity and write them down. Then, after the experience, complete the assignment by writing a description of the actual experience and indicating whether the reality matched your expectations, considering in particular your original perceptions and expectations and whether they were accurate. How closely can we trust our perceptions and prejudgments about our expectations of experiences? How true is our ―gut instinct?‖ The purpose of the Zone assignment is to encourage students to engage in a ―stretch,‖ to do something they might not otherwise do and to explore whether their preconceptions about that stretch were correct. Sometimes, of course, they are. But more often, they are not and the students are thereby primed for the next class sessions to be a bit more open-minded about what judgments might lie ahead, as well. Reinforce to the students, however, that you do not mean to imply that they should do anything that they are not supposed to do, but simply something they might not otherwise be likely to do. Topics of etiquette and social norms can be helpful here.

3. What issue, challenge, or idea do you care about most in the world? Share it in a brief essay, then convince your reader why it is so important that they should also care about that issue to the same extent. It may be effective to use the theories discussed in prior chapters to persuade your reader of the value of your argument.

At the end of the chapter, as Appendix B, is an example of an argument made by an author in favor of freedom of the press with inserts (in bold/italics) by one of the text authors to reiterate how that original author is making his points using connections to the theories addressed in this chapter. Students might also be directed to take a look at NPR‘s "This I Believe" series to get some ideas of how to argue passionately for something 5-30 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

in which they believe (though those authors do not necessarily use the theories discussed in the chapters as they will!). They will find them at: http://www.npr.org/templates/story/story.php?storyId=4538138.

4. Your CEO recognizes you as having extraordinary skills in decision making and communications so she asks for guidance on how to best communicate her plans for an imminent reduction in force. What are some of the key strategies you will suggest she employ in reaching such a decision and making the announcement?

Students will need to use the ethical decision-making process, including sensitivity to stakeholders and careful consideration of theories.

5. Describe the qualities you believe are necessary in an ―ethical leader.‖ Provide support for your contentions and explain why a leader should evidence these qualities in order to be considered ―ethical‖ from your perspective. Then identify someone you believe embodies these qualities in their leadership and provide examples. Finally, provide an example of someone who you believe does not possess these qualities and describe that person‘s leadership.

With the students, walk through the qualities of an ―ethical leader‖ and use these as a basis for discussion of who we currently recognize as leaders in our world. Compare the ethical leaders to those listed as unethical. One might begin with the question of a ―good‖ leader and play on the ambiguity between ―good-as-effective,‖ and ―good-as-ethical.‖ 6. How can your global firm best ensure that it is taking into account the perceptual differences that may exist as a result of diverse cultures, religions, ethnicities, and other factors when creating a worldwide marketing plan?

Refer students to the seminal case in this area, the Nestle infant formula case (Found at http://multinationalmonitor.org/hyper/issues/1987/04/formula.html in the Multinational Monitor, April 1987, Volume 8, Number 4).

Students may also want to read: ―Ethnic Consumers Require Sensitive Marketing.‖ July 7, 2005. Destination CRM.com: http://www.destinationcrm.com/articles/default.asp?ArticleID=5249 You may also wish to encourage students to take a look at which encourages evaluation of marketing campaigns and the messages contained in them. Exploring the impact of and responsibility for messages communicated is a critical element of judgment and accountability.

7. Many people have blamed the global financial crisis of 2008–2009 on a single value or motive, namely greed. How would you define greed? How common do you think true greed is in the general population? Do you think it is more common on, say, Wall Street, than in the general population?

Review different ways people define greed. Ask students to provide real-world examples of decisions motivated by greed. How do the students think that the decision maker justified the decision to themselves? Do they have a different perception of greed on Wall Street? Why or why not?

Challenge students to imagine themselves in 5-31 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

the position of a Wall Street actor who made decisions that contributed to the financial crisis, and to articulate a rationale for their decision making.

8. As a class exercise, write a brief account of any unethical or ethically questionable experience you have witnessed in a work context. Read and discuss the examples in class, keeping the authors anonymous. Consider how the organization allowed or encouraged such behavior and what might have been done to prevent it.

Review different ways people perceive and behave in situations. Anonymity is important here, but it is common to discover that many students have experienced unethical behaviors at work. Once again, asking students to role play can encourage them to understand the situation from various points of view and therefore understand complexity.

9. Lisa is trying to raise funds to support the creation of a free clinic in a poor neighbourhood in her hometown. She has been trying very hard, but she has not been able to raise enough money to get the clinic up and running. One day, she gets a huge check from a high profile business executive whom she met at a fundraiser. She is ecstatic and finally sees her dream take shape. However, after a few days, the person who gave Lisa the money is arrested for fraud, money laundering, and tax evasion. What should Lisa do? Should she still keep the money and look the other way? Does the source of the money matter or does the end justify the means?

Consider how different roles might impact judgment about an ethical dilemma.

Students could refer back to the example of how judgment about the iPod might differ greatly if you knew that your friend had lost it, or if you were a teacher in the class, or if you were a member of the campus judicial board.

10. What values do you think motivated Bernard Madoff in carrying out his Ponzi scheme? How do you think his motivation may have evolved over the years that the scheme was in play?

What do you think he would have said if asked, 5 years prior to being caught, to reflect on the values that inspired him in his work?

Ask students to consider Bernie Madoff‘s initial motivations in carrying out his Ponzi scheme. Students should consider if Madoff‘s initial financial success at the beginning of the Ponzi scheme may have contributed to the development of normative myopia that enabled the scheme‘s continuation. Challenge students to place themselves in Madoff‘s shoes at various points in the timeline of his growing criminal activities, and to reflect on whether the same motivations and values could explain his behavior in the earlier and later stages of the many years that he maintained his scheme. This discussion might stress the ―slippery slope‖ character of unethical decision making.

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APPENDIX A MISSION AND LIFE GOALS ASSIGNMENT The purpose of this assignment is to encourage you to manage your life and to become aware of the foundations of that management.

A. Mission Statement: Your assignment is to draft a mission statement for your personal interactions. This mission statement should articulate how you plan to treat others in any situation where you are in contact with another individual. The statement should identify who is your primary stakeholder, what values will dictate your actions and responses, and what are your primary objectives in your life. In drafting the statement, you may choose to look at some corporate mission statements. An example of a personal mission statement: My personal objective is to enjoy each of my days to their fullest. In order to achieve this objective, I will place the needs of my family above those of my work.

However, I will place my personal needs above those of my family since I must be happy in order to make others happy. The values that I will use in negotiating personal interactions are honesty and integrity, courage, trust, and consideration.

You do not have to answer all of the following questions but, in drafting your mission statement, it might help to consider your responses to the following questions:  Self-image: If you could be exactly the kind of person you wanted what would your qualities be?  Tangibles: What material things would you like to own?  Home: What is your ideal living environment?  Health: What is your desire for health, fitness, athletics, and anything to do with your body?  Relationships: What types of relationships would you like to have with friends, family, and others?  Work: What is your ideal professional or vocational situation? What impact would you like your efforts to have?  Personal pursuits: What would you like to create in the arena of individual learning, travel, reading, or other activities?  Community: What is your vision for the community or society you live in?  Other: What else, in any other arena of your life, would you like to create?  Life purpose: Imagine that your life has a unique purpose—fulfilled through what you do, your interrelationships, and the way you live. Describe that purpose, as another reflection of your aspirations.

B. Goals. List five goals that you would like to achieve before you retire. It is helpful to think of where you would like to be at that time. Think both about material and near-material possessions (the amount of money that you would like to have, the level of position you would like to hold, and the sort of vacations you would like to take) as well as non-material aims (your family life, community service, and political actions).

C. Next, list three personal traits that should be helpful in reaching your goal along with 5-33 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

three personal traits that may tend to hinder your reaching that goal D. Norms. List five actions that you believe to be ―right.‖ Think about actions that you would ALWAYS approve if others did them, and that you would certainly be willing to do yourself.

Yes, this is difficult but the effort is toward finding those particular things that you would always judge as acceptable. Then, list five actions that you believe to be ―wrong.‖ Here, think about actions that you would ALWAYS condemn in others, and that you would not be willing to do yourself. Yes, difficult, as well.

E. Beliefs. Think about why the actions listed above are ―right‖ or ―wrong‖ in your opinion; what is the basis for your conclusion that it is right or wrong?

F. Values. The following is a list of twelve statements, each of which implies given goals (ends desired by the person), norms (acts approved by a person), and beliefs (ideas accepted by a person). Rank the statements in your order of preference or agreement (1 is the highest in your preference or agreement among them, 12 is the least preferred). ___ 1.

Increases in my wealth and the power, possessions, and life style that go with money are important to me. ___ 2.

Advancement in my company and the authority and privileges that go with promotion are important to me. ___ 3.

Performance in my job and the security and respect that go with achievement are important to me. ___ 4.

Reputation within my community and the political offices and social activities that go with reputation are important to me. ___ 5.

Attention to my family and the affection and companionship that go with family life are important to me. ___ 6.

Devotion to my faith or spiritual community and the sense of community and sharing that are a part of a spiritual life are important to me. ___ 7.

Independence in my personal life and the ability to achieve my own goals and follow my own rules (as long as I do not directly harm others) are important to me. ___ 8.

Interdependence with my fellow citizens and the opportunity to set social goals and adopt mutual rules (through representative government) are important to me. ___ 9.

Protection of the poor and the need to help others within our society who are less fortunate than I have been are important to me. ___ 10. Equality among races, sexes, and ethnic groups and the need to achieve courtesy/respect between peoples are important to me. ___ 11. Preservation of the environment and lack of exploitation of the earth‘s resources are important to me. ___ 12. Peace between nations and a lack of oppression of the earth‘s peoples are both important to me.

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APPENDIX B The following article ["WHY YOU SHOULD CARE ABOUT PRESS FREEDOM," by Mark Feldstein, published in the Chicago Tribune, April 23, 2006] has been modified by the authors to reflect the ways in which the original author of the article uses (intentionally or not) ethical theory to strengthen his arguments.

WHY YOU SHOULD CARE ABOUT PRESS FREEDOM Nation needs an unfettered press

By Mark Feldstein, Director of the Journalism Program at George Washington University Last month, as part of an ongoing criminal investigation, two FBI agents showed up at my home in suburban Washington, D.C., and waved their government-issued badges to demand access to decades-old historical archives that I have been reading.

Why? Because they say these documents may—or may not—shed light on alleged leaks to a dead investigative reporter that may—or may not—have occurred more than 20 years ago.

This inept fishing expedition would be laughable if it were not part of a larger and more serious government assault on freedom of the press, the most systematic attack on free expression and the public‘s right to know waged by any presidential administration since the infamous days of Richard Nixon.

Establishes free expression as a universal principle based on historical violations and the public‟s reaction to those violations.

In my case, the FBI claims it is entitled to rummage through the notes of columnist Jack Anderson, who donated his papers to my university before he died in December. The FBI agents who interviewed me said they want to confiscate any classified government documents that might be in the Anderson collection and prosecute whoever leaked them more than two decades ago. The agents even demanded the names of graduate students who might have looked at these records while helping with my research.

My university and the Anderson family are resisting this government intrusion into our files.

Ultimately, the courts may have to decide the outcome.

Regardless, this heavy-handed action is troubling because the FBI has already violated the Justice Department‘s own guidelines that for the past three decades have set limits on such fishing expeditions into reporters‘ notes.

Addresses the violation as a violation of other, widely accepted rules, such as the Justice Department‟s own guidelines. A violation of guidelines articulated by the one engaged in the violation is hypocritical, which would be against Universalism, though perhaps hypocrisy is justified when one looks only at ends, such as Utilitarianism.

The media as a target.

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Worse still, it is just one of many efforts hatched by the Bush administration to target journalists who have criticized the government, and it would have the effect of criminalizing the kind of press leaks that have been a regular part of politics since the presidency of George Washington.

Looks to perhaps undesirable end results (criminalizing leaks) to persuade those who might not otherwise follow a Universalistic approach.

Media censorship always increases in wartime, in the United States and everywhere else.

Abraham Lincoln shut down newspapers that sympathized with the Confederacy during the Civil War, and Woodrow Wilson did the same to leftist and German-American periodicals during World War I. In wartime, truth is notoriously the first casualty.

While we are now at war just as surely as we were then, our current enemy makes censorship more dubious and dangerous than it was in the past. America‘s battle against terrorism could well last decades and has no obvious end in sight. Are we to live under a kind of undeclared and unofficial martial law until all potential threats can be stamped out?

Strives toward a Universalist argument of whether this would be all right if it became a universal, consistent, and prevailing occurrence. In addition, asks how we would feel if this restriction increased, supporting a Distributive Justice perspective.

That may sound like hyperbole, but the Bush administration is now dusting off the antiquated Espionage Law of 1917, designed to jail dissidents during World War I, as a way to prosecute journalists who disclose information that the government deems a threat to America‘s war on terror. The president‘s congressional allies are considering even more disturbing legislation that would further criminalize leaks of classified information to reporters, action that even Bush‘s conservative former attorney general, John Ashcroft, opposed.

In addition, the CIA director has testified that he hopes reporters will soon be forced to reveal under oath to criminal grand juries the identities of their confidential sources. Judith Miller is only the most prominent of several journalists jailed in the past few years because of government efforts to uncover anonymous sources.

Considering the end results of allowing these intrusions, arguing that we would not desire these end results so we should not accept the beginning of the erosion of this principle.

President Bush himself contributed to this climate of intimidation in December when he said whoever leaked the information to the press about the domestic spying operation was ―helping the enemy‖ in ―a shameful act.‖ In response to all of this, the international watchdog group Reporters Without Borders has rated the United States behind forty-three countries when it comes to press freedom—just ahead of Bolivia and just behind Macedonia.

Explains that external parties believe this is not acceptable (works toward supporting a Universalist concept).

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Thomas Jefferson and the other constitutional framers who enshrined press freedom in our First Amendment would not be proud.

A violation of press freedom would not be what a virtuous country would do.

Choking off information.

Unfortunately, the administration has not targeted only reporters. Equally important, federal officials are now trying to choke off the flow of information to the public right from the source.

As part of ongoing leak investigations, numerous government employees have had to undergo lie detector tests. Although the polygraphs have not turned up any known cases of law breaking, such harassment has undoubtedly discouraged politically embarrassing whistle-blowing.

Stakeholder perspective, Distributive Justice (trying to see how the various stakeholders in various roles might be impacted).

Other government investigators have been poring through university archives around the country as part of a larger effort to reclassify historical documents previously made public.

The Pentagon now is enforcing long-established restrictions that limit how close journalists can get to the funerals for American personnel killed in Iraq who are being buried at Arlington National Cemetery. Press photographs of coffins arriving at military bases are also prohibited for fear of undermining public support for the war.

All of this has led media outlets to censor themselves lest they run afoul of the administration.

According to correspondent Christiane Amanpour, even the mighty CNN was intimidated by the administration‘s ―climate of fear,‖ leading to ―self-censorship‖ in its coverage of the war in Iraq in 2003.

Asks whether we really want this end result. Consider the result and determine whether the good outweighs the bad—Utilitarianism.

Why does any of this matter?

Because a free society depends on democratic decision making by an informed public. And an informed public depends on a free and independent press.

Justifies the Universal principle by explaining the consequences—Utilitarian, as well.

Ironically, dictatorships around the world are now using America‘s crackdown on journalists to justify their own repression.

As I learned all too clearly when the FBI came calling at my door, we cannot stifle freedom at home and have any hope of spreading it abroad.

IM Chapter 3: Philosophical Ethics and Business Chapter Objectives 5-37 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

After reading this chapter, you will be able to: 1. Explain the ethical framework of utilitarianism.

2. Describe how utilitarian thinking underlies much economic and business decision making.

3. Explain how the free market is thought to serve the utilitarian goal of maximizing the overall good.

4. Explain some challenges to utilitarian decision making.

5. Explain principle-based, or rights-based, frameworks of ethics.

6. Explain the concept of human rights and how they are relevant to business.

7. Distinguish moral rights from legal rights.

8. Explain several challenges to principle-based ethics.

9. Describe and explain virtue-based framework for thinking about ethical character.

Opening Decision Point Are CEOs Getting Paid Too Much Compared to Their Employees?

This Opening decision Case is an updated case study of the issue of executive compensation.

There are few topics that raise ethical issues so closely connected to the three major ethical theories that will be introduced in this chapter. An ethical analysis of excessive compensation needs to look at arguments that appeal to utilitarian considerations, rights and duties, and virtues.

We have again expanded this case for this edition. It now raises the issue of CEO compensation relative to other employees. This allows a more consistent way to measure the changes in CEO pay over decades, as well as introducing the ethical topic of just compensation for all and, more practically, the topic of minimum wage.

Many argue, on utilitarian grounds, that high compensation is justified because it provides strong incentives for performance, or that it is necessary to recruit talent. Others argue that high compensation is earned or deserved, and therefore is a matter of right and justice. Or, some argue that compensation decisions is best left to bargaining between individuals and, thus, should be amateur of respect for individual liberty. In contrast, some argue that excessive compensation is undeserved and unfair, and the result of unfair collusion between powerful people who seek only self-interest. Still others argue that excessive compensation results from character flaws such as greed and selfishness, and that it works against such virtues as moderation, beneficence, and humility.

It can be helpful to ask students to take a stand on this issue, ―do CEOs get paid too much?‖ Then students can be asked to locate their own reasoning within the three broad categories of consequences (utilitarian), principles (rights and duties), or virtues.

It can be a good idea to return to the Wells Fargo and Facebook cases from Chapter 1 and use the example of the Wells Fargo and Facebook CEO pay to explore this question.

I.

Introduction: Ethical Frameworks: Consequences, Principles, Character a. Consider the reasons that you or others would offer to defend or criticize the payment of large bonuses to executives. These reasons fall into three general 5-38 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

categories: i.

ii.

iii.

Some reasons appeal to the consequences of paying the bonuses (e.g., they either will or will not provide incentives for producing good work and beneficial future consequences).

Other reasons appeal to certain principles, such as: one should not break a contractual promise, even if it has unpopular results; one should never benefit from serious harms that have been caused by one‘s own actions.

Other reasons cite maters of personal character: accepting bonuses is greedy or distasteful; paying bonuses that were due in the face of public criticism was courageous and had to be done as a matter of integrity.

b. Ethics involves what is perhaps the most significant question any human being can ask: How should we live our lives? Every major philosophical, cultural, political, and religious tradition in human history has grappled with this question. c. Barriers to Discussions of Philosophical Ethics: i.

ii.

Discussions of philosophical ethics can appear intimidating or too abstract and discussions of ethical ―frameworks‖ often seem to be too theoretical to be of much relevance to business.

This chapter attempts to suggest a more accessible understanding of ethical frameworks and shed light on the practical and pragmatic application of these theories to actual problems businesspeople face.

d. Ethical Framework is an attempt to provide a systematic answer to the fundamental ethical question: How should human beings live their lives? i. ii. iii.

Ethics can be understood as the practice of examining our decisions and thinking about answers to the question: Why? Ethics attempts to provide reasons to support the answers to this question.

Ethics also seeks to provide a rational justification for why we should act and decide in a particular way.

e. Philosophical and reasoned ethics must answer the ―why?‖ question as well by connecting its prescriptions with an underlying account of a good and meaningful human life. f. Foundations of Ethical Views: Many people and cultures across the world would answer this ―why‖ question in religious terms and would base their normative judgments on certain religious foundations. If ethics is based on religion, and if different cultures have widely divergent religious beliefs, it seems that ethics cannot escape the predicament of relativism.

Decision Point Who Is to Say What Is Right and Wrong?

This Decision Point deals with ethical relativism and asks the question: Are you an ethical 5-39 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

relativist?

Ethical relativism holds that ethical values are relative to particular people, cultures, or times.

Relativism denies that there can be any rationally justified or objective ethical judgments. When there are ethical disagreements between people or cultures, the ethical relativist concludes that there is no way to resolve that dispute and prove one side is right or more reasonable than the other.

Consider Abigale Disney‘s description of CEO pay (described in the opening decision case) as ―insane.‖ Ordinarily, we think of such judgments as personal, subjective things. You enjoy spicy Indian food, while I prefer simple, Midwestern meat and potatoes. It is all a matter of personal taste. Disney may have found the bonuses distasteful, but others find them well-deserved. Ethical relativists believe that ethical values are much like tastes in food; it all depends on, or it is all relative to, one‘s own background, culture, and personal opinions.

Do you believe that there is no way to decide what is ethically right or wrong? Imagine a teacher returns an assignment to you with a grade of ―F.‖ When you ask for an explanation, you are told that the teacher does not believe that people ―like you‖ (e.g., men, Christians, African Americans) are capable of doing good work in this field (e.g., science, engineering, math, finance). When you object and say that this is unfair and wrong, the teacher then offers a relativist explanation. ―Fairness is a matter of personal opinion,‖ the professor explains. ―Who determines what is fair or unfair?‖ you ask. Your teacher claims that his view of what is fair is as valid as any other. Because everyone is entitled to their own personal opinion, he is entitled to fail you because, in his personal opinion, you do not deserve to succeed.

Students are asked to consider the following questions related to this scenario: 

Would you accept this explanation and be content with your failing grade? If not, how would you defend your own, opposing view?



Are there any relevant facts on which you would rely on to support your claim?



What values are involved in this dispute?



What alternatives are available to you?



Besides you and your teacher, are there any other people who are or should be involved in this situation, any other stakeholders?



What reasons would you offer to the dean in an appeal to have the grade changed?



What consequences would this professor‘s practice have on education?



If reasoning and logical persuasion do not work, how else could this dispute be resolved?

**Teaching Note: Examples that speak directly to students are useful to counter the tendency toward relativism. Value-laden terms such as fairness, deserve, justice, equal treatment, and merit are inescapable when discussing grades. This example can easily be 5-40 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

transferred into an employment situation in which a manager conducts a performance appraisal of an employee. Other than reasoning and logical persuasion, what is the major alternative for resolving conflicts? Since at least the time that Thrasymachus informed Socrates that ―justice is the advantage of the stronger,‖ the most common alternatives have been force and violence. g. Religious ethics explains human well-being in religious terms, while philosophical ethics provides justifications that must be applicable to all people, regardless of their religious starting points. i. ii.

Example of philosophical justification: ―You should contribute to disaster relief because it will reduce human suffering.‖ Example of religious justification: ―You should contribute to disaster relief because God commands it,‖ or ―because it will bring you heavenly rewards.‖

h. Ethical frameworks evolved over time and have been refined and developed by many different thinkers. The insights of an ethical framework prove to be lasting because they truly do pick out some important elements of human experience. i. This chapter will introduce several ethical frameworks that have proven influential in the development of business ethics.

II.

i.

Utilitarianism is an ethical tradition that directs us to decide based on overall consequences of our act.

ii.

Principle-based ethical traditions direct us to act on the basis of moral principles such as respecting human rights.

iii.

Virtue ethics direct us to consider the moral character of individuals and how various character traits can contribute to, or serve as an obstruction to, a happy and meaningful human life.

Utilitarianism: Making Decisions Based on Ethical Consequences

*Chapter Objective 1 Discussed Below* a. Background: Utilitarianism has its roots in eighteenth- and nineteenth-century social and political philosophy. b. Fundamental Insight of Utilitarianism: Begins with the conviction that we should decide what to do by considering the consequences of our actions. In this sense, utilitarianism has been called a consequentialist approach to ethics and social policy. i.

Utilitarianism tells us that we should act in ways that produce better overall consequences than the alternatives we are considering.

1. ―Better‖ consequences are those that promote human well-being: the happiness, health, dignity, integrity, freedom, and respect of all the 5-41

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people affected.

2. A decision that promotes the greatest amount of these values for the greatest number of people is the most reasonable decision from an ethical point of view. ii.

Emphasis of utilitarianism is on producing the greatest good for the greatest number. According to utilitarians, the ultimate ethical goal is to produce the best consequences for all parties affected by the decisions.

iii.

Historically, utilitarianism has provided strong support for democratic institutions and policies and opposes those policies that aim to benefit only a small social, economic, or political minority.

iv.

It could be said that the economy and economic institutions are utilitarian in that they exist to provide the highest standard of living for the greatest number of people, not simply to create wealth for a few.

v.

Example: In judging the ethics of child labor, utilitarian thinking would advise us to consider all the likely consequences of employing young children in factories.

1. There are some obviously harmful consequences: Children suffer physical and psychological harms, they are denied opportunities for education, their low pay is not enough to escape a life of poverty, and so forth.

2. But the consequences must be compared to the consequences of alternative decisions, such as if children in poor regions are denied factory jobs? These children would still be denied opportunities for education; they would be in worse poverty; and they would have less money for food and family support. In many cases, the only alternatives for obtaining income might include crime, drugs, and prostitution.

3. We should also consider the consequences for the entire society. Child labor can have beneficial results for bringing foreign investment and money into a poor country. Thus, some would argue that allowing children to work for pennies a day under sweatshop conditions produces better overall consequences than the available alternatives.

4. One might argue on utilitarian grounds that such labor practices are ethically permissible because they produce better overall consequences than the alternatives.

c. Utilitarians tend to be very pragmatic thinkers. They decide on the basis of consequences and they believe that the consequences of our actions will depend on the specific facts of each situation. d. According to Utilitarianism: No act is ever absolutely right or wrong in all cases in every situation; it will always depend on the consequences.

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i.

For example, lying is neither right nor wrong in itself, according to utilitarians. There might be situations in which lying will produce greater overall good than telling the truth. In such a situation, it would be ethically justified to tell a lie.

ii.

Utilitarian reasoning also usually supplies some support for each competing available alternative (e.g., we can ban child labor as harmful to the overall good or allow child labor as contributing to the overall good).

e. Ethical Legitimacy: Deciding on the ethical legitimacy of alternative decisions requires that we make judgments about the likely consequences of our actions. How do we do this? i.

Within the utilitarian tradition, there is a strong inclination to turn to social science for help in making such predictions, since it studies causes and consequences of individual and social actions.

ii.

In general, the utilitarian position is that happiness is the ultimate good, the only thing that is and can be valued for its own sake.

f. The Goal of Ethics: Both individually and as a matter of public policy, the goal of ethics should be to maximize the overall happiness. *Reference: ―Reality Check—Everyone Matters‖* Students often have difficulty distinguishing egoism from utilitarianism. The difference is between seeking to maximize personal happiness and seeking to maximize overall happiness. To complicate matters, economic theory might suggest that the most efficient means to accomplishing the latter is to pursue the former. Utilitarianism judges actions by their consequences for the general and overall good and takes into consideration the well-being of every individual affected by an action. Thus, utilitarianism serves the impartial promotion of human well-being, while egoism serves to maximize only individual happiness. This Reality check complements the Decision Point on Ethical Relativism—―Who Is to Say What Is Right or Wrong?‖ earlier in this chapter and can be assigned together to prompt a class discussion on reasons and ethics.

III.

Utilitarianism and Business

*Chapter Objective 2 Addressed Below* a. Utilitarianism‘s greatest contribution to philosophical thought has come through its influence in economics. With roots in Adam Smith, the ethics which underlies much of twentieth century economics—essentially what we think of as the free market—is decidedly utilitarian. In this way, utilitarianism continues to have a very strong impact on business and business ethics. b. Utilitarianism answers the fundamental question of ethics: ―What should we do?‖ by referring to the following rule: maximize the overall good. This is similar to the 5-43 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

financial practice of conducting a cost–benefit analysis and making a decision based on maximizing the net benefits over costs. c. How do we achieve this goal? What are the best means for attaining the utilitarian goal of maximizing the overall good? Two versions of utilitarian policy have emerged: one involves free, competitive markets and the other involves administration. *Chapter Objective 3 Addressed Below* d. Free Markets: One movement within utilitarian thinking invokes the tradition of Adam Smith and claims that free and competitive markets are the best means for attaining utilitarian goals. i.

This version would promote policies that deregulate private industry, protect property rights, allow for free exchanges, and encourage competition.

ii.

In such situations, decisions of rationally self-interested individuals will result, as if led by ―an invisible hand,‖ in Adam Smith‘s terms, to the maximum satisfaction of individual happiness.

iii.

In classic free market economics, economic activity aims to satisfy consumer demand. Since people are made happy, and human welfare/well-being increases, when people get what they desire, overall human happiness is increased when the overall satisfaction of consumer demand increases.

iv.

The goal of free market economics is to maximize the satisfaction of wants (happiness). Free markets accomplish this goal most efficiently by allowing individuals to decide what they most want and then bargain for these goods in a free and competitive market.

v.

This requires that business managers, in turn, should seek to maximize profits.

By pursuing profits, the business ensures that scarce resources go to those who most value them and thereby ensures that resources will provide optimal satisfaction. Competitive markets are seen as the most efficient means to the utilitarian end of maximizing happiness.

e. A second influential version of utilitarian policy turns to policy experts who can predict the outcome of various policies and carry out policies that will attain utilitarian ends. i.

Because utilitarian reasoning determines what to do based on consequences, reasonable judgments must take into account the likely consequences of our actions.

ii.

Policy experts, usually trained in the social sciences such as economics, political science, and public policy, are familiar with the specifics of how 5-44

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society works, and they, therefore, are in a position to determine which policy will maximize the overall good. *Reference: ―Reality Check—Utilitarian Experts in Practice‖* This example cites how central banks such as the U.S. Federal Reserve set monetary policy. Balancing the goals of low inflation and low unemployment, the Fed seeks a utilitarian balance that would promote the greatest overall good. The Reality Check has been expanded for this edition to acknowledge that Fed policy to combat inflation is a growing public concern. iii.

This approach to public policy underlies one theory of the entire administrative and bureaucratic side of government and organizations. From this view, the legislative body (from Congress to local city councils) establishes the public goals that we assume will maximize overall happiness.

1. The administrative side (presidents, governors, and mayors) executes (administers) policies to fulfill these goals.

2. People working within the administration know how the social and political system works and use this knowledge to carry out the mandate of the legislature.

iv.

This approach would be sympathetic with government regulation of business, on the grounds that such regulation will ensure that business activities do contribute to the overall good.

f. Dispute Between Versions of Utilitarian Policy: The dispute between what we might call the ―administrative‖ and the ―market‖ versions of utilitarianism characterizes many disputes in business ethics. i.

One example concerns the regulation of unsafe or risky products: 1. One side argues that questions of safety and risk should be determined by experts who then establish standards that business is required to meet. Government regulators (e.g., the Consumer Products Safety Commission) are then charged with enforcing safety standards in the marketplace.

2. The other side argues that the best judges of acceptable risk and safety are consumers themselves. A free and competitive consumer market will ensure that people will get the level of safety that they want.

Individuals calculate what risks they wish to take and what trade-offs they are willing to make in order to attain safety. Market-based solutions will prove best at optimally satisfying these various and competing interests and will thereby serve the overall good.

The following decision point asks students to think through the trade-offs that happen on a daily basis in government regulatory decisions. This demonstrates the utilitarian nature of such decisions but also can raise the questions of whether or not some values, such as safety, should be exempt from utilitarian trade-off and balancing.

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Decision Point Is Regulation Making Cars too Safe?

The North American auto industry is heavily regulated. Fuel efficiency is, of course, regulated (by the Environmental Protection Agency in the United States and by Transport Canada in Canada), as are tailpipe emissions. But even more significant are the safety regulations to which the modern North American vehicle is subject. Safety standards cover everything from the design of seat belts to the performance of braking systems, the presence and functioning of airbags, and the ability of front and rear bumpers to survive low-speed collisions. All of these things have made the cars driven by North Americans (and Europeans) vastly safer—both under ―normal‖ driving conditions and during emergencies—than they were, say, 50 years ago.

Economist and blogger Alex Tabarrok points out that in order to fully evaluate the outcomes of safety regulations, we need to look at how those regulations affect people‘s decisions.* One way they affect consumer decision making is through their impact on prices. Safety features have inevitably driven up the price of cars. This has made cars unaffordable to some consumers, with some consumers instead opting to drive motorcycles. Motorcycles, after all, are much less expensive. As just one example, in North America, a basic Honda motorcycle costs less than one-third as much as Honda‘s cheapest model of car, the Honda Fit. But motorcycles are not only less expensive than cars—they are less safe, too. (The U.S. National Highway Traffic Safety Administration says that per mile traveled, motorcycles are twenty-six times more deadly than cars.†) As we all know, airbags have made cars safer but also more expensive. And as Tabarrok points out, motorcycles do not have airbags. So what is the net effect of regulations that increase the safety of car drivers, but that also push some drivers to buy motorcycles instead? It is not clear that anyone knows the answer to that.

1. If careful study showed that more people were being killed by automotive safety requirements than saved, would you be in favor of regulations that allowed manufacturers to make at least some cars that are less safe?

2. If a single potential car buyer opts to buy a motorcycle because cars are now too expensive for her, and if she dies or is injured in a motorcycle accident, should we blame regulators?

3. If regulators did not force car makers to install safety equipment, would consumer demand be enough to get car makers to do so anyway? Or would car makers abuse the fact that most consumers do not know which safety features are most worth paying for? **Teaching Note: ―Letting the market decide‖ is a common approach in several areas of business ethics. In terms of the logical structure and ethical values, disputes about consumer product safety, workplace health and safety, and environmental protection raise identical questions. A useful study question or assignment for a writing exercise or exam would ask students to trace the logic of this perspective across such issues as product safety, workplace safety, and environmental protection.

IV.

Challenges to Utilitarian Ethics

*Chapter Objective 4 Addressed Below* 5-46 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

a. Reviewing some challenges to utilitarianism can guide us in evaluating later applications of utilitarian decision making. b. Counting, Measuring, Comparing and Quantifying Consequences: If utilitarianism advises that we make decisions by comparing the consequences of alternative actions, then we must have a method for making such comparisons. i.

In principle, utilitarianism tells us that the interests of all stakeholders who will be affected by a decision ought to be included in calculating the consequences of a decision. But, there is no consensus among utilitarians on how to measure and determine the overall good.

ii.

For example: Imagine trying to calculate the consequences of a decision to invest in the construction of a nuclear power plant whose wastes remain toxic for tens of thousands of years.

c. A second challenge relates to utilitarianism‘s reliance on consequences. i.

Ethical and unethical acts are determined by their consequences. In short, the end justifies the means. But this seems to deny one of the earliest ethical principles that many of have learned: the ends do not justify the means.

ii.

When we say that the ends do not justify the means, what we are saying is that there are certain decisions we should make or certain rules we should follow no matter what the consequences. We have certain duties or responsibilities that we ought to obey, even when doing so does not produce a net increase in overall happiness.

1. Examples of such duties are those required by such principles as justice, loyalty, and respect, as well as the responsibilities which flow from our roles as parent, spouse, friend, citizen, employee, or professional.

d. Since utilitarianism focuses on the overall consequences, utilitarianism seems willing to sacrifice the good of individuals for the greater overall good. i.

For example, it might turn out that the overall happiness would be increased if children were held as slave labor. Utilitarians would object to slavery or to child labor, not as a matter of principle, but only if and to the degree that it detracts from the overall good.

ii.

If it turns out that slavery and child labor increases the net overall happiness, then utilitarianism would have to support these practices. In the judgment of many people, such a decision would violate fundamental ethical principles of justice, equality, and respect.

e. Rights function to protect individuals from being sacrificed for greater overall happiness. For example, it is often argued that child labor is ethically wrong in 5-47 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

principle, even if it contributes to overall social happiness. f. A similar example cites those principles that arise from commitments that we all make and the duties that flow from them. i.

For example, as parents we love our children and have certain duties to them.

Violating such commitments and duties would require individuals to sacrifice their own integrity for the common good.

ii.

Commitments and duties play a large role in business life. Contracts and promises are exactly the commitments that one ought to honor even if the consequences turn out unfavorably. The duties that one takes on as part of a professional role function in a similar way: 1. Wells Fargo might defend their payment of large bonuses to executives, citing the contractual duty to pay them.

2. Arthur Andersen‘s auditors should not have violated their professional duties simply to produce greater overall beneficial consequences.

3. Lawyers have a duty not to help their clients find ways to violate the law, even if they are offered a high salary to do so.

4. Teachers should not violate their professional duties by failing students whom they do not like.

5. The accountant/manager in Chapter 2‘s opening decision point likewise has professional duties of confidentiality and obedience.

**Teaching Note: This notion of specific relationships and commitments can be used to introduce professional responsibilities and examine how they may function within business settings. While a certain decision may work toward maximizing the overall good, one‘s role as a lawyer, and accountant, a banker might create special responsibilities that trump the greater overall good. g. Benefits of Utilitarian Reasoning: Responsible decision making requires that we consider the consequences of our acts, but this is only part of the ethical landscape.

Responsible ethical decision making also involves matters of duties, principles, and personal integrity.

V.

An Ethics of Principles and Rights

*Chapter Objective 5 Addressed Below* a. Consequences should be considered as part of responsible ethical decision making but must be supplemented with the recognition that some decisions should be a matter of principle, not consequences. b. Principle-based, ethical frameworks address questions such as, ―Which principles should we follow and how do we decided when a principle should trump beneficial consequences?‖ 5-48 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

i.

As an example: Consider the relationship between the legislative and judicial branches of government found in constitutional democracies.

1. The legislative role can be thought of as pursuing the utilitarian goal of creating policies to produce the greatest good for the greatest number.

2. The judiciary‘s rule is to enforce basic principles of justice and fairness.

3. The essential insight of constitutional democracies is that majority-rule decisions that seek the greatest overall happiness should be restricted by constitutional limits that reflect fundamental principles of human rights.

ii.

This political example reflects the ethical axiom that a utilitarian framework should be supplemented by a framework that also accounts for fundamental ethical principles. In other words, utilitarian ends do not justify any and all means to those ends.

c. ―Following Rules‖: i.

Ethical principles can be thought of as a type of rule. This approach to ethics tells us that there are some rules that we ought to follow, even if doing so prevents good consequences from happening, or even if it results in some bad consequences.

ii.

Rules or principles create ethical duties that bind us to act or decide in certain ways.

1. For example, many would argue that there is an ethical rule prohibiting slave labor, even if this practice would have beneficial economic consequences for society.

iii.

What principles or rules should guide our decisions?

1. Legal rules are one major set of rules that we ought to follow.

2. Example: We have a duty to pay our taxes, even if the money might be more efficiently spent on our children‘s college education. We ought to stop at a red light, even if there are no other cars coming and you could get to the destination more quickly.

3. Decision making within a business context will involve many situations in which one ought to obey legal rules even when the consequences, economic and otherwise, seem to be undesirable.

iv.

Other rules are derived from various institutions in which we participate or from various social roles that we fill.

1. Example: As a teacher, I ought to read each student‘s research paper carefully and diligently, even if they will never know the difference and their final grade will not be affected. In the role of teacher and university faculty member, I have the duty to enforce the rules fairly, even when it would be easier not to do so.

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2. Similar rule-based duties follow from our roles as friends, family members, students, church members, citizens, and good neighbors. v.

Role-Based Duties arise on many occasions in business.

1. As an employee, one takes on a certain role that creates duties and every business will have a set of rules that employees are expected to follow.

2. Sometimes rules are explicitly stated in a code of conduct, other times rules are included in employee handbooks, still others are simply stated by managers.

*Reference: ―Reality Check—Ethical and the UN Global Compact‖* 3. As a business manager, there are many rules that one ought to follow with respect to stockholders, employees, suppliers and other stakeholders. vi.

―Gatekeeper functions‖ are performed by lawyers, accountants, auditors, financial analysts, and bankers in their roles within political and economic institutions. Many of these roles ensure the integrity and proper functioning of the economic, legal, or financial system.

*Chapter 2 introduced the idea of professional responsibilities in the workplace and this theme will be further developed in Chapter 10. vii.

Professional Duties—An Illustration: While examining Enron‘s financial reports, the auditors at Arthur Andersen knew that diligent application of strict auditing standards required one decision, but that the consequences of this diligent application would be harmful to Arthur Andersen‘s business interests.

A fair analysis of this aspect of the Enron–Arthur Andersen scandal would point out that Andersen‘s auditors failed in their ethical duties precisely because they did not follow the rules governing their professional responsibilities and allowed beneficial consequences to override their professional principles.

*Reference: ―Reality Check—Alternative Medicine and the Risks of Consequence-Based Reasoning”* d. Legal rules, organizational rules, role-based rules, and professional rules are part of a social agreement, or social contract, which functions to organize and ease relations between individuals. i.

No group could function if members were free at all times to decide for themselves what to do and how to act.

ii.

By definition, a cooperative activity requires cooperation, meaning it requires rules that each member follows.

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e. Many philosophers believe there are ethical duties that are more fundamental and that bind us in a stricter way than the way we are bound by contracts or professional duties. i.

You should not be able to ―quit‖ ethical duties and walk away from them in the same way that one can dissolve a contract or walk away from professional duties by quitting the profession.

iii.

Philosophers would say that ethical duties should be categorical imperatives, rather than hypothetical ones: ―I should or must (an imperative) obey a fundamental ethical rule no matter what (a categorical).‖

*Chapter Objective 6 Addressed Below* f. Human Rights and Duties: Are there any such fundamental duties? Are there any rules we should follow or decisions we should make, no matter what the consequences? i.

Many ethical traditions agree that each and every human being possesses an intrinsic value, or essential dignity, that should never be violated. A common way of expressing this is to say that each and every human being possesses a fundamental human right to be treated with respect, and that this right creates duties on the part of every human to respect the rights of others.

ii.

Kant expressed this as the fundamental duty to treat each person as an end in themselves and never only as means to our own ends.

iii.

Human rights, or moral rights, have played a central role in the development of modern democratic political systems.

1. The U.S. Declaration of Independence speaks of ―inalienable rights‖ that cannot be taken away by government.

2. Following World War II, the United Nations created the UN Declaration of Human Rights as a means for holding all governments to fundamental standards of ethics.

3. This rights-based framework of ethics would object to child labor because such practices: a. Violate our duty to treat children with respect. b. Violate the rights of children by treating them as mere means to the ends of production and economic growth and as children, they have not rationally and freely chosen their own ends, so they are used as tools or objects. c. Even if child labor produced beneficial consequences, it would be considered ethically wrong because it violates a fundamental human right.

g. The concept of a human or moral rights is central to the principled-based ethical tradition: 5-51 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

i.

The inherent dignity of each individual means that we cannot do just anything at all to another person.

ii.

Human rights protect individuals from being treated in ways that would violate their dignity and that would treat them as mere objects or means.

Rights imply that some acts and some decisions are ―off limits.‖

iii.

Our fundamental moral duty (the ―categorical imperative‖) is to respect the fundamental human rights of others.

iv.

Our rights establish limits on the decisions and authority of others.

h. Consider how rights function relative to the utilitarian goal of maximizing the overall good: i.

Example: Supposed you owned a local business and the local government decided that your property would be a great location for a city park, but you disagree.

1. On utilitarian grounds, it might seem that your land would best serve the overall good by being used for a park.

2. However, your property rights prevent the community from taking your land to serve the public.

ii.

Human rights are meant to offer protection of certain central human interests, prohibiting the sacrifice of these interests merely to provide a net increase in the overall happiness.

1. The standard account of human rights offered through the Western ethical tradition connects basic human rights to some theory of a basic human nature.

2. Human nature provides the grounds for distinguishing central interests from mere wants.

3. The Kantian tradition claims that our fundamental human rights, and the duties that follow from them, are derived from our nature as free and rational beings.

4. Humans act not only out of instinct and conditioning; they make free choices about their own lives and their own ends. In this sense, humans are said to have a fundamental right of autonomy or ―selfrule.‖

i. Human Rights and Social Justice i.

Two related rights have emerged as fundamental components of social justice: 1. Autonomy, or self-rule, is a fundamental characteristic of human nature.

2. Liberty to make our own choices also deserves special protection as a basic right.

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ii.

Because all humans possess liberty, equal treatment and equal consideration must also be fundamental rights.

1. Liberty and equality are ―natural rights‖ that are more fundamental and persistent than the legal rights created by governments and social contracts.

*Reference: ―Reality Accepted?‖*

Check—Are

Fundamental

Human

Rights

Universally

2. Liberty and equality are also fundamental to the theories of social justice upon which democratic societies and capitalist economies have been built—thus, they are crucial to an understanding of business ethics. iii.

Libertarian versions of social justice argue that individual liberty (the freedom from coercion by others) is the most central element of social justice.

1. Political perspectives that seek to reduce the size of government and limit government regulation of the market typically cite individual liberty as their ethical justification.

2. If we acknowledge liberty as the most basic human right, it would be easy to generate an argument for a more laissez-faire, free-market system: a. As long as individuals are not harming others, they should be free to engage in any voluntary economic exchange. b. Government‘s only role is to ensure that there is free and open competition and that economic transactions are free from coercion, fraud, and deception.

3. From the libertarian perspective, businesses should be free to pursue profit in any voluntary and nondeceptive manner. a. Unethical business practices would include fraud, deception, and anti-competitive behavior. b. Government activity to enforce contracts and compensate for harms would be considered just. Other government regulation would be seen as unjust interference.

4. Egalitarian versions of justice argue that equality is the most central element of social justice, arguing that equal distribution of basic economic goods and services is at the heart of social justice. a. Egalitarian theories of social justice typically support greater governmental responsibility in the economy as a necessary means to guarantee equality.

5. Other theories argue that equal opportunity, rather than equality of outcome, is crucial.

iv.

―Justice as fairness‖: John Rawls developed an account of justice called ―justice as fairness,‖ that combines respect for both liberty and equality.

1. Rawls offers a contemporary version of the social contract theory that 5-53

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understands basic ethical rules as part of an implicit contract necessary to ensure social cooperation. v.

Two major components of Rawls‘ theory of justice: (1) a method for determining the principles of justice that should govern society and (2) the specific principles that are derived from the method.

1. Imagine rational and self-interested individuals having to choose and agree on the fundamental principles for their society. The image of members of a constitutional convention is a helpful model for the idea.

2. To ensure that the principles are fair and impartial, imagine that these individuals are, in Rawls‘ terms, behind a veil of ignorance, where they are unaware of their own position in the social structures of society or their own abilities/disabilities, strengths, weaknesses or details of their own lives.

3. To ensure that each individual is treated as an end and not as a means, imagine that these individuals must unanimously agree on the principles.

4. Rawls calls these original conditions of impartiality the ―original position.‖ They guarantee that the principles chosen are fair.

vi.

Rawls contends that our decisions ought to be made in such a way, and our social institutions ought to be organized in such a way, that they would prove acceptable to us no matter whose point of view we take. He argues that we should strive for impartiality.

vii.

Rawls derives two fundamental principles of justice from this ―original position‖: 1. The first principle states that each individual is to have an equal right to the most extensive system of liberties. This principle argues that equal rights are a fundamental element of social justice.

2. The second principle holds that benefits and burdens of a society should generally be distributed equally, unless an unequal distribution would benefit the least advantaged members of society, and only if each person has an equal opportunity to obtain those benefits.

viii.

Rawls‘ theory of justice could support a market-based, private-property economy as long as there are programs in place that would provide a safety net of social and economic goods to the least advantaged as long as there is a real opportunity of attaining higher levels of such goods.

j. Human Rights and Legal Rights *Chapter Objective 7 Addressed Below* i.

It is helpful to distinguish between human rights and legal rights. In business, 5-54

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employees typically have three types of rights: 1. First, there are legal rights, granted to employees on the basis of legislation or judicial rulings, such as minimum wage or equal opportunity.

2. Second, employee rights might refer to the goods that employees are entitled to on the basis of contractual agreements with employers, such as specific health care packages or paid holidays.

3. Finally, employee rights might refer to those moral entitlements to which employees have a claim, independently of any particular legal or contractual factors, originating with the respect owed to them as human beings. ii.

Consider how legal and contractual rights interact: 1. In general, both parties to an employment agreement bargain over the conditions of work: Employers offer certain wages, benefits, and working conditions and in return seek worker productivity. Employees offer skills and abilities and seek wages and benefits in return.

2. Thus, employment rights emerge from contractual promises. However, legal rights exempt certain interests from the employment contract.

Such legal rights set the basic legal framework in which business operates.

3. Legal rights are established by the legal system in which business operates and, in this sense, are part of the price of doing business.

iii.

Human rights lie outside of the bargaining that occurs between employers and employees.

1. Unlike legal rights, such as minimum wage, moral rights are established and justified by moral rather than legal considerations.

2. Moral rights establish the basic moral framework for the legal environment itself, and more specifically for any contracts that are negotiated within business.

3. As described in the United States Declaration of Independence, governments and laws are created in order to secure more fundamental natural moral rights.

4. The rights outlined in the UN‘s Universal Declaration of Human Rights fit this conception of fundamental moral rights.

Decision Point: Do Employees Have Moral Rights?

Employees certainly have legal rights, such as the right to be paid a minimum wage, to enjoy equal opportunity in the workplace, and to be free from sexual harassment. Many employees also have contractual rights, such as the right to an employer contribution to a retirement plan, health care, or certain number of vacation and sick days. But do employees really have rights against their employer that are not specified in the law or in the employment contract? Do employers 5-55 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

have duties to their employees other than what is required by law and the employment contract?

If every human has a right to health care, do employers have a moral duty to provide health insurance for every employee? Do employers have a duty to provide a just wage? Do employers have a duty to respect employee‘s right to privacy? k. Challenges to an Ethics of Rights and Duties: *Chapter Objective 8 Discussed Below* i.

So what rights do we have and what does that mean for the duties of others?

1. In the U.S. Declaration of Independence, Thomas Jefferson claimed that we have ―inalienable rights‖ to life, liberty, and the pursuit of happiness. Jefferson was influenced by the British philosopher John Locke, who spoke of ―natural rights‖ to life, health, liberty, and possessions. The UN Universal Declaration of Human Rights lists more than twenty-six human rights that are universal.

*Reference: ―Reality Check—Are Fundamental Human Rights Universally Accepted?‖* 2. Acknowledging this diversity of rights makes it easy to understand the two biggest challenges to this ethical tradition: a. What rights truly are basic human rights? b. How should we apply this approach to practical situations, especially in cases where rights seemingly conflict?

3. Consider a possible right to health care: a. During debates over health care reform in the U.S. Congress in 2009, many claimed that humans have a right ―to a standard of living adequate for the health and well-being‖ and that this right includes medical care. b. Many disagree and point out that such a right would carry significant costs for others. This raises many questions, such as: If every human has a right to health care, who has the duty to provide it and at what costs? ii.

Critics charge that unless there is a specific person of institution that has a duty to provide the goods identified as ―rights,‖ talk of rights amounts to little more than a wish list of things that people want.

1. More relevant to business is UN Declaration‘s Article 23, that everyone has a ―right to work and free choice of employment,‖ as well as a ―right to just and favorable remuneration.‖ But, who has the duty to provide jobs to every unemployed person? What is a just wage and who gets to decide?

iii.

The first major challenge to an ethics based on rights is that there is no 5-56

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agreement about the scope and range of such rights.

1. Which good things qualify as rights, and which are merely things that people want? Unless there is some clear way to distinguish the two, the list of rights will only grow to unreasonable lengths and the corresponding duties will unreasonably burden everyone. iv.

VI.

A second challenge to an ethics based on rights points to practical problems in applying a theory of rights to real-life situations. With a long list of human rights, all of which are claimed to be basic and fundamental, we need a practical guide to decide what to do when rights come into conflict.

1. For example, how would we decide between one individual‘s right to medical care and the physician‘s right to just remuneration of their work? Suppose the person needing medical care could not afford to pay a just fee for the care?

2. In a business setting, a conflict would occur when an employer‘s rights to property came into conflict with an employee‘s alleged rights to work, just wages and health care. Granting economic rights to employees would seem to create numerous conflicts with the property rights of employers.

3. The ethical tradition of rights and duties has not been able to provide a persuasive and systematic account for how these conflicts should be resolved.

Virtue Ethics: Making Decisions Based on Integrity and Character

*Chapter Objective 9 Discussed Below* a. Virtue Ethics is a tradition within philosophical ethics that seeks a full detailed description of those character traits, or virtues, that would constitute a good and full human life. *Reference: ―Reality Check—Virtues in Practice‖* i.

Perhaps the best place to see the ethics of virtue is in the goal of every good parent who hopes to raise happy and decent children.

b. To understand how the virtue ethics differs from utilitarian and principle-based frameworks, consider the problem of egoism: i.

Egoism is a view which holds that people act only out of a self-interest.

1. The biggest challenges posed by egoism, and according to some, the biggest challenge to ethics, is the apparent gap between self-interest and altruism, or between motivation that is ―self-regarding‖ and motivation that is ―other-regarding.‖ 2. Ethics requires us, at least at times, to act for the well-being of others, yet some claim that this is not possible because humans act only from self-interested motives.

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ii.

An ethics of virtue shifts the focus from questions about what a person should do, to a focus on who that person is. This shift requires a different view of ethics, as well as a different view of ourselves.

1. According to virtue ethics, a person‘s character—those dispositions, relationships, attitudes, values, and beliefs that might be called a ―personality‖—is not some feature that remains independent of that person‘s identity.

2. The self is identical to a person‘s most fundamental and enduring dispositions, attitudes, values, and beliefs.

iii.

The shift changes the nature of justification in ethics. If an ethical justification of some act requires that it be tied to self-interest, we should not be surprised that this justification often fails.

1. Ethical controversies often involve a conflict between self-interest and ethical values. Example: Why should an executive turn down a multimillion dollar bonus? The only way to answer this question appears to be to show how it would be in their self-interest to do so.

*Reference: Reality Check—―The Greed Is Astounding‖* 2. However, if I am the type of person who had moderate and restrained desires for money, then there is no temptation to be unethical for the sake of a large bonus.

3. For many people, the ―self‖ of self-interest is a caring, modest, unaffected, altruistic self. For those people, there simply is no conflict between self-interest and altruism.

4. The degree to which we are capable of acting for the well-being of others, therefore, seems to depend on our character or the type of person we are.

5. If people are caring, empathetic, charitable, and sympathetic, then the challenge of selfishness or egoism is not a factor in their decision making. iv.

Virtue ethics recognizes that our motivations are not the sorts of things that each one of us chooses anew each morning, rather, human beings act in and from character.

1. Virtue ethics seeks to understand how those traits are formed and which traits bolster and which undermine a meaningful, worthwhile, and satisfying human life.

v.

A Fuller Description: Rather than simply describing people as good or bad, right or wrong, an ethics of virtue encourages a fuller description.

1. For example: We might describe Aaron Feuerstein from Malden Mills as heroic and courageous, a man of integrity who sympathizes with his employees and cares about their well-being. Other executives, however, might be described as greedy or ruthless, proud or competitive.

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2. Faced with a difficult dilemma, we might ask what a person with integrity would do. What would an honest person say? What would a virtuous person do? vi.

Virtue ethics also reminds us to examine how character traits are formed and conditioned.

1. Much of our character is formed by such factors as our parents, schools, church, friends, and society.

2. Powerful social institutions such as business and our places of employment, as well as our particular social roles within them, have profound influence on shaping our character. a. Consider an accounting firm that hires a group of trainees, fully expecting that fewer than half will be retained and where only a very small group will make partner. This corporate environment encourages motivations and behavior very different than one would find at a firm where a few trainees are hired and given a greater chance for long-term success.

vii.

Virtue ethics reminds us to look at current business practices and ask: What types of people are being created?

*Reference: ―Reality Check—Where Do Virtues Come from?‖* viii.

Example: A study within marketing firms and advertising agencies revealed that on several occasions, advertising agents said that they would never allow their own children to watch the very television shows and advertisements that their own firms were producing.

1. A virtue ethics approach would look at the type of person who is able to disassociate himself and his own values from his work, and the social institutions and practices that encourage it.

2. What kind of person is willing to subject others‘ children to marketing practices that are unacceptable for his own children? Such a person seems to lack even the most elementary form of personal integrity.

**Teaching Note: Perhaps nowhere is virtue ethics more relevant than in discussion about how one would wish to raise one‘s children. Students will often respond well to questions about how they intend to raise their children. What type of person do they want their children to become? What habits and character traits are likely to lead to happy lives?

Which are likely to lead to unhappiness? How does one encourage a child to be cheerful, courteous, positive? How does one discourage a child from being selfish, gloomy, and cruel? Again, this discussion can easily be translated into the workplace context: What type of employees would you want? How does one encourage creativity and discourage acrimony?

VII.

A Decision-Making Model for Business Ethics Revisited a. Understanding the philosophical basis of ethics will enable you to become more 5-59 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

aware of ethical issues, better able to recognize the impact of your decisions, and more likely to make better informed and more reasonable decisions. i.

Ethical theories allow us to better and more articulately explain why we have made or wish to make a particular decision.

b. Developing a Decision-Making Model: These ethical theories and traditions provide important ways in which to develop the decision-making model introduced in Chapter 2. i.

Ethical theories and traditions provide systematic and sophisticated ways to think and reason about ethical questions.

ii.

A more detailed version of the decision-making model from Chapter 2 aims, above all else, to help individuals make ethically responsible business decisions.

*Reference: ―Opening Decision Point Revisited—Executive Compensation versus Employee Pay‖* There are, of course, two approaches for reducing pay differentials between CEOs and average workers. First, as represented by calls for increasing the minimum wage, the wages of lower paid employees could be increased. Second, CEO pay could be lowered. There are some recent examples of both approaches.

A number of major corporations have announced plans to increase wages beyond what is required by law. In his April 2019 letter to shareholders, Amazon CEO Jeff Bezos wrote: ―Today I challenge our top retail competitors (you know who you are!) to match our employee benefits and our $15 minimum wage. Do it! Better yet, go to $16 and throw the gauntlet back at us. It is a kind of competition that will benefit everyone.‖1 Target Corporation had previously announced plans to increase its minimum wage to $15 hourly by 2020 and in June 2020 announced that they would meet that goal in the following month. In September 2021, Walmart announced that its minimum hourly wage was rising to $12, but Walmart pointed out that its average hourly worker earned $16.40 hourly and when all benefits are included, their average hourly wage was even more.

A second approach would be to limit CEO pay. One example of this occurred in April 2015, when CEO Dan Price of Gravity Payments made a shocking announcement. Price, who is also the founder and co-owner of Gravity, decided to cut his own salary by 93%, and then to use that money—along with a big chunk of corporate profits—to ensure that every single one of his employees makes a minimum of $70,000. (Over a 2,000-hour work-year, this would be equivalent to $35 hourly.) The news was certainly welcomed by Gravity‘s employees. (For the lowest paid employees, the raise to $70k meant a doubling of their salaries.) And Price was widely applauded by commentators and on social media.2 There were a variety of reactions to Dan Price‘s decision. Some applauded it as a move toward justice or fairness in compensation. Others thought it was a savvy business move, aimed at 5-60 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

producing better outcomes for Gravity Payments by motivating employees and gaining free publicity for the company. In fact, Gravity‘s business grew significantly following the decision.

Still, others thought it spoke well of Price‘s character; to them, Price looked like what a good CEO ought to look like, in comparison to the greedy CEOs of so many other companies.

In the year following Dan Price‘s announcement, he was embroiled in a legal battle with his brother Lucas, co-owner of Gravity Payments.* Lucas Price sued Dan, claiming that his brother had violated their agreement governing the ownership and management of the company. Lucas sued, in part, because he says his brother had failed to involve him even in very major decisions—including the decision to change how much Gravity workers were paid. The lawsuit claimed that by increasing employee pay so significantly, Dan Price had violated the rights of other stockholders. In 2016, a court ruled against Lucas and in favor of Dan Price.

1. Should employee pay be determined by legal minimums, or should it be left to the workings of the labor market and determined by negotiations between individual employees and employers?

2. Who determines the market for CEO pay?

3. Dan Price‘s decision to pay Gravity employees more required spending some of the company‘s profits. Did this violate the rights of stockholders?

4. Using the vocabulary of virtue ethics, how would you describe your original impression of Dan Price? How would you describe CEOs who seek compensation in the range of $100 million annually?

This review has been expanded to emphasize the comparative issue of CEO pay relative to average employees. As a classroom exercise, students could be asked to follow Dan Price on Twitter for on-going comments that he regularly makes concerning exorbitant CEO pay.

Questions, Projects, and Exercises 1. Using the distinction between theoretical reason and practical reason introduced in Chapter 1, identify which of your other business courses have practical goals. Which courses aim to help student learn how to make responsible decisions about what they should do and how they should act. Can you identify the values that are either implicitly or explicitly taught in these classes?

Practical Reasoning—reasoning about what we should do; Theoretical Reasoning—reasoning about what we should believe.

2. What makes an ethical decision or issue, ethical? How would you explain the differences between ethical/nonethical and ethical/unethical? What ethical issues or dilemmas have you experienced in the workplace? Are any ethical issues or dilemmas presently being discussed at your school?

Identifying an issue as an ethical issue is more of a challenge than many student might initially think. Simply reviewing the morning newspaper with students at the start of class can be a beneficial exercise in identifying ethical issues. Are there any ethical issues on the front page? Asking students to name the one biggest ethical debate on5-61 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

campus can be an eye-opening exercise.

3. What ethical issues or dilemmas have you ever experienced in the workplace? How were they resolved? Are there any ethical issues or dilemmas presently being discussed at your school?

Ask students to reflect on how their own experiences and examine an ethical dilemma they have faced at work and/or school. Have students share these dilemmas and discuss options for addressing these dilemmas.

4. Are there some ethical values or principles that you believe are relative to one‘s own culture, religion, or personal opinion? Are there some that you believe are not? What makes them different?

Ask students to reflect on how their own values and perceptions have changed since coming to college. Oftentimes students will acknowledge that issues that they previously considered settled are now more ambiguous. Students who have participated in study abroad programs often have a lot to add on this point.

5. Do an internet search on international human rights and/or fundamental moral rights. Can you make the argument that any moral rights are universally acknowledged?

A sampling of websites where students can find information on international human rights and/or fundamental moral rights: 

Amnesty International: http://www.amnesty.org



International Labour Organization, Rights at Work: http://www.ilo.org/global/lang--en/index.htm



United Nations: https://www.un.org/en/about-us/universal-declaration-of-humanrights

6. Why might the political goal of economic growth be considered a utilitarian goal?

Use the globalization debate as an example that not everyone agrees with the idea of a globalized economy. Some helpful websites to show the arguments for and against globalization are: 

World Trade Organization: https://www.wto.org/english/thewto_e/whatis_e/what_stand_for_e.htm



Globalization101.org, A Project of SUNI Levin Institute: http://www.globalization101.org/



International Forum on Globalization: http://www.ifg.org



Global Policy Forum, Globalization Section: http://www.globalpolicy.org/globaliz/index.htm

7. Some political philosophers understand the ethical foundations of legislatures to be utilitarian, while the ethical foundation of the judiciary is rights-based (deontological). How 5-62 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

would you explain this distinction?

Ask students to discuss the role of the legislature in a democratic society. Why use majority rule as a decision procedure and proportionate representation to determine membership in the legislature? By and large, majority rule serves the end of maximizing overall happiness. But constitutional democracies set limits to what the majority and the legislature can do. In the United States, the Bill of Rights explicitly begin with a limitation on the will of the majority: ―Congress shall make no law . . . .‖ In a constitutional democracy, it becomes the judiciary‘s role to enforce the in-principle limits on the will of the majority. The courts‘ role is to protect rights, enforce duties, and protect fundamental principles from the whims of the majority. It becomes the role of the courts to prevent the legislature from using just any means to accomplish its ends.

8. Do people have a right to do whatever they want? If not, in what sense can people have a right to liberty or personal freedom?

Explore with students possible lines or boundaries to freedom. It is helpful in a business ethics class to examine the limits of the libertarian commitment to individual freedom because this ethical perspective can easily be embedded within some economic theories.

Can you do just anything you want with your own property? What justifiable limits should exist for personal liberty and property rights. Examples of zoning laws are often useful—Should a city be allowed to prevent me from renting out my own home to a group of college students? Can a neighborhood legitimately restrict the size of the fence I build around my own home? Can a city prevent me from running a business out of my home? Such questions get students to understand that there must be limits to even such a basic right as freedom. Extending this example to corporate freedom and corporate property rights raises more challenges.

9. The right of private property is often described as a ―bundle‖ of rights. What rights are involved in ownership or property?

Discuss the ―bundle‖ of rights (see About.com‘s explanation at: http://realestate.about.com/od/ownershipandrights/f/bundle_of_right.htm for more information). Explore why these rights are important and the costs when someone violates these rights.

10. Relying on the description of virtue ethics, how would you describe Aaron Feuerstein‘s character? What type of person would make the decision he made?

Engage students in a discussion about what they view as admirable character traits and how they would describe Feuerstein‘s character. Also discuss whether the decision he made is something to be admired and what qualities/character traits allowed him to make the decision he made. Would they be able to do the same? Why or why not?

11. Can such character traits as honesty, loyalty, trustworthiness, compassion, and humility be taught? Do people learn to be selfish, greedy, and aggressive, or do these traits come naturally?

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This is the concept of nature versus nurture. How do we teach? Can ethics be taught?

Once again, ask students to discuss their own ideas for raising children. Are people ―naturally‖ selfish? If so, what implications follow for such social institutions as the law, courts, police, and economics? If not, what social conditions encourage selfishness?

12. Do professional such as accountants and lawyers have duties and obligations that other people do not? From where would such duties come?

Expand this question to ask whether teachers also have duties beyond other people. For instance, can a teacher go out to a bar and get drunk, or are teachers bound by a duty to set a good example for students? Explore the topic of professional responsibilities with students who plan careers in law, accounting, auditing, and so on. Ask students to distinguish between professions and jobs.

IM Chapter 4: The Corporate Culture—Impact and Implications Chapter Objectives After reading this chapter, you will be able to: 1.

2.

3.

4.

5.

6.

7.

Define corporate culture.

Explain how corporate culture impacts ethical decision making.

Discuss the differences between a compliance-based culture and a values-based culture.

Discuss the role of corporate leadership in establishing the culture.

Explain the difference between effective leaders and ethical leaders.

Discuss the role of mission statements and codes in creating an ethical corporate culture.

Explain how various reporting mechanisms, such as ethics hotlines and ombudsmen, can help integrate ethics within a firm.

8. Discuss the role of assessing, monitoring, and auditing the culture and ethics program.

9. Explain how culture can be enforced via governmental regulation. ** Teaching Note: This chapter can be introduced by picking up a theme that was presented previously. Ethical decision making by individuals can be both encouraged and discouraged by the social context in which they operate. A corporate culture can have significant influence on the decision making of all employees, indeed, on all stakeholders. Therefore, a corporation has a responsibility to create a culture that will support ethical decision making and deter unethical decisions.

Organizational cultures have also been significantly impacted by the Covid pandemic, especially by an increase in the number of employees who work from home and by what has been called the ―Great Resignation.‖ The following Decision Point asks students to think about these issues.

Opening Decision Point Creating an Ethics Program in the Post-Pandemic Workplace This Decision Point has been greatly expanded to situate the topic of organizational culture 5-64 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

within the content of a post-pandemic workplace. The case asks students to imagine that they work in the Human Resources department of their company and that the CEO has asked the HR department to develop an ethics program for the firm. They have been assigned the responsibility of creating this ethics program and have 2 weeks to come up with a draft version of a code of ethics for the company, a summary of other elements that the ethics program will include, and a proposal for how to assess whether the program is working. The CEO also asks them to come prepared to explain what role she can play in promoting ethics and ensuring the ethics program's success. After doing her research, she comes up with eight potentially desirable outcomes of effective ethics programs: 1.

2.

3.

4.

5.

6.

7.

8.

Discovery of unethical/illegal behavior and reduction of meltdowns.

Awareness of ethical and legal issues.

A resource for guidance and advice.

Accurate reports of wrongdoing.

Greater customer loyalty.

Incorporation of values in decision processes.

Greater employee commitment and loyalty to the organization.

Satisfaction of external and internal stakeholder needs.

The students are asked to play the role of this HR person in several different types of businesses: a fast-food restaurant, an automobile dealership, a retail store selling consumer electronics, a government agency, and a large international corporation.

Students are asked to consider the following questions as they complete the task of developing an ethics program in each of these business settings:      

 I.

List the issues you think should be addressed in a code of ethics.

Other than a code of ethics, what other elements would you include in an ethics program?

How will you define ―success?‖ Are there any facts that you will need to gather to make this judgment?

How would you measure success along the way? How will you measure whether your ethics program is ―working‖ before you reach any end objective?

Whom will you define as your primary stakeholders?

What are the interests of your stakeholders in your program and what are the impacts of your program on each stakeholder? How might the measurement of the program‘s success influence the type of people attracted to the firm or who are most motivated within your organization?

How will you answer the CEO‘s questions about her role in promoting ethics?

Introduction: What is Corporate Culture? a. Developing an Ethical Culture: This chapter examines the ways in which corporations develop ethical cultures, cultures in which individuals are encouraged and supported in making ethically responsible decisions.

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b. Consequences of Business Decisions: The decision-making model of ethics that we have introduced in the opening chapters emphasizes the responsibility of individuals for the decisions they make in business. These decisions impact one‘s own personal integrity and also have consequences for many stakeholders with whom business organizations interact. c. Corporate Culture: influences, limits, shapes, and sometimes determines decision making within a firm. i.

Individuals can be helped or hindered in making the ―right‖ or ―wrong‖ decision (according to their own values) by the expectations, values, and structure of the organization in which they live and work.

d. This chapter surveys: some of the major issues surrounding the development, influence, and management of a corporate culture as well as the role of business leaders in creating, enhancing, and preserving cultures that support ethical behavior. e. Corporate Culture Perseveres: Even in the age of decentralized corporations and other institutions, there remains a sense of culture in organizations. i.

Despite the fact that corporations have many locations, with diverse employee groups and management styles, an individual working for a large global firm in one country will share various aspects of their working culture with someone working for the same firm halfway around the world.

ii.

Corporate culture survives the distance and differences.

*Chapter Objective 1 Addressed Below* f. Organizational Culture: Every organization has a culture fashioned by a shared pattern of beliefs, expectations, and meanings that influence, guide, and shape the thinking and behaviors of the members of that organization. i.

Businesses have unspoken yet influential standards and expectations.

*Reference: Figure 4-1 Here* *Reference: Reality Check—―Built To Last‖* 1. Example: At some offices, the dress code might be white shirts and gray suits, while one of Google‘s 10 principle philosophies is ―you can be serious without a suit.‖ ii.

If you join a firm with a culture that supports other values than those with which you are comfortable, there will be value conflicts—for better or worse.

ACHING NOTE: A new Reality Check titled ―Your Own Culture‖ has been added to this chapter. This Reality Check asks students to reflect on how their attitudes, beliefs, and 5-66 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

values are shaped by their own culture. A helpful classroom exercise can be to assign students into small groups to answer the questions among themselves before sharing them with the wider class. Students can be helped to understand the influence of organizational culture on decision making and values by using examples from their own experiences. Ask students to compare character traits of typical students living in particular residence halls or fraternities/sororities. Or, ask what distinguishes the ―typical student‖ at your school from a ―typical‖ student at a rival school. Students often will want to argue that the culture does not create character and that a process of self-selection is operating as well. People of a certain type are attracted to organizations of certain types. But, of course, this is part of the point. Organizations of any type will tend to attract people who will fit in a flourish—Trader Joe‘s is an example. The question remains: What type of organization and person are you going to be?

How are your beliefs and expectations alike, and different from, your classmates and friends who do not share your religion, ethnic background, or gender? Have a conversation with a student in your class from a different country than your own. Do you have different expectations and norms regarding such things as work and gender roles? How do your expectations regarding such things as work and gender roles differ from your parents? In what ways do you differ from the normal expectations of your hometown or family? What pressures have existed for you to ―fit in‖ and conform to the ―ways things are done around here?‖ g. Cultures Change: No culture is static, but modifying culture is a bit like moving an iceberg. One person cannot alter its course alone, but strong leaders (sometimes from within but often from the top) can have a significant impact on culture, and a strong business leader can certainly have an impact on corporate culture. i.

A firm‘s culture can be its sustaining value—offering it direction and stability during challenging times.

ii.

For example, some point to Trader Joe‘s culture as the basis for its high quality and consistent customer satisfaction.

1. “It is Just Groceries”—On a stressful day, you might hear a captain or mate remind their crew, ―it‘s just groceries.‖ This may be why Trader Joe‘s remains ranked one of the best places to work in the United States.

2. 7 Core Values: The stability that corporate culture provides can be a benefit at one time and a barrier to success at another time. While some believe that Trader Joe's 7 Core Values might contribute to a culture of high-quality products, others suggest that these values could contribute to a culture of defensiveness and secrecy.

*Reference: Reality Check—“It is Just Groceries‖* iii.

The culture can also constrain an organization in the common ways of managing issues, as in the typical phrases, ―that is how things have always been done here,‖ or ―that is our prevailing climate.‖ 5-67

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h. Corporate cultures can be defined not only from the top-down but also by the employees themselves. i.

EXAMPLE: At Zappos, the employees persuaded CEO Tony Hsieh to establish a code of ethics. He did so by emailing all employees in the company to ask them what they thought were the core values of Zappos. His email resulted in 10 ―Core Values,‖ which represent a strong emphasis on employee and customer satisfaction see Reality Check ―Living Our Core Values‖).

** Teaching Note: You may consider asking students at this point how they might respond to a CEO if they would have received an email such as this one. It is a slightly different consideration to receive an email as an employee asking for input on values, or to be a CEO creating values to impose on a workforce. How would the result values be different if they were to write them from these different perspectives? ii.

EXAMPLE: Elon Musk prefers to communicate directly with his employees, sending them regular emails and tweeting a message to them. He has also invited employees to speak directly to people high up in the chain of command, including himself.

** Teaching Note: You may ask students how this sort of direct communication might be viewed as both positive and challenging elements to culture. Should a CEO directly email employees? What about tweeting at them? Is there a benefit to putting culture-related information in writing? i. When a culture is not clear, sometimes neither are the resulting decisions or the public-facing reputation of the firm. i.

EXAMPLE: United Airlines has had a number of recent blunders, including a couple of online pricing errors, a bloodied customer who was dragged off an overbooked flight, and incidents with customers‘ pets dying or being flown to the wrong country.

** Teaching Note: You might ask students to consider how United‘s values differ from those of Zappos. What values might they have emphasized as an employee responding to the CEO in each of these companies? What do these core values suggest about the companies' respective cultures? j. Defining culture within specific organizations: Defining the specific culture within an organization is not an easy task since it is partially based on each participant‘s perception of the culture. i.

Perception may actually impact the culture in a circular way—perpetuating itself over time.

ii.

Several of the elements that are easiest to perceive, such as attitudes and 5-68

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behaviors, are only a small fraction of the elements that comprise the culture. iii.

In addition, culture is present in and can be determined by exploring any of the following, among others:  Tempo of work  The organization‘s approach to humor  Methods of problem solving  The competitive environment  Incentives  Individual autonomy  Hierarchical structure

iv.

It can be difficult for individuals in a firm to identify the specific characteristics of the culture in which they work.

1. Culture becomes so much a part of the environment that participants do not even notice its existence.

2. EXAMPLE: When individuals go off to college, they can finally begin to recognize that their family has its own culture. Each family has a culture that is distinct and self-perpetuating, as does each business.

II.

Culture and Ethics *Chapter Objective 2 Addressed Below* a. What Role Does Corporate Culture Play in Business Ethics? In situations where the law provides an incomplete answer for ethical decision making, the business culture is likely to be the determining factor in the decision. i.

Ethical businesses must find ways to encourage, to shape, and to allow ethically responsible decisions.

b. Role of Social Environment: Each of the factors in the decision-making mode we introduced in chapter 2, from fact gathering through moral imagination to assessment, can be supported or discouraged by the environment in which the decision is made. i.

An ethical environment, or culture, would be one in which employees are empowered and expected to act in ethically responsible ways even when the law does not require it.

c. Creating an Ethical Corporate Culture: In order to understand that cultures can influence some types of behaviors and discourage others, consider as an example the role of culture in the ethical dilemmas that Wells Fargo Bank has encountered over the past few years. i.

EXAMPLE: Return to the case in Chapter 1‟s Opening Decision Point 5-69

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about Wells Fargo. Wells Fargo long enjoyed a reputation for sound management. The bank was able to avoid many of the pitfalls and risky investments that led to the U.S. recession that began in 2008 and emerged from it relatively unscathed.

1. Following the 2008 recession, Fortune magazine praised Wells Fargo for ―a history of avoiding the rest of the industry‘s dumbest mistakes.‖ American Banker described Wells Fargo as ―the big bank least tarnished by the scandals and reputational crises.‖ 2. Wells Fargo‘s original success came from deep customer relations paired with an actively engaged sales culture. The Wells Fargo vision is to ―satisfy our customers‘ needs, and help them succeed financially.‖ 3. Despite being one of the most respected companies in 2015, the company fell to dead last by 2017. The decline was the result of a number of poor decisions, including the cross-selling scandal uncovered in 2016.

4. The bank set daily sales targets, including quotas assigned to branch managers for the number and types of products sold. Rumors began circulating that Wells Fargo employees were engaging in aggressive tactics to meet their quotas, including opening new accounts and issuing debit or credit cards without customer knowledge. At times, employees would even forge customer signatures.

5. When the scandal was made public in 2016, the senior management and the board of directors wrestled with how to adequately condemn the situation and take responsibility for the bank‘s infractions, while also convincing the public that the problem was contained.

6. In 2017, Wells Fargo admitted to additional (and subsequent) wrongdoing! It was engaged in illegally repossessing over 860 cars without a court order in violation of federal law; it also admitted to charging at least 570,000 customers for auto insurance that they did not need; and the bank acknowledged that 110,000 mortgage holders were fined for missing a deadline, despite the fact that the delay was the bank's fault.

7. The saga continued in 2018 when the bank uncovered 870 customers who had been incorrectly denied mortgage changes, resulting in 545 customers losing their homes.

8. The series of scandals have severely damaged the bank‘s reputation and hurt Wells Fargo‘s bottom line.

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ii.

Explored from a utilitarian perspective, it certainly was not a culture that revolved around the consequences of its decision-making process. The culture did not place weight on the long-term impact of its process or decisions on its stakeholders.

1. One might be able to argue that, in some cases, the decision makers were placing human well-being, including the fundamental needs and dignity of their stakeholders (such as shelter), as a high priority. These loans in some instances allowed individuals who otherwise did not qualify now to access funds for a home loan.

2. On the other hand, there is a reason they did not qualify and, as history demonstrated, they were unable to repay the loans, or the property was not worth the amount of the loans.

d. Expectations and Habits: The cultivation of habits, including the cultivation of ethical virtue, is greatly shaped by the culture in which one lives. i.

The virtue ethics tradition reminds us that our decision and our actions are very often out of habit and not the result of careful deliberation. Thus, the question of where we get our habits and character is all-important.

ii.

We can choose to develop some habits rather than others, but it is also clear that our habits are shaped and formed by culture. This culture exists in every social context, including the workplace, where individuals quickly learn behaviors that are appropriate and expected through those which get rewarded and promoted.

iii.

The effect of this workplace culture on decision making cannot be overemphasized—including on the bottom line.

1. DATA: The Ethics Resource Center (ERC) reports that ―by every measure, strong ethics programs and strong ethics cultures produce substantially better outcomes—less pressure, less misconduct, higher reporting, and less retaliation—than in weaker ethical environments.‖ 2. DATA: When indexed together, the publicly traded businesses on the Ethisphere Institute‘s World‘s Most Ethical Companies list regularly outperform other major indices, including the S&P 500.

3. BUT—if ignored, the culture could instead reinforce a perception that ―anything goes,‖ and ―any way to a better bottom line is acceptable,‖ destroying long-term sustainability in both financial performance and employee retention/recruitment.

*Reference: Reality Check—“Ignore at Your Peril!” See, also, how the devastating impact is not limited to a single industry or type of business.

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e. Corporate culture also is very powerful in shaping the individuals that work for a firm. Collins and Porras‘ book, Built to Last: Successful Habits of Visionary Companies, explains that power in detail discussed in the Reality Check, ―Built to Last.‖ III.

Compliance and Value-based Cultures *Chapter Objective 3 Discussed Below* a. Two Types of Corporate Culture: In the 1990‘s, a distinction was recognized between the traditional compliance-based approach and values-based or integritybased approaches to corporate culture, which are perceived to be more far-sighted and flexible. i.

The distinction between compliance-based and values-based cultures perhaps is most evident in accounting and auditing situations, but it can also be used to understand wider corporate cultures.

*Reference: Table 4.1 Here* ii.

Compliance-based culture: Emphasizes adherence to the rules as the primary responsibility of ethics.

1. A compliance-based culture will empower legal and audits offices to mandate and monitor compliance with the law and with internal codes 2. Goals of Compliance: A traditional compliance-oriented program will focus on meeting legal and regulatory requirements, minimizing risks of litigation and indictment, and improving accountability mechanisms.

iii.

Values-based culture: Reinforces a particular set of values rather than a particular set of rules.

1. Values-based firms may have codes of conduct, but the codes are predicated on a statement of values, and it is presumed that the code includes mere examples of how to apply the values.

2. In Favor of a Values-based Culture: The argument for values-based culture is that a compliance culture is only as strong and as precise as the rules with which workers are expected to comply.

3. A firm can only have a certain number of rules, and the rules can never unambiguously apply to every conceivable situation.

4. A values-based culture recognizes that where a rule does not apply, the firm must rely on the personal integrity of its workforce when 5-72

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decisions need to be made. b. This is not to say that values-based organizations do not include a compliance structure. The relationship between ethical culture and strong ethics and compliance programs is often symbiotic. i.

DATA: In 2018, the Ethics Resource Center (ERC) found that high-quality ethics and compliance programs ―are linked with stronger ethics cultures.

Stronger cultures lay the groundwork for better ethics outcomes such as employees seeking guidance and being prepared to handle situations that could be unethical.‖

*Reference: Reality Check—―Compliance versus Values‖* c. Choosing an Ethics Program: If a firm decides on a values-based orientation for its ethics program, it must find a way to integrate ethics into the compliance environment to prevent dilemmas and create a ―culture‖ of ethics. *Reference Reality Check—―Going Deep on Values”* IV.

Ethical Leadership and Corporate Culture a. The primary responsibility of corporate culture is to cultivate values, expectations, beliefs, and patterns of behavior that best and most effectively support ethical decision making. b. Who Is Responsible for the Corporate Culture? The tone of the firm comes from the top, so leaders are charged with this duty to guide stakeholders throughout the organization. i.

This is not at all to relieve leaders throughout an organization from their responsibilities as role models, but instead to suggest the pinnacle position that the executive leader plays in setting the direction of the culture. In fact, neither can be successful independent of the other; there must be a consistent tone throughout the firm.

ii.

DATA: Unfortunately, according to one study published in 2013, senior leaders are more likely than lower-level employees to break rules, and 60% of misconduct reported is attributed to managers. This is an alarming trend that should be considered by businesses as they develop their ethics and compliance training programs.

iii.

The leader is the model for either ethical or unethical behavior in a firm, and their actions and attitude relay the tone to the stakeholders.

*Reference: Decision Point—―A Leader Takes Responsibility‖* 5-73 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Decision Point Decision Point A Leader Takes Responsibility Today‘s GM will do the right thing. That begins with my sincere apologies to everyone who has been affected by this recall, especially the families and friends [of those] who lost their lives or were injured. I am deeply sorry.

Mary Barra, CEO of General Motors, apologizing for a botched recall of 2.6 million GM vehicles that contained dangerous and deadly ignition switch defects Mary Barra, CEO of General Motors, appeared before Congress in April 2014 to apologize publicly for 13 deaths that GM says were caused by a faulty ignition switch, as well as for GM‘s 10-year delay in issuing a recall for the vehicles containing this dangerous defect.

Barra faced serious questions from the U.S. House of Representatives about why GM waited almost 10 years when internal documents demonstrated that the company knew about the defect as early as 2005, but decided that the $0.57 modification was too costly. The House of Representatives asked Barra what had changed at GM to ensure this same process of decision making does not occur in the future.

Barra had stepped into the CEO role at GM only three months prior to her congressional appearance, in January 2014. The defect was made known to the public in February 2014.

Therefore, much of Barra‘s testimony reiterated that the decisions—and culture—that caused this ethical lapse in judgment came before her time and knowledge. However, she emphasized that her primary focus was to change GM from a ―cost culture‖ to a ―customer culture.‖ She explained to Congress that she had recently established a new position specifically responsible for global vehicle safety in order to encourage interdepartmental communication, and she assured the Congressional members that GM was doing a full investigation of the issue. She also hired a high-profile compensation consultant to consider appropriate compensation for victims‘ families. However, House members did report that no engineer or manager was fired for their culpability in the incident.

In June 2015, Barra fired 15 employees deemed responsible for not tracking the problem attentively enough. By August 2015, 124 deaths and an additional 275 injuries were linked to faulty ignition switches. In 2018, a federal judge in New York dismissed the Department of Justice‘s (DOJ‘) criminal case brought against GM at the request of federal prosecutors after a plea agreement had been made. At the time of the dismissal, GM had paid more than $2.6 billion in penalties and settlements, including fines to the DOJ. GM also recalled 2.6 million vehicles.

In 2018, during the days between Thanksgiving and the December holidays, Barra announced job cuts of more than 14,800, explaining, "I accept no excuses for why we cannot be the best."

Perhaps Barra is moving back to a ―cost culture‖ but only time will tell if the earlier culture of mistakes also will follow.

1. Do you think it is fair for Barra to be held responsible for mistakes made under prior CEOs? If not, then how do we hold organizations responsible once a leader departs? Was it sufficient merely to fire the 15 lower-level employees?

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2. Barra was criticized for spending a significant portion of her congressional testimony responding that she just ―didn‘t know.‖ From what you read here, do you think that she made effective decisions on her arrival at GM to address the problem?

3. What additional facts might you need to uncover, if any, to respond to this particular issue?

4. Do you see any additional ways to respond to the issue(s) facing Barra? If you were Barra, what else might you do at GM to (1) respond to this particular issue and (2) modify the culture?

5. Who are Barra‘s primary stakeholders in her most pressing decisions right now?

6. What would you suggest might be Barra‘s most effective ethical strategy for decision making at present? iv.

One of a leader‘s primary responsibilities, therefore, is to be a role model by setting a good example, by keeping promises and commitments, by maintaining their own standards, and by supporting others in doing so.

Employees are often looking to leaders/supervisors for guidance on how to act.

* Reference: Reality Check – ―Perceptions on Ethics Training‖* *Chapter Objective 4 Discussed Below* v.

Leadership sets the tone through other mechanisms, such as the dedication of resources. Ethical business leaders allocate corporate resources to support and promote ethical behavior.

c. Why Ethics Officers? i.

Ethics officers were introduced to the corporate structure in the early 1990s as a way to emphasize to firms, and their stakeholders, that ethics were both relevant and influential within their organizations.

ii.

Ethics would no longer be a job for the general counsel to do in her ―spare time,‖ rather a highly skilled individual would be hired and given a staff and budget to do the required work.

iii.

Ethics officers would ensure that firms maintain their dedication to ethical decision making within the company, as well as in its dealing with vendors, suppliers, and other contractors. They would make sure the code of conduct was upheld across the board.

iv.

When firms are effective in enacting ethics programs, employees are more likely to see themselves as participants in an ethical workplace culture.

v.

DATA: In a nationwide survey completed in 2018, over two-third of employees responded that they reported misconduct when they observed it in their workplaces (23% higher than when the survey was first conducted in 2000). The report indicates that wrongdoing is significantly reduced, and 5-75

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reporting is far more likely (36% more likely) where there is a strong workplace culture. d. Ethical Leaders: One study of the nature of ethical leadership emphasized the importance of being perceived as a people-oriented leader, as well as the importance of leaders engaging in visible ethical action. i.

Traits of ethical leaders include receptivity, listening, openness, integrity, honesty, trustworthiness, broad ethical awareness, concern for multiple stakeholders, and using ethical decision processes.

ii.

Ethical leaders do many things that ―traditional leaders‖ do, but they do that within the context of an ethics agenda. Their goal is not simply job performance, but performance that is consistent with a set of ethical values and principles.

iii.

Ethical leaders demonstrate caring for people in the course of their work.

*Reference: Reality Check—―Perception of Leadership Qualities‖* e. These ethical traits and behaviors must be socially visible and understood in order to be noticed and to influence perceptions. i.

V.

Executives are expected to be focused on the financial bottom line and shortterm demands of stock analysts, but it is noteworthy when they focus on broader and longer-term concerns.

Effective Leadership and Ethical, Effective Leadership a. Role of an Ethical Leader: Being perceived as a leader plays an important role in a leader‘s ability to create and transform an ethical corporate culture. Leaders have the responsibility for shaping the corporate environment so that ethical decision making can flourish. *Chapter Objective 5 Addressed Below* b. What is the difference between an effective leader and an ethical, effective leader? i.

An effective leader is someone who guides, directs, and escorts others toward a destination successfully and, presumably, efficiently.

ii.

Not every effective leader is an ethical leader.

iii.

One key difference between effective leaders and ethical leaders lies in the means used to motivate others and achieve one‘s goals.

1. Effective leaders might achieve their goals through threats, 5-76

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intimidation, harassment, and coercion.

2. Leaders can also use more amenable interpersonal means such as modeling ethical behavior, persuasion, or using the impact of one‘s institutional role. c. ―True‖ Leadership: Promoters of certain styles of leadership tend to identify a method of leading with ―true‖ leadership in an ethical sense. i.

Some say that the best leaders are individuals who lead by the example of serving others in a non-hierarchical style.

ii.

Others suggest that true ethical leaders are those ―transformational‖ or ―transactional‖ leaders who employ methods that empower subordinates to take initiative and to solve problems for themselves.

iii.

Creating a corporate culture in which employees are empowered and expected to make ethically responsible decisions is a necessary part of being an ethical business leader.

d. Direction and Goals: It is not the method alone that establishes an ethical leader; the other element of ethical leadership involves the end or objective toward which the leader actually leads. i.

This distinction should sound reminiscent of the emphasis on means in the deontological theory of universalism or the focus on ends or results in utilitarianism discussed more fully in Chapter 3.

1. If we judge a leader solely by the results produced—the utilitarian greatest good for the greatest number – we might ignore the mistreatment of workers that was necessary to achieve that end.

2. Alternatively, if we look only to the working conditions protected by universalism, we may not consider a failure to produce a marketable product or one that brings in a profit necessary to sustain adequate working conditions.

ii.

Comparisons/Dichotomies: 1. A business executive who leads a firm into bankruptcy is unlikely to qualify as an effective or successful leader, while an executive who transforms a business into a productive, efficient, and profitable business likely will be judged as a successful business leader.

2. A leader who succeeds in a manner that respects subordinates and/or empowers them to become creative and successful themselves is, at least at first glance, an effective and ethical leader.

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3. But are profitability and efficiency accomplished through ethical means alone enough to make a business leader an ethical leader? Other socially responsible goals might be necessary before we conclude that a leader is fully ethical. a. EXAMPLE: Imagine a business leader who empowers their subordinates and respects their autonomy by consulting and listening, but who leads a business that publishes child pornography or pollutes the environment, or sells weapons to radical organizations.

VI.

Building a Values-based Corporate Culture a. Modifying culture alone seems about as tough as moving an iceberg. b. Each individual in an organization has an impact on the corporate culture, although no one individual can build or change the culture alone. c. Culture derives from leadership, integration, assessment, and monitoring.

VII.

Mission Statements, Credos, Codes of Conduct, and Statements of Values a. Articulation of Values: One of the key elements of ethical leadership is the communication of values throughout the organization. These values may evolve from an inclusive process of values identification, not simply from the values of one particular executive. b. Guidance: It is the leader‘s responsibility to ensure that the firm is guided by some set of organizing principles that can guide employees in their decision-making processes. *Reference: Reality Check—―Do Codes Make a Difference?‖* *Chapter Objective 6 Addressed Below* c. Mission is Critical: Before impacting the culture through a code of conduct or statement of values, a firm must first determine its mission. i.

In the absence of other values, the only value is profit—at any cost. Without additional guidance from the top, a firm is sending a clear message that a worker should do whatever it takes to reap profits.

ii.

EXAMPLE: The corporate mission of Southwest Airlines emphasizes the importance of treating employees, as well as customers, with respect and dignity. Founder and former CEO Herb Kelleher explains, ―It began by us thinking about what is the right thing to do in a business context. We said we want to really take care of these people, we want to honor them and we love them as individuals. Now that induces the kind of reciprocal trust and 5-78

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diligence that made us successful.‖ d. Codes of conduct: Codes may more specifically delineate the firm‘s foundation both for internal and external stakeholders. i.

The code of conduct has the potential to both enhance corporate reputation and provide concrete guidance for internal decision making, thus creating a built-in risk management system.

ii.

The firm‘s vision can and should be inspiring, and its code of conduct should lay down the law with regard to the basis and objectives for all future decisions. In fact, the mission statement or corporate credo serves as an articulation of the fundamental principles at the heart of the organization and those that should guide all decisions, without abridgment.

e. Developing the mission and the code i.

The first step in developing a code is to ask yourself what you stand for or what the company stands for. Why does the firm exist? What are its purposes?

How will it implement these objectives? Once you make these determinations, how will you share them and encourage a commitment to them among your colleagues and subordinates? ii. The second step is the articulation of a clear vision regarding the firm‘s direction. Why have a code of ethics? iii. The third step in this process is to identify clear steps as to how this cultural shift will occur. iv.

Fourth, there must be a belief throughout the organization that this culture is actually possible and achievable. *Reference: See Table 4.2: Ethics Code Guidelines Culture Integration: Ethics Hotlines, Ombudspersons, and Reporting *Chapter Objective 7 Discussed Below* II.

Communication Systems: Many firms must have mechanisms in place that allow employees to come forward with questions, concerns, and information about unethical behavior. a. Integrating an ethical culture throughout a firm and providing means for enforcement is vitally critical both to the success of any cultural shift and to the impact on all stakeholders. b. Integration can take a number of different forms, depending both on the organizational culture and the ultimate goals of the process. c. One of the most determinative elements of integration is communication.

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i.

Communication of culture must be incorporated into the firm‘s vocabulary, habits, and attitudes to become an essential element in corporate life, decision making, and determination of success.

Decision Point: Short Term versus Long Term You are a corporate vice president of one of the largest units in your organization. Unfortunately, you have noticed over the past few years that your unit has developed a singular focus on profits, since employees‘ performance appraisals and resulting compensation increases are based in significant part on ―making the numbers.‖ Though the unit has done well in this regard, you have noticed that people have been known to cut corners, to treat others less respectfully than you would like, and to generally disregard other values in favor of the bottom line. While this might be beneficial to the firm in the short run, you have grave concerns about the long-term sustainability of this approach.     

What are the ethical issues involved in striving to define or impact the culture of a unit?

How might you go about defining the culture of your unit so that employees might be able to understand your concerns?

What will be the most effective means by which to alter this culture?

What stakeholders would be involved in your suggestion in response to the previous question? How might the different stakeholder groups be impacted by your decision on this process?

How can you act in order to ensure the most positive results? How will you measure those results or determine your success? Will you measure inputs or outcomes, responsibilities, and rights? *Reference: Reality Check—―Examples of Culture Integration‖*

III.

How is ethical behavior encouraged and acknowledged? a. Consider whether incentives are in the right place to encourage ethical decision making and whether ethical behavior is evaluated during a worker‘s performance review. b. Reward employees for doing the right thing through appropriate honors and positive appraisals. c. Encourage employees to raise questions related to unethical behavior, establish multiple and varied reporting mechanisms, and ensure employees that their reports will be free from retaliation. d. Ensure that employees who violate company code are disciplined appropriately, even if they are good performers. No one is exempt from discipline for violations.

IV.

Reporting Ethical Issues: a. Reporting ethically suspect behavior is difficult to do because there is a general social prohibition against informing others.

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b. Individuals often pay a real cost when they report unethical behavior (such as retaliation), especially if workplace superiors are involved in the report of wrongdoing.

V.

―Whistle-blowing‖ involves the disclosure of unethical or illegal activities to someone who is in a position to take action or prevent or punish the wrongdoing. a. Whistle-blowing can expose and end unethical activities. But it can also seem disloyal; it can harm the business; and, sometimes, it can extract significant costs on the whistleblower. b. Whistle-blowing can occur internally, such as to a superior; or it can occur externally, such as an outside consultant reporting to someone inside the firm, some unethical behavior within the firm; or externally from someone inside the firm to a legal authority. c. Internal mechanisms for reporting wrongdoing are preferable for all concerned because the effects of whistle-blowing to an external group can be quite damaging. i.

VI.

The internal mechanisms for reporting must be effective, must allow confidentiality, if not anonymity, and they must strive to protect the rights of the accused party.

Reporting Mechanisms: In addition to, or as part of ethics and compliance officers‘ responsibilities, many firms have created ethics ombudsman and internal or external ethics hotlines. a. These mechanisms allow employees to report wrongdoing and to create mechanisms for follow-up and enforcement. b. While these responses might seem evident, reasonable, and commonplace, many organizations do not have them in place for a variety of reasons. c. In addition, even when they are in place, people who observe threats to the organization opt not to report the threat or possible wrongdoing. d. One of the challenges with reporting systems is that they do not make clear the values of the organization, and what is accepted and what is not accepted within its culture. e. There are methods by which firms might actively curtail these negative influences: i.

Leaders should model the act of reporting wrongdoing, in an obvious manner, so that everyone throughout the organization can see that reporting is the highest priority—not covering up malfeasance.

ii.

Leaders can explain the process of decision making that led to their conclusion.

iii.

Running

drills

or

rehearsals of challenging events will allow for 5-81

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much greater comfort and generate a level of expectation among workers that might not otherwise exist. iv.

A culture that allows sufficient time for reflection in order to reach responsible decisions is most likely to encourage consideration of appropriate implications.

v.

The most effective way to ensure clarity and thereby also ensure a successful reporting scheme is to consistently and continuously communicate the organization‘s values and expectations to all stakeholders, and to reinforce these values through the firm‘s compensation and reward structure.

* Reference: Reality Check—―Examples of Culture Integration”* *Chapter Objective 8 Discussed Below* Assessing and Monitoring the Corporate Culture: Audits VII.

Encouraging Participation in Ethical Culture: If we cannot or do not measure, assess, or monitor culture, it is difficult to encourage others throughout the organization to pay attention to it. a. Monitoring and an ongoing ethics audit allow organizations to uncover silent vulnerabilities that could later pose challenges to the firm, thus serving as a vital element in risk assessment and prevention. b. By engaging in ongoing assessment, organizations are better able to spot areas of vulnerability before other stakeholders (both internal and external) spot them. c. Beyond uncovering vulnerabilities, an effective monitoring process may include: i. ii. iii. iv. v.

VIII.

An evaluation of appropriate resource allocation; Whether the program is keeping pace with organizational growth; Whether all of the program‘s positive results are being accurately measured and reported; Whether the firm‘s compensation structure is adequately rewarding ethical behavior; and Whether the ‗tone at the top‘ is being disseminated effectively.

How do you detect a potentially damaging or ethically challenged—sometimes referred to as ―toxic‖—corporate culture? a. Values: The first clear sign would be a lack of any generally accepted fundamental values for the organization. b. Relationships: The management of its internal and external relationships is critical evidence of its values.

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c. Finances: The manner in which it manages and communicates its financial environment is telling. *Chapter Objective 9 Addressed Below* IX.

Mandating and Enforcing Culture: The Federal Sentencing Guidelines for Organizations a. Government Regulation: When internal mechanisms for creating ethical corporate cultures prove inadequate, the business community can expect governmental regulation to fill the void. b. The United States Sentencing Commission (USSC), an independent agency in the United States Judiciary, was created in 1984 to regulate sentencing policy in the federal court system. i.

Prior to 1984, the U.S. Congress had been struggling to resolve issues relating to differences in sentencing, arbitrary punishments, and crime control.

c. Mandatory Federal Sentencing Guidelines: Beginning in 1987, the USSC prescribed mandatory Federal Sentencing Guidelines for Organizations (FSGO) for individual and organizational defendants in the federal system, bringing some amount of uniformity and fairness to the system. i.

These directions, based on the severity of the offense, assign most federal crimes to one of 43 ―offense levels.‖

ii.

In its 2005 decision in U.S. v. Booker, however, the Supreme Court separated the ―mandatory‖ element of the guidelines from their advisory role, holding that their mandatory nature violated the Sixth Amendment right to a jury trial.

1. A sentencing court is still required to consider guideline ranges. The court is also permitted to individually tailor a sentence in light of other statutory concerns.

d. Relevance: The relevance of these Guidelines to ethics is that the USSC strived to use them to create both a legal and ethical corporate environment. i.

The USSC updated the guidelines in 2004 to include references not only to compliance programs but also to ―ethics and compliance‖ programs and also required that organizations promote ―an organizational culture that encourages ethical conduct and commitment to compliance with the law.‖ 1. The revision also includes a requirement that organizations assess areas of risk for ethics and compliance and periodically measure the effectiveness of their programs.

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2. In addition, the criteria for an effective program are now found in a separate specific guideline. e. Goals of USSC Guidelines: The Guidelines seek to encourage corporations to create or maintain effective ethics and compliance programs. i.

Companies that find themselves in court as a result of a ―bad apple‖ or two, but that also can demonstrate that they have effective ethics and compliance programs, may find that the recommended penalty will be reduced (called a ―mitigated‖ penalty).

ii.

On the other hand, firms that do not have effective ethics and compliance systems will be sentenced to an additional term of probation and ordered to develop a program during that time (called an ―aggravated‖ penalty).

iii.

The USSC says that organizations shall ―exercise due diligence to prevent and detect criminal conduct; and otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.‖

f. Due Diligence: The guidelines identify those specific acts of an organization that can serve as due diligence in preventing crime and the minimal requirements for an effective compliance and ethics program. These include the following. i.

Standards and Procedures. The organization shall establish standards and procedures to prevent and detect criminal conduct.

ii.

Responsibility of Board and other Executives; Adequate Resources and Authority.

(A) The organization‘s board shall be knowledgeable about the compliance and ethics program and shall exercise reasonable oversight with respect to its implementation and effectiveness.

(B) High-level personnel must be assigned to have responsibility for the program and must then ensure its effectiveness.

(C) Specific individual(s) within the organization shall be delegated day-today operational responsibility for the program and shall report periodically to these high-level personnel and, as appropriate, to the governing authority, or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program. They shall also be given adequate resources, appropriate authority, and direct access to the governing authority.

iii.

Preclusion from Authority: Prior Misconduct. The organization shall avoid placing people in charge of the program who have previously engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.

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iv.

Communication and Training. The organization shall communicate its standards and procedures to all members of the organization through training or other means appropriate to such individuals‘ respective roles and responsibilities.

v.

Monitoring, Evaluation, Reporting Processes. The organization shall take reasonable steps: (A) To ensure that the organization‘s compliance and ethics program is followed, including monitoring and auditing to detect criminal conduct; (B) To evaluate periodically the effectiveness of the organization‘s compliance and ethics program; and (C) To have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organization‘s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.

vi.

Incentive and Disciplinary Structures. The organization‘s compliance and ethics program shall be promoted and enforced consistently throughout the organization through: (A) Appropriate incentives to perform in accordance with the compliance and ethics program; and (B) Appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.

vii.

Response and Modification Mechanisms. After criminal conduct has been detected, the organization shall take reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the organization‘s compliance and ethics program.

g. Adequate reporting to the Board of Directors. In 2010, the USSC adopted amendments to the FSGO to lower the penalties for compliance violations if the organization meets the following four conditions: i.

The individual or individuals with operational responsibility for the compliance and ethics program have direct reporting obligations to the governing authority or an appropriate subgroup thereof (e.g., an audit committee of the board of directors);

ii.

The compliance and ethics program detected the offense before discovery outside the organization or before such discovery was reasonably likely;

iii.

The organization promptly reported the offense to appropriate governmental authorities; and 5-85

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iv.

No individual with operational responsibility for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense.

h. Adhering to FSGO Criteria: FSGO criteria are principles-based, which provides organizations flexibility in tailoring an approach that best fits their circumstances. i.

This flexibility allows firms to avoid a ―one-size-fits-all‖ standard for compliance, but the lack of clarity poses a challenge to business managers.

ii.

A firm must learn from its mistakes and take steps such as follow-up investigation and program enhancements to prevent recurrences.

iii.

The USSC requires that each firm benchmark itself and its due diligence against comparable companies in their industry to ensure they are holding themselves appropriately accountable.

*Reference: Decision Point “Legal Pressure to Violate Confidentiality” Decision Point Legal Pressure to Violate Confidentiality This Decision Point explores the issue of confidentiality and its protection when reporting illegal and unethical information within a company. Corporate ethics officers, ombudsmen, and ethics hotlines typically guarantee that any reports of illegal or unethical behavior will be held in the strictest confidence. Ethics officers promise anonymity to whistle-blowers, and those who report wrongdoing trust that this promise of confidentiality will be upheld. However, Federal Sentencing Guidelines can create ethical dilemmas for corporations that promise anonymity and confidentiality. The guidelines call for significantly reduced punishment for firms that immediately report potential wrongdoing to government authorities. Failure to report evidence of wrongdoing can mean the difference between a significant penalty and exoneration. Of course, failure to promise confidentiality can also be evidence of an ineffective ethics and compliance system, itself a potential risk for receiving stiffer legal penalties.

Students are asked to consider the following questions when reaching their decision:     

Should ethics officers guarantee confidentiality to those who report wrongdoing, and should they violate that confidence to protect the firm from prosecution?

What facts would you want to know before making this decision?

Can you imagine any creative way out of this dilemma?

To whom does the ethics officer owe duties? Who are the stakeholders?

What are the likely consequences of either decision? What are the fundamental rights or principles involved?

** Teaching Note: This Decision Point raises a true ethical dilemma; all options seem to result in both ethical benefits and ethical harms. Asking students to role-play in this case can be helpful. Would they be less likely to report wrongdoing even with a promise of anonymity if they knew that there is legal pressure on their company to disclose the wrongdoing to 5-86 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

prosecutors? Does the ethics officer have a duty to inform employees that promises of confidentiality may not be honored? ** Teaching Note: Reference Opening Decision Point Revisited “Creating an Ethics Program”* Opening Decision Point Revisited Creating an Ethics Program This Decision Point asks students to define the ―success‖ of an ethics program they have devised.

One way to look at the inquiry would be to consider the measures by which they would be willing to be evaluated. This requires exploration of whether there are pressures in the environment that encourage worker misconduct or systematic problems that encourage bad decisions. Students are asked to consider if they have identified all of the major legal, ethical, and reputational risks that their organization faces, and to determine the means by which to remediate those risks.

It is important to determine whether students will be most concerned with the end results or consequences, or with the protection of particular values articulated by their program or codes. If they measure outcomes alone, they will have a singular focus on the achievement of those outcomes by decision makers. If they measure the protection of rights alone, they may be failing to consider the long-range implications of decisions in terms of their costs and benefits to the firm.

According to the Ethics Resource Center, the Federal Sentencing Guidelines are rarely applied to large corporations today. On the other hand, ethics programs seem to be having an effect internally. A 2013 study found that corporate employees in the United States are witnessing record-low levels of wrongdoing; and these levels have continued to drop since 2007. However, while employees‘ willingness to report wrongdoing has declined, some of that decline is due, in part, to high retention rates that discourage reporting.

To provide some context to this exploration, ask students to consider which offenses are most likely to lead to a fine for an organization. In 2017, the USSC received information on 131 organizations sentenced under Chapter 8:        

29% had been charged with fraud; 16.8% were charged with environmental offenses related specifically to water; 6.1% were charged with import/export offenses; 6.1% were charged with environmental offenses related to hazardous/toxic pollutants; 6.1% were charged related to food, drugs, agricultural, & consumer products.

Approximately 74.8% were required to pay a fine (or a fine plus restitution), and another 12.2% were required to pay restitution only.

The average fine imposed was over $27.5 million, and the average restitution payment imposed was almost $1.2 million.

The average fine for cases involving fraud was over $46.5 million; in public corruption cases, the average was $41.7 million; and in antitrust cases, the average was $65.6 5-87 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

million.

Sources: https://www.ussc.gov/sites/default/files/pdf/research-and-publications/annual-reportsand-sourcebooks/2017/Table51.pdf; https://www.ussc.gov/sites/default/files/pdf/research-andpublications/annual-reports-and-sourcebooks/2014/Table52.pdf.

End of Chapter Questions, Projects, and Exercises 1. To help understand organizational culture, think about some organization to which you belong. Does your company, school, or fraternity/sorority have its own culture? How would you describe it? How does it influence individual decision making and action?

Would you be a different person had you attended a different school or joined a different fraternity/sorority? How would you go about changing your organization‘s culture?

Direct students to the discussion about forming an organizational culture to begin answering this question. Or, ask students to reflect on cases that they may have read in a course on Organizational Behavior and challenge them to examine the ethical perspectives that may be implicit in those cases. Student organizations and clubs, as well as their own work experience, can provide other examples of organizational culture and organizational change.

2. Consider how you evaluate whether a firm is ―one of the good guys‖ or not. What are some of the factors you use to make this determination? Do you actually know the facts behind each of those elements, or has your judgment been shaped by the firm‘s reputation? Identify one firm you believe to be decent or ethical and make a note of the bases for that conclusion. Next, identify a second firm that you do not believe to be ethical or that you think has questionable values and write down the bases for that alternate conclusion. Now, using the internet and other relevant sources, explore the firms‘ cultures and decisions, checking the results of your research against your original impressions of the firms. Try to evaluate the cultures and decisions of each firm as if you had no idea whether they were ethical. Were you accurate in your impressions or do they need to be modified slightly?

Refer students to the following website, a page devoted to support and criticism of Walmart: http://www.businessethics.ca/wal-mart/. This exercise also provides an opportunity to examine the difference between a good/bad corporate culture, and good/bad individuals. What if anything, beside the individuals who work within them, makes an organization ethical or unethical?

3. You will need to draft a memorandum to your chief executive identifying the value of a triple-bottom-line approach, which would represent an enormous shift from the firm‘s current orientation. What are the three key points that you could make and how would you best support this argument?

This question raises a topic that will become very relevant for Chapter 9, but it is useful to introduce it here. What factors, other than the financial bottom line, should be considered in evaluating the performance of a firm? Students will consider social, economic, and environmental aspects.

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

Information on TBL can be found at http://www.economist.com/node/14301663.



There is an interesting critique of the TBL at http://www.businessethics.ca/3bl/ in areas of economics, environment, and economics.

4. Now that you have an understanding of corporate culture and the variables that impact it, how would you characterize an ethically effective culture, one that would effectively lead to a profitable and valuable long-term sustainability for the firm?

Walk students through a discussion on the definition and application of an ethically effective culture. Refer students to SustainAbility.org: http://www.sustainability.org, for an example of the elements of an ethical corporate culture. It is useful here to distinguish an ethically praiseworthy culture in principle from one that has been effectively applied in practice. In this regard, students can be directed to research Enron‘s corporate statements on ethics.

5. One element that surely impacts a firm‘s culture is its employee population. While a corporate culture can shape an employee‘s attitudes and habits, it will do so more easily if people who have already developed those attitudes and habits are hired in the first place. How would you develop a recruitment and selection process that would most successfully allow you to hire the best workers for your particular culture? Should you get rid of an employee who does not share the corporate culture? If so, how would you do that?

The University of Notre Dame has developed a document highlighting the importance of ethics in the recruitment process. The document lists the benefits of working for an ethical company, as well as the benefits of hiring ethical individuals.

The document also provides lists of unethical behaviors that employers and employees should avoid. A few examples of the questions listed are: 

Have you taken a course in ―business ethics?‖ What does ―business ethics‖ mean to you?



How have you dealt with a specific ethical issue either as a student or an employee?



What elements of your personal code of ethics influence you to make ethical decisions?



If you were asked by your supervisor to undertake an action that you thought was unethical, how would or did you respond? What about if it was your co-worker?

6. What are some of the greatest benefits and hazardous costs of compliance-based cultures?

Refer students to the chapter‘s discussion of benefits and costs of compliance-based cultures. Ask students to describe their own experiences in ―compliance-based‖ organizations, e.g., school, workplace, church, sports teams.

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7. Assume you have a number of suppliers for your global apparel business. You have in place a code of conduct both for your workplace and for your suppliers. Each time you visit a particular supplier, even on unannounced visits, it seems as if that supplier is in compliance with your code. However, you have received communications from that supplier‘s employees that there are violations. What should you do?

Suggestions for steps to take: interview the workers, do additional spot-checks, get locals to visit at unannounced times, interview former employees (if possible) for information about their practices.

8. You are aware of inappropriate behavior and violations of your firm‘s code of conduct throughout your operation. In an effort to support a collegial and supportive atmosphere, however, you do not encourage co-workers to report on their peers. Unfortunately, you believe that you must make a shift in that policy and institute a mandatory reporting structure. How would you design the structure, and how would you implement the new program in such a way that the collegiality that exists is not destroyed?

Suggestions might include: ensure anonymous reporting is available, maintain confidentiality, enforce a non-retaliation policy, provide a supportive culture, be proactive rather than reactive, model collegial and supportive behavior in all organizational practices.

9. Wasta is the term used in the United Arab Emirates (UAE) for favoritism. In the UAE, it is a highly valued element of the culture. In fact, while nepotism might be kept under wraps or discussed in hushed tones in an American firm, Wasta is more likely to be worn on one‘s sleeve among UAE professionals. It is precisely who-you-know that often dictates the position you might get in many companies or how fast you might get approved for certain processes. If you were assigned to build and then lead a team based in the UAE that would be comprised of both UAE nationals (called ―Emiratis‖) as well as U.S. ex-pats, how might you most effectively respond to this culture of historical and embedded preferential treatment, reflecting the local realities, while at the same time respecting your own or your home country‘s value structure, if different?

In a relationship-centric culture as the United Arab Emirates, simply putting the kibosh on preferential treatment via an anti-nepotism policy may be ineffective at the very least, and more likely regarded as naïve or desensitized to a culture in which these situations are not only possible but occur frequently. Policies should adequately account for certain realities. A good start would be to implement a training program that emphasizes the importance of employee and prospect qualification and performance and then takes into consideration wasta. To enhance the cohesiveness of the workforce, it would also be worthwhile to train foreign employees on the local emphasis on relationships and loyalty. For more insight, have a look at de Waal, A., and M. Frijns, "The influence of the UAE context on management practice in UAE business,‖ International Journal of Islamic and Middle Eastern Finance and Management, v. 9, no. 2 (2016), pp.236–253.

10. A large U.S.-based corporation has decided to develop a mission statement and then conduct training on a new ethics program. It engages you to assist in these endeavors.

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What activities would you need to conduct in order to complete this project? What are some of the concerns you should be sure to consider?

Direct students to the Ethics and Compliance Initiative (www.ethics.org), which provides a ―How To‖ on mission statements (at https://www.jisc.ac.uk/fullguide/vision-mission-and-values). Students should walk through the mission statement process step by step, ensuring that all stakeholders are invited to participate, that the mission applies to all levels of the firm, and that the mission will actually move the firm forward.

11. Put yourself in the position of someone who is establishing an organization from the ground up. What type of leader would you want to be? How would you create that image or perception? Do you create a mission statement for the firm and/or a code of conduct?

What process would you use to do so? Would you create an ethics and/or compliance program and how would you then integrate the mission statement and program throughout your organization? What do you anticipate might be your successes and challenges?

One can lead students in a discussion of this scenario in various ways. Small groups of students can be assigned to develop their own organizational culture. Students can be asked to interview small business owners, or student entrepreneurs, to learn how such things have been done elsewhere. Students can simply be asked to conduct an informal survey of local businesses to discover how many have their own code of ethics, mission statements, compliance programs, or ethics officers.

12. With regard to employee recognition in the workplace, what effects would a program like ―employee of the month‖ have on the corporate culture, and what factors might lead you to recommend it as a motivational program for your company?

Lead students in a discussion of previous personal experiences in the workplace.

Have they been involved in ―employee of the month‖ programs? Have they ever been the employee of the month? What impacts did it have on the corporate culture or the general atmosphere in the workplace and the work relationship between coworkers? What could have been improved to make the program more effective and impactful?

13. Identify an industry in which you would like to work and choose a company for whom you would like to work, ideally. Use the company's website to learn about their core values and culture in order to find your best fit and then please explain your choice.

Next, identify a company at which you would not like to work based on its core values and culture. Explain your reasons.

Lead students in a discussion to (1) identify the core values that are important to them, (2) how important it is to them that an employer share those values, (3) how they could go about identifying which companies do, indeed, share those values, and (4) how they could contribute to the value system of a potential employer or go about helping to change the values of the company for the better.

Appendix A: Case Report Assignment 5-91 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Ask students to choose one of the following companies (or any company that has been in the press) and develop a critical analysis of the ethical issues involved in the case. Their analysis should include the following:     

A short description of the case Identification of the ethical issues involved (what was the alleged ethical wrong done, and why is/was it wrong?)

A statement, in their own opinion, of whether it was wrong or not, and more importantly, why?

Thoughts on what could have been done to avoid the problem—do we need more laws and government regulation? What internal controls might have prevented this situation?

Was the problem more a matter of individuals gone wrong, or was it more systemic and organizational?

They will need to do some research to get at the facts, but beyond that students should be asked to rely on their own thinking.

This case analysis can be used either as a written assignment, or as reports that can be used as an ongoing means to begin class discussions.

Some examples: Legal Cases: Tyco Imclone WorldCom Adelphia Merrill Lynch Health South Al Dunlap and Sunbeam

Global Crossing NYSE and Richard Grasso Marsh and McLennan

Activist-lead Consumer Boycotts Walmart GAP L‘Oreal

Nike McDonalds Body Shop De Beers Nestlé Shell IM Chapter 5: Corporate Social Responsibility Chapter 5 continues to develop the framework introduced in the opening chapters. Chapters 1–3 introduced a decision-making model and focused on individuals as the agents of decisions. How should an individual employee, manager, executive decide what to do. However, we recognized that individual decision making occurs within an institutional context, and a full account of decision making must acknowledge that fact. Beginning in Chapter 3, but as the focus of Chapter 4, we introduce students to corporate culture as providing the context for individual decision making, and in which good or bad decisions can be reinforced, conditions, discouraged. With Chapter 5, we turn to that corporate institution itself as the agent of decision making and ask what responsibilities do businesses, and in particular corporations, have to the society in which they operate?

The opening quotation from former GOP presidential candidate Mitt Romney, ―Corporations are 5-92 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

people‖ is a helpful way to introduce some of these questions. Corporations are ―people‖ in the sense that, like people, they can have legal rights and duties. So, can it be said that, like people, they also have ethical rights and duties?

Chapter Objectives After reading this chapter, you will be able to: 1. Define corporate social responsibility.

2. Distinguish key components of the term responsibility.

3. Describe and evaluate the economic model of corporate social responsibility.

4. Describe and evaluate the stakeholder model of corporate social responsibility.

5. Describe and evaluate the integrative model of corporate social responsibility.

6. Explain the role of reputation management as motivation behind CSR. 7. Evaluate the claims that CSR is ―good‖ for business.

Opening Decision Point Internet Content, Section 230, and Social Responsibility We wrote this new Decision Point to open this chapter. Section 230 provides a very helpful case for examining the boundary between ethics and law as it demonstrates how obedience to the law is insufficient for being ethically and socially responsible. It also is easily connected to Chapter 1‘s discussion of the Separation Thesis. ―No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.‖ This sentence has been called the ―26 words that created the internet‖ and the most important words in the tech industry. The sentence is from Section 230 of a United States federal law, the Communications Decency Act of 1996, and is commonly referred to simply as Section 230. It is not an exaggeration to say that without Section 230, Facebook, Google, Twitter, YouTube, Internet Service Providers (ISPs), and all other internet-based companies that allow users to post information and upload videos (what is meant by an ―interactive computer service‖) would not exist as they do today. It is understandable why many think that this law created the internet.

What does Section 230 mean, and why is it so important? This law holds that any internet company that allows users to post or unload information cannot be treated as if they themselves spoke or published that information. Because they are not ―publisher or speaker,‖ they cannot be held legally responsible for the content of what was posted or uploaded. In short, they have broad legal immunity from harms caused by whatever might be posted, even if it is slanderous, libelous, misleading, false, fraudulent, harmful, or pornographic. As private businesses, the companies may choose to censor some posts, but they have both the freedom to allow most any content, and legal immunity for anything that is posted.

Discussion Questions: It is often said that business has a responsibility to its customers. Who are the ―customers‖ of Facebook, Google, Twitter, Instagram?; What responsibilities does Facebook have to them?

Using the cases described above, evaluate the claim that a company fulfills its social responsibilities as long as it obeys the law.

Is there anything ethically wrong with websites such as TheDirty?

The legal right of freedom of speech is a right against government censorship. Do private companies like Facebook and Twitter have a duty to respect free speech, or should they have a 5-93 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

right to limit what is said on their platform?

Facebook, Twitter, and all other social media platforms and software companies have a ―terms of usage‖ agreement that users acknowledge when they sign up for an account. To what degree does this mean that users have consented to these policies and practices?

Use the decision procedure described in Chapters 1 and 2 to analyze this case. What further facts would you need to know? What are the ethical issues involved? Who are the stakeholders involved in these cases?

The quote at the start of this chapter from Larry Fink, CEO of BlackRock, is taken from his annual letter to shareholders. This annual letter is readily available online and can be assigned each year to students for review and analysis. These letters are more statements of business philosophy than financial reports and are very relevant for an ethics class.

II.

Introduction a. This chapter addresses the nature of Corporate Social Responsibility (CSR) and how firms opt to meet and demonstrate their fulfillment of this perceived responsibility. i.

What Responsibility Does Business Have? At a minimum, it is indisputable that business has a social responsibility to obey the law. But is this enough?

1. Economists might also say that business has a social responsibility to produce the goods and services that society demands.

2. If a firm fails to meet society‘s interests and demands, it will simply fail and go out of business.

ii.

We can say that the primary question of CSR is the extent to which business has social responsibilities that go beyond producing goods and services within the law. *Chapter Objective 1 Discussed Below* b. Corporate Social Responsibility: Refers to the responsibilities that a business has to the society in which it operates. i.

From an economic perspective, a business is an institution that exists to produce goods and services demanded by society and, by engaging in this activity, the business creates jobs and wealth that benefit society further.

ii.

The law has created a form of business called corporations, which limits the liability of individuals for the risks involved in these activities. *Chapter Objective 2 Discussed Below* iii.

The economic model of CSR holds that business‘ sole duty is to fulfill the economic functions businesses were designed to serve.

1. On this narrow view, the social responsibility of business managers is simply the pursuit of profit within the law.

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2. Because profit is an indication that business is efficiently and successfully producing the goods and services that society demands, profit is a direct measure of how well a business firm is meeting its society‘s expectations.

3. Corporations are expected to obey the legal mandates established by the society.

4. This economic model of CSR denies that business has any social responsibilities beyond the economic and legal ends for which it was created. iv.

v.

vi.

Profit-Based Social Responsibility: Milton Friedman‘s 1970 New York Times article ―The Social Responsibility of Business Is to Increase Its Profits‖ is perhaps best known as an argument for this economic model, or profit-based, social responsibility of business.

1. Friedman does not ignore ethical responsibility in his analysis; he suggests that decision makers are fulfilling their responsibility if they follow their firm‘s self-interest in pursuing profit.

2. Friedman explains that a corporate executive has a responsibility to conduct business in accordance with their employer‘s desires, which generally will be to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom.

This edition introduces the phrase ―managerial capitalism‖ to identify this perspective. This phrase is described as the theory that the primary obligation of business managers is to serve the interests of stockholders by maximizing profits.

This view of corporate social responsibility has its roots in the utilitarian tradition and in neoclassical economics.

1. As agents of business owners, the contention is that managers do have social responsibilities—their primary responsibility is to pursue maximum profits for shareholders. By pursuing profits, a business manager will allocate resources to their most efficient uses.

2. Consumers who most value a resource will be willing to pay the most for it; so, profit will continuously work toward the optimal satisfaction of consumer demand which, in one interpretation of utilitarian, is equivalent to maximizing the overall good.

c. Debates concerning CSR start with alternatives to the narrow view expressed by Friedman and others. i.

As alternatives to the economic model, we describe three models that provide a helpful way to understand debates surrounding corporate social responsibility: the economic model, the stakeholder model, and the integrative model.

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*Chapter Objective 3 Discussed Below* a. The words responsible and responsibility are used in several different ways. i.

When we say that a business is responsible, we might mean that it is reliable or trustworthy.

ii.

A second meaning of responsible involves attributing something as a cause for an event or action.

iii.

A third sense involves attributing liability or accountability for some event or action creating a responsibility to make things right again.

1. For example, that a business is responsible for a polluted river is not only to say that the business caused the pollution but that the business is at fault for it and should be held accountable.

iv.

Laws regarding product safety and liability involve many of these meanings of being responsible.

1. When a consumer is injured, for example, a first question is to ask if the product was responsible for the injury, in the sense of having caused the injury.

2. For example, several years ago, a controversy developed over the drug Vioxx—some evidence suggested that Vioxx was responsible for causing heart attacks in some users. The debates that followed addressed two questions: Was Vioxx the cause of the heart attacks?

Was Merck at fault, that is, should it be held legally liable for the heart attacks? More recently, a jury concluded that Monsanto‘s Round-Up was responsible for causing certain cases of cancer.

3. Both ethics and tort law involved the question of liability or fault for causing harm.

v.

It is the sense of responsibility as accountability that is at the heart of CSR. Corporate social responsibility refers to those actions for which a business can be held accountable.

1. We can think of responsibilities as those things that we ought, or should, do even if we would rather not.

2. Responsibilities bind, or compel, or constrain, or require us to act in certain ways.

3. We can be expected to act in order to fulfill our responsibilities; and we will be held accountable if we do not.

4. To talk about corporate social responsibility is to be concerned with society‘s interests that should restrict or bind business‘ behavior.

5. Social responsibility is what a business should or ought to do for the sake of society, even if this comes with an economic cost.

vi.

Philosophers often distinguish three different levels of responsibilities in this sense on a scale from more to less demanding or binding: 5-96

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1. The most demanding responsibility is the responsibility not to cause harm to others: often called duty or obligation, obliges us in the strictest sense. For example, a business ought not to sell a product that causes harm to consumers, even if there would be a profit in doing so.

2. The second, less binding, responsibility is to prevent harm even in those cases where one is not the cause. These are so-called good Samaritan 3. Finally, there might be responsibilities to do good, such as volunteering and charitable work. vii.

Is there a duty not to cause harm?

1. The strongest sense of responsibility is the duty not to cause harm.

Even when not explicitly prohibited by law, ethics would demand that we not cause avoidable harm.

2. If a business causes harm to someone and, if that harm could have been avoided by exercising due care or proper planning, then both the law and ethics would say that business should be held liable for violating its responsibilities.

3. In practice, this ethical requirement is the type of responsibility established by the precedents of tort law. When it is discovered that a product causes harm, then business can appropriately be prevented from marketing that product and can be held liable for harms caused by it. a. For example: Businesses are restricted in marketing products that have been proven to cause cancer and other serious medical harms.

viii.

Is there a responsibility to prevent harm?

1. There are other cases in which a business is not causing harm but could easily prevent harm from occurring.

2. A more inclusive understanding of corporate social responsibility would hold that business has a responsibility to prevent harm.

3. Example: Merck‘s drug, Mectizan, prevents river blindness, a disease prevalent in tropical nations—infecting between 40 and 100 million people annually. A single tablet of Mectizan administered once a year can relieve the symptoms and prevent the disease from progressing.

Mectizan would not be a very profitable drug to bring to market considering the low demand and the target audience being among the poorest people living in the poorest regions of Africa, Asia, Central America, and South America. However, in 1987, Merck started a program to provide Mectizan free of charge, forever. Merck‘s actions were explained in part of its corporate identity statement: ―We are in the business of preserving and improving human life.‖ 4. Clearly, Merck was not responsible for causing river blindness, thus, according to the standard of CSR, they had no social responsibility, 5-97

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but their executives saw this issue differently. They felt that they did have a social responsibility to prevent a disease easily controlled by their patented drug. ix.

Is there a responsibility to do good?

1. The third, and perhaps most wide-ranging, standard of CSR would hold that business has a social responsibility to do good things and to make society a better place.

2. Corporate philanthropy would be the most obvious case in which business takes on a responsibility to do good.

3. Corporate giving programs to support community projects in the arts, education, and culture are clear examples. Some corporations have a charitable foundation or office that deals with such philanthropic programs. *Reference: ―Reality Check—Corporate Philanthropy: How Much Do Corporations Give?‖* This case has been updated with more current data.

4. Many of the debates surrounding corporate social responsibility involve the question of whether business really has a responsibility to support these valuable causes.

5. Some argue that, like all cases of charity, this is something that deserves praise and admiration; but it is not something that every business ought to do.

6. Others argue that business does have an obligation to support good causes and to ―give back‖ to the community, as a sense of gratitude and thankfulness—something less binding than a legal or contractual obligation, but more than a simple act of charity. *Reference: ―Figure 5.1—Models of Corporate Social Responsibility”* The models of CSR introduced in Figure 5.1 are revised from the earlier edition of this text. For the sake of simplicity, we now distinguish only THREE models: the ―Economic Model‖ which corresponds to the Friedman, free-market, ―dominant model‖ discussed previously, the ―Stakeholder model‖ which replaces the former ―social web model‖ and now more explicitly focuses on stakeholder theory, and the ―Integrative model,‖ which has been reworked to emphasize benefit corporations. *Chapter Objective 4 Discussed Below* *Reference: Reality check—Profits: Pursue, Increase, or Maximize?

This Reality Check was recently added to the text. There is ambiguity in many discussions concerning the financial responsibility of management. One need only look in the classic article by Friedman, in which he argues that the responsibility of management is to (1) increase profits and to (2) make as much money as possible. The ambiguity and confusion is compounded when one adds the time range: Over what period of time? This Reality check should help students more deeply analyze the apparent tension between financial and social goals. *Reference: ―Reality Check—Putting Your Money Where Your Mouth Is?‖* 5-98 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

7. Peruse the program at a local art gallery museum theater school event and you will likely see a list of local businesses as donors or sponsors who have contributed to the event. The social contribution is as much an investment as it is a contribution since the business gets recognition and advertising in the program. x.

There are also cases in which business contributes to social causes without seeking any reputational benefits.

1. Some firms contribute to charity anonymously.

2. Some support causes that have little or no business or financial payoff as a matter of giving back to their communities.

3. One may contend that corporate support for these social causes is done imply because it is the good and right thing to do.

4. Others would suggest that the business has concluded that the society in which the firm does business is a stronger or better one if this particular activity exists.

xi.

Situations where a business supports a social cause for the purpose of receiving a business benefit in return are not much different from the economic view of CSR. 1. In these cases, a business manager exercises managerial discretion in judging the social contribution will have economic benefits.

2. There is a great deal of overlap between decision makers who engage in the philanthropic model for reputational reasons and those who follow the economic view of business‘ social responsibilities.

xii.

The philanthropic model in which business support for a social cause is done simply because it is the right thing to do differs from the reputational version only in terms of the underlying motivation.

1. In one case, the social good is done as a means to economic ends.

2. In the other case, the social good is done as an end in itself.

3. From the perspective of the economic model, only philanthropy done for reputational reasons and financial ends is ethically responsible.

4. From the perspective of the philanthropic model, philanthropy done for financial reasons is not fully ethical and not truly an act of social responsibility. *Chapter Objective 5 Discussed Below* IV. Stakeholder Model of CSR a. The stakeholder model of CSR contains a variety of perspectives which all share in common the view that business exists within a web of social relationships. i.

Views business as a citizen of the society in which it operates and, like all members of a society, business must conform to the normal ethical duties and obligations that we all face.

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1. While producing goods and services and creating wealth and profits are among business‘ responsibilities, they do not trump other ethical responsibilities that equally bind all members of a society. ii.

Philosopher Norman Bowie has defended one version of CSR that would fall within this social web model.

1. Bowie argues that beyond the economic view‘s duty to obey the law business has an equally important ethical duty to respect human rights.

2. Respecting human rights is the ―moral minimum‖ that we expect of every person whether they are acting as individuals or within corporate institutions.

3. Bowie identifies his approach as a ―Kantian‖ theory of business ethics.

He begins with the distinction between the ethical imperatives to cause no harm to prevent harm and to do good. a. People have a strong ethical duty to cause no harm, and only a prima facie duty to prevent harm or to do good. b. The obligation to cause no harm, in Bowie‘s view, overrides other ethical considerations.

4. Bowie accepts the economic view that managers are the agents of stockholder owners and thus they also have a duty to further the interests of stockholders.

5. According to Bowie, as long as managers comply with the ―moral minimum‖ and cause no harm, they have a responsibility to maximize profits.

6. Bowie would argue that business has a social responsibility to respect the rights of its employees, even when not specified or required by law.

7. But the contractual duty that managers have to stockholder-owners overrides the responsibility to prevent harm or to do (philanthropic) good.

b. Stakeholder Theory i.

Stakeholder Theory is perhaps the most influential version of CSR that would fall within the social web model.

1. Stakeholder theory begins with the recognition that every business decision affects a wide variety of people benefiting some and imposing costs on others.

2. Business decisions produce far-ranging consequences to a wide variety of people. Every decision involves the imposition of costs, in the sense that every decision involves opportunities forgone, choices given up.

3. Stakeholder theory recognizes that every business decision imposes costs on someone and mandates that those costs be acknowledged.

4. Any theory of corporate social responsibility must then explain and 5-100

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defend answers to the questions: For whose benefit and at whose costs should the business be managed? ii.

The economic model argues that the firm should be managed for the sole benefit of stockholders. This view is justified by the appeal to the rights of owners, the fiduciary duty of managers, and the social benefits that follow from this arrangement.

iii.

Stakeholder theory argues on factual, legal, economic, and ethical grounds that the economic model is an inadequate understanding of business.

1. R. Edward Freeman has offered a defense of the stakeholder model in his essay, ―Managing for Stakeholders.‖ He describes both a narrow and a wider understanding of the concept of a ―stakeholder.‖ a. In a narrow sense, a stakeholder includes anyone who is vital to the survival and success of the corporation. b. More widely, a stakeholder could be ―a group or individual who can affect or be affected by the corporation.‖ 2. As a descriptive account of business, the classical stakeholder model ignores over a century of legal precedent arising from both case law and legislative enactments.

3. As a matter of law, it is simply false to claim that management can ignore duties to everyone but stockholders.

4. Corporate management must limit their fiduciary duty to stockholders in the name of the rights and interests of various constituencies affected by corporate decisions.

5. Factual, economic considerations also diminish the plausibility of the economic model. The wide variety of market failures in economics show that even when managers pursue profits, there are no guarantees that they will serve the interests of either stockholders or the public.

iv.

The economic model appeals to two fundamental ethical norms for its justification: (1) utilitarian considerations of social well-being; (2) individual rights.

v.

The stakeholder theory requires management to balance the ethical interests of all affected parties, much like utilitarianism requires management to consider the consequences of its decisions for the well-being of all affected groups.

1. According to the rights-based ethical framework, the overriding moral imperative is to treat all as ends and never as means only.

vi.

The stakeholder theory argues that a wider ―stakeholder‖ theory of corporate social responsibility is proven ethically superior.

vii.

Freeman argues that the ―stakeholder‖ theory does not give primacy to one stakeholder group over another, although there will be times when one 5-101

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group will benefit at the expense of others. viii.

Firms exist in a web of relationships with many stakeholders and these relationships can create a variety of responsibilities. It may not be possible to satisfy the needs of each and every stakeholder in a situation; therefore, social responsibility would require decisions to prioritize competing and conflicting responsibilities.

Reality Check: What Is the Purpose of a Corporation According to Leading Corporate CEOs? This reality check has been updated to include more from BlackRock‘s CEO Larry Fink. When combined with the Business Roundtable, this can provide a healthy reminder to students that the ―shareholder primacy‖ model defended by many is out of step with many actual business leaders. In August 2019, the Business Roundtable, an organization comprised of CEOs of many of the world‘s largest corporations, issued a statement on the purpose of a corporation. This statement asserts as a ―fundamental‖ principle that the purpose of a corporation is to serve all stakeholders.

For over 20 years, the Business Roundtable had endorsed the principle of shareholder primacy as the fundamental corporate purpose. Shareholder primacy, of course, is another way of expressing the perspective that this chapter identifies as the economic model of CSR, or managerial capitalism. As of February 2020, the CEOs of more than 160 of the world‘s largest corporations have signed onto this statement. Further information and updates can easily be found on the Business Roundtable website as well online for the BlackRock annual shareholder letter.

V.

Integrative Model of CSR a. Much of CSR literature assumes a tension between the pursuit of profit and social responsibility. But, there have always been organizations that turn this tension around and pursue social ends as the very core of their mission. b. There is growing recognition that some for-profit organizations have social goals as a central part of the strategic mission of the organization. i.

In two areas in particular, social entrepreneurship and sustainability, we find for-profit firms that do not assume a tension between profit and social responsibility.

1. The Grameen Bank is one example of the growing movement of social entrepreneurship.

2. Firms that make environmental sustainability as central to their mission, such as Interface Corporation, are an example of sustainability. *Reference: ―Reality Check—Benefit Corporations‖* The topic of Benefit corporations, or ―B-Corps,‖ was the focus of the opening decision scenario of the previous edition. We moved that topic into the chapter as a reality check case of the integrative model of CSR. 5-102 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

ii.

Because these firms bring social goals into the core of their business model and fully integrate economic and social goals, we refer to this as the integrative model of CSR. 1. Even defenders of the narrow economic model of CSR, such as Milton Friedman, would agree that owners of a firm are free to make the pursuit of social goals a part of their business model. They would just disagree that these social goals should be part of every business‘s mission.

2. For a clear articulation of arguments surrounding each of the CSR models, see the article ―Rethinking the Social Responsibility of Business,‖ reprinted at the end of this chapter.

iii.

Social entrepreneurs demonstrate that profit is not incompatible with doing good, and therefore that one can do good profitably. *Reference: ―Reality Check—Fairness in a Cup of Coffee: Example of the Integrative Model‖* iv.

However, there are some who would argue that the ethical responsibilities associated with sustainability are relevant to every business concern.

1. Sustainability offers a model of CSR that suggests that ethical goals should be at the heart of every corporate mission.

c. The Implications of Sustainability in the Integrative Model of CSR: As a topic within CSR, sustainability holds that a firm‘s financial goals must be balanced against and perhaps even overridden by environmental considerations. i.

Defenders of this approach point out that all economic activity exists within a biosphere that supports all life.

ii.

They argue that the present model of economics, and especially the macroeconomic goal of economic growth, is already running up against the limits of the biosphere‘s capacity to sustain life.

iii.

Fundamental human needs for goods such as clean air, water, nutritious food, and a moderate climate are threatened by the present dominant model of economic activity.

1. From this perspective, the success of a business must be judged not only against the financial bottom line of profitability but also against the ecological and social bottoms lines of sustainability.

2. A firm that is financially profitable but that uses resources at unsustainable rates and that creates wastes at rates that exceed the Earth‘s capacity to absorb them is a business or industry that is failing its fundamental social responsibility.

3. A firm that is environmentally unsustainable is also a firm that is financially unsustainable in the long term.

iv.

A business model that ignores the biophysical and ecological context of its 5-103

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activities is a business model doomed to failure. *Reference: ―Reality Check—Will Sustainability Reports Replace the Annual Financial Reports?”* *Teaching Note: It is becoming common to find corporations moving from Sustainability Reporting to ESG reports. ESG stands for Environmental, Social, and Governance and are increasingly being applied in financial analyses as a measure of a corporation‘s success in managing risks and opportunities beyond financial.

Engage students in a discussion about whether or not they would use a company‘s sustainability or ESG report to evaluate a company that they were considering working for. Why or why not? Also ask the students whether or not they would use the sustainability report to evaluate the company if they were thinking of investing in it. Again, discuss why they would or would not consider the sustainability report when making this decision. *Chapter Objective 7 Discussed Below* VI. Exploring Enlightened Self-Interest: Does ―Good Ethics‖ Mean ―Good Business?‖ a. ―If business does not serve society, society will not long tolerate our profits or even our existence.‖ CSR not only provides benefits to society but it can also benefit an organization by securing its place within a society. b. But are there other reasons self-interested and economic for a business to engage in socially responsible activities? Can we make a ―business case‖ for CSR? i.

Perhaps the most obvious answer to this question is that CSR can improve a firm‘s reputation within a community, which can improve profitability by improving a company‘s standing among its stakeholders, including consumers and employees.

ii.

Some evidence suggests that employees who are well treated in their work environments may prove more loyal and more effective and productive in their work.

1. Liz Bankowshi director of social missions at Ben & Jerry‘s Homemade Ice Cream Company claims that 80 to 90% of Ben & Jerry‘s employees work there because ―they feel they are part of a greater good.‖ 2. The positive impact on the bottom line, therefore, stems from customer preference and employee preference.

iii.

The problem with a focus on reputation, however, is that social responsibility can then become merely social marketing.

iv.

A firm may use the image of social responsibility to garner customer support or employee loyalty while the facts do not evidence a true commitment.

1. Paul Hawken cofounder of Smith & Hawken gardening stores and an 5-104

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advocate of business social responsibility reminds us that: ―[y]ou see tobacco companies subsidizing the arts then later you find out that there are internal memos showing that they wanted to specifically target the minorities in the arts because they want to get minorities to smoke. That‘s not socially responsible. It‘s using social perception as a way to aggrandize or further one‘s own interests exclusively.‖ 2. Procter & Gamble Co. was harshly criticized by respondents to a survey seeking to rank firms on the basis of their corporate philanthropy. Respondents contended that P&G did ―absolutely nothing to help‖ after the September 11 tragedy. However in truth, P&G provided more than $2.5 million in cash and products but simply did not publicize that contribution. c. Reputation Management: practice of caring for the ―image‖ of a firm.

There is nothing inherently wrong with managing a firm‘s reputation but observers might challenge firms for engaging in CSR activities solely for the purpose of impacting their reputations. The challenge is based on the fact that reputation management often works! *Reference: ―Figure 5.2—The Construction of Corporate Reputation” i.

1. If a firm creates a good image for itself, it builds a type of trust bank— consumers or other stakeholders seem to give it some slack if they then hear something negative about the firm.

2. Similarly if a firm has a negative image that image may stick regardless of what good the corporation may do.

3. Plato explored this issue when he asked whether one would rather be an unethical person with a good reputation or an ethical person with a reputation for injustice. You may find that if given the choice between the two, companies are far more likely to survive under the first conception than under the second. *Reference: Reality Check—“Enron and BP as „Most Admired‟”* ii.

Check out the perspectives of various consumer and advocacy groups in connection with well-known businesses at any of the following websites:  

www.ihatestarbucks.com www.starbucked.com

iii.

In some ways, reputation may often be more forceful than reality.

1. For example: Shell Oil has publicized its efforts toward good citizenship in Nigeria; but it has an unfortunate record in terms of its responsiveness to spills, and its community development projects have created community rifts in areas around oilfields.

iv.

Is good ethics also good business? The larger question involves the 5-105

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possible correlation between profits and ethics.

1. One important justification offered for CSR, what is often called enlightened self-interest, presumes that it is or at least it can be.

2. Theorists continue to dispute whether ethical decisions lead to more significant profits than unethical decisions.

3. While we are all familiar with examples of unethical decisions leading to high profits, there is general agreement that in the long run ethics pays off. However, the measurement of that payoff is a challenge and sometimes the long-term value is not as evident or obvious. *Chapter Objective 8 Discussed Below* d. Is there a business case for a return on investment from ethics? i.

There is evidence that good ethics is good business; yet the dominant thinking is that if it cannot be measured, it is not important. As a result, efforts have been made to measure the bottom-line impact of ethical decision making.

ii.

Measurement is critical because the business case is not without its detractors. For example, David Vogel, a political science professor at Berkeley, contends that while there is a market for firms with strong CSR missions, it is a niche market and one that therefore caters to only a small group of consumers or investors.

1. Vogel argues that CSR should be perceived as one option for a business strategy that might be appropriate for certain types of firms under certain types of conditions, such as well-known brand names whose reputations are subject to threats by activists.

2. He warns of the exposure a firm might suffer if it does not live up to its CSR promises.

3. Vogel also cautions against investing in CSR when consumers are not willing to pay higher prices to support that investment.

4. While this argument is persuasive, research suggests the contrary to be true on numerous counts, most predominantly, the overall return on investment to the company.

iii.

Evidence of Impact: A recent study entitled, ―Developing Value: The Business Case for Sustainability in Emerging Markets,‖ provides evidence that in emerging markets, cost savings, productivity improvement, revenue growth, and access to markets were the most important business benefits of sustainability activities.

1. Environmental process improvements and human resource management were the most significant areas of sustainability activities.

2. The report concludes that it does pay for businesses in emerging markets to pursue a wider role in environmental and social issues, citing cost reductions productivity revenue growth and market access 5-106

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as areas of greatest return for multinational enterprises (MNEs). e. Outcomes to Ethics Programs: Studies have found a number of expected and measurable outcomes to ethics programs in organizations. i.

Some people look to the end results of the firms that have placed ethics and social responsibility at the forefront of their activities, while others look at the firms that have been successful and try to determine the role that ethics may have played in that success. *Reference: ―Reality Check—So They Say‖* ii.

Quantifiable measurements can perhaps serve as proxies for success, to some extent, or at least would be unlikely to occur in a company permeated by ethical lapses.

iii.

Link to Financial Performance? Professors Stephen Erfle and Michael Frantantuono found that firms that were ranked highest in terms of their records on a variety of social issues (including charitable contributions, community outreach programs, environmental performance, advancement of women, and promotion of minorities) had greater financial performance as well.

iv.

Another study by Murphy and Verschoor found that the overall financial performance of the 2001 Business Ethics magazine Best Corporate Citizens was significantly better than that of the remaining companies in the S&P 500 index based on the 2001 Business Week ranking of total financial performance.

1. The researchers also found that these same firms had a significantly better reputation among corporate directors, security analysts, and senior executives.

2. The same result was found in a 2001 Fortune survey of Most Admired Companies.

3. The UK-based Institute of Business Ethics did a follow-up study to validate these findings and found that from the perspectives of economic value added, market value added, and the price-earnings ratio, those companies that had a code of conduct outperformed those that did not over a 5-year period.

4. The higher performance translated into significantly more economic value added, a less volatile price/earnings ratio, and 18% higher profit/turnover ratios.

5. This study ―gives credence to the assertion that ‗you do business ethically because it pays.‘‖

f. Does a Social Responsibility of Business Exist? i.

The responsibility may be based in a concept of good corporate citizenship, a social contract, or enlightened self-interest.

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ii.

It is impossible to engage in business today without addressing CSR.

iii.

Despite substantial differences among companies, research demonstrates that almost all companies will confront CSR issues from stakeholders at some point in the near future. *Reference: Opening Decision Point Revisited— This review addresses the question of how social media platforms might use Artificial Intelligence (AI) to monitor content and challenges a common response to criticisms (by Mark Zuckerberg among others) that companies lack the ability to monitor and control unethical content. Students might be asked to research the present status of proposals in Congress to modify Section 230.

End of Chapter Questions Projects and Exercises

1. What is your overall perspective on CSR after reviewing this chapter? If market forces do not encourage responsibility for social causes, should a firm engage in this behavior?

Does social responsibility apply only to firms or do consumers have a responsibility as well to support firms that take socially responsible action and withhold our support from firms that fail to exhibit socially responsible behavior? If we stand by and allow irresponsible actions to take place using profits made on our purchases, do we bear any responsibility? 

How did you reach your decision? What key facts do you need to know in order to judge a firm‘s actions or your complicity in them by supporting a firm with your purchases or other choices?



How do you determine responsibility? Do you pay attention to these issues in your purchases and other choices?



Would you be more likely to support a company by purchasing its products or services if the company (a) donated a portion of the proceeds to a cause that was important to you; (b) paid its workers a ―fair‖ wage (however you would define that concept); or (c) was a good investment for its stockholders? Which consequence is more influential to you? On the contrary, would you refrain from purchasing from a firm that failed in any of those areas?



How do the alternatives compare? Do you believe different purchasing decisions by consumers could really make a difference?

To stimulate discussion, refer students to the concept of corporate social responsibility.

2. Which of the three models of CSR is most persuasive to you and why? Which do you believe is most prevalent among companies that engage in CSR efforts?

Students should refer to the four models of CSR that are defined in the chapter (Economic, Stakeholder, and Integrative).

3. This chapter has asked in several ways whether the social responsibility of the companies 5-108 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

you patronize has ever made any difference to your purchasing decisions. Will it make any difference in the future as a result of what you have learned? Consider your last three largest purchases. Go to the websites of the companies that manufacture the products you bought and explore those firms‘ social responsibility efforts. Are they more or less than what you expected? Do your findings make a difference to you in terms of how you feel about these firms your purchases and/or the amount of money you spent on these items?

For those students who have not found websites prior to class discussion, here are a few examples that can be used: 

McDonald‘s ―Values in Action‖ Page: http://www.mcdonalds.com/us/en/our_story/values_in_action.html



Nike‘s ―Responsibility‖ Page: http://www.nikeinc.com/pages/responsibility



Adidas‘s ―Sustainability‖ Page: http://www.adidasgroup.com/en/sustainability/welcome.aspx



Dell‘s ―Corporate Responsibility‖ Page: http://content.dell.com/us/en/corp/cr.aspx?c=us&l=en&s=corp&~ck=mn

4. One of the leading figures in the Enron debacle was company founder Kenneth Lay who died in mid-2006 after his conviction for fraud and conspiracy but before he began serving his sentence. Prior to the events that led to the trial and conviction, Lay was viewed in Houston as one of its ―genuine heroes‖ and Enron was a ―shining beacon‖ according to a professor at Rice University in Houston. The Houston Astros‘ field was named after Enron when the company gave the Astros a large grant. Enron also gave money to local organizations such as the ballet and national organizations based in Houston such as United Way. The Lay family supported Houston‘s opera and ballet its Holocaust Museum the University of Texas MD Anderson Cancer Center and other charitable organizations. If you were on the jury, would any of this information be relevant to your decision about Mr. Lay‘s guilt or innocence? If your jury had determined that Mr. Lay was guilty, would any of this information be relevant to your decision about the sentence you would then impose? Defend your decision from an ethical perspective.

Although Lay is often portrayed in the media as a wrongdoer, he was more of a dogooder in Houston society at one time. This question asks whether that should have been at all relevant to his later sentencing. To learn more, you may wish to direct students to a few articles that described the history of the ―fallen hero‖: 

60 Minutes Interview: https://www.cbsnews.com/news/enrons-ken-lay-iwas-fooled-11-03-2005/



BBC News: http://news.bbc.co.uk/1/hi/business/1779445.stm



And just for kicks an article that argues that Ken Lay was not such a bad guy after all (at least not when you compare him to some really worse white collar criminals out there): https://mises.org/library/ken-lay-reallycriminal

5. In 2005, Nestlé S.A. CEO Peter Braeck-Letmathe explained ―Companies shouldn‘t feel 5-109 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

obligated to ‗give back‘ to communities because they haven‘t taken anything away.

Companies should only pursue charitable endeavors with the underlying intention of making money. It is not our money we‘re handing out but our investors‘. A company‘s obligation is simply to create jobs and make products. What the hell have we taken away from society by being a successful company that employs people?‖ Which model of CSR would the Nestlé CEO advocate and do you agree with his assessment?

Refer students to the pages mentioned in Question 2 discussing the three models of CSR. 6. Supermodel Kate Moss appeared in photos in a number of tabloid magazines and elsewhere using illegal drugs. Subsequent to the appearance of the photographs several of her clients including Chanel H&M and Burberry cancelled their contracts (some only temporarily) with her or determined that they would not renew them when they became eligible for renewal. Other clients opted to retain her services preferring to ―stand by her‖ during this ordeal. Ms. Moss issued a statement that she had checked herself into a rehabilitation center for assistance with her drug use. Assume that you are the marketing vice president for a major global fashion label that is a current client of Ms. Moss at the time of these events. Use the ethical decision-making process to evaluate how to respond to the situation. What is your decision on what to do?

An article on Kate Moss attached to this chapter as Appendix A will help in guiding student discussion.

7. What kind of organization would you like to work for? What would be the best? What would be the most realistic? Think about its structure, physical environment, lines of communication, treatment of employees, recruitment and promotion practices, policies toward the community, and so on. Consider also however what you lose because of some of these benefits (e.g., if the company contributes in the community or offers more benefits for employees, there might be less money for raises.)

Discuss trade-offs. Link the costs and benefits (utilitarianism) to the value of what the firm is doing (universalism).

8. Take another look at the quote earlier in this chapter by Paul Hawken. He seems to be saying that it is not acceptable to use social perception as a way to further one's own interests (exclusively). Now find the Smith & Hawken site on the web and any additional information you can locate regarding Smith & Hawken or Paul Hawken and CSR. Would you identify Smith & Hawken as a firm interested in CSR? Would you identify Mr. Hawken as an individual interested in CSR or personal social responsibility? Which model of CSR would you suggest that Mr. Hawken supports?

Students can look at the website www.paulhawken.com to read about Paul Hawken and his work starting ecological businesses, writing about the impact of commerce on living systems, and consulting with heads of state and CEOs on economic development, industrial ecology, and environmental policy. In addition, refer students to the models of CSR in this chapter.

9. Given the significant financial power that a retailer and sponsor like Nike can have in the sports world, does it have any obligation to use that power to do good in connection with 5-110 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

its particular industry? A 2006 New York Times article ―Coaches Like Graham Still Have Their Sponsors‖ suggested that ―(m)ore than television packages more than attendance at the gate track and field is driven by shoe company dough. Nike could if it chose threaten to pull its financial support from the coaches and trainers of athletes who are barred for doping violations. For years the caretakers of the athletes have also been suspected as the doping pushers. Curiously Nike hasn't fallen in line with everyone else calling for strict liability among coaches trainers and athletes.‖ The article instead suggests that Nike does not benefit when a star falls from glory so it tends to shy away from this area of oversight. In fact it goes so far as to say that ―Nike is the doping society's enabler.‖ Can you make the argument that Nike has an obligation to intervene? Or if you do not agree with an argument for its responsibility to do good, could you instead make an economic argument in favor of intervention?

Lead students in a discussion of the ethical and moral obligations (or lack thereof) of the shoe companies that sponsor athletes who have been accused of or charged with doping violations.

10. Make a list of the five products on which you have spent the most money over the past 3 years. Using the internet, find corporate sustainability reports for the companies that produced those products or that had some responsibility in their production. Are you able to find a sustainability report for each company? What can you determine about the company‘s sustainability efforts by reviewing these reports? Can you determine anything about their sincerity? Do you perceive that the company is undergoing a fundamental transformation in its efforts to sustainability, or does it seem more a matter of windowdressing (or, in other words, for the sole purpose of reputation)?

Lead students in a discussion of whether consumers should learn more about which companies produce sustainability reports and the contents of those reports before deciding where to spend their money. Discuss whether or not it matters if the company is sincere in its sustainability efforts—why or why not?

APPENDIX A October 2005 KATE MOSS—A MODEL FOR Corporate Social Responsibility (CSR)?

By Ivor Hopkins Director MHC International Ltd. 1. Background: Kate Moss, a Super Model, is filmed recently on a mobile phone apparently snorting cocaine in the company of her singer boyfriend (and others): a picture of this makes its way to the front page of The Daily Mirror, a British tabloid. Her clients major fashion houses like Chanel H&M and Burberry either cancel their contracts with her or state that they will not be renewing them.

Her reputation is badly tarnished and she makes a public apology. With the authorities now interested in her possession of illegal substances and questions being raised about her suitability as the single mother of a 2-year old, she states that she takes complete responsibility for her actions and checks into a rehabilitation clinic in the United States.

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"DRUGGIE KATE'S A MODEL IDIOT" screams Carole Malone in The Sunday Mirror: She doesn't think she's sick—she thinks she's the coolest chick on the planet. She believes that even though she's off her head most nights she's still totally in control. She even believes that after three-day benders where she passes out in her own vomit she can still juggle her multi-million contracts with A-list companies like Chanel Burberry and Dior.

Which just shows what a deluded little fool she has become. Does Moss actually believe pictures of her snorting big fat lines of coke and stumbling out of hotel rooms looking wrecked is the kind of image Chanel wants to promote its products? When they signed her up they bought an icon not the out-of-control idiot she is now.[1] My initial reaction to the breaking story was similar: She has gone too far broken the law and the subsequent loss of her contracts really does serve her right. The Observer though gave me a different angle: In the ongoing tabloid-led witch-hunt it is worth remembering that the Myth of Moss was created and sustained by us—the media and the public—and that she is an icon because we made her one. No matter how much we might have willed it though she was never a role model in the accepted sense. Burberry knew that. Chanel knew that. Rimmel knew that. They hired her for her edge and her outlaw cool as much as for her good looks and her sex kitten allure. In short they too bought into the Myth of Moss in all its chemical potency.[2] Further when you then know that her biography is entitled Kate Moss: Model of Imperfection,[3] then you can see that double standards are at work here which puts the response of the main companies she worked for as well as the response from the media in a different light.

Would things have turned out differently for Kate Moss if Corporate Social Responsibility had been at play? And if CSR principles are brought to bear on the main players in this sorry drama, is there anything that we can learn from it? Using Michael Hopkins‘ definition of CSR that "CSR is the integration of business operations and values whereby the interests of all stakeholders including customers employees investors the community and the environment are reflected in the company's policies and actions,[4]" let us have a look at the key players in turn: o the companies who pay to support and use Kate Moss' beauty and celebrity status; o the print media who report and comment on stories like this; o Government legislation which makes cocaine illegal; o consumers like us of both fashion and the news; o Kate Moss the Fashion Icon with feet of clay.

2. The Fashion Companies H&M cancelled its contract with Kate Moss. The company has a code of conduct which supports the fight against drugs through Mentor and has a CSR Report 2005 that states in the communication and marketing section: [1]

Carole Malone in The Sunday Mirror, 18 September 2005.

Sean O'Hagan, ―The breaking of Kate,‖ The Observer digital edition, News (Sunday September 25, 2005), p. 26.

[3] Katherine Kendall 2005.

[4] www.mhcinternational.com [2]

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The models portrayed in our advertisements should be healthy and wholesome. H&M actively chooses not to work with models who are too young or too thin or models suffering from eating disorders or drug or alcohol abuse.

This is a clear statement and they made a clear decision. The only niggle that I have is that given Kate Moss' history and wild child image, why did they hire her as a face in the first place?

Burberry Group PLC is one of a group of companies owned by GUS who have a CR Report for 2005 although it is not specific to Burberry and not mentioned on the Burberry website. In the GUS CR Report 2005, they mention the importance of ―sharing a set of values that mean something to us‖ but I could not find a list or further exploration of these values. They are obviously following a CSR strategy so their decision on Kate Moss would seem to make sense.

Chanel is a privately owned company and I could find no reference to any CSR activity codes of ethics or codes of values. An image that is highlighted on their website is the camelia which is underlined as having radiance and purity so this is something of a clue. In the media, they stated that they are not extending their contract with Kate Moss but were careful to point out that this was unrelated to drugs. In an interview with the German weekly magazine Focus Karl Lagerfeld Chanel's chief designer is in a very gentlemanly way protective of Kate Moss: Personally I am very sorry about this affair. Kate is a victim of her success her style and of her timelessly modern uniqueness. She never said she would be a paragon of virtue.…

Kate simply has more courage is freer more open and more spontaneous than the others.[5] Rimmel (Coty Beauty): Kate Moss is very much their cosmetic face as their website shows and the information states: The instinctive understanding between Kate Moss & Rimmel has evolved into one of beauty's most potent partnerships This means that they have a much more difficult business decision: In light of this statement and Kate's determination to address these issues, Coty Beauty is currently reviewing its relationship with her and will continue to do so read the company‘s statement. ―We would like to express our support for all those who undertake the often difficult process of overcoming their problems‖ it added.[6] That they are supportive of someone in a difficult personal situation speaks well for the company. In the absence though of any obvious guidance or sets of values, they might be well advised to address this. A start would be to use the Texas Instruments Ethics Quick Test[7]:       

Is the action legal?

Does it comply with our values?

If you do it, will you feel bad?

How will it look in the newspapers?

If you know it is wrong, do not do it!

If you are not sure, ask.

Keep asking until you get an answer.

[5]

Kate ist ein Opfer ihres Erfolgs ihres Stils ihrer zeitlos modernen Einmaligkeit. Sie hat nie darauf bestanden ein Tugendpinsel zu sein…Kate hat nur mehr Mut ist freier offener und spontaner als andere." Puder Zucker—oder Kokain? Focus 39/2005, p. 13. Translated by Ivor Hopkins.

[6] www.forbes.com/business [7] Fisher and Lovell, Business Ethics and Values (Prentice Hall, 2003), p. 103.

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And any CEO that embraces CSR as a whole will have a healthy conscience and a good reputation.

3. The media The Sunday Mirror was especially virulent about Kate Moss: Is this what their shareholders wanted given failed legal action against Moss in the 90s or is it a standard reaction that they know will appeal to their readers? Carole Malone (also quoted above) does flag up the need for responsibility but prefers to deal with drug abuse in an ―out of sight out of mind‖ way rather than pronounce upon it because her real target is Kate Moss: Someone asked me this week whether I expected our icons to be perfect. The answer of course is no. However I do believe people who are icons—either by choice or because it's been thrust upon them (together with a multi-million-pound pay-packet) have a duty to the legions of young people who look up to them. Yes Kate Moss should be allowed to blow her head off with crack cocaine—but not as long as she's making money out of her image. Because there's a responsibility that goes with that and you pee over it at your peril.

In contrast, the other print media I consulted—Der Spiegel and Focus (German quality weeklies) and The Observer (UK Sunday broadsheet) were much more measured in their approaches. This is partly to be explained by the fact that there is not so much national interest in Kate Moss in the German magazines and because they are all more highbrow.

She was the face of the Nineties in which she threw the rules of the fashion world on its head. What she lacked in legs and bosom was forgotten in her look. This was cool but vulnerable headstrong but concerned empty with boredom but still on the case. Earlier rockstars sang "Walk on the wild side:" Kate Moss strode for Versace and Dolce & Gabbana along the precipice where far below dangers lurked—amongst them cocaine.

Only the drug was not seen in the glossy adverts.[8] Certainly these last three titles showed more responsibility in their balanced articles but having said that it was the Mirror Group‘s in-your-face reporting that put this story—about an illegal act—in the public domain in the first place. Maybe they could turn their crusading methods onto other more worthwhile targets: that will be an area for discussion at MHC International Ltd's Masterclass on CSR and the Media in London on the 26th October 2005!

4. The Government One area the Mirror Group as well as the other titles could turn their attention to is the knotty subject of hard drugs. Cocaine is 150 years old and has been illegal around the world since the beginning of the last century except for legitimate medical or governmental use. Yet in the United Kingdom, 475,000 people regularly use the drug recreationally. Colombian Nobel Prize [8]

"Sie wurde das Gesicht der neunziger Jahre in denen sie die Gesetze der Branche auf den Kopf stellte. Was ihr an Beinen und Oberweite fehlte ließ sie vergessen durch ihren Blick: Kühl war er aber verletzlich; störrisch aber anteilnehmend; leer vor Langeweile aber es entging ihm trotzdem nichts. Vorher hatten Rockstars von "Walk on the Wild Side" gesungen Kate Moss marschierte für Versace und Dolce & Gabbana am Abgrund entlang und natürlich lagen dort unten gefährliche Dinge—auch Kokain. Nur zu sehen war die Droge auf den Hochglanzanzeigen nicht." Supermodel Kate Moss: Popstar mit Probleme Der Spiegel 27.09.05.

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winning writer and thinker Gabriel Garcia Marquez has among others stated[9] that the legalization of cocaine would stop the misery both in his home country and in poor housing estates in the United Kingdom. And further he cannot see an end to the civil war in Colombia as long as the illegal drug trade exists.

The UK Government would be able to tax revenues that otherwise line the pockets of drug traffickers and we as responsible adult citizens would be free to choose cocaine alongside other recreational addictive and legal drugs like tobacco and alcohol[10] without fear of censure or poisoning! But all that is another story.

5. We consumers Can vote with our feet and with our wallets by making conscious decisions not to purchase unethical products or purchase from companies we feel are not responsible. This also cuts both ways and means that we have to be responsible and ethical in our purchasing too. It is unlikely that many readers of this Monthly Feature get turned on by a counterfeit timepiece or handbag but just consider who is benefiting from the too-good-to-be-true software deal you might be considering!

6. Kate Moss A Super Model is at the top of her profession and all the world is her stage. She is more than the brands and companies who employ her good looks. Indeed it is her own unique brand of celebrity that they want to use in selling their clothes shoes accessories and cosmetics. She is completely in the limelight: confident on the front pages of glossy magazines; wonderful at galas and premieres; supreme on the cat walk. It is a great business: as one Super Model infamously said ―I don't get out of bed for less than $1000 a day!‖ Yet that same Super Model is the one who recommended Kate Moss go into rehab as she had herself been treated for serious depression some years back.

The fashion world is fast changing and fickle and like a top footballer the time at the top for a Super Model while lucrative for the very best can often be very short. Indeed it will be interesting to see whether the importance of Super Models will now gradually decline as brands see that their reputation is best kept carefully in-house by using beautiful but anonymous faces rather than in the external care of wayward celebrities. Either that or the fashion world will have to set up codes of behavior and clear sets of values that keep their catwalk goddesses literally on the straight and narrow.

I originally started this Monthly Feature on the premise that Kate Moss was a woman with too much time and too much money on her hands and that her recent disgrace really served her right.

In the end though, she has unintentionally done us all a service by pointing up the importance of responsible behavior both on a personal and on a corporate level.

7. Concluding Remarks So Kate Moss has two main choices: either to kick into touch the excesses of her current lifestyle before they kill her and put her talents to some positive use or be true to herself and live fast and [9]

http://en.wikinews.org/wiki/Main_Page For the record before there is a late night knock on the door this author is a nonsmoking nonsubstance abusing person who enjoys a glass or two of Merlot.

[10]

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die young(ish) but by doing that keep turning the fashion world on its head. To do either one properly requires vision and courage. And either way Kate Moss could become an example to us all a model for CSR! [Contributed Ivor Hopkins MHC International Ltd September 2005 with comments from Michael Hopkins]

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APPENDIX B Overview on Measurement and Corporate Social Reporting Measurement Assessment and Reporting Social Responsibility There is an old adage in management: ―You can‘t manage what you can‘t measure.‖ If we ask business managers to pursue social responsibilities in addition to profit, then managers will seek instruments to measure their success in doing this in much the same way that profits are measured. Managers will need ways to know what works and what does not and whether on approach is more successful in attaining social responsibility than others. In recent years, a wide array of instruments for measuring corporate social responsibility have been developed and adopted by both business and NGOs. Measurement and reporting are all the more important these days as we move from a unique occurrence where a firm shares information with regard to social and environmental issues to a quasi-regulatory environment that arose in the mid-1990s where firms began to produce reports pursuant to generally accepted principles. In fact, the French Parliament enacted a new law in France in March 2002 that required all French corporations listed on the Paris Stock Exchange to report on the sustainability of their social and environmental performance. In Fall 2002, PricewaterhouseCoopers reported the results of a survey evidencing that two-thirds of multinationals in Europe and 41% in the United States provide information on their ―triple bottom line‖ performance—economic social and environmental performance.

Even in focusing solely on social reporting there is no one structure of topics to be included in a corporate social report. Though some elements may be mandatory pursuant to other regulations and depending on the country in which they are reported such as corporate charitable contributions pension fund adequacy employee share ownership schemes and employment data other information is not otherwise required to be disclosed in the United States. This additional information may include energy savings consumer protection efforts product safety health and safety efforts beyond OSHA employee training vendor agreements or codes of conduct mission statements and/or statements of social responsibility.

Firms are engaging in this voluntary reporting process for a variety of reasons. The benefits to a transparent organization include a positive impact on reputation enhanced shareholder relations clearer and more transparent corporate governance greater trust within the investment community. In fact, research evidences a positive correlation between reporting and lower price volatility higher operating profits and revenue growth.i Formal efforts at standardized corporate responsibility reporting began in the early 1990s. In 1991 seven companies had published sustainability reports; at that time however much of the reports‘ focus was on the environment. The reporting trend has since transformed itself addressing not only environmental issues but also economic and social performance now also referred to as the ―triple bottom-line.‖ Since that time the number of corporations documenting their social behavior has exploded into a global legion and the number of standards and initiatives against which these reports can be judged has topped 200. As of October 2005, 714 firms report in accordance with or with reference to the Global Reporting Initiative; and more than 2,500 firms worldwide publish some type of stand-alone report on citizenship sustainability environmental and/or social concerns. One scholar draws two critical conclusions from his research on nonfinancial reporting: ―markets are using reporting practices as a proxy for quality 5-117 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

of management; and second markets are beginning to reward disclosure practices that reach beyond the narrow confines of conventional financial reporting.‖ As a result, reporting practices have evolved from forced transparency where firms report only as a reaction to pressure or crises to active transparency where firms report based on strategic objectives.

Social reporting or as it is also referred to Triple bottom-line reporting or sustainability reporting has only recently started to appear on the agenda of academic business ethics conferences. Yet it does not seem to be a concept that many management theorists are well acquainted with nor has it been fully integrated into business ethics as academic discipline. There seems to be a need for a rigorous interrogation of the notion of the triple bottom-line as well as a detailed analysis of the performance indicators that are proposed by triple bottom-line reporting models.

As the number of companies adopting corporate social reports have grown so too have the number of initiatives aimed at standardization dealing with the topic of international corporate behavior. Business leaders even after acknowledging the importance of corporate social reporting are being pinned into a situation where simply having a governance committee and a corporate social report is no longer good enough—after all Enron received accolades in corporate governance and corporate citizenship. Accountability credibility and transparency are now all a necessity in the company‘s social reporting procedure.

These voluntary initiatives are considered credible and authentic because of their association with reputable international organizations and agencies despite the absence of formal regulatory schemes. Each of the initiatives shares a common mission: to promote an economic environment where smart sustainable development and good corporate citizenship coexist. Collectively the global initiatives discussed below are at the forefront in addressing corporate responsibility and developing practices and codes of conduct that will promote sustainable development and corporate citizenship. However a number of issues do exist or have yet to be addressed.

A broad compendium of global initiatives has emerged including principles and standards designed to stimulate change and to promote good corporate citizenship and encourage innovative solutions and partnerships. There are now over 300 sources of corporate responsibility tools worldwide.ii These standards may be promulgated by international intergovernmental organizations (such as the ILO or OECD) by a particular government by a private certification agency by financial organizations (such as the FTSE4Good Index) or by other voluntary associations. Several organizations have created processes standardized reporting structures management systems or normative frameworks in order to assist organizations in quantifying their social reporting as well as in creating benchmark data against which they can gauge their activities and decisions. Though many of these are industry specific (such as the Clean Clothes Campaign) others apply cross-industry. The organizations include the following and are discussed in greater detail below:        

Global Reporting Initiative Global Sullivan Principles Social Accountability 8000 UN Global Compact OECD Guidelines for Multinational Enterprises ILO Conventions AA1000 ISO 14000 5-118 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

These voluntary initiatives are considered credible and authentic because of their association with reputable international organizations and agenciesiii despite the absence of formal regulatory schemes.iv Each of the following initiatives shares a common mission: to promote an economic environment where smart sustainable development and good corporate citizenship coexist.v Global Reporting Initiative Established in 1997, the Global Reporting Initiative (GRI) is a foundation-funded program that established a generally accepted sustainability-reporting framework to which corporations adhere. The reporting criterion covers all aspects of a company‘s performance—economic environmental and social. The GRI recognizes the limits of an international ―one-size-fits-all‖ approach towards corporate reporting and therefore developed sector specific guidelines or ―sector supplements‖ for companies to follow.vi The GRI distinguishes itself from the list of voluntary initiatives due to its performance indicator system: the GRI encourages companies to establish watermarks for performance and then to report on their successes and failures in reaching those targets.vii In addition, it is based on a stakeholder analysis that assesses the impact of the organization on the variety of its stakeholders rather than simply its stockholders. The GRI is a means for companies to communicate with their multiple stakeholders across regions and nations as well as a way for companies to monitor their progress in sustainable development.

Other attributes include strong governance accessibility and transparency as well as the ability to create strong partnerships throughout the globe. To date 618 companies in over fifty countries have used and reported according to the GRI guidelines.viii Global Sullivan Principles As opposed to the auditable framework of the GRI the Global Sullivan Principles comprises a set of internal ethical business operating principles.ix Conceived in 1977, The Sullivan Principles were the brainchild of late Reverend Leon Sullivan. The Global Sullivan Principles have a tripartite structure that includes corporations‘ higher education and civic involvement. This tripartite initiative exemplifies Rev. Sullivan‘s commitment to ethical conduct which he believed is not limited to businesses alone—instead it is the responsibility of the entire community.

However because the Global Sullivan Principles omit the right to freedom of association as a core labor standard the Principles lack support from the labor organization community. x Currently, more than 170 companies including public sector and religious organizations subscribe to the Global Sullivan Principles the vast majority of signatories are within the United States.xi Social Accountability 8000 Created in 1997 by the Social Accountability Institute (SAI), a not-for-profit nongovernmental organization and the Council on Economic Priorities (CEP) Social Accountability 8000 (SA8000) is a standard based on a commitment to establishing a cross-industry standard for workplace conditions and independent verification.xii Unique to SA8000 is this independent verification which allows the standard to be implanted in any nation and within any industry of any size and its monitoring arm the Council on Economic Priorities Accreditation Agency (CEPAA). The SA8000 focuses on the core labor rights of the ILO Conventions the International Declaration of Human Rights and the UN Convention on the Rights of the Child addressing key issues such as child labor compulsory labor health and safety freedom of association increased 5-119 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

educational attainment for employees‘ discrimination and working hours and wages.xiii It applies to manufacturers and suppliers but retailers can also adhere to it. The auditing process is required every 3 years and includes minimum performance requirements employee interviews as well as an open complaints and appeals system. Presently, there are more than 190 companies in thirtyone countries that have SA8000 certifications.xiv United Nations Global Compact On January 31, 1999, United Nations Secretary General Kofi Annan presented to The World Economic Forum at Davos his proposal for a Global Compact.xv On July 26, 2000, Kofi Annan‘s vision was set into action.xvi The Secretary General‘s Global Compact made the issue of corporate social responsibility paramount challenging business leaders around the world to take part in the global initiative. The Global Compact is comprised of nine principles surrounding the issues of human rights labor standards and environment.xvii Participating companies must publish annual reports and display on their websites specific examples of how they put the Global Compact principles into practice. Like the other initiatives the Global Compact is voluntary and has no enforcement arm. The initiative‘s openness is designed ―to stimulate and to promote good corporate citizenship and encourage innovative solutions and partnerships.‖xviii Its openness was also designed to carry out the Global Compact‘s two objectives: (1) incorporate the Global Compact and its nine principles into a business‘s strategy and operations; (2) facilitate a partnership among key stakeholders and promote partnerships in support of UN goals. xix The United Nations‘ reputation and moral authority is one the reasons why more than 649 companies and cities have adopted the Global Compact.xx OECD Guidelines for Multinational Enterprises The Organization for Economic Cooperation and Development is a forum of thirty member countries and active relationships with seventy additionally whose mission is to encourage sustainable business practices and ―to improve the fit between business and society by clarifying the rights and responsibilities of governments and enterprises in the area of international business.‖xxi The structure allows these governmental to make recommendations to multinational corporations operating in or from any one of the member countries. First established in 1976 and then revised in 2000, the OECD Guidelines for Multinational Enterprises ―is the only comprehensive code of conduct agreed to by multiple nations‖ addressing issues like disclosure of material information employment relations consumer interests competition science and technology diffusion and environmental management.xxii The Guidelines are unique in that they adopt local practices instead of international-agreed standards and that each OECD country has a contact point serving as a form of customer service. Similar to the ILO conventions the OECD Guidelines for MNEs are intended for governmental commitment making it all the more difficult to hold companies directly accountable. At the moment thirty-four governments have signed on to these operating principles.xxiii International Labor Organization Conventions The International Labor Organization (ILO) is the oldest of the UN agencies. Like the Global Sullivan Principles the ILO is a tripartite structure composed of government labor and employers‘ organization. The ILO‘s tripartite structure coupled with its early establishment enhances the credibility of the organization as well as its conventions. The three-tiered system does however create a quite lengthy and arduous decision-making process. And like the other 5-120 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

global initiatives the ILO conventions have a weakness when it comes to enforcement and implementation. The International Labor Organization has enacted more than 180 Conventions throughout its history addressing a wide range of labor issues including the freedom of association prohibition of compulsory labor prohibition of child labor employment of disabled persons equal remuneration/equal work and health and safety.xxiv The Conventions‘ positive elements—international reach history and tripartite structure—give it credibility in addressing the topic of social reporting.xxv AA1000 and AA1000 Series The AccountAbility 1000 Series developed in 1999 concentrates on improving the accountability and overall performance of organizations by way of increasing the quality of social and ethical accounting auditing reporting.xxvi This global initiative is overseen by the Institute of Social and Ethical AccountAbility an international not-for-profit professional institute dedicated to the promotion of social ethical and overall organizational accountability as well as members from business (profit and nonprofit) academic and consultant groups.xxvii Developed by its International Council the AA1000 is the first systematic stakeholder-based approach to address institutional accountability and performance enhancement.xxviii The AA1000 has evolved into the AA1000 Series (AA1000s) which is an extension to the AA1000 Framework a standard engineered to improve accountability and performance by ―learning through stakeholder engagement.‖xxix The AA1000s provides comprehensive outlines and guidelines for stakeholder engagement supporting social ethical and environmental accountability systems. Unveiled in 2002 the Assurance Standard (which has as its focus strengthening the credibility of social and sustainability reporting) was the first addition to the AA1000 Framework. The AA1000 Assurance Standard compliments the GRI in that it provides an outline for independent third parties to assure and audit sustainability reporting. At press time AccountAbility was developing two other modules; one with an emphasis on risk and the other with a focus on measuring and communicating the quality of stakeholder engagement.xxx While the scope of the GRI includes economic environmental and social performance and public reporting the scope of the AA1000 is social and ethical accounting auditing and reporting stakeholder dialogue and accountability and quality assurance. Though both emphasize satisfying the information and decision making needs of a full range of stakeholder groups the AA1000 is based on accountability principles and the process of social accounting and stakeholder engagement while GRI is a disclosure framework based on reporting principles characteristics and indicators.

ISO 14000 Developed in 1996 by the International Organization for Standardization in Geneva Switzerland the ISO 14000 series is a voluntary initiative that places an emphasis on environmental management standards and operations (i.e., management systems auditing labeling performance evaluation life cycle assessment).xxxi Its core mission is to provide voluntary environmental management standards to enhance companies‘ ability to manage environmental impacts and risks and to improve environmental performance. The Series' commitment to the improvement of the corporate environmental atmosphere—management systems auditing performance evaluation life cycle, and so on—is what distinguishes this initiative from others mentioned above. The standards promote continual improvement without specifying actual standards of performance.

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internationally. The key stakeholders for the ISO 14000 series are the standard-creating organizations within the ISO member community but also include environmental NGOs professional research governmental and other nonprofit institutions. The ISO series includes a number of standards; those that deal directly with external reporting include the ISO 14001 (which is the model adopted by organizations for their environmental management system) the ISO 14004 (which extends the definition of environmental management systems to include a general framework for external auditing); and the ISO 14031 (a process by which companies can assess and report on their environmental behavior).xxxii The ISO‘s greatest attribute is its development of management systems which is why several hundred thousand facilities subscribe to the standards;xxxiii however due to the Series‘ substantial implementation cost ($25,000 to $128,000) it is difficult for small and mid-size companies to adopt and implement.xxxiv In an effort to explore the process and substance of reporting according to these various standards from the perspective of multiple stakeholders researchers Axel Klein and Martin Le Jeune conducted a global stakeholder survey on nonfinancial reporting. Relevant to our exploration Klein and Le Jeune found that human rights was the single most important issue on stakeholders‘ minds. ―Corporate citizenship‖ however was not of keen interest to stakeholders since firms were hard pressed to explain the business case for these activities. The research also revealed the following:  

Stakeholders prefer regional reports to one report from a parent company.

Stakeholders primary process concerns are accountability and transparency rather than detailed descriptions.  Eighty percent of respondents believed that all companies should be required to report on nonfinancial indicators.xxxv Collectively, the global initiatives discussed above are at the forefront in addressing corporate responsibility and developing practices and codes of conduct that will promote sustainable development and corporate citizenship. However a number of issues do exist or have yet to be addressed. Among them: conflict resolution between initiatives; level of enforcement if any— local national or international; discrimination against smaller firms because of the high costs associated with initiatives. Beyond those problems associated with the actual initiatives skepticism exists amongst the general public with respect to social reports themselves. Among the questions critics pose: Are the social reports credible relevant and effective especially now when every corporation seems to have one? Are social reports a fad trying to lure shareholders back into the market? Are the organizations themselves even credible? In a time where corporations are held suspect corporate social reporting is leading the charge in freeing businesses‘ tainted image. The recent vim in corporate responsibility has emerged in part to sustain those market economies and regain corporate value but ultimately the goal is to help companies across the map change their behavior so as to realize that everyone is a stakeholder in their company.

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APPENDIX C: Group Project Description: The Social Change Project

―Never doubt that a small group of thoughtful, committed citizens can change the world.

Indeed, it‘s the only thing that ever has.‖ —Margaret Mead Planning your project: You will be placed into groups before class begins. You should meet with your group and discuss your plans then implement them before our final class session at which time you will be expected to offer a group presentation pursuant to details below.

The purpose of this exercise: We are conducting this project for several reasons. The first reason is because corporations often feel that it is in their best interest to engage in some form of socially responsible activity. They are not always acting, of course, from their own personal motivation but instead are engaging in these activities because one or more stakeholders believe that they should or will treat them more favorably if they do so. You will perhaps experience these same circumstances as you are being asked to do something as an ―organization‖ (your group) that you might not otherwise engage in but that is valued by a stakeholder (hence the critical importance of your ability to evidence the impact you have—think about this requirement when designing your project!).

The second purpose of this exercise is to evidence the extraordinary impact affected by small changes. Of course given the time period involved and other demands on your time your choice of activity will necessarily be limited and somewhat smaller than one possible by a large organization. However by focusing on the possibility of impact you will have and evidencing that impact you will learn by experience of the power you possess both individually and as a team. Imagine the impact you will then be able to have when you are in a leadership role in an organization.

The project: Small groups will implement a social change program within an organization or environment of their choosing. This could include a wide range of options and can impact any social area including recycling homelessness workplace AIDS education and so on. While the group is to strongly strive for effective implementation of their plan the grade for this assignment is based on evidencing some impact at all.

The requirements: At the beginning of the class session on________ each group shall submit a Statement of Intent with regard to their Social Change Project. This statement shall be simply a statement of their plan of action with regard to their Social Change Project. It will describe their project anticipated challenges (if any) how they plan to overcome these challenges and any other details necessary.

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During one of the final class sessions each group will give an oral presentation of their project to the class of 10–15 minutes. Be creative in your project and in your presentation. Prepare the oral analysis as if you were presenting the information to both the top management team of your company and to community representatives. This oral presentation will include: (1) an overview of your social change program; (2) Social reasons for its importance and an ethical analysis of your choice of project; and (3) an assessment of the degree of success of the project including evidence of some impact on the world and the reasons for the program's success or failure. Please anticipate this part of the presentation by building into your program some form of assessment.

Due from group at time of presentation: 

 

Three- to five-page executive summary of the project. BE SURE to include references where necessary and must adhere to appropriate bibliographic citation style as included at the end of this syllabus in connection with any of the research you might have done for the project. This summary shall include: o A narration of your oral presentation (an overview discussion of the ethical and social reasons for the project‘s importance assessment of successes and failures with specific reference to evidence of impact) o A statement of how the project can be linked to the theories or concepts presented in the course and texts o A discussion of how the project has modified or transformed your thinking around social and ethical issues in business.

Group statement explaining the particular contributions of each group member (i.e., What were each member‘s responsibilities with regard to the project?)

Each group member‘s peer evaluation form (to be handed in individually, i.e., not as part of the group materials)

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Peer Evaluation Form for Use with Group Social Change Project Score 1–5 points with 5 being the highest possible evaluation. Please add comments below form where appropriate.

Your Name: ________

Grp. Member Name: __________

Grp. Member Name: __________

Grp. Member Name: __________

Grp. Member Name: __________

Preparation: Met commitments to others; was prepared for all meetings and on all dimensions of individual assignments Written contributions: Written ideas were well developed and presented; contributed to the group written product; written work in final rather than draft form Oral contributions: Ideas for the oral presentation were well developed and presented; contributed to the group oral product; work on oral product in final rather than draft form Team Dynamics: listened to others open-minded helped all of the members to contribute to the 1-1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Your Name: ________

Grp. Member Name: __________

Grp. Member Name: __________

Grp. Member Name: __________

Grp. Member Name: __________

discussion shared leadership for some of the team meetings.

Overall evaluation IM Chapter 6: Ethical Decision Making: Employer Responsibilities and Employee Rights Chapter Objectives After reading this chapter, you will be able to: 1. Distinguish between the two distinct perspectives of the ethics of workplace relationships.

2. Explain the concept of due process in the workplace.

3. Define employment at will (EAW) and its ethical rationale.

4. Describe how to downsize in an ethical manner.

5. Explain the difference between intrinsic and instrumental value in terms of health and safety.

6. Illustrate an employer‘s responsibility with regard to employee health and safety and why the market is not effective at managing this responsibility.

7. Explain the basic arguments for and against regulation of the global labor environment.

8. Describe the argument for a market-based resolution to workplace discrimination.

9. Define diversity as it applies to the workplace, as well as its benefits and challenges.

10. Explain affirmative action and describe the three ways in which affirmative action may be legally permissible.

This chapter starts with another quote from Blackrock CEO Larry Fink who claimed that ―No relationship has been changed more by the pandemic than the one between employers and employees.‖ This chapter echoes that claim in several places.

Opening Decision Point There is a new Opening Decision Point for this Chapter: The Great Resignation and Meaningful Work Post-Pandemic.

The case picks up on Fink‘s suggestion. Fink acknowledged the changing relationship between employers and employees as one of the most significant trends in the present economy. A large part of that change involves what the Decision Point in Chapter 4 identified as the ―Big Quit,‖ or the ―Great Resignation.‖ This was the phenomenon in which record numbers of employees left their jobs, even during one of the most uncertain 1-2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

labor markets in history. Between April and September 2021, an all-time high number of Americans, more than 24 million, left their jobs. Recognizing the fact that the relationship between employer and employee is "changing" raises the question of what that relationship is changing into and what it should be.

The case continues: Fink suggested to CEO that workers were especially demanding ―more flexibility and more meaningful work.‖ Other research adds to this conclusion. According to a study published by the MIT Sloan Management Review, five separate areas explained more workforce attrition than low wages: a toxic workplace culture in which workers felt disrespected; job instability and organizational restructuring; high rates of innovation and organizational change; failure to recognize performance and contributions; and poor response to the COVID-19 pandemic. Other studies identified increased stress and anxiety caused by such things as working from home, lack of childcare, and tensions arising from fear about COVID-19.

Discussion questions that can be used to build on this case include:  What would make work more ―meaningful‖ for you?  Do you agree with Larry Fink that employers who do deliver in providing more meaningful and flexible workplaces will reap the rewards of greater economic performance?  Can you think of any jobs or industries in which this is more, or less, likely to occur?  Do you think that work-from-home makes work more or less attractive?  Do you think that providing ―meaningful work‖ should be understood as a basic duty of employers, or is it simply one benefit that can be offered if an employer chooses?  If you worked in HR for a companying seeking to hire, what would you recommend be done in order to attract workers who have left during the ―Great Resignation?‖  What changes, post-pandemic, do you think employees will most demand?

I.

Introduction a. Ethics in the employment context is perhaps the most universal topic in business ethics since nearly every person will have the experience of being employed or employing someone else. b. Unresolved Ethical Issues: While legislators and the courts have addressed many aspects of the working environment, countless ethical issues remain that these regulatory and judicial bodies have left unresolved. c. Beyond the Law: The law provides guidance for thinking about ethical issues in the workplace, but such issues go well beyond legal considerations. d. This chapter explores areas of ethical decision making in the workplace where the law remains relatively fluid and where answers are not easily found by simply calling the company lawyer. e. The chapter also examines various ethical challenges the employee faces and the nature of employer responsibilities. Although individual perspectives may change, similar conflicts and stakeholders present themselves across business settings.

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f. Utilizing the Ethical Decision-Making Process: Consider how you might employ the ethical decision-making process we have discussed to reach the best possible conclusion for the stakeholders involved in the situations described in this chapter. i.

II.

Using the ethical decision-making process may seem cumbersome at the outset, but once the process becomes embedded in the professional landscape and culture, its effectiveness and efficiency in resolving these issues will become apparent.

Ethical Issues in the Workplace: The Current Environment a. Ethics in Human Resources: is about our relationships with others and with our organizations. i.

Research demonstrates that ―companies that place employees at the core of their strategies produce higher long-term returns to shareholders than do industry peers‖—practically double!

ii.

DATA: 50% of U.S. workers feel a very strong sense of loyalty to their employer. When asked about the greatest influence on their commitment, workers responded that the most important factor is to feel valued by elements such as benefits like health care coverage and also opportunities for professional growth—key components of an ethical working environment.

iii.

DATA: These influences play out in practical ways for businesses since research shows that 47% of U.S. workers have observed misconduct in the workplace during the previous 12 months.

iv.

DATA: Seventy-eight percent of employees who have experienced unethical or uncivil behavior at work report that their commitment to the organization declined, and 66% report that their performance declined.

v.

DATA: At the same time, when employees do not perceive a positive ethical culture in the workplace, they tend not to report misconduct. That is a big problem since the Ethics Resource Center's Global Business Ethics Survey for 2018 found a significant increase over prior year in pressure on employees to engage in misconduct!

1. More than one in every six employees has felt pressure to do something wrong, and that is an increase of almost 25% since 2013.

In fact, almost two-third of employees report that they see bad conduct rewarded, so these violations are going to happen over and over again.

*Chapter Objective 1 Addressed Below* b. Perspectives on Workplace Relationships: There are two very distinct, and sometimes competing, perspectives on the ethics of workplace relationships (utilitarian and universalist, please see below):

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i.

UTILITARIAN: Employers might decide to treat employees well as a means to produce greater workplace harmony, productivity, and innovation.

1. This raises a question about moral motivation and instrumentalist, selfinterested reasons for doing good, which is similar to our discussion of corporate social responsibility in Chapter 5.

2. DATA: Contrary to the second argument (below), this perspective does not claim that employees have some universal right to a ―happy‖ workplace. But, a comprehensive review of research by Jeffrey Pfeffer suggests that more effective, productive firms are indeed characterized by a set of common practices, all of which involve treating employees in humane and respectful ways.

3. DATA on the Role of Emotion in the Workplace: Studies also suggest that managers can have a significant impact on the emotions of their workers, and this impact also can greatly affect productivity and loyalty, as well as perceptions of fairness, care, and concern. Bottom line is that if employees feel better about their work, they are going to ―work better.‖ a. Scholars Neal Ashkanasy and Catherine Daus suggest that managers should pay attention to the emotional impact of various jobs within their workplace and model a positive emotional environment. b. Rewards and compensation structures can clearly impact the emotions of workers, as can the composition of teams or the power relationships within the workplace.

4. When employees see that a firm values their emotions, as well as exhibits values such as honesty, respect, and trust, they feel less pressure, more valued as employees, and more satisfied with their organizations.

5. Since reporting to external stakeholders has become such a key issue in recent scandals, one might also want to consider whether a more satisfied employee is more or less likely to report misconduct to outside parties.

ii.

Principle-based, deontological: the second perspective is that employers might treat employees well out of a Kantian sense of duties and rights, regardless of either utilitarian or self-interested productivity consequences.

1. This deontological approach emphasizes the rights and duties of all employees and treats employees well simply because ―it is the right thing to do.‖ 2. Defenders of employee rights argue that rights should protect important employee interests from being constantly subjected to utilitarian and financial calculations.

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3. This sense of duty might stem from the law, professional codes of conduct, corporate codes of conduct, or such moral principles as fairness, justice, or human rights on the part of the organization‘s leadership. *Reference: ―Reality Check – Protecting Employee Rights through Unions‖ * This Reality Check has been updated with more recent data.

III.

Defining the Parameters of the Employment Relationship This section has been expanded somewhat to include a more explicit discussion of the ethical parameters of the employment relationship and a bit less on the legal parameters. Seeing the employment relationship as one requiring the free and informed consent of both parties provides the ethical basis for employment contracts. This topic will appear again later in Chapter 8‘s discussion of the ethical basis of the marketing relationship between company and consumer, so it can be introduced here and connected to that relationship as well. a. Legal and Ethical Boundaries: The employment relationship raises issues of power, obligation, responsibility, fair treatment, and expectations. The livelihoods of both parties rely on each other‘s contributions to the relationship, so it is important that clear boundaries be established to maintain the relationship. i.

Legal Requirements: Though legal requirements might serve to protect some interests, they can only go so far and only cover so many bases.

1. The ethics underlying the concepts of due process and fairness can help determine what is or is not acceptable behavior in the workplace.

2. Challenging circumstances, such as reduction in force, may threaten employers‘ ability to remain true to the principles of due process and fairness.

3. The employment relationship is further defined by the application of these principles to working conditions such as health and safety, both in domestic operations and abroad.

ii.

The issues in the following sections: are predominantly settled from an ethical perspective by their justification. In other words, for example, people of good will would be likely to agree that an employee has a right to a safe and healthy workplace.

iii.

Disagreements remain, however, in discussions surrounding the implementation, interpretation, or extent of that right.

iv.

The second section of this chapter explores several issues that are not perceived as settled from either a legal or ethical point of view.

v.

Reasonable minds may differ not only as to whether the means to achieve the ends are justified but whether the ends themselves are just, fair, or ethical. An example of this latter issue would be affirmative action, a thorny matter for courts, managers, and philosophers alike.

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b. Due Process and Just Cause *Chapter Objective 2 Addressed Below* i.

Employment security is perhaps the most significant aspect of work from the employee‘s ethical perspective.

ii.

Fundamental questions of justice arise because employees are subject to considerable harm from a lack of security in their jobs and do not have much power to create security.

iii.

Remaining issues: Should employers‘ rights and ability to hire, fire, or discipline employees be restricted in order to prevent injustices? Are there any other means by which to protect against unethical behavior or unjust results?

iv.

The Right of Due Process is the right to be protected against the arbitrary use of authority.

1. In legal contexts, due process refers to the procedures that police and courts must follow in exercising their authority over citizens. The state‘s authority to punish citizens, through police and courts, creates a safe and orderly society.

2. The state‘s authority is not unlimited; it can be exercised only in certain ways and under certain conditions. Due process rights specify these conditions.

3. Due process in the workplace acknowledges and employer‘s authority over employees. Because of the immense value that work holds for most people, the threat of losing one‘s job is a powerful motivation to comply.

4. Basic fairness, implemented through due process, demands that an employer‘s power be used justly. The definition of basic fairness remains a challenge.

*Reference: ―Reality Check – Protests in Support of Employment Security in Europe‖* 5. DATA: In a 2017 survey, 19% of workers reported that they had experienced workplace ―bullying‖ firsthand, defined as ―the repeated, malicious, health-endangering mistreatment of one employee … by one or more employees,‖ and another 19% had witnessed it. a. The mistreatment need not be physically threatening, of course, but might simply involve a boss who is constantly yelling dictates at workers or a co-worker who spreads rumors about another in order to sabotage their position. b. These behaviors lead not only to emotional abuse but a complete loss of personal dignity, intimidation, and fear.

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6. Evidence demonstrates that not only does the employer have significant bottom line expenses from workers‘ compensation claims based on stress and other emotional stimuli, but also costs related to potential litigation arising from claims of abusive work situations.

7. There is also the indirect impact on employee morale, and certainly, the negative effects that occur when one would prefer not to be at the workplace: turnover, absenteeism, poor customer relationships, and acts of sabotage.

8. The issue of workplace bullying is one that we hear about more and more, especially in economies based on strong service sectors where the work relies significantly on interpersonal relationships and interaction. * Reference: Decision Point: ―Bullying in the Workplace?‖ Decision Point Bullying in the Workplace This Decision Point addresses anti-bullying legislation that would enable victims of workplace bullying to sue their harassers and hold their employers accountable. Advocates of anti-bullying laws argue that the extent of the problem, when considered alongside evidence that bullying causes significant physical, emotional, and economic harm to its victims, calls for a legislative response. On the other hand, critics worry that anti-bullying legislation would lead to a spike in employee lawsuits and point to the difficulty of determining whether abusive bullying has taken place, particularly in high-pressure work environments.

Surveys show that at least 38% of U.S. workers have experienced bullying in their place of employment or have seen others experience bullying.

Since 2003, 30 states and 2 territories have introduced workplace bullying legislation that would allow workers to sue for harassment without requiring any evidence of discrimination. New Hampshire, for example, began considering a bill in 2013 that defines bullying broadly and would include ―the repeated use of derogatory remarks, insults, and epithets, as well as conduct that a ‗reasonable person‘ would find threatening, intimidating or humiliating.‖ The bill passed both the New Hampshire House and Senate, only to be vetoed by the governor. As of 2018, only one U.S. state—Tennessee—has passed an anti-bullying statute into law.

Other countries have progressed beyond the United Stated in their protection of employees in this area. Queensland, Australia, prohibits workplace bullying under its Workplace Health and Safety Act, while Quebec, Canada, protects employees through the psychological harassment section of its labor standards. Ireland includes prevention and resolution of bullying in its Code of Practice in the workplace, while Sweden contains specific provisions against bullying in its Provisions on measures against Victimization at Work.

Students are asked to consider the following questions concerning anti-bullying legislation:  How would you define ―bullying‖ if you were to design an anti-bullying law? What should stakeholder groups be considered in crafting your definition?

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  

As a manager, what steps might you take to prevent bullying behavior in your company?

Do you believe that legislation is needed to respond to the problem of workplace bullying?

Why or why not?

A 2017 study revealed that the majority of workplace bullying is against women (two-third), with basically the same level of bullying coming from men as from women  (65% from men and 67% from women). How do these data affect your views about anti-bullying legislation? Why or why not?

*Chapter Objective 3 Addressed Below* v.

Employment at Will: Much employment law within the United States instead evolved in a context of a legal doctrine known as employment at will. Employment at will (EAW) holds that absent a particular contractual or other legal obligation that specifies the length or conditions of employment, all employees are employed ―at will.‖

*Reference: ―Reality Check—Employing ‗Employees‘‖ 1. Unless an agreement specifies otherwise, employers are free to fire an employee at any time and for any reason.

2. An EAW worker may opt to leave a job at any time for any reason, without offering any notice at all, so the freedom is theoretically mutual. vi.

The Ethical Rationale for EAW: Employment at Will has both utilitarian and deontological elements. EAW was thought to be an important management tool.

1. Total discretion over employment gives manager the ability to make efficient decisions that should contribute to the greater overall good.

2. It was thought that the manager would be in the best position to know what was best for the firm and that the law should not interfere with those decisions.

3. Another basis for EAW was the rights of private property owners to control their property by controlling who works for them.

vii.

Limits to EAW: Both legal and ethical analyses demonstrate that there are good reasons to limit EAW. Even if EAW proved to be an effective management tool, justice demands that such tools not be used to harm other people.

1. Even if private property rights grant managers authority over employees, the right of private property itself is limited by other rights and duties.

2. The freedom to terminate the relationship is theoretically mutual; however, the employer is often responsible for the employee‘s 1-9

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livelihood, which creates an unbalanced power relationship between the two parties. viii.

Exceptions to EAW: Many courts and legislatures have created exceptions to the EAW rule. Civil rights laws, for example, prohibit firing someone on the basis of membership in certain prohibited classes, such as race, sex, disability, age, national origin, religion, or ethnic background.

1. Labor laws prevent employers from firing someone for union activities.

2. When the employer is the government, constitutional limitations on government authority are extended into the workplace to protect employees.

*Reference Table 6.1 Here* ix.

EAW Has Priority: A crucial element to recognize with these exceptions is the fact that EAW has priority unless the employee can prove that their case falls under one of the exceptions. That is, EAW is the default position on which courts will rely until and unless an exception can be demonstrated.

1. The burden of proof lies with the dismissed employee to show that they were unjustly or illegally fired.

2. Due process and just cause, whether instituted as part of internal corporate policy or through legislation, would reverse this burden of proof and require employers to show cause to justify the dismissal of an employee.

x.

Due Process in Other Employment Contexts: Being treated fairly in the workplace also involves fairness in areas such as promotions, salary, benefits, and work conditions.

1. Because such decisions are typically made on the basis of performance appraisals, due process rights should also extend to these aspects of the workplace.

xi.

Ethical Questions: 1. In the EAW environment, these ethical questions remain: a. Is this atmosphere one that is most fair and just for all stakeholders? b. Does it lead to the most effective employment outcomes? c. Does it satisfactorily guard the rights and interests of both employers and employees?

2. Consider the key facts relevant to issues of due process and fairness.

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a. EXAMPLE: If you are striving to serve the autonomy of the employer, could you perhaps serve the due process interest of the employee by offering additional notice of termination or more information about alternatives?

3. Due process is the right to be protected against arbitrary use of authority, so it as the decision maker, it is your role to ensure protection against those arbitrary decisions. a. The over-arching obligation, here, is to make sure that decisions are made in light of reasons that can be defended from an ethical perspective.

A new Reality Check on Free Expression in the Workplace has been inserted at this point.

A version of this case had been used as a Decision Point in a previous edition, but it is now used to bring the academic discussion of employee rights down into a practical context. The cases involve a Google employee criticizing the company‘s diversity initiatives, a women who was fired after social media posts showed her flipping off a presidential motorcade, and the well-known story of NFL Colin Kaepernick. Discussion questions to encourage debate include:  Do you believe that Briskman would have been fired by her firm if the politics had been reversed (if she had posted the same photo against a president from the other political party), or was the termination politically motivated?  What was it about Damore‘s memo that led to his termination? Is there an argument that it was arbitrary?  Is the blacklisting of Kaepernick an arbitrary use of authority by the NFL owners, or is there an argument that it is fair, just, and according to due process? c. Downsizing: Terminating many employees at once can have both emotional and ethical implications. i.

Terminating workers is not necessarily an unethical decision, but it raises ethical quandaries since alternatives may be available to an organization in financial difficulty.

1. Since a host of negative consequences may result, these alternatives may pose a more effective option from the perspective of all stakeholders involved.

2. The more responsibility given to leadership for the downsizing, the more likely that stakeholders also will have a negative perception of a firm‘s commitment to corporate social responsibility.

*Chapter Objective 4 Addressed Below* ii.

Once the decision to downsize has been made, one must consider whether there are ways an organization can act more ethically in the process.

1. Important factors to consider are respect, dignity, transparency, and consistency. For instance, when a firm decides to downsize, it is critical 1-11

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to lessen the impact as much as possible and to allow the terminated employees to depart with dignity. It is critical to be honest and forthright and to be sensitive to the experiences of those who will be affected. iii.

Using the decision-making model can provide guidance for downsizing.

1. First, the decision regarding downsizing should be made by a representative group to consider all stakeholder interests and earn the trust of those that will be impacted.

2. The facts should be collected, and any issues should be determined.

3. The question of notice is debatable since some say that firms should give notice of the intent to downsize as soon as the need is determined, while others say that early notification can create too many negative feelings and rumors.

4. These costs and benefits must be weighed in any communication decision and certainly considered in managing and interacting with employees following a lay-off.

5. Enumerate any and all possible options with regard to the downsizing efforts and catalog the impact of each option on each group of stakeholders.

*Reference: ―Reality Check—Is It Really ‗Inevitable‘?‖* iv.

Planning for Downsizing: From a legal perspective, the decision about whom to include in a downsizing effort must be carefully planned.

1. If the firm‘s decision is based on some criterion that seems neutral on its face, such as seniority, but the plan results in a different impact on one group than another, the decision may be suspect. a. EXAMPLE: Assume the firm makes termination decisions based on longevity with the organization. Assume that those workers who are most senior are almost entirely male since women only entered this industry in recent years. If the firm moves forward with this process, the majority of those fired will be women, and the majority of those remaining will be men. In this case, the effort may violate Title VII‘s prohibition against discrimination based on gender because the termination policy has a more significant—and negative—impact on women.

2. Firms should review both the fairness of their decision-making process and the consequences of that process on those terminated and the resulting composition of the workforce.

3. Rawls‘s theory of justice is one of the most effective philosophical theories to employ in downsizing decisions because the decision maker considers

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the decision as if she or he does not know what role they will be in after the decision. a. Under a formulation he developed called the "veil of ignorance," you would consider what decision you would make—such as whether to downsize or how to downsize—if you did not know what role you would be playing following the decision. b. In other words, you might be the corporate executive with the secure position; you might be a terminated employee with years of seniority who was close to retirement, or you might be a worker who survives the termination slips. If you do not know which role you would be playing, Rawls argues that you are more likely to reach a decision that is relatively fairest to all impacted.

4. Perhaps the most important consideration in the event of a downsizing or lay-off is the fact that there are countless stakeholders who will be impacted by the decisions involved.

Another new Decision Point has been introduced at this point. ―Fired During a Zoom Call‖ details a case in which employees were unexpectedly fired during a zoom call.

Challenging students to articulate exactly what would be wrong with this practice is a good way to use this case. d. Health and Safety i.

Right to Safety: Within the United States and throughout many other countries with developed economies, there is a wide consensus that employees have a fundamental right to a safe and healthy workplace.

1. In some other regions, employees lack even the most basic health and safety protections, such as working environments that are often termed ―sweatshops.‖ 2. Not only is the very extent of an employer‘s responsibility for workplace health and safety in dispute but there is also significant disagreement concerning the best policies to protect worker health and safety.

ii.

Value of Health and Safety: Health and safety have a very high instrumental value since part of their value derives from the fact that we use them to attain other things of value.

*Chapter Objective 5 Addressed Below* 1. Health and safety are also valuable in and of themselves. They have intrinsic value in addition to their instrumental value.

2. The life of a worker who dies in a workplace accident has instrumental value that can be measured, in part by the lost wages that would have been

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earned had that person lived. But lost wages do not measure the intrinsic value of the life.

3. If ―safe‖ means completely free from risk, certainly no workplace is perfectly safe.

4. If health and safety are interpreted as ideals that are impossible to realize, then it would be unreasonable to claim that employees have a right to a safe and healthy workplace. e. Health and Safety as Acceptable Risk: Employers cannot be responsible for providing an ideally safe and healthy workplace. Instead, discussions in ethics about employee health and safety will tend to focus on the relative risks workers face and the level of acceptable workplace risk. *Reference Figure 6.1 Here* i.

―Risks‖ can be defined as the probability of harm, and we determine the ―relative risks‖ by comparing the probabilities of harm involved in various activities.

ii.

A workplace is considered safe if the risks are acceptable. An ―acceptable level of risk‖ means that the probability of harm involved in a specific work activity is equal to or less than the probability of harm in some more common activity.

iii.

If all workplace health and safety standards were determined in this manner, the responsibility for workplace safety would fall solely on management.

iv.

Businesses would hire safety experts to perform a risk assessment and determine the relative risks of work.

v.

If the workplace were less risky than other common activities, management could conclude that they have fulfilled their responsibility to provide a healthy and safe workplace.

vi.

Problems with Excluding Employees: Putting all of the responsibility for workplace health and safety on the management poses several problems.

1. This approach treats employees disrespectfully by ignoring their input as stakeholders. It treats employees like children and makes crucial decision for them, ignoring their role in the decision-making process.

2. It assumes that health and safety are mere preferences that can be traded off against competing values, ignoring the fundamental deontological right and employees might have to a safe and healthy working environment.

3. It assumes and equivalency between workplace risks and other types of risk, when there are actually significant differences between them.

The risks faced in the workplace may not be freely chosen, nor are the risks faced in the workplace within the control of workers.

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4. It disregards the utilitarian concern for the consequences of an unsafe working environment on the social fabric, resulting product or service created, morale of the workforce, and the community, as well as other large-scale results of an unhealthy workplace. *Reference: ―Reality Check – Cannabis: A New Arena for Choice‖* *Reference Table 6.2 Here* vii.

Workplace Risks: Unlike some daily risks each of us freely undertakes, the risks faced at work could be controlled by others, particularly by others who might stand to benefit by not reducing the risks.

1. Making the workplace safe may pose substantial costs to employers.

2. Workers‘ choices and control are limited in the workplace. As long as a worker wants to keep their job, they cannot avoid the risks involved in the work or workplace. Often the employer could minimize or eliminate the risks, but there may be financial incentive not to do so.

f. Health and Safety as Market Controlled: Perhaps the health and safety standards can be left to the market. i.

Defenders of the free market and the classical model of corporate social responsibility would favor individual bargaining between employers and employees as the approach to workplace health and safety.

1. Under individual bargaining, employees would be free to choose the risks they are willing to face by bargaining with employers.

ii.

iii. iv.

2. Employees could balance their preferences for risk against their demand for wages and decide how much risk they are willing to take for various wages.

Those who demand higher safety standards and healthier conditions presumably would have to settle for lower wages. Those willing to take higher risks presumably would demand higher wages.

In a competitive and free labor market, individual bargaining would result in the optimal distribution of safety and income.

Employer Responsibility: The market approach can support compensation to injured workers when it can be shown that employers were responsible for causing the harm.

1. An employer who fails to install firefighting equipment in a workplace can be held liable for burns an employee suffers during a workplace fire.

2. The threat of compensation can act as incentive for employers to maintain a reasonably safe and healthy workplace.

Decision Point Should Clinical Trials for New Drugs Be Exported?

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This Decision Point discusses the concept of exporting dangerous jobs to places where people are willing to do them. Following the market-based recommendation to allocate workplace risks on the basis of an optimal distribution of risks and benefits, from a business perspective, it seems that dangerous jobs ought to be exported to those areas where wages are low and where workers are more willing to accept risky working conditions. The harms done by dangerous jobs, in terms of forgone earnings and health effects, are lower in regions with low wages and lower life expectancies. The benefits of providing jobs in regions with high unemployment would also outweigh the benefits of sending those jobs to regions with low unemployment.

Following this market-based logic, many U.S.-based pharmaceutical companies seeking to test new medications have begun to conduct pharmaceutical trials abroad. Clinical trials in developing economies tend to be subject to far fewer regulations than trials in the United States, and therefore are significantly less costly. For example, 90% of new pharmaceuticals approved in 2017 were tested outside of North America.

Students should consider the following questions when assessing this scenario:  What facts would you want to know before deciding whether the practice of exporting clinical trials was fair and responsible?  What alternatives to exporting clinical trials exist for a pharmaceutical company?  Who are the stakeholders of your decision? What is the impact of each alternative mentioned above on each stakeholder you have identified?  Should local legal regulations govern the situation, or should legal regulations be in the pharmaceutical company‘s home country?  What are the consequences of such a decision? What rights and duties are involved? If the consequences are effective and valuable to the majority but fundamental rights are implicated, how will you decide what to do? *Chapter Objective 6 Addressed Below* v.

Problems with the Free Market Approach: The free market approach has a number of serious problems, especially since labor markets are not perfectly free and competitive.

1. Employees do not have the kinds of free choices that the free market theory would require in order to attain optimal satisfactions.

2. Though enlightened self-interest would be a valuable theory to introduce and apply in this environment, it is unrealistic to presume employees always have the choices available to them that make it possible. a. For example, risky jobs are often the lowest-paying jobs, and people with the fewest employment choices hold them. Individuals are forced to accept jobs because they have no choice but to accept.

3. Employees seldom, if ever, possess the kind of complete information efficient markets require. If the employees do not know the risks, they 1-16

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will not be in a position to effectively protect their rights or ensure the most ethical consequences.

4. This is a particular concern when we recognize that many workplace risks are not at all obvious, such as the toxicity or exposure levels of workplace chemicals or airborne contaminants.

5. Such market failures can have deadly consequences when they involve workplace health and safety issues.

Market Balance: Market defenders argue that markets will, over time, compensate for such failures. Over time, employers will find it difficult to attract workers to dangerous jobs, and over time, employees will learn about the risks of every workplace.

vi.

1. This raises the ―first generation‖ problem. In effect, markets sacrifice the first generation to gain information about safety and health risks.

2. These questions of public policy would never even be asked by an individual facing the choice of working at a risky job. To the degree that these are important questions that ought to be asked, individual bargaining will fail as an ethical public policy approach to worker health and safety. * A new Reality Check has been inserted here on the topic of vaccine mandates at work. This was a much-debated topic during the Covid pandemic, and the Biden Administration eventually directed OSHA to step in as a means of protecting employee health and safety.

This can be a good point at which to debate the limits of personal freedom/liberty and protecting others from harm.

The discussion questions following this case include:  Of course, the conclusion that government cannot require such mandates does not mean that private businesses cannot mandate them for their own employees.  Do you think that employers should require employees to be vaccinated or wear a mask at work during a pandemic?  This controversy is something framed as debate between two claims of the right to liberty. Some argue that vaccine or mask mandates violate the freedom of employers who are subjected to the mandate. Others argue that employees have the right to be free from undue risk of exposure to a contagious disease. How do you think this conflict of rights should be resolved? g. Health and Safety—Government Regulated Ethics: Mandatory government standards address most of the problems raised against market strategies and appear appropriate from an ethical perspective. i.

Standards can be set according to the best available scientific knowledge, thus overcoming market failures that result from insufficient information.

ii.

Standards prevent employees from having to face the fundamentally coercive choice between job and safety.

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iii.

Standards also address the first-generation problem by focusing on prevention rather than compensation after the fact.

iv.

Standards are fundamentally a social approach that can address public policy questions ignored by markets.

*Reference: Reality Check ―Do Health and Safety Programs Cost Too Much?‖* * Reference: Decision Point ―How Much Is Enough?”

Decision Point How Much is Enough?

This Decision Point contemplates whether the cost of violating workplace health and safety standards is sufficiently high to deter unsafe conditions for workers.

While there is a cost associated with workplace health and safety violations, some argue that this cost is not sufficiently high to deter violations. In other words, they advocate higher fines in order to deter violations or to encourage employers to provide safer conditions. In one 2009 case, OSHA imposed a fine of $87.5 million on British Petroleum (BP), the largest fine in OSHA‘s history. OSHA had found more than 400 new safety violations at the company‘s Texas City refinery. The violations were considered egregious because they were discovered in 2009, four years after a deadly explosion at the refinery (15 deaths, 170 injured) had led BP to sign an OSHA agreement promising to improve safety conditions. The top penalty is four times the amount of the total issued penalty that earned the second spot, which, unfortunately, also is held

by BP from a few years earlier.

If you were on the OSHA Commission to review the amounts of fines imposed, how would you reach a decision as to how much is enough in BP‘s second (later) case? What factors would you consider?  Who are the stakeholders involved in your decision?  What do you foresee will be the impact of your decision on the stakeholders involved?  How might ethical theory assist you in reaching this particular decision?  Once you have reached your decision, which constituencies do you anticipate will be most supportive and which will be most against your decision, and why? v.

Occupational Safety and Health Administration (OSHA): In 1970, the U.S. Congress established OSHA and charged it with establishing workplace health and safety standards.

1. Since OSHA was established, the major debates concerning workplace health and safety have focused on how such public standards ought to be set.

2. The dominant question has concerned the appropriateness of using cost– benefit analysis to set health and safety standards.

3. When OSHA was first established, regulations were aimed at achieving the safest feasible standards.

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a. This ―feasibility‖ approach allows OSHA to make trade-offs between health and economics, but it is prejudiced in favor of health and safety, placing the burden of proof on industry to show that high standards are not economically feasible. b. Health and safety standards are not required, no matter the cost, but an industry is required to meet the highest standards attainable for technological and economic reasons.

4. Some critics charge that this approach does not go far enough and unjustly sacrifices employee health and safety. From that perspective, industries that cannot operate without harming the health and safety of their employees should be closed.

5. More influential critics argue that these standards go too far. Critics in industry as well as government have argued that OSHA should be required to use cost–benefit analysis in establishing such standards.

6. From this perspective, even if a standard is technologically and economically feasible, it would still be unreasonable and unfair if the benefits did not outweigh the costs. These critics argue that OSHA should aim to achieve the optimal, rather than highest feasible, level of safety. vi.

Cost–Benefit vs. Cost-Effectiveness Analysis: Using cost–benefit analysis to set standards, in effect, returns us to the goals of the market-based, individual bargaining approach.

1. Use of cost–benefit analysis faces serious ethical challenges. However, rejecting cost–benefit analysis in setting standards is not the same as rejecting cost-effective strategies in implementing those standards.

2. A commitment to cost-effectiveness would require that, once the standards are set, we adopt the least expensive and most efficient means available for achieving those standards. Cost–benefit analysis, in contrast, uses economic criteria in setting the standards in the first place.

3. It is cost–benefit, not cost-effectiveness, analysis that is ethically problematic because the use of cost–benefit analysis in setting workplace health and safety standards commits us to treating worker health and safety as just another commodity to be traded against competing commodities. It denies health and safety its intrinsic value.

vii.

Use of Cost–Benefit Analysis: 1. Cost–benefit analysis requires that an economic value be placed on one‘s life and bodily integrity. Typically, this would follow the model used by the insurance industry in which one‘s life is valued in terms of one‘s earning potential.

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2. A shift to cost–benefit analysis entails that health and safety is traded off against profit margin.

3. Employees have a legitimate ethical claim on mandatory health and safety standards within the workplace. a. This implies that employees should not be expected to make tradeoffs between health and safety standards and job security or wages. b. Recognizing that most mandatory standards reduce, rather than eliminate risks, employees should also have the right to be informed about workplace risks.

4. If risks have been reduced to the lowest feasible level and employees are fully aware of them, then a society that respects its citizens as autonomous decision makers has done its duty. ** Teaching Note: Consider the alternative perspective of health and safety here with the students. An internal Walmart Stores Inc. memo proposing that the retailer cut its health-care costs by discouraging unhealthy people from applying for jobs raises questions about how far employers can legally go in preferential hiring. The Walmart memo to the company's board of directors proposes incorporating physical activity in all jobs to discourage the infirm from applying. For example, the memo suggests that Walmart arranges for "all cashiers to do some cart gathering." Are there any ethical issues associated with a firm‘s choice to cut health care costs by eliminating people who are unhealthy? Do you think there will be ethical or legal issues associated with a corporate memo proposing physical activity in all jobs to discourage the infirm from applying? The ACA (at least for now) actually encourages business and insurance providers to support healthy workforces. Does this change in government policy change your view on businesses‘ actions?

IV.

Global Applications: The Global Workforce and Global Challenges a. Which Law Applies? Workers outside of the United States may be subject to some U.S. laws if they work for an American-based organization, though enforcement is scattered. i.

In some cases, workers in other countries are often protected by even more stringent laws than those in the United States. Many European Union countries have strong laws protecting workers‘ rights to due process and participation.

ii.

In certain developing countries, however, workers find themselves subject to conditions that U.S.-based workers would find appalling. For example, some workers in certain Southeast Asian countries are simply arguing for at-will bathroom breaks.

*Chapter Objective 7 Discussed Below* b. Solution to Poor Working Conditions: Economists and others do not agree about a solution to these circumstances in the workplace.

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i.

Some contend that the exploitation of cheap labor allows developing countries to expand export activities and to improve their economies.

1. Economic growth brings more jobs, which will cause the labor market to tighten, which in turn will force companies to improve conditions in order to attract workers.

ii.

iii.

iv.

Some argue that encouraging greater global production will create additional opportunities for expansion domestically, providing a positive impact on more stakeholders.

Though an unpopular sentiment with the general consuming public, many economists argue that the maintenance of sweatshops is therefore supported by economic theory.

Philosophers such as Benjamin Powell and Matthew Zwolinski explore the issue from a slightly different perspective.

1. They defend the moral legitimacy of sweatshops and responds to the question of whether a worker under these conditions can actually consent to them or be considered to be working ―voluntarily‖ at all.

2. They conclude that a worker actually is able to give consent. They explain, ―genuine respect for workers‘ dignity requires recognizing their freedom decide for themselves issues of central importance to their lives.‖

*Reference Figure 6.2 Here* v.

An interesting and high-profile case unfolded in early 2012 when the public realized—through the aid of the media—that their iPhones and other Apple devices were largely created in China by suppliers under conditions that might not be deemed ethically acceptable in the United States and that certainly violated internal standards issued by Apple and local Chinese labor laws.

1. Apple responded immediately after the media attention, but some say the response was significantly tardy because some violations went back for several years.

2. Apple is a company that relies heavily on consumers‘ positive opinions of the company. In turn, Foxconn relies heavily on its relationship with Apple; both Apple and Foxconn derive profit from stable, long-term relationships, and that provides the opportunity for continued improvement in working conditions.

3. Apple continues to partner with Foxconn, and while iPhones (for instance) are designed in the United States, most continue to be produced outside of the United States.

* Reference Reality Check ―Making Better Mistakes Tomorrow‖

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c. Global Dimension: Certainly, it is arguable that some minimum standards might apply, and multinationals and their suppliers may have some core ethical obligations to employees. In the absence of specific guidance, how do we determine what those standards and obligations might be? i. Concluding that the standards of one particular country, such as the United States, are appropriate for all countries and cultures of the world is not necessarily the optimal conclusion. ii. Some scholars have argued that Kantian universal principles should govern the employment relationship and that the ethical obligation of respect for persons should guide the employment interactions.

1. This means that individuals should be treated with respect and dignity, rather than as a means to an end. iii.

It is arguable that a fundamental moral minimum set of standards exists that should be guaranteed to workers in all countries notwithstanding culture, stage of economic development, or availability of resources. iv. Multinational corporations must ensure the physical well-being of employees, encourage development of rational and moral capacities, adhere to local labor laws, refrain from using coercion, provide decent working conditions, and provide wages above the overall poverty line for a 48-hour work week. d. Living Wage: Even defining a living wage is problematic. i. In a world that cannot seem to agree on the number of people living in poverty, figuring out how much is sufficient to offer a subsistence quality of life represents hurdles. ii. A number of companies have joined the Ethical Trade Initiative. (ETI), an alliance of corporations, trade unions, and voluntary organizations dedicated to improving the conditions of workers. The ETI has established a "Base Code" of ethical standards that all signatories commit to uphold. The portion of the Base Code addressing living wages states the following: 1. Wages and benefits paid for a standard working week meet, at a minimum, national legal standards or industry benchmark standards, whichever is higher.

2. All workers shall be provided with written and understandable information about their employment conditions with respect to wages before they enter employment and about the particulars of their wages for the pay period concerned each time that they are paid.

3. Deductions from wages as a disciplinary measure shall not be permitted, nor shall any deductions from wages not provided for by national law be permitted without the expressed permission of the worker concerned. All disciplinary measures should be recorded.

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What to Do about Child Labor This Decision Point raises critical questions to prompt student reflection and discussion regarding the issue of child labor. As students explore the question of child labor, they are asked to consider the many stakeholders involved and the power each one holds (or lack thereof), the options available to the multinational corporations, and the options consumers have in determining from whom they will buy, what rights might be implicated and the consequences of protecting them, and how they would respond if they were a labor advocate seeking to determine the best next steps in the debate.

Students are asked to consider the following questions, which apply the ethical decision-making process described in Chapter 2:  What are the key facts relevant to your decision regarding child labor?  What are the ethical issues involved in child labor? What incentives might be in place that would actively support or pose challenges to your response?  Who are the stakeholders in connection with child labor?  What alternative responses might you suggest?  How would each of your alternatives affect each of the stakeholders you have identified?  Is there any guidance available from global organizations to assist you in resolving this particular dilemma? iii.

Non-wage benefits are an important and neglected aspect of the debate over global sweatshops.

1. In many instances, such benefits can provide an advantage to both the worker and the employer. a. An MNC factory that provides free health checkups and basic health care services to workers through a factory clinic will typically have a healthier and more productive workforce than factories that lack such benefits. b. Example: Levi Strauss & Company provides medical services to employees, their families, and members of the surrounding communities. Because public healthcare in the locations where the Levi Strauss factories are located is generally poor, particularly in smaller cities and remote rural areas, companies play a vital role in providing additional assistance. Levi‘s sees the business value of investing in women‘s health as a pathway to strengthening whole communities. e. Voluntary Standards: International nongovernmental organizations have also attempted to suggest voluntary standards to which possible signatory countries or organizations could commit. i. Example: The International Labour Office has promulgated its Tripartite Declaration of Principles Concerning Multinational Enterprises and Social policy, which offers guidelines for employment, training, conditions of work and life, and industrial relations.

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ii.

Awareness of the limitations of the legal and ethical analysis and sensitivity to the challenges of global implementation are critical in today‘s multinational business operations. f. The Case of Child Labor: One of the key issues facing business in today‘s global economy is the potential for cultural or legal conflicts in connection with the worldwide labor management. i. One such conflict arises with the case of child labor. As we begin to understand the circumstances facing children worldwide, we can see that a simple prohibition might not offer us the best possible solution. ii. According to International Labor Organization estimates, 152 million children between 5 and 17 years old currently work in developing countries. iii. Approximately 85 million of these children are performing ―hazardous work.‖ The category of hazardous work developed by the ILO includes all forms of labor that adversely affect children‘s safety, health, or moral development. However, this category is also considered a proxy for the worst forms of child labor for which data are difficult to secure, such as forced and bonded labor, child soldiering, and commercial sexual exploitation. iv. Child labor has damaging effects on children: 1. Because work takes children out of school, nation-specific studies show that high levels of child labor are associated with low literacy levels.

2. Regions with a high prevalence of child labor are also characterized by high levels of childhood morbidity associated with HIV/AIDS, non-HIV infectious diseases, and malaria.

3. The harmful effects are not limited to child laborers themselves; because children who work are more likely to earn low wages as adults, the risk that poverty and child labor will be passed to the next generation increases. v.

Employers in many economically developed countries currently use children as laborers, so one should carefully review the social and economic structure within which the labor exists.

1. Ridding all factories of all workers under 18 years old is not necessarily the best answer for the children or families involved.

2. Prospects for working children in developing countries appear bleak.

Children may begin work as young as 3 years old and may both live and work in unhealthy conditions.

3. The labor opportunities that exist almost always require children to work full time, precluding them from obtaining an education.

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However, if they are not working, their options are not as optimistic as those of children in developed countries.

4. Often children who do not work in the manufacturing industry are forced to work in ―underground‖ professions, such as drug dealing or prostitution, simply to earn their own food each day. vi.

V.

Before suggesting the removal of the child from the workplace, one must consider that the income that the child worker generates may, at the very least, assist in supporting his or her fundamental needs and may even be critical in supporting the entire family.

Rights and Responsibilities in Conflict: Discrimination, Diversity, and Affirmative Action a. Debatable Issues: The issues of discrimination, diversity, and affirmative action are all matters that scholars, jurists, and corporate leaders continue to debate. i.

The law is not yet completely settled on many of these issues and remains open to diverse cultural interpretations, strong minority opinions, and value judgments.

ii.

Distributive justice does not provide a clear-cut solution, as each camp can often make an argument for fairness.

iii.

Our purpose here is to articulate and apply the ethical decision-making process to the challenges presented, provide a cross-section of the arguments the advocates involved make, and explore the insights that ethical theory might supply.

b. Discrimination: The courts have carefully construed legal precedent in the decades since Title VII of the United States Civil Rights Act was passed in 1964 and created the prohibited classes of discrimination. i. Several specific areas of delicate and subtle quandaries remain; however, many of the original legal and ethical debates have been fought, offering business decision makers arguably clear guidance on appropriate behavior in the workplace.

1. Example: While the advent of sexual harassment as a basis for legal complaints was new to the court system during the last century, seldom does a new recruit begin employment at a large company today without standard sexual harassment training.

2. Example: Sexual harassment emerged as a new legal basis for a legal complaint during the last century, and both employers and employees had to sort out the boundaries of its legal definition. Today sexual harassment training in workplaces has become commonplace. The Equal Employment Opportunity Commission (EEOC), as well as many other sources, offer guidance, legal direction, and parameters for both employees and employers. However, as the #MeToo movement (which began in 2006 but went viral in October 2017) 1-25 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

demonstrated, perceptions and definitions in this arena continue to fluctuate and vary significantly from culture to culture. * Reference Reality Check ―#MeToo in The Workplace‖ c. Guidelines for Decision Making: The law allows employers to make decisions on any basis other than those prohibited by the Constitution, precedent, and several statues (such as age, religion, race, disability, gender, national origin, color, and depending on the jurisdiction, sexual orientation). d. Some commentators would contend that this broad mandate allows employers enormous autonomy in their employment decisions while many employers till be moan any regulation of their workplaces. e. There remains widespread disagreement on a global basis about the rights of employees with regard to discrimination, the extent of protected classes, diversity, and affirmative action. i. Even in the United States, the concept of discrimination remains one of the most intensely debated issues today.

1. Employers continue to advocate for their rights to manage the workplace and to be permitted to hire, retain, and terminate employees without external influence or control.

2. Employees fear unfair treatment and a loss of power based on reasons completely outside their control. ii.

(Retired) Judge Richard Posner argues how the market might be able to relieve employees of some of these fears—at least in theory.

Decision Point Who Needs Ethics? Can the Market ―Fix‖ Discrimination?

This Decision Point addresses the issue of discrimination in employment. Defenders of the market argue that if the market were left to its own devices, we could expect discrimination to fall by the wayside. That is, if a firm hires its employees based on prejudices and discriminatory views, then it is limiting its pool of possible employees. Another firm that does not discriminate has a larger pool of applicants and is more likely to obtain the most qualified individual for the job. (Retired) Judge Richard Posner explains the economic impact of this theory in terms of race discrimination, noting that the least prejudiced ―sellers‖ will come to dominate the market in the same way that those who are least afraid of heights dominate occupations that require working at heights.

Should corporate policy makers and government leave such issues to the market? Should employees‘ fears or concerns about workplace discrimination be relieved upon understanding Judge Posner‘s theory? Why or why not?

Students should consider the following questions when assessing this scenario:

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



 

  

What key facts do you need to determine whether the market can solve this challenge? Under what circumstances would Posner's argument fail? What market failures might prevent economic forces from efficiently ending discrimination?

What are some of the other ethical issues that come to mind when you consider this proposed ―solution?‖ What is the effect of regulation such as Title VII on Posner's argument? Even if the market could work against discrimination, is this matter sufficiently important from an ethical perspective that society should address it more actively through legislation?

Who are the stakeholders involved in this particular issue?

What alternative responses could you propose? Are you more comfortable with management through legislation or a free market? Consider the implications if the discriminating firm held a monopoly on its good or service.

How would each of your alternatives affect each of the stakeholders you have identified?

Where might you look for additional guidance to assist you in resolving this particular dilemma?

The United States has more significant antidiscrimination provisions than some other countries, such as those in the Middle East. Is this information in support of or contrary to the judge‘s proposition?

*Chapter Objective 8 Addressed Below* f. Covert forms of discrimination: are widely prevalent, though they often go unnoticed. i.

DATA: In one study involving almost 13,000 fake resumes, researchers found that people with Chinese, Indian or Pakistani-sounding names were 28% less likely to get an interview than candidates with precisely the same qualifications but with English-sounding names

g. Gender Discrimination: In the United States, discrimination not only persists with regard to race but also in connection with gender. Women often face challenges that are distinct from those faced by men. i.

Women and men are both subject to gender stereotyping but suffer from different expectations in that regard.

ii.

EXAMPLE: Marianne Cooper, sociologist and lead researcher for the New York Times best-selling book Lean In: Women, Work and the Will to Lead (written by Facebook COO Sheryl Sandburg), explains that success and likability do not go together for women. Often women are ―applauded for delivering results at work but then reprimanded for being ‗too aggressive,‘ ‗out for herself,‘ ‗difficult,‘ and ‗abrasive.‘‖

iii.

Powerful women are often considered ‖ice queens,‖ while unemotional men are seen as doing what is necessary to get ahead.

1. The cultural image of powerful women as ―unsympathetic powermongers‖ creates a catch-22: if a woman is extremely professional, 1-27

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showing little emotion, she is at risk of being perceived as an ‗ice queen;‘ however, if she shows emotion, she is at risk of being seen as unstable or weak, and thus, incapable of strong leadership.

2. DATA: A study of the effects of gender stereotyping on communication styles adds support to the experiences reported by powerful women. The study found that women who believed that they were being stereotyped on the basis of their gender tended to adopt a more masculine style of communication. However, other test subjects rated these women as less likable and were less likely to follow their leadership. *Chapter Objective 9 Discussed Below* h. Diversity: The U.S. workforce today is significantly more diverse than ever before and all data suggest that this will continue. i.

Efforts toward eliminating discrimination and a changing population are major factors in the increasingly diverse workplace.

ii.

Diversity refers to the presence of differing cultures, languages, ethnicities, races, affinity orientations, genders, religious sects, abilities, social classes, ages, and national origins in a firm.

iii.

DATA: 66% of executives in the United States consider diversity and inclusion as important or very important. This level of attention is about mid-level globally when compared to a high of 86% in Japan and a low of 56% in Belgium (of those countries included in the survey conducted by Deloitte).

iv.

DATA—Comparisons: United States to the rest of the world 1. European countries have outpaced the United States in terms of diversity efforts and, in particular, in connection with board representation. While the average representation of women on European boards in 2018 was 26% (a significant increase from 15% in 2012), some countries have significant higher numbers, in part because of legislation that requires it. For instance, Norway has a federal law that requires companies to have at least 40% of their corporate board seats filled by women or face a complete shutdown of operations. As a result, 42% of corporate board seats are held by women. Women hold over 32% of board seats in Finland and 28% in France.

2. Other countries have also set up quotas, including India, where, as of 2017, 12.4% of corporate directors were women. (an increase of 4.7% over the prior 2 years). The increase is the result of legislation that requires any public company with five or more directors to have at least one female board member. Germany passed a law requiring boards to give 30% of their supervisory seats to women beginning in 1-28

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2016; France requires 40% of board positions in public companies to be held by women by 2017 (private companies have until 2020); they are joined by France, Spain, Iceland, Italy, the UK, and Belgium. a. The United States does not have any similar requirement and the Fortune 500 in 2017 had 22% female representation on its boards. v.

DATA: The business case for diversity: Diversity has been found to lead to more enhanced innovation, employee engagement, and stronger financial performance. A 2018 study found that, where there is greater diversity in leadership teams and boards, they also reap these financial benefits: 1. 53% increase in return on equity (ROE) (where Fortune 500 companies have at least three female board members) 2. Increase of 6% in their net profit margin (where companies have at least 30% of executive roles filled by women) 3. Increase of 9% in EBIT (earnings before interest & taxes) 4. Increase of 19% in innovation

*Reference: ―Reality Check – Diversity = Less Risk?”* vi.

Diversity efforts have brought benefits to the workplace but have also created new conflicts.

1. Diversity can potentially increase several areas of values tension.

2. Where differences are new or strong, and where negative stereotypes previously ruled interactions between particular groups, sensitivity to the potential for conflict is necessary.

3. In a 2018 survey of board directors, more than half responded that they believed diversity efforts were motivated by political correctness, and 48% thought that shareholders were too preoccupied with diversity at the expense of other concerns.

** Teaching Note: To explore the nature of perceptions, faculty may wish to assign the following brief paper project: During the next week (or however long faculty wish to offer), you should endeavor to experience something outside of your ―zone of comfort.‖ This assignment asks that you might not otherwise do and experience something that you might not otherwise experience.

You are NOT being asked to do anything wrong, unethical, or otherwise inappropriate (form your own or others‘ perspectives), but instead to do something that may constitute a ―stretch‖ for you or something that perhaps you should do (from your own perspective) but do not usually. Before engaging in this activity, consider what your expectations are (i.e., how do you think you'll feel, what do you think it will be like) and draft the first section of your paper. Then, after the experience, conclude the paper by describing the experience and whether the reality matched your expectations. In addition, please comment on the 1-29 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

nature of perceptions and how they impact or play a role in your decision making and your judgment of others‘ ethics and decision making. vii.

Integrating diverse viewpoints with a preexisting corporate culture can also create conflict.

1. Ensuring that workers will support the particular values of a firm doesn‘t seem inappropriate, but it might be difficult to accomplish while also encouraging diversity.

2. Diversity might be a source of fundamental differences in values that must be balanced. Some scholars even suggest that job applicants be screened with regard to their values. a. Hiring is not an area to be taken lightly, but most firms go with a ―gut‖ instinct about whether or not a job applicant will ―fit in.‖ i. Multiculturalism: Efforts at understanding multiculturalism, such as acknowledging and promoting diversity through celebration and appreciation of various cultures in the workplace, can serve both to educate and encourage the benefits linked to diversity efforts. i. It is not discriminatory to refuse to hire someone about whom you simply have a ―bad feeling,‖ unless that bad feeling is based on their difference in race or gender. ii. While variance in fundamental standards might justify a sense of ―bad fit‖ between a potential employer and employee, divergence in culturally based standards such as attire, hairstyles, or manner of speaking might instead be treated differently. iii. Honoring diversity or promoting freedoms of expression can certainly be taken to an extreme and go too far. A divergence of cultures between a potential employee and one's clientele will render the hire ineffective.

1. Though the law is slow to catch up to social mores, it does eventually come apace so these characteristics of diversity are often resolved by statute or other codification. iv. The cost of ignoring diversity is high, not only in terms of losses of productivity, creativity, and other performance-based measures but also in terms of legal liability.

1. EXAMPLE: Texaco was required to pay $175 million to settle a racial discrimination lawsuit based on taped conversations of executives using racist language and documented compensation discrimination against minority employees.

2. In the aftermath of this ―crisis,‖ Texaco has reformed, and their subsequent numbers reveal that: a. In 2002, minority hires accounted for 46% of all new employees, including some key senior executives, more than 20% of promotions, and 34% of new hires were women.

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b. EXAMPLE: Texaco pledged to spend at least $1 million with minority and women contractors within five years of the settlement and diversity training is now mandated for all workers, with management compensation tied to the attainment of success in implementing new initiatives. c. EXAMPLE: A group of black financial advisors filed a lawsuit in 2005 against Merrill Lynch, alleging that their bosses systematically steered the most profitable business to white employees. They also were able to show that white workers made salaries averaging 43% more than black employees at the firm.

1. Eight years later, in 2013, Merrill Lynch agreed to pay $160 million, distributed among all black investment brokers and trainees who worked at the firm from mid-2001 to that time (around 1,200 people).

2. At the time of the suit, black traders made up so few of the firm‘s staff that Merrill branches in more than half of U.S. states did not even have a single black broker. The suit claimed that Merrill Lynch sometimes relied on stereotypes, once allegedly suggesting that its managers encourage black brokers to ―learn to play golf or other activities designed to learn how business gets done in manners (they) might not be familiar with.‖ 3. They also found that beginning in the first month of the training program for new hires, the company gave more and larger accounts from new customers or retiring brokers to the white trainees. Merrill Lynch has a history of discrimination issues, settling gender discrimination suits in the 1970s and 1990s, plus an ongoing suit over a company training course recommending women employees read a book called Seducing the Boys Club: Uncensored Tactics from a Woman at the Top. * Reference: Decision Point ―Women‘s Economic Development Programs‖ * Reference: Reality Check ―Bias Interrupters‖ Decision Point Women‘s Economic Development Programs This Decision Point refers to Walmart‘s Global Women‘s Economic Power Initiative, which planned to invest billions in new programs aimed at women. This program was announced three months after the United States Supreme Court dismissed a class action suit that alleged systematic gender discrimination in pay and promotion decisions at Walmart, the nation‘s largest private employer. Although Walmart was victorious in defeating the class action suit, the 1-31 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Supreme Court decision allows individual employees to file civil actions. In addition, the company faced negative publicity from the high profile case.

In September 2011, Walmart Stores Inc. announced its Global Women‘s Economic Power Initiative and planned to invest billions in new programs aimed at women, including a commitment to double its purchases from women-owned businesses by 2016, provide support for training women in factories and farms that supply its stores, and donate $100 million to organizations that foster women‘s economic development. ―We‘re stepping up our efforts to help educate, source from and open markets for women around the world,‖ said Walmart CEO Mike Duke.

As of 2018, Walmart has achieved and surpassed each of these objectives.  it has sourced $20 billion from women-owned businesses, supported the training of 1 million women, and fostered diversity and inclusion among its major suppliers.

Three months prior to the creation of the initiative, the U.S. Supreme Court dismissed a classaction suit, first filed by six employees in 2001, that alleged systematic gender discrimination in pay and promotion decisions at Walmart, the nation‘s largest private employer. Representing 1.6 million female Walmart employees and a potential for losses in the billions for the corporation, the case was the biggest sex discrimination class action in history. Although Walmart was victorious in defeating the class-action suit, the Supreme Court decision allows individual employees to file civil actions. In addition, the company faced negative publicity from the highprofile case.

Corporate spokespersons denied any connection between the gender discrimination charges and the launch of the new women‘s programs. However, some charged that the initiative represents a public relations attempt by Walmart to improve its reputation and, as a Wall Street strategy analyst proposed, ―get out in front of any potential future lawsuits.‖  What do you believe was Walmart‘s motivation for the initiative discussed here?  Who are its key stakeholders for this launch announcement—and for the programs themselves?  With the current level of giving and the collaborations established, do you think that Walmart is living up to its commitment? What do you believe would be the key components to make this program successful?  One of the key goals of Walmart‘s Initiative is ―creating the building blocks of success and self-sufficiency for women,‖ and much of its funding goes to highly practical efforts to help women help themselves. Some argue that this objective is in line with Walmart‘s conservative stance on economic opportunity and demonstrates no acknowledgment or empathy for other economic forces that undermine earning power for low-skilled workers (e.g., race, poverty). Do you think this critique is justified? j. Affirmative Action: Raises questions regarding how to balance employee rights to fair treatment and due process in the workplace with competing employee rights. ** Teaching Note: Given the wealth of materials available that offer varying perspectives on affirmative action, staging a debate on the topic is a valuable way to get students to view the topic in a new light. Ask whether one person deserves a position more than another person. A good example to use with students is college admissions, something with which they are all 1-32 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

familiar. Compile a student-generated list of criteria that are, in fact, used to qualify for admission (include athletic ability/accomplishments, legacy, faculty children, mission); follow that by asking for the underlying reasons (Why SAT/ACT scores? Why legacy? Which are forward-looking, predictors of college success? Which are backward-looking, acknowledgments of earning or dessert?); Compare to the underlying reasons to consider such factors as race, socio-economic background, first-generation college; then ask which, if any, should be eliminated; Finally, ask who is ―most‖ and ―least‖ qualified? More or less deserves admission. i.

The question regarding affirmative action is not necessarily whether a person has a right to fair process in connection with employment but instead whether one has a right to the job in the first place. Does one person deserve a job more than another person?

ii.

Efforts to encourage greater diversity can be seen as a form of ―reverse discrimination‖: discrimination against those traditionally considered to be in power or the majority, such as white men.

1. The word reverse above presumes that discrimination only travels in one direction. If instead, it travels in a different direction, it is ―backing up‖ or heading in reverse. Yet, surely it does not feel that way to the subject of discrimination. Perhaps discrimination against a member of a group that normally holds power or is well represented is atypical or not the norm, but discrimination on the basis of someone‘s membership in a protected class is still wrongful discrimination.

iii.

The arguments on both sides of this issue have a tendency toward emotional persuasion.

1. EXAMPLE: Imagine you are hiring a social worker to serve an overwhelmingly African American community that is currently facing issues, among others, of teen pregnancy. Not only might you argue that you want to hire someone who is African American; you might also want a female social worker who might be better able to speak with the teenage women in that community. Is it fair to hire a young, female, African American woman for the job rather than a 40-year-old white male who has more experience and a master‘s degree from a distinguished program? What is the fairest decision? Fair to whom—the women in the community, the applicants, and other stakeholders? How should you decide? What are the consequences of the decision?

iv.

Diversity issues raise other less apparent problems. Consider the experience of The Mazzoni Center.

1. EXAMPLE: The Mazzoni Center in Philadelphia is a nonprofit, LGBT-focused facility that offers health care and wellness services resources. In 2018, it hired a new CEO, who happened to be a straight woman. Mazzoni‘s community was not universally pleased with the choice. Some critics questioned her qualifications, but others suggested that the Center should have hired a CEO who more 1-33

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appropriately represented the communities Mazzoni ―is funded to serve.‖ 2. The board responded to the community by saying, When it comes to matters of employment, Mazzoni Center does not discriminate on the basis of race, creed, religion, color, national origin, ancestry, age, sex, gender identification or gender expression, sexual orientation, disability, marital status, or any other protected status covered by federal, state or local law. Thus, all employment-related decisions are made solely on the basis of a candidate‘s skills, ability, experience, education, training, and other legitimate factors related to the requirements of the job.

3. Any decision by the Board that would have considered LGBT status would rise to the level of illegal discrimination. v.

Some theorists argue that formal affirmative action measures have served to create a greater divide rather than to draw people closer.

*Chapter Objective 10 Discussed Below* k. Ethical Issues Related to Affirmative Action i.

Affirmative Action: refers to a policy or program that tries to respond to instances of past discrimination by implementing proactive measures to ensure equal opportunity today.

1. Affirmative action may take the form of intentional inclusion of previously excluded groups in employment, education, or other environments.

ii.

The use of affirmative action policies in both business and universities has been controversial for decades. In its first discussion of affirmative action in employment, the U.S. Supreme Court held that employers were permitted to include minorities intentionally (and thereby exclude others) in order to redress past wrongs.

1. However, the holding had some restrictions, and those restrictions have caused confusion. Even today, the law is not clear, and we must turn to our ethical decision-making systems to provide direction.

l. Affirmative Action in the Workplace: Affirmative action arises in the workplace in three ways. i.

Legal requirements: Much of the law relating to affirmative action applies only to about 20% of the workforce; however, those employees of federal contractors with 50 or more employees are subject to Executive Order 11246, which requires affirmative action efforts to ensure equal opportunity.

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ii.

Where Executive Order 11246 does not apply: courts may also require what is termed ―judicial affirmative action‖ in order to remedy a finding of past discrimination.

Voluntary affirmative action plans: Employers undertake these plans to overcome barriers to equal opportunity. These may include training plans and programs, focused recruiting activity, or the elimination of discrimination that might be caused by hiring criteria that excludes a particular group.

A demonstrated underrepresentation of a particular group or a finding of past discrimination is required to justify affirmative action efforts under either of these latter two options.

iii.

iv.

m. Basic Guidelines: After a number of legal opinions, employers are left with some basic guidelines for creating affirmative action policies and programs. i.

ii.

Legal constraints to affirmative action: 1. The affirmative action efforts or policy may not unnecessarily infringe on other employees‘ rights or create an absolute bar to their advancement (for example, it would be inappropriate to discharge or lay off others in order to achieve a racial balance).

2. The affirmative action effort or policy may not set aside any specific positions for women or minorities and may not be construed as quotas to be met.

3. It may not change legitimate expectations of employees (in other words, it may not require the reduction of expectations or require the hiring of unqualified individuals).

4. It must be temporary, lasting only until it attains, rather than maintains, a balanced workforce.

Opponents to affirmative action contend that the efforts do more harm than good, and that affirmative action creates ill will and poor morale among workforces. They argue that it translates into current punishment of past wrongs and therefore is inappropriate because those who ―pay‖ for the wrongs are unfairly burdened and should not bear the responsibility for the acts of others.

n. University of Michigan Case: In 2003, the Supreme Court addressed affirmative action through a case of ―reverse discrimination‖ at the University of Michigan Law School. i.

Michigan‘s Law School relied on an admissions policy that took into account the ability of each applicant to contribute to the school‘s social and intellectual life.

1. As part of this criterion, the school considered the applicant‘s race on the assumption that a diverse student body would contribute to the goals of the law school and that a critical mass of minority students was required to accomplish that goal.

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ii.

2. Two white females who were denied admission brought the lawsuit, arguing that admission of minority students with lower grades and test scores violated their rights to equal treatment.

In support, General Motors Corporation filed an amicus curiae (―friend of the court‖) brief, going out of its way to identify itself as a business stakeholder.

1. In its brief, GM claimed that the need to insure a racially and ethnically diverse student body was a compelling reason to support affirmative action policies.

2. GM claimed that the future of American business and the economy depended on racial and ethnic diversity in the workplace.

3. GM also claimed that prohibiting affirmative action would likely reduce diversity ―in the pool of employment candidates from which the nation‘s businesses can draw their future leaders, impeding businesses‘ own efforts to achieve and obtain the manifold benefits of diversity in the managerial levels of their workforces.‖

iii.

Questions to consider: 1. Does a diverse student body contribute to the ability of a school to accomplish its educational mission?

2. Should the law prohibit, allow or require affirmative action programs?

3. Would GM be ethically correct in adopting a similar affirmative action hiring policy?

o. Challenges to Michigan case i.

ii.

iii.

In a case challenging the admissions policies of the University of Texas in 2013, the U.S. Supreme Court upheld the idea that race-conscious selection can be constitutionally permissible in states that wish to use it.

However, in 2014 the Supreme Court upheld a Michigan constitutional amendment that bans affirmative action in admissions to the state‘s public universities (an amendment that passed as a result of its prior 2013 decision). This decision opened the door to similar amendments in seven other states.

As a result, states that forbid affirmative action in higher education, such as Florida and California as well as Michigan, have seen a significant drop in the enrollment of black and Hispanic students in their most selective colleges and universities.

Opening Decision Point Revisited The Opening Decision Point for this Chapter was written in early 2022, with the COVID-19 pandemic continuing to have major impact on the global economy. Effects of the "Great Resignation" continue, despite steadily declining unemployment numbers. To say that the 1-36 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

nature of the employer-employee relationship has changed seems true, but to conclude that it has changed forever seems premature at this time.

As you read this case, it would be worthwhile to reflect on how students think the workplace has changed in the past few years. Has the trend to work-form-home continued?

Is that a good or bad thing? Do you know anyone who did leave work during the "Great Resignation" and have they returned to the workplace? How many people that you know have changed careers since the beginning of the pandemic? Have your own expectations for work changed in recent years? How concerned will you be about such things as child-care, flexibility, wages, health care benefits, and workplace diversity in seeking your next job?

We quoted from the annual letter that BlackRock CEO Larry Fink sent in January 2022.

BlackRock issues this letter every year. Find a copy of any letters that have appeared since 2022 and compare the vision contained in them to the one we use at the start of this chapter. Has BlackRock's advice to CEOs changed? How? 1.

End of Chapter Questions, Projects, and Exercises 1. Maya confides in her friend and colleague, Alicia, ―My husband Gene is very sick. I haven‘t shared this with anyone else at work because I didn‘t want them to think I couldn‘t manage my responsibilities. He was diagnosed last year with progressive Parkinson‘s, and I thought it would move slowly and that I could handle everything. Believe me, I am trying to keep everything under control, but our home life is just overwhelming me already. You couldn‘t imagine how hard this is—physically and emotionally—plus there‘s the added pressure of keeping it under wraps at work. You know they‘ll start diminishing my role on those larger projects if they knew my attention might be diverted, and Gene and I just can‘t risk the financial instability that might cause. I really appreciate being able to talk to you. I had to get this off my chest, and I knew I could trust you.‖ Alicia offered her shoulder and told Maya that she could count on her to cover for her, if need be, or to support her in any way she needed. Three weeks later, Alicia and Maya are separately called into the president‘s office and told that they are both being considered for a more senior-level position. This new position would require a great commitment of both time and energy and would involve taking on a large number of subordinates for mentoring and development. Both women express a strong interest in the position and are told that they will learn of the president‘s decision within 2 weeks. What should Alicia do with the information Maya gave her if anything? Notwithstanding your response to the previous question, if Alicia chooses to inform the president of Maya‘s current situation, would you consider that action to be wrong, or unethical? If you were the president in this current scenario, what could you do to impact the corporate culture in order to ensure that your preferred result in this dilemma occurred in the future?

When discussing the situation between Maya and Alicia, most people encourage Alicia to discuss the situation with Maya and, if Maya asks her to remain silent, then they advise Alicia to do so. Under these circumstances, however, challenge the students to consider how the CEO will feel if he later discovers that Alicia knew about the facts and did not alert him. Maya was to be handed a great deal of responsibility with other peoples‘ careers at stake and Alicia had concerns about her potential, even knew that 1-37 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

she might fail. She was not considering all of the other stakeholders who could potentially be hurt. What if Maya were to be in charge of an area that dealt with issues of public safety? Would that change the circumstances? How can Alicia manage the situation, however, without appearing that she is only considering her own self-interest?

2. Review the discussion in the chapter regarding global labor challenges. Choose a specific issue, such as child labor or sweatshop labor. Go online and find a news story about a particular company accused of employing child labor or sweatshop labor. How did the company involved defend itself against the accusations? Did they deny involvement in those practices, or, rather, defend the practices themselves? Do you find their defense convincing?

Why or why not? Would a different defense be more plausible?

Refer to the PowerPoint slides for this chapter, which include the following arguments: 







Exploitation of cheap and vulnerable labor supplies allows developing countries to expand export activities and to improve their economies. This economic growth brings more jobs, which will cause the labor market to tighten, which in turn will force companies to improve conditions in order to attract workers. Encouraging greater global production will create additional opportunities for expansion domestically, providing a positive impact on more stakeholders.

Opponents to this perspective argue that allowing this process to take its course will not necessarily lead to the articulated result, just as voluntarily improving legal compliance, wages, and working conditions will not inevitably lead to the negative consequences the free market advocates threaten.

Many economically developed countries currently employ child and juvenile labor, albeit with restrictions, and so one should carefully review the social and economic structure within which the labor exists. Though children may work in unhealthy conditions, they also live in unhealthy conditions.

If children are not working, their options are not as optimistic as those for children in developed economies. There are not always sophisticated education systems or public schools. Often children who do not work in the manufacturing industry are forced to work in less hospitable ―underground‖ professions such as drug dealing or prostitution simply in order to provide for their own food each day.

3. We can distinguish due process from just cause in the following way: Imagine a company wanted to abandon the arbitrary nature of employment at will and ensure that its employees were treated fairly in any termination decision. Can you imagine how the employment environment in that firm might be different than in other firms? One approach would be to specify the acceptable reasons for terminating an employee. Obvious candidates would include absenteeism, incompetent job performance, theft, fraud and economic necessity. This approach might also identify unacceptable reasons for dismissal. Such a policy would be identified as a ―just cause‖ practice, since it defines the factors that would justify dismissing an employee for cause. But creating such a list could be a challenge in that one would have to know beforehand all possible reasons for firing someone. As the common law clearly shows, one cannot anticipate all future ways in which something unjust could occur. As a result, a due process policy might be created to complement, or substitute for, a just cause policy. A policy guaranteeing due process, for example, would outline procedures that must be 1-38 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

followed before an employee can be dismissed. The process itself is what determines a just dismissal. If an employer followed the process, the decision would be considered just; if the process was violated, then dismissal would be considered unjust. Such procedures might include regular written performance appraisals, prior warnings, documentation, probationary periods, rights to appeal, or response to accusations. Can you imagine other ways in which this hypothetical firm might change standard processes to ensure fairness?      

What are the key facts relevant to issues of due process and fairness?

What are the ethical issues involved in your decision and implementation?

Who are the stakeholders involved in your decision?

What are alternatives available to you?

How would each of your alternatives affect each of the stakeholders you have identified?

Where might you look for additional guidance to assist you in resolving this particular dilemma?

Suggest that the students take the roles of each player—the decision maker and the affected employees—to be certain the decision is perceived as fair from all perspectives. A group project around this question may be appropriate.

4. What is the difference in your mind and in your common usage between a perception, a generalization, and a stereotype? Can you give an example of each? After doing so, go to the Web and find dictionary-equivalent definitions of the terms to determine whether your common understanding is the correct one. Are each or all consistently unethical judgments, or are they sometimes or always ethically justified in their use and implementation? Under what conditions?

Discuss the definitions of perceptions, generalizations, and stereotypes. Lead group discussion on the differences between these terms and what judgments they imply.

(Please refer to the PowerPoint slides from this chapter, as well.)  

A perception is a mental image or concept.

A generalization is a vague or general statement, typically derived from details of a situation.  A stereotype is an idea held about certain individuals of particular groups based only on membership in that group.

5. A particular research study provides some evidence that those born between 1979 and 1994 are perceived as ―impatient, self-serving, disloyal, unable to delay gratification and, in short, feeling that they are entitled to everything without working for it.‖ The study dubs this group the ―entitlement generation.‖ Do you know people born during those years? Is this true generally, or would you consider the perception instead a stereotype? From where do you think it stems?

Discuss the nature of perception and our own judgment of ourselves.

6. As a result of rising health care costs and the challenge to contain them, companies are trying to encourage employees to take better care of themselves, and some are even penalizing 1-39 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

employees if they do not. Walmart Inc. has announced that starting in 2012, free smoking cessation programs will be made available to employees, but tobacco users will be charged higher health care premiums. A survey conducted by a consulting firm and the National Business Group on Health reports that 40% of large- and mid-sized companies will use penalties in their employee health care system, up from 18% in 2009. What do you think of businesses‘ attempts to decrease health care costs by helping employees to become healthier?

What are the ethical issues associated with a firm‘s choice to cut health care costs by eliminating people who are unhealthy? What rights, duties, responsibilities, and consequences does this strategy imply? Do you think people who don't take care of themselves should be responsible for their increased healthcare costs? How would you feel personally if your past health conditions and current health practices were a part of an employment application?

Challenge the issue of personal accountability versus what corporations should be responsible for. Discuss the shifting of burdens from corporations to individuals, such as putting the responsibility for health care back onto the employee, or increasing health care premiums, if that individual does not take care of themself. Apply the ethical decision-making process to this situation to determine whether this behavior is ethical or not. What about firms that refuse to hire smokers? Or overweight people?

Remember that in the case of the overweight person, refusing to hire that individual could be a violation of the Americans with Disabilities Act. 7. You run a small consulting business that serves a relatively diverse community and has 24 employees in professional positions. You are not subject to Executive Order 11246. You are concerned that, of the employees in professional positions, your workplace has only one African American, no other employees of color, and three women. At this time, your upperlevel management—the top six executives and yourself—are all white males. On the other hand, you have 15 support staff (secretaries and other clerical workers), of whom 14 are women and 11 are either African American or Latino.

Are these concerns valid? Ask the students whether a business must reflect its community and whether it is realistic for a small firm to adequately represent a balanced workforce. Discuss the implications of a workforce that is diverse within its various different segments, but overall is not diverse—such as this firm where the top six executives are all white males, while the support staff consists of 14 women and 11 others who are either African American or Latino.

You would very much like to better represent the community in which you do business and you believe a diverse workforce has significant business benefits. You, therefore, decide to institute a program that will increase the number of minorities and women in professional positions as soon as possible. Is this permissible? Do you have all the relevant facts you will need to answer this question? What steps will you undertake in your plan to increase these proportions, and what pitfalls must you avoid?

An employer's action may be permissible, but there are factors with which employer must comply in order for a voluntary affirmative action plan to be viable and protect the employer from claims of "reverse" discrimination by employees who feel adversely affected by the plan's operation. The plan must be for the purpose of breaking down old 1-40 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

patterns of racial or gender segregation and hierarchy or a manifest imbalance, and it cannot unnecessarily trammel the interests of other employees or create an absolute bar to their advancement and must be temporarily for the purpose of achieving, not maintaining a more balanced workforce. See United Steel Workers of America, AFL-CIO v. Weber, 443 U.S. 193 (1979). Direct students to the section of the chapter related to affirmative action.

8. You are a senior global human resources manager for a large apparel retailer that purchases goods from all over the world. The media has focused a great deal of attention on the conditions of your suppliers‘ workplaces and, for myriad reasons, including a strong commitment to your values-based mission, as well as a concern for your reputation, you are paying close attention to the wages paid to the workers who construct your clothing. Your suppliers in several locations have agreed to talk with you about developing a policy that would apply throughout your operations—now and in the future, wherever you plan to do business—and would impose a minimum wage requirement for all factory workers. You begin to explore some of the resources publicly available to you, such as www.globalexchange.org, www.workersrights.org, www.fairlabor.org, and www.ethicaltrade.org, to find out what other firms are doing and what labor advocates recommend in terms of language for policies such as these. You explore Nike‘s website at www.nikeinc.com, www.adidas-group.com, and others. Now it is time to begin constructing your own policy. What will you include, how specific will you make this policy, how will you determine what will be the ―living wage‖ in each region, and what elements will it contain? Please draft a policy for your company on implementing a living wage worldwide.

Students should utilize the websites provided to draft a policy on implementing a living wage worldwide.

9. As a project manager, Kelly is leading a team on an international business trip where she is scheduled to do a presentation on its project and to negotiate a deal. Just a few days before the trip, Kelly gets a call asking her whether she is willing to let a male member of her team do all the talking because the managers at the company with whom they were planning to do business felt more comfortable dealing with men. Kelly is told that she would still be in charge and that this would never happen again. If this deal works out, it would prove very profitable for the company as well as for Kelly's career. Kelly thinks about the situation in which she finds herself; she has worked very hard on this project and, if the deal is successful, she is bound to get a promotion. On the other hand, she feels discriminated against based on the fact that she is a woman. She has the choice of acting on her principles and calling off the deal, or going ahead with this modification on a ―one-time basis‖ and getting a promotion. After contemplating on the issue for a while, she decides to go ahead with deal and lets someone do all the talking. When they get back, she is promoted, and everybody is happy. What do you think of Kelly's decision? Could this situation be prevented altogether? If you were in a similar situation, what would you choose to do and why?

First, lead students in discussing Kelly‘s options/alternatives. Second, walk students through the ethical dilemmas Kelly would face under each scenario. Third, discuss whether or not Kelly made the right decision. Finally, ask students to develop a creative solution that allows Kelly to satisfy everyone involved, including herself.

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10. Fortune magazine compiles a ―Best Companies to Work For‖ list every year. Go to their website http://money.cnn.com/magazines/fortune/bestcompanies/2011/full_list/ and spot trends or similarities, if any, among the listed companies to find policies or programs that you think may help attract employees.

The class can discuss the similarities between top-rated companies and then decide if those qualities/circumstances make them want to work for those companies. Would students accept lower pay to work for a top-rated company? Would they work for a company with a low rating for a higher paycheck?

IM Chapter 7: Ethical Decision Making: Technology and Privacy in the Workplace Chapter Objectives After reading this chapter, you should be able to: 1. Explain and distinguish the two definitions of privacy.

2. Describe the ethical sources of privacy as a fundamental value.

3. Identify the legal sources of privacy protection, including the concept of a ―reasonable expectation of privacy.‖ 4. Discuss recent development in connection with employee monitoring.

5. Identify and explain the risks involved in a failure to understand the implications of technology and its use.

6. Enumerate the reasons why employers choose to monitor employees‘ work.

7. Discuss the ethics of monitoring as it applies to drug testing.

8. Discuss the ethics of monitoring as it applies to polygraphs, genetic testing, and other forms of surveillance.

9. Explain the interests of an employer in regulating an employee‘s activities outside of work.

10. Discuss the implications of world events, like recent immigration policy changes, on business decisions about privacy.

Opening Decision Point Monitoring Employees in the Workplace and Elsewhere This is a new Opening Decision Point for this chapter. The case details how one company is marketing technology that would allow employers to track employees via their digital devices throughout the workday. Students might be asked to consider the following questions as they prepare for class discussion:   

It is often said that one cannot manage what one cannot measure. Is it good management practice to measure an employee‘s every activity?

As consumers, we have grown used to our activities being tracked by such companies as Google, Facebook, and Amazon. How, if at all, is this any different from your employer tracking your behavior?

Are there different reactions to this case among students of different ages? Different cultural backgrounds? Different academic majors?

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

To what degree should employee monitoring extend to employees who work from home?

Does a student‘s own view of monitoring differ depending on location at work or at home?

Who or why not?

I.

Introduction

II.

Even before the widespread shift toward work from home that took place during the pandemic, there were growing concerns about the blurring of boundaries between work and home. For example, in 2019, law professor Jeffrey Hirsch warned of an impending onset of the ―blended workplace,‖ a concept that saw the blending of work and home. Hirsch cautioned each of us—as employees or future employees—that the ease of technology while making some jobs and activities easier to perform would be ―simultaneously providing employers more tools to monitor and control workers—thereby shifting the balance of power further toward business and away from labor.‖ Hirsch claimed that benefits from the technology that creates better working conditions would be far outweighed by the threats to worker autonomy and potentially worse infringements. a. Privacy: Privacy issues in the workplace raise ethical issues involving individual rights as well as those involving utilitarian consequences. i.

Workplace privacy issues evoke an inherent conflict between the rights of employers to protect their interests and the rights of employees to be free from wrongful intrusions into their personal affairs.

ii.

Conflicts can arise in the workplace environment through the regulation of personal activities or personal choices or through various forms of monitoring.

b. Monitoring: Contrasting utilitarian arguments can be offered on the ethics of monitoring employees.

A new Reality Check: The previous Opening Decision Point has been rewritten as a new Realty Check: Being Smart about Smartphones.

The case asks students to imagine that their work team is assembled in a client‘s conference room, pitching a new database system. This pitch concerns an important sale, so while a colleague presents your team‘s slides detailing the benefits of your system, you watch the client‘s team carefully for their reactions and take detailed notes on your smartphone. The client‘s chief information officer (CIO) and chief financial officer (CFO) are both present, and you are paying special attention to the CIO, watching her reaction to each feature mentioned during the presentation. By the end of the meeting, you have typed up a brief report that will help your team to prepare for the follow-up visit that is planned for the following week. When you get back to your own office, your boss—the head of sales—is waiting for you. ―This deal is dead in the water,‖ he says. ―I just got a call from our client‘s CFO, and she is furious. She says that you spent the entire meeting fiddling with your phone instead of paying attention. What on earth were you thinking?‖ While your boss is speaking, you feel your phone vibrating. You are expecting a call from another key client, one who does not like to have to chase you down— 1-43 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

ever! Of course, clearly this is not a good time to take a call. But it also is not a good moment to lose a key client either. You know the phone currently is set to ring with a sound after three vibrating alerts.      III.

Please list as many ethical issues as you can identify that are raised by the use of smartphones in the workplace.

Did you do anything wrong this morning in the meeting? Clearly, this morning‘s client was offended. Having the benefit of hindsight now, how might you have handled your actions this morning differently in order to have prevented that offense?

At what point does behavior some might consider impolite—for instance, actions that might offend others, such as answering emails during a meeting or even playing games because you are bored or tired—cross the line into unethical behavior?

What type of policy would you suggest for an organization regarding the use of smartphones in the workplace, if any? Should the rules be different for using smartphones during in-house meetings versus during meetings with clients or suppliers?

What will you do next? Will you answer your phone? How will you answer your boss‘s concerns?

The Right to Privacy a. Protection of Privacy Rights: With the tremendous increase in computer technology in recent decades, calls for greater protection of privacy rights have increased. i.

There is widespread confusion concerning the nature, extent, and value of privacy.

ii.

Some Western countries do not acknowledge a legal right to privacy as it is recognized in the United States (though recall that the U.S. Constitution makes no explicit mention of the right to privacy), while others seem far more sophisticated in their centralized and consistent approaches to personal privacy issues.

iii.

A Supreme Court decision in 2022 (Dobbs v Jackson) overturned previous court decisions that had grounded the right to abortion in a constitutional right of privacy, and one supporting opinion (by Justice Thomas) suggested that other decisions that rest upon a purported Constitutional right to privacy, such as a right to marriage equality and contraception, should likewise be revisited.

These cases can be used to emphasize the relevance of privacy in contemporary settings.

b. Defining Privacy: *Chapter Objective 1 Addressed Below* i.

Two general and connected understandings of privacy are: 1. Privacy as a right to be “left alone” within a personal zone of solitude.

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2. Privacy as the right to control information about oneself. ii.

Privacy is important because it establishes the boundary between individuals and thereby serves to define one‘s individuality.

iii.

The right to control certain extremely personal decisions and information helps determine the kind of person we are and the person we become.

c. Conflicting Beliefs about Privacy: i.

Many people believe that a right to be let alone is much too broad to be recognized as a moral right (i.e., employees at a workplace are not going to be left alone).

ii.

Others have concluded that a better understanding focuses on privacy as involving the control of personal information.

1. From this perspective, the clearest case of an invasion of privacy occurs when others come to know personal information about us, as when a stranger reads your email or eavesdrops on a personal conversation.

2. Yet, the claim that a right of privacy implies a right to control all personal information might also be too broad.

d. Philosophical Argument: Philosopher George Brenkert has argued that the informational sense of privacy involves a relationship between two parties, A and B, and personal information X about A. i.

Privacy is only violated when B comes to know X, and no relationship exists between A and B that would justify B knowing X.

ii.

Limiting access of personal information only to those with whom one has a personal relationship is one important way to preserve one‘s own personal integrity and individuality.

iii.

It is perhaps that choice of limitation or control that is the source of one‘s sense of privacy.

** Teaching Note: To drive home the relevance of privacy to today‘s students, sometimes it is important to find topics on which they feel vulnerable. Perhaps the abortion and same-sex cases mentioned previously are too threatening or controversial to encourage open discussion and debate. One of those topics might be how long something can follow them into the future.

Consider discussing whether a university should identify the reason behind a dismissal (expulsion) of a student if it was for academic integrity reasons or because of a sexual assault.

Should a university disclose this information on the student‘s transcript such that it would follow 1-45 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

them for the rest of their lives? Should they disclose such information as a means of protecting others from harm? e. Ethical Sources of a Right to Privacy: *Chapter Objective 2 Discussed Below* i.

Social Contract: The right to privacy is founded in the individual‘s fundamental, universal right to autonomy. This right is restricted by a social contract in our culture that prevents us from infringing on someone else‘s right to their personal autonomy.

ii.

Philosopher Patricia Werhane describes this boundary as a ―reciprocal obligation‖; that is, for an individual to expect respect for their personal autonomy, that individual has a reciprocal obligation to respect the autonomy of others.

iii.

Applied to the workplace: reciprocal obligation implies that, while an employee has an obligation to respect the goals and property of the employer, the employer has reciprocal obligation to respect the rights of the employee as well, including the employee‘s right to privacy.

iv.

Kant links the moral worth of individuals to ―the supreme value of their rational capacities for normative self-determination‖ and considers privacy a categorical moral imperative.

f. Hypernorms: Ethicists Thomas Donaldson and Thomas Dunfee have developed an approach to ethical analysis that seeks to differentiate between those values that are fundamental across culture and theory, ―hypernorms,‖ and those values that are determined within ―moral free space‖ and that are not hypernorms. i.

They propose that we look to the convergence of religious, cultural, and philosophical beliefs around certain core principles as a clue to the identification of hypernorms. (Examples: the right to personal freedom, the right to informed consent)

ii.

Individual privacy is at the core of many of these basic minimal rights and is a necessary prerequisite to many of them. Ultimately, the failure to protect privacy may lead to an inability to protect personal freedom and autonomy.

iii.

A discussion of privacy in the context of liberty and autonomy may be just North American based. A European foundation would be based on the protection of human dignity.

* Reference: Reality Check ―Privacy: Europe Compared to the United States‖

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g. Property Rights: Legal analysis of privacy using a property rights perspective yields insight into personal freedoms and rights. i.

―Property‖ is an individual‘s life and all nonprocreative derivatives, such as thoughts, ideas, and personal information, of their life.

ii.

The concept of property rights involves a determination of who maintains control over tangibles and intangibles, including personal information.

iii.

Property rights relating to personal information thus define actions that individuals can take in relation to other individuals regarding their personal information.

iv.

Private property rights depend upon the existence and enforcement of a set of rules that define who has a right to undertake which activities on their own initiative and how the returns from those activities will be allocated.

h. Legal Sources of a Right to Privacy in the United States: *Chapter Objective 3 Addressed Below* i.

The law has not yet caught up with the technology involved in employee privacy. As a result, this is one area where simply obeying the law may fall far short of responsible management practice (i.e., While the law may be very clear with regard to tapping a worker‘s telephone, it is less clear with monitoring a worker‘s email or text messages on a handheld device).

ii.

Privacy can be legally protected in the United States in three ways: by the constitution (federal or state), by federal and/or state statutes, and by the common law.

1. Common law refers to the body of law comprised of the decision handed down by courts, rather than specified in any particular statutes or regulations.

2. The U.S. Constitution‘s Fourth Amendment protection against an unreasonable search and seizure governs only the public sector workplace because the Constitution applies only to state action.

Therefore, unless the employer is the government or other representative of the state, the Constitution generally will not apply.

3. Statutes also offer little, if any, protection from workplace intrusions.

iii.

The Electronic Communications Privacy Act of 1986 (ECPA) prohibits the "interception" or unauthorized access of stored communications.

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1. The courts have rule that ―interception‖ applies only to messages in transit and not to messages that have actually reached company computers. Therefore, the impact of ECPA is to punish electronic monitoring only by third parties and not by employers.

2. The ECPA allows interception where consent has been granted. A firm that secures employee consent to monitoring at the time of hire is immune from ECPA liability. *Reference: ―Reality Check—Eyes in the Sky‖* iv.

Some states rely on statutory protections rather than common law. Others provide constitutional recognition and protection of privacy rights.

1. In all states except California, application of this provision to private sector organizations is limited, uncertain, or not included at all.

v.

―Intrusion into seclusion‖ is an invasion of privacy legal violation that occurs when someone intentionally intrudes on the private affairs of another when the intrusion would be ―highly offensive to a reasonable person.‖ 1. EXAMPLE: In City of Ontario v. Quon (2010), the U.S. Supreme Court addressed the issue of employer monitoring for the first time. a. Two California police officers were disciplined after an audit of text messages on city-issued devices found that many of the officers' texts were personal in nature. Though the officers had been assured by their supervisor that an audit would not be performed, the Court determined that the audit was permissible nonetheless because the review of the messages was reasonably "work-related." b. However, relying on the Quon case as precedent for protection in regard to electronic surveillance of employees is a double-edged sword. c. Under the Quon precedent, how much protection for electronic communications, the Fourth Amendment will provide to employees remains unclear. d. As well, those protections do not extend to the private sector.

Remember that the employer in Quon was a government agency.

2. In a subsequent case, Riley v. California, the U.S. Supreme Court unanimously found explicit protection under the Fourth Amendment of cell phones and other similar devices.

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a. Employers may wish to consider more carefully the nature and extent of searches they may conduct on these devices, but also whether their policies are drafted clearly enough to alert employees of the potential scope of such searches and the level of privacy employees can expect. i. Notice: Many recent U.S. court privacy decisions seem to depend on whether the worker had notice that the monitoring might occur. i.

An employee‘s legitimate and reasonable expectation of privacy is the basis for finding an invasion of privacy. If an employee has actual notice, then there truly is no real expectation of privacy.

1. This conclusion was supported in K-Mart v. Trotti, where the court held that search of an employee‘s company-owned locker was unlawful invasion since the employee used his own lock. However, in Smyth v. Pillsbury, the court held that monitoring is allowed even when a firm promised not to monitor.

2. Evidence of the impact of this decision is the fact that only two states, Connecticut and Delaware, require employers to notify workers when they are being monitored.

3. Increasingly, however, states are enacting laws to limit employer monitoring powers. As of 2018, 26 states (plus Guam) prohibit employers from obtaining social media passwords from prospective or current employees.

*Reference Table 7.1 Here* j. Global Applications: The unpredictable regime of privacy protection is all the more problematic to maintain when one considers the implications of the European Union‘s General Data Protection Regulation (GDPR). i.

The GDPR provides that personal information cannot be collected nor shared by companies without individuals‘ permission. Information about who is using the data and for what purpose it is being collected must be provided in a clear, easily understandable manner. Further, consumers have the right to review the data, correct inaccuracies, and request that they be erased.

ii.

All companies – regardless of their size or location—are required to comply with GDPR if they offer free or paid goods or services to E.U. residents and collect the consumer's personal information. (i.e., even small companies based in the United States can still be subject to this law)

iii.

The European Union does not allow the transfer of data on its citizens outside of the country unless the country is deemed to have adequate data privacy 1-49

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laws. Unfortunately, the E.U. has deemed that the United States does not have adequate data privacy laws, but organizations can navigate this by adhering something called the "Privacy Shield.‖ Under this agreement, U.S. companies must adhere to a detailed set of standards, which surpass what U.S. law typically requires. * Reference: Table 7.2 here * k. Legal Uncertainty: Ethics is perhaps the only source of an answer to the legal uncertainty or instability concerning the challenging areas of information gathering. l. Business Implications: What are the implications of this understanding of privacy for businesses and for business ethics analysis? i.

One would argue that personal information should remain private unless a relationship exists between the business and the individual that legitimates collecting and using personal information about that individual.

ii.

The nature of the employment relationship helps determine the appropriate boundary between employers and employees and, therefore, the information that ought to remain rightfully private within the workplace.

iii.

If we adopt something like a contractual model of employment, where the conditions and terms of employment are subject to the mutual and informed consent of both parties, then employee consent would become one major condition on what information employers can collect.

iv.

Employee privacy is violated whenever: 1. Employers infringe upon personal decisions that are not relevant to the employment contract (whether the contract is implied or explicit) 2. Personal information that is not relevant to that contract is collected, stored, or used without the informed consent of the employee.

v.

The burden of proof: rests on the employer to establish the relevancy of personal decisions and information at issue.

Decision Point Inquiring Employers Want to Know This Decision Point addresses the boundaries of privacy within an employment application. The following information is sometimes requested on standard employment applications, though candidates might consider some of it to be private or personal. Which of the following items about an employee might an employer have a legitimate claim to know, and why? What information might lead to unreasonable intrusions or discriminatory practices, and why? 

A job applicant‘s social security number 1-50 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

       

An applicant‘s arrest record An employee‘s medical records An employee‘s marital status Whether a job applicant smokes An employee‘s political affiliation An employee‘s sexual orientation An employee‘s credit rating An employee‘s prior salary

Students should consider the following questions in their assessment of this scenario:     IV.

What facts are relevant to your decisions?

What would the consequences be of refusing to answer any questions on an employment application?

Are you basing your decision on particular rights of the employee or the employer?

Are there people other than the employer and employee who might have a stake in what information is released to employers?

Linking the Value of Privacy to the Ethical Implications of Technology

A new Reality Check has been included here: How Much Is Enough? What Do You Owe Your Employer while at Work?

Students can sometimes assume that employees owe employers their full attention and focus while at work and any nonwork-related activity is a failure to do one‘s duty to employers. Thus, employers are justified in monitoring employee behavior to discover any nonwork-related activity. But is this reasonable? What do employees owe to their employer, and how should this be determined? This case asks students to consider how the labor market functions and considers whether pay and performance should be linked. a. Challenging Privacy: The advent of new technology challenges privacy in ways we could never before imagine. Consider the implications technology has for: i.

Employee and employer expectations regarding the use of time.

ii.

The distinction between work use and personal use of technology.

iii.

The protection of proprietary information.

iv.

Performance management.

v.

Privacy interests.

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vi.

Accessibility issues related to the digital divide.

b. Increased Opportunities and Challenges: i.

Technology allows for in-home offices, raising extraordinary opportunities as well as challenges, issues of safety, and privacy concerns.

ii.

Because technology allows each of us to be more productive, it provides us benefits and allows employers to ask more of each employee.

iii.

Advances in technology seem to blur boundaries between leisure and work time, as well as between our places of work and our homes.

c. Value Judgments: New technology does not necessarily impact our value judgments but instead simply provides new ways to gather the information on which to base them. i.

Consider the attacks of September 11, 2001, on a U.S. employer‘s decision to share personal employee information or customer information with law enforcement. Private firms may be more willing, or less willing, today to share private information than they would have been previously.

d. New Technology Means New Challenges: Firms often experience, and find themselves ill-prepared for, unanticipated challenges stemming from new technology. i.

EXAMPLE: An employee at PhoneDog, a company that provides mobile device news and reviews, created a work-related Twitter account that amassed 17,000 followers. When he left the company, he kept control of the account and used it as his personal account. The company sued, but the employee claimed that the account belonged to him. The case is ongoing, but regardless of the outcome, it illustrates the dangers of failing to establish clear policies governing the use new technologies as they arise in the workplace.

e. New Ethics for a New Economy? i.

The same values one held under previous circumstances, if they are true and justified, should permeate and relate to later circumstances.

ii.

Perspectives are impacted by the understanding and use of new technology.

iii.

An economist, Antonio Argandona, cautions about the change in values that may be caused by opportunities created by technology, but he also points to the good that new technology could do, including developing depressed areas, defending human rights, and increasing citizenship participation.

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f. Information and Privacy: i.

Businesses need to be able to anticipate the perceptions of their stakeholders in order to be able to make the most effective decisions for their long-term sustainability. New technology can be confusing for the public, so it helps to plan ahead for technological changes.

ii.

Trust is the key issue with the introduction of new technology.

1. EXAMPLE: The motto at Google, the internet-based search engine, is ―don‘t be evil‖ (originally used as its core motto, now retained as the last sentence of its Code of Conduct). The company is sensitive to stakeholder concerns as it develops new technology (such as a choice not to allow gun ads).

iii.

When consumers rely on technology provided by a business, they might easily assume that the business will respect their privacy. They would like to believe that those responsible for the technology are, themselves, accountable to the user.

* Reference Decision Point: ―Technology Dilemmas‖ Decision Point Technology Dilemmas This Decision Point addresses questions about using technology for ―good‖ or ―evil‖ raised by an anonymous web posting by an employee who has been directed by management to use a computer program to spy on a colleague. The employee seeks general thoughts and advice regarding legal protection against liability for following this directive.

Students should consider the following questions in assessing this scenario:     

What are the key facts relevant to your response?

What is the ethical issue involved in peer spying in the workplace?

Who are the stakeholders?

What alternatives would you suggest to this individual, and what alternatives exist for employers who wish to gather information about employees surreptitiously?

How do the alternatives compare; how do the alternatives affect the stakeholders?

g. Should Moral Requirements Be Imposed? i.

Economist Antonio Argandona contends that if new technology is dependent on and has as its substance information and data, then significant moral requirements should be imposed on that information. He suggests the following necessary elements: 1-53

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1. Truthfulness and accuracy: The person providing the information must ensure that it is truthful and accurate, at least to a reasonable degree.

2. Respect for privacy: The person receiving or accumulating information must take into account the ethical limits of individuals‘ (and organizations‘) privacy. This would include issues relating to company secrets, espionage, and intelligence gathering.

3. Respect for property and safety rights: Areas of potential vulnerability, including network security, sabotage, theft of information, and impersonation, are enhanced and must therefore be protected.

4. Accountability: Technology allows for greater anonymity and distance, requiring a concurrently increased exigency for personal responsibility and accountability. ii.

V.

How might firms respond to this call for responsibility in the development, manufacture, marketing, and service related to new production or other corporate activities? What ethical issues does this proposal raise?

Managing Employees through Monitoring *Chapter Objective 4 Addressed Below* A New Reality Check has been included here: Work at Home Flexibility: A Two-Way Street?

The situation described here involves broader issues than only employee monitoring. As more employees are working from home, finding an ethically proper balance between expectations of work and the expectations of personal home life is challenging. This case ties these questions to the broader topic of work-life balance and the older ―mommy-track‖ debates of the 1980s and 1990s. This can also be easily connected back to the question of meaningful work and the "great resignation‖ discussed in Chapter 6. a. Monitoring in the Workplace: One of the most prevalent forms of information gathering in the workplace is employer monitoring of employees‘ work; and technology has afforded employers enormous abilities to do this effectively at low costs. i.

DATA: According to one survey, 88% of employees use social media at least once during the workday and 18% check more than 10 times each day.

ii.

DATA: There is an increasing trend within mid- to large-sized U.S. firms with regard to employee email and internet monitoring.

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1. A survey conducted by the American Academy of Management found that nearly 80% of large companies monitor their employees‘ use of email, internet, and phone. That number rises to 90% for firms in particularly sensitive industries.

2. Productivity is a primary concern for employers who feel their employees bring too much of their personal lives to the workplace.

One CareerBuilder.com survey found that 41% of workers named "the Internet" as the largest productivity killer at work, while 37% named "social media.‖ 3. Employee monitoring has even crossed the threshold from computer use to body autonomy. Biotracking technology allows employers to record the number of steps that employees take in a day, their heart rate, what they eat and drink, how much sleep they get and even their hormone levels. The information gathered from this technology often is incorporated into employee wellness programs. One employer has even begun testing tracking implants in employees. *Chapter Objective 5 Addressed Below* b. Hidden Ethical Issues: Many of the ethical issues that arise in the area of managing information are not readily visible. i.

When we do not completely understand the technology, we might not understand the ethical implications of our decisions and we are not able effectively to protect our own information.

1. When we mistakenly believe that no one is watching, we may engage in activities that we would otherwise refrain from doing, such as deleting an email message that we do not want anyone to read.

ii.

A knowledge gap exists between people who understand the technology and others who are unable to protect themselves because they do not understand.

c. Access: Technology allows for access to information that was never before possible. i.

Access can take place unintentionally, such as a supervisor discovering personal information during a routine background check.

ii.

Technology allows us to work from almost anywhere on the planet, so we are seldom out of the boundaries of our workplace.

1. Our total accessibility creates new expectations and therefore conflicts. It raises such questions as: How long is it reasonable to wait before responding to email? Should a text message be considered more urgent than an email, or do the same answers apply?

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iii.

Continuous accessibility blurs the lines between our personal and professional lives.

*Reference: ―Reality Check – ―Is Privacy Perception a Factor of Age?‖* iv.

Another challenge posed by the new technology in the workplace is the facelessness that results from its use.

1. If we have to face someone as we make our decisions, we are more likely to care about and take into account the impact of our decision on that person.

2. When one puts something in writing, we assume that people mean what they say, and we hold them to it as a precise rendering of their intent. To the contrary, we consider email, texting, and posting on social media sites to be more akin to conversation, and treat it as such, lobbing notes back and forth, much as we would in a conversation, and permitting the idiosyncrasies that we would allow when speaking.

d. Ten Commandments: The Computer Ethics Institute has created ―The Ten Commandments of Computer Ethics,‖ to address some ethical issues presented by increased computer use. They include the following: i.

Thou shalt not snoop around in other people‘s computer files.

ii.

Thou shalt think about the social consequences of the program you are writing or the system you are designing.

iii.

Thou shalt always use a computer in ways that insure consideration and respect for your fellow humans.

*Reference Table 7.3 Here*

*Chapter Objective 6 Addressed Below* e. Reasons for Monitoring: i.

Employers need to manage their workplaces to place workers in appropriate positions, to ensure compliance with affirmative action requirements, and to administer workplace benefits.

ii.

Monitoring also allows the manager to ensure effective, productive performance by preventing the loss of productivity to inappropriate technology use.

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iii.

DATA: Research evidences a rise in personal use of technology; of the 6.8 billion people on the planet, 5.5 billion have access to a mobile phone.

1. Nearly 95% of North Americans, 85.2% of Europeans, and a total of just over 54.4% of the world had Internet access in 2017.

2. More than 3 billion around the world now use social media each month, with 9 out 10 accessing the various platforms via mobile phone. .

3. A 2017 survey found that, during a typical workday, the average office employees spends 56 minutes using their cell phone at work for nonwork activity ; 44% are conducting Internet searches unrelated to work; and 36% are checking personal social media accounts.

*Reference: Table 7.3 * f. Legal Liability: i.

Given the courts‘ focus in many cases on employer response to claims of sexual harassment or unethical behavior, firms believe they need a way to uncover their inappropriate behaviors.

1. Twenty-eight percent of American employers report that they've fired people for using the internet for nonwork-related activity (such as shopping online or using social media) during the workday and 18% have dismissed employees because of something they posted on social media. The main reasoning behind someone getting fired is posting racist, sexist, and inappropriate comments.

ii.

Courts maintain the standard in many cases of whether the employer ―knew or should have known‖ of wrongdoing, so it seems that the expectation is that firms are monitoring their employees to discover these wrongdoings.

*Chapter Objective 7 Addressed Below* g. Monitoring Employees through Drug Testing: Drug testing is one area in which employers have had a longer history of monitoring employees. i.

Recent changes in the law, such as the legalization of marijuana in many jurisdictions for medical or recreational purposes, have made for complicated workplace dilemmas.

1. The psychoactive ingredient in marijuana, THC, remains in one‘s system for as long as 30 days after use. If a person legally uses marijuana on their own time, the THC will remain in their system and show up on any testing that may occur during work hours.

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2. In several U.S. states—including Connecticut, Maine and Massachusetts—courts have ruled in certain cases that an employee testing positive for marijuana has a viable claim against an employer for enforcing drug-free workplace policies. Maine is the only state that has passed legislation to explicitly protect workers from adverse employment action based on their use of marijuana and marijuana products (both recreational and medicinal), provided the use occurs away from the workplace. Determining when the use occurred is still a difficult question to answer. In 12 states—Arkansas, Arizona, Connecticut, Delaware, Illinois, Maine, Massachusetts, Minnesota, Nevada, New York, Pennsylvania, and Rhode Island—medical marijuana users have certain job protections, so pre-employment screens or random screens could trigger job protections in those states. ii.

The employer has a strong argument in favor of drug or other substance testing based on the law.

iii.

Since the employer is often responsible for legal violations its employees committed in the course of their job, the employer's interest in retaining control over every aspect of the work environment increases.

1. Employees may argue that their drug usage is only relevant if it impacts their job performance.

iv.

Consider the possibilities of incorrect presumptions in connection with drug testing.

1. An employer may decide to test based on common "signs" of drug use.

But is it ethical to presume someone is guilty based on those signs?

v.

DATA: A 2018 poll of more than 6,000 human resource professionals in the United States found that 63% of companies require job candidates to take a pre-employment drug test.

1. Though drug testing may provide a productivity benefit for companies, such policies may introduce legal and ethical challenges for employers.

2. DATA: A 2017 study by Quest Diagnostics, a popular provider of workplace drug tests, revealed that testing positive for drug use was at its highest rate in 12 years (4.2%) in the United States.

3. However, there has been a slow decline in the number of preemployment drug tests due to the growing legality and social acceptance of marijuana in the U.S. Drug testing restricts the job pool, and in a tight labor market, that has an impact on productivity and growth. Employers cited an inability by applicants to pass drug 1-58

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tests among reasons for difficulties in hiring, according to surveys conducted by the U.S. Federal Reserve in 2017.

4. The Americans with Disabilities Act prohibits employers from inquiring about employee prescription drugs unless the employer has a reasonable basis for believing that the worker poses a safety threat or is unable to do his or her job. vi.

In the seminal legal case on the issue, Skinner v. Railway Labor Executives' Ass'n, the Court addressed the question of whether certain forms of drug and alcohol testing violate the Fourth Amendment.

1. The defendant justified testing railway workers based on safety concerns: "to prevent accidents and casualties in railroad operations that result from impairment of employees by alcohol or drugs.

2. The court held that ―[t]he Government's interest in regulating the conduct of railroad employees to ensure safety, like its supervision of probationers or regulated industries, or its operation of a government office, school, or prison, likewise presents 'special needs' beyond normal law enforcement that may justify departures from the usual warrant and probable-cause requirements."

3. The issue for the Court was whether, absent a warrant or individualized suspicion, the means by which the defendant monitored compliance with this prohibition justified the privacy intrusion. The Court concluded that it did because the proposed testing ―is not an undue infringement on the justifiable expectations of privacy of covered employees.‖

h. Public Interest in Drug Testing: Where public safety is at risk, there is arguably a compelling public interest claim from a utilitarian perspective that may be sufficiently persuasive to outweigh any one individual‘s right to privacy or right to control information about oneself. i. Drug-Free Workplaces: Several major retail employers, like Home Depot, Ikea, and Wal-Mart, have comprehensive drug-testing policies for job applicants and employees and promote these drug-free workplace policies as a marketing strategy.

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* Reference: Decision Point, ―Limits on Personal Information in Hiring‖ * Decision Point Limits on Personal Information in Hiring What limits should be placed on the reasons a job applicant can be denied employment? As we discussed earlier, the law prohibits denying someone a job on the basis of race, religion, ethnicity, gender, or disability. The law generally allows denial of a job on the basis of drug use.

Like employment at will, the burden of proof lies with the job applicant to demonstrate that the denial was based on the prohibited categories; otherwise, employers need no reason to deny someone a job. Suppose a business wanted to ensure not only a drug-free workplace but also an alcohol-free workplace. Would a business have the ethical right to deny a job, or dismiss an employee, for drinking alcohol? Courts have been asked to decide the legitimacy of dismissals for cigarette smoking, for political beliefs, and for having an abortion. Do you think any of these are legitimate grounds for dismissal? Between 50% and 60% of U.S. employers evaluate applicants‘ personalities with assessment tools. Such tests ask many personal questions, including some that concern a person‘s sexual life. Would a business have an ethical right to deny employment to someone on the basis of the results of a personality test?

What are some of the questions or concerns you might raise in trying to answer the above challenge? What would you suggest a business do to respond to them?

Students should consider the following questions when assessing this scenario:     

What are the key facts relevant to your response?

What are the ethical issues involved in basing hiring decisions on personal information?

Who are the stakeholders?

What alternatives would you suggest to businesses in considering personal information in hiring, and what alternatives exist for employers?

How do the alternatives compare for business and for the stakeholders?

Some argue that companies run the risk of bias when conducting personality tests for hiring, particularly in regards to diversity of thoughts. One issue centers on the argument that certain personality traits are not relevant to job performance. But if hiring managers believe that they are, they might miss out on talents who don‘t fit the personality type, but whose skills, motivations, and other attributes bring a lot of value to the company. This example is well illustrated in the technology industry. As Bloomberg journalist Emily Chang recounts in Brotopia: Breaking Up The Boy’s Club Of Silicon Valley, during the mid-1960s, the tech industry hired two psychologists, William Cannon and Dallis Perry, to determine what type of individuals would make successful programmers. First, they concluded that such individuals needed to enjoy problem solving. Second, they concluded that good programmers ―don‘t like people.‖ Five and a half decades later, this stereotype continues to persist, even though product gaffes have shown, time and time again, of the dangers of not having emotionally intelligent developers who can understand their users‘ concerns and point of view.

Another consideration that is currently being investigated by the Equal Employment Opportunity Commission (EEOC) and in litigation based on the ADA is whether personality tests adversely 1-60 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

impact individuals with certain mental illnesses such as depression or bipolar disorder. The EEOC is concerned because the tests ask respondents to answer questions honestly, such as ―over the course of the day, I can experience many mood changes,‖ and ―if something very bad happens, it takes some time before I feel happy again.‖ Employers are watching and waiting for the EEOC‘s decision because a ruling against personality tests would ―set a tremendous precedent,‖ forcing companies and test makers to prove their tests are not discriminatory, says Marc Bendick, an economist and consultant who studies workforce diversity issues.     

VI.

If you were researching this issue for the EEOC, would you conclude that these questions violate the ADA? Do the questions listed inappropriately ask these individuals to reveal a disability?

Do you conclude that answering these questions may adversely impact their potential employment?

If so, is there an alternative way of protecting against this discrimination while still retaining these assessments?

How do the alternatives compare for business and for the stakeholders involved?

Other Forms of Monitoring a. Limitations: Employers are limited in their collection of information through other various forms of testing, such as polygraphs or medical tests. i.

Employers are constrained by a business necessity and relatedness standard, or by a requirement of reasonable suspicion.

ii.

With regard to medical information, employers‘ decisions are not only governed by the Americans with Disabilities Act but also restricted by the Health Insurance Portability and Accountability Act (HIPPA) in the United States.

1. HIPPA stipulates that employers cannot use ―protected health information‖ in making employment decisions without prior consent.

2. Protected health information includes all medical records or other individually identifiable health information.

*Chapter Objective 8 Addressed Below* iii.

In recent years, polygraph and drug testing, physical and electronic surveillance, third-party background checks, and psychological testing have all been used as means to gain information about employees. More recently, electronic monitoring and surveillance are increasingly being used in the workplace.

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iv.

Genetic testing is one area that is sure to provide new questions about privacy.

v.

The Genetic Information Non-Discrimination Act of 2008 (GINA) became effective in the United States in November 2009 and prohibited discriminatory treatment in employment based on genetic information.

1. Under GINA, your genetic information is not merely information about you but also your family‘s medical history, including any disease or disorder, or genetic test results of a family member. The term ―family member‖ includes your dependents and relatives all the way to the fourth degree of kinship.

2. In addition, GINA mandates that employers be extremely careful in terms of how they gather and manage employee genetic information as they are subject to similar conditions to the Americans with Disabilities Act. 3. GINA does provide for exceptions. a. For instance, an employer can collect genetic information in order to comply with the Family Medical Leave Act or to monitor the biological effects of toxic substances in the workplace. b. Although GINA contains a strict confidentiality provision, an employer may release genetic information about an employee under certain specific circumstances: 1. To the employee or member upon request; 2. To an occupational or other health researcher; 3. In response to a court order; 4. To a government official investigating compliance with this Act if the information is relevant to the investigation; 5. In connection with the employee's compliance with the certification provisions of the Family and Medical Leave Act of 1993 or such requirements under state family and medical leave laws; or 6. To a public health agency.

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c. Finally, there is a "safe harbor" liability exception for employers that inadvertently receive genetic information in response to a lawful medical inquiry, so long as the employer has notified the respondent of her or his GINA rights.

4. GINA could represent a possible privacy intrusion not only into the individual employee's personal privacy but also the worker's family's information. Can discrimination based on genetic information ever be an ethically justified basis for an employment decision? * Reference Reading 7-4, ―Genetic Testing in the Workplace‖ * b. Business Reasons to Limit Monitoring: Employee advocates suggest limitations on monitoring for several reasons. i.

There is a concern that monitoring may create a suspicious and hostile workplace.

1. Monitoring reduces the level of worker autonomy and respect, as well as workers‘ right to control their environment. The employer neglects to consider the worker.

2. Monitoring may arguably constrain effective performance since it can cause increased stress and pressure, negatively impacting performance and having the potential to cause physical disorders.

3. One study found monitored workers suffered more depression, extreme anxiety, severe fatigue or exhaustion, strain injuries, and neck problems than unmonitored workers.

4. These elements will lead to an unhappy, disgruntled worker who perhaps will seek alternative employment, and also to lower productivity and performance that will lead to higher costs and fewer returns to the employer.

ii.

Employees claim that monitoring is an inherent invasion of privacy that violates their fundamental human right to privacy.

c. Balancing Interests: Where should the line be drawn between employer and employee rights? i.

As long as technology exists to allow for privacy invasions, should the employer have the right to use it? Consider whether monitoring could be made ethical or humane: 1. Provide employees with notice of monitoring and allow them the opportunity to avoid monitoring in certain situations, such as using a 1-63

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nonmonitored phone at designated times in order to make personal phone calls. ii.

Taking this approach does not solve all concerns about monitoring. If you tell the employees who will be monitored, they are sure to be on their best behavior.

1. This effect of employer monitoring is termed the ―Hawthorne Effect‖: workers are found to be more productive based on the psychological stimulus of being singled out, which makes them feel more important.

2. Random, anonymous monitoring may better resolve the employer‘s concerns.

iii.

Perhaps the most effective means to achieve monitoring objectives while remaining sensitive to the concerns of employees is to strive towards a balance that respects individual dignity while also holding individuals accountable for their particular roles in the organization.

d. Developing a Monitoring Program: i.

A monitoring program developed according to the mission of the organization (for example, with integrity), then implemented in a manner that remains accountable to the impacted employees, approaches that balance.

ii.

Parameters for a monitoring policy: 1. No monitoring in private areas (e.g., restrooms).

2. Monitoring limited to within the workplace.

3. Employees should have access to information gathered through monitoring.

4. No secret monitoring—advance notice required.

5. Monitoring should only result in attaining some business interest.

6. Employer may only collect job-related information.

7. Agreement regarding disclosure of information gained through monitoring.

8. Prohibition of discrimination by employers based on off-work activities.These parameters allow the employer to effectively and ethically supervise the work employees do, protect against misuse of resources, and to have an appropriate mechanism by which to evaluate each 1-64

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worker's performance, thus respecting the legitimate business interest of the employer.

1. Global organizations such as the International Labor Organization (ILO) support these parameters for monitoring. *Refer to Table 7.4 Here* iv.

Philosopher William Parent conceives the right to privacy more appropriately as a right to liberty and suggests the following six questions to determine whether an employer‘s acts are justifiable or have the potential for an invasion of privacy or liberty: 1. For what purpose is the undocumented personal knowledge sought?

2. Is this purpose a legitimate and important one?

3. Is the knowledge sought through invasion of privacy relevant to its justifying purpose?

4. Is invasion of privacy the only or the least offensive means of obtaining the knowledge?

5. What restrictions or procedural restraints have been placed on the privacy-invading techniques?

6.

v.

How will the personal knowledge be protected once it has been acquired?

Both of these sets of guidelines may also respect the personal autonomy of the individual worker by providing for personal space within the working environment, by providing notice of where that ―personal‖ space ends, and by allowing access to the information gathered, all designed toward achievement of a personal and professional development objective.

* Reference Reading 7-2, ―The Ethical Use of Technology in Business‖ * VII.

Regulation of Off-Work Acts *Chapter Objective 9 Addressed Below* a. Regulation in At-Will Environments: i.

Even employers of at-will employees must comply with a variety of statutes in imposing requirements and managing employees.

ii.

New York‘s lifestyle discrimination statute prohibits employment decisions or actions based on four categories of off-duty activity: legal 1-65

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recreational activities, consumption of legal products, political activities, and membership in a union. iii.

Across the nation, there are other less broad protections for off-work acts.

A number of states have enacted protections about the consumption or use of legal products off the job, such as cigarettes.

b. Smoking: Currently abstention from smoking cannot be a condition of employment in at least 29 states and the District of Columbia. i.

Some companies have sought to encourage employees to quit smoking by offering programs. Others have chosen to punish employees for smoking

ii.

Under the Affordable Care Act (ACA), insurance companies are permitted to charge smokers and other tobacco users up to 50% more than nonsmokers for a health insurance policy. Many companies instituted wellness programs in response to this ACA change to encourage smoking cessation.

iii.

Under the Health Insurance Portability and Accountability Act (HIPAA) wellness plan rules, health contingent programs that are "outcome based" or "activity only" require employers to offer a reasonable alternative standard (RAS). A RAS is an alternative option for participants who do not meet the initial standards set forth in the wellness program to earn the incentive or avoid a surcharge.

1. For example, if an employer has a tobacco/nicotine surcharge that requires users to pay a higher premium on their health plan, the employer needs to offer an alternative option for them to potentially avoid that surcharge.

c. Weight: On the other hand, only one U.S. state (Michigan) and six U.S. cities ban discrimination on the basis of weight. i.

In all other U.S. regions, employers are permitted to make employment decisions on the basis of weight, as long as they are not in violation of the American with Disabilities Act (ADA) when they do so.

ii.

The issue depends on whether the employee‘s weight is evidence of or results from a disability. If so, the employer must explore whether the worker is otherwise qualified for the position. Both the EEOC and American Medical Association have defined obesity as a disability, but several U.S. courts have said obesity cannot be considered a disability under the ADA unless it is caused by a ―physiological disorder.‖

iii.

Employers should be cautious since the ADA also protects workers who are not disabled but who are perceived as being disabled, a category into which 1-66

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someone might fall based on their weight- and society‘s misconceptions due to biases around weight. d. Marital Status: Laws that protect against discrimination based on marital status exist in just under half of the states. i.

Though workers might be protected based on marital status, they are not necessarily protected against adverse action based on the identity of the person they married.

ii.

For example, some companies might have an anti-nepotism policy, or a conflict-of-interest policy under which the employer refuses to hire or terminates a worker based on the spouse working at the same firm, or working at a competing firm, respectively.

e. Workplace Dating Because 36% of workers have dated an office colleague, policies and attitudes on workplace dating have an especially strong potential impact. i.

DATA: Forty-five percent of workplaces have policies addressing workplace dating, and that number may increase as the #MeToo movement raises awareness of relationship dynamics in the workplace

ii.

EXAMPLE: In McCavitt v. Swiss Reinsurance America Corp., the U.S. court held that an employee's dating relationship with a fellow officer of the corporation was not a ―recreational activity‖ and reaffirmed the employer‘s right to terminate a worker on the basis of romantic involvement.

1. The court agreed with the employer that termination was permitted since dating was not a recreational activity, and therefore not protected from discrimination.

iii.

While concerns about workplace dating used to surround issues of sexual harassment, they are more likely to involve concerns about claims of retaliation after a relationship is over.

iv.

However, contrary to the court‘s holding in McCavitt, not everyone agrees that the most effective response to the discovery of an illicit relationship is termination of the individual in power.

* Reference: Decision Point, ―To date or not to date‖* Decision Point To Date or Not to Date What does a company do when its founder is socializing with an employee who is in a subordinate position? Google cofounder Sergey Brin became involved romantically with a Google employee and subsequently divorced his wife. Complicating things further, Brin‘s 1-67 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

former sister-in-law and former brother-in-law both have major positions at Google. Brin insists that nothing about his new (or former) relationship will impact Google; but some suspect that this story is only the beginning of a large problem for Google.

Google maintains an informal approach to workplace dating and its code of conduct does not prohibit dating between employees. The code states: ―Romantic relationships between coworkers can, depending on the work roles and respective positions of the co-workers involved, create an actual or apparent conflict of interest. If a romantic relationship does create an actual or apparent conflict, it may require changes to work arrangements or even the termination of employment of either or both individuals involved.‖ Brin is an important and, some argue, vital part of the Google company and its research and development teams. He also has a controlling interest of Google stock. According to one article, Larry Page, the CEO and other cofounder, was extremely upset with Brin‘s relationship and they did not speak for a time. Further, some Google employees, especially women, were furious that Brin and his girlfriend were not more separated professionally.74 Under a utilitarian analysis, it might appear that the cost of Brin‗s alleged ―errors‖ compared to the cost of his departure from Google might seem to weigh in favor of keeping Brin employed.

Or would you argue that employee morale surrounding this situation is so damaging to the work environment that it outweighs Brin‘s current and future contributions?

Have you considered further challenges in this narrative? Who would be the one to make the decision to fire Brin from the company, given his position and stock holdings? Plus, should the girlfriend be fired? If so, on what basis? Is it possible for them to be professionally separated when one of them is the CEO? Does Google need a clearer policy on workplace romance?

Assume you are charged with drafting your organization‘s policy on workplace dating. In which direction will you tilt with regard to its management of this issue? Utilitarian, or more in line with the 28% of workplaces that simply prohibit workplace dating in order to have a clearer line of demarcation? If you opt for the former, what ethical issues do you anticipate and how do you plan to respond to them because planning ahead will help you to prepare most effectively and ethically? Who are your stakeholders and what options do you have in your responses to those stakeholders in order to best meet each of their interests and rights?

If you opt for a prohibition, how do you plan to enforce it? Are you willing to hire someone who is dating a current employee? Must they stop dating? What problems might arise as a result of your policy, in either direction? f. Political Involvement and Lifestyle Discrimination: i.

The majority of states protect against discrimination on the basis of political involvement, though states vary on the type and extent of protection.

ii.

Lifestyle discrimination may be unlawful if the imposition of the rule treats one protected group differently than another.

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1. The rule may be unlawful if it has a different impact on a protected group than on other groups. iii.

Most U.S. statutes or common law decisions provide for employer defenses for those rules that: 1. Are reasonably and rationally related to the employment activities of a particular employee.

2. Constitute a ―bona fide occupational requirement,‖ meaning a rule that is reasonably related to that particular position.

3. Are necessary to avoid a conflict of interest or the appearance of a conflict of interest.

g. Relevant to the issues of technology monitoring discussed earlier in this chapter and emerging as an astonishingly challenging area of conflict between employers and employees, and one without much legal guidance, thus one demanding sensitive ethical decision making, is the question of monitoring and managing employee online communications while off work. i.

EXAMPLE: Consider the question of off-duty use of social media sites like Facebook. Though Facebook and other social media sites may initially seem to offer a convenient environment in which employees can vent during office-work hours about their employment situation, imagine the impact when a posting goes viral. Corporate reputations are at stake, and legal consequences can be severe.

ii.

DATA: As of July 2018, Facebook had 2.234 billion monthly active users worldwide, a usage that encompasses 29% of the world.

iii.

EXAMPLE: Some employees are fighting back, including one Virginia woman who was fired after venting on Facebook about how she is a ―team of 1 because others… are too lazy to help‖. She filed a lawsuit claiming the social media policy she was fired under impeded her right to talk about workplace conditions under the National Labor Relations Act. She settled with her company three months later.

h. In addition, while employers are legally prevented from asking candidates about their religion or prior illegal drug use during a job interview, is it ethical for them to seek out that information through online sources when the candidate voluntarily discloses it with no connection with work? i.

For instance, in various individuals‘ profiles on Facebook, there is posted, ―Nothing is more important to me than the values I have learned from being a Seventh Day Adventist.‖ 1-69

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1. The prospective employer could never access this information through the interview so is gathering it in this method any more appropriate? ii.

EXAMPLE: In one situation, an energy company employee in Detroit was fired after the employee grumbled on Facebook about customers who called the company with complaints about a lack of power after weekend storms.

(More examples in text).

iii.

The laws on this matter vary from jurisdiction to jurisdiction.

1. There are far greater limitations on the collection of personal information in Australia, for instance, than in the United States.

2. DATA: As of 2018, 26 states restrict employers from requiring social media passwords from prospective or current employees, and several more state legislatures have bills pending.

iv.

What ethical values should dictate? Should a single, universal value govern an employer‘s judgment, or should the employer‘s behaviour also vary from country to country, if it is a global operation?

*Reference: ―Reality Check – Thinking Critically About Acts of Criticism‖* i.

We must also remember that it is important to consider your choices before employment and the impact they will have on an employer‘s later decisions about hiring you.

*Reference: ―Reality Check—The Employment Relationship Begins Pre-Employment‖* Opening Decision Point Revisited End of Chapter Questions, Projects, and Exercises 1. Marriott Resorts had a formal company party for more than 200 employees. At one point during the party, the company aired a videotape that compiled employees‘ and their spouses‘ comments about a household chore they hated. However, as a spoof, the video was edited to make it seem as if they were describing what it was like to have sex with their partner. One employee‘s wife was very upset by the video and sued Marriott for invasion of privacy.

Evaluate her argument, focusing on the ethical arguments for a violation of her rights.

Direct students to the invasion of privacy discussion so they can identify the basis of the claim.

2. Richard Fraser, an at-will independent insurance agent for Nationwide Mutual Insurance Company, was terminated by Nationwide and the parties disagree on the reason for Fraser's termination. Fraser argues that Nationwide terminated him because he filed complaints regarding Nationwide's allegedly illegal conduct, for criticizing Nationwide to the Nationwide Insurance Independent Contractors Association, and for attempting to obtain the 1-70 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

passage of legislation in Pennsylvania to ensure that independent insurance agents could be terminated only for "just cause." Nationwide argues, however, that it terminated Fraser because he was disloyal. Nationwide points out that Fraser drafted a letter to two competitors saying that policyholders were not happy with Nationwide and asking whether the competitors would be interested in acquiring them. (Fraser claims that the letters were drafted only to get Nationwide's attention and were not sent.)

When Nationwide learned about these letters, it claims that it became concerned that Fraser might also be revealing company secrets to its competitors. It therefore searched its main file server—on which all of Fraser's email was lodged—for any email to or from Fraser that showed similar improper behavior. Nationwide's general counsel testified that the email search confirmed Fraser's disloyalty. Therefore, on the basis of the two letters and the email search, Nationwide terminated Fraser's employment agreement. The search of his email gives rise to Fraser's claim for damages under the Electronic Communications Privacy Act of 1986 (ECPA). Do you believe the employer was justified in monitoring the employee‘s email and then terminating him? What ethical arguments do you believe either side could use in this case?

Refer students to the pages in the chapter explaining email monitoring and providing arguments for and against it. A debate format in class would be a great way to facilitate this discussion.

3. A customer service representative at an electronics store is surfing the internet using one of the display computers. She accesses a website that shows graphic images of a crime scene. A customer in the store who notices the images is offended. Another customer service representative is behind the counter, using the store‘s computer to access a pornographic site, and starts to laugh. A customer asks him why he is laughing. He turns the computer screen around to show her the images that are causing him amusement. Is there anything wrong with these activities?

This is a great class discussion on the issues of technology use policies, what is offensive and what is appropriate for the workplace.

4. The term cybersquatting refers to the practice of: registering a large number of website domain names hoping to sell them at huge prices to others who may want the URL or who are prepared to pay to get rid of a potentially confusing domain name. For instance, People for the Ethical Treatment of Animals, which operates www.peta.org, was able to shut down http://www.peta.com/, a pro-hunting website that dubbed itself "People Eating Tasty Animals." Cybersquatters often determine possible misspellings or slightly incorrect websites with the hopes that the intended website will pay them for their new domain. For example, someone paid over $7 million for the address www.business.com. In one case, one day after a partnership was announced that would result in an online bookstore for the Toronto Globe & Mail newspaper, Richard Morochove, a technology writer, registered the domain chaptersglobe.com. When the partnership demanded that he stop using the name, he promptly agreed, as long as he received a percentage of the sales from the Chapters/Globe website. The case went to trial. In situations such as these, do you believe the cybersquatter is doing anything wrong? What options might the ―intended website‖ owner have?

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Suggest that students use the ethical decision-making process to determine whether cybersquatting is ethical.

Students can refer to the following websites for more information on cybersquatting:  https://www.upcounsel.com/cybersquatting-examples  https://www.thewindowsclub.com/cybersquatting-and-typosquatting  http://www.wipo.int/wipo_magazine/en/2006/06/article_0008.html (Wayne Rooney)  http://www.wipo.int/amc/en/domains/decisions/html/2006/d2006-0560.html (Tom Cruise)  http://www.wipo.int/amc/en/domains/search/text.jsp?case=d2010-2220 (Donald Trump)  ―Trump awarded damages in 'cybersquatting' case over domain names:‖ http://edition.cnn.com/2014/03/01/studentnews/trump-cybersquatting-lawsuit/index.html 5. Spam, or spamming, refers to the use of mailing lists to blanket usenets or private email boxes with indiscriminate advertising messages. Some people believe that spamming should be protected as the simple exercise of one‘s First Amendment right to free speech while others view it as an invasion of privacy or even theft of resources or trespass to property, as Intel argued when a disgruntled ex-employee spammed more than 35,000 Intel employees with his complaints. In that case, the court agreed, considering his email spamming equivalent to trespassing on Intel's property and recognizing that Intel was forced to spend considerable time and resources to delete the email messages from its system.

It is amusing to note that the source of the term spam is generally accepted to be the Monty Python song, "Spam spam spam spam, spam spam spam spam, lovely spam, wonderful spam…" Like the song, spam is an endless repetition of worthless text. Others believe that the term came from the computer group lab at the University of Southern California, which gave it the name because it has many of the same characteristics as the lunchmeat Spam:  Nobody wants it or ever asks for it.  No one ever eats it; it is the first item to be pushed to the side when eating the entree.  Sometimes it is actually tasty, like 1% of junk mail that is really useful to some people.

Using stakeholder analysis, make an argument that spamming is either ethical or unethical.

For additional assistance and discussion, refer students to the following websites related to the ethics of spam:  Taming the Beast.net: http://www.tamingthebeast.net/articles/EmailMarketingEthicsSpamReporting.htm  CAN-SPAM Act of 2003: http://www.spamlaws.com/federal/can-spam.shtml  Spam – Ethics in Computing: https://ethics.csc.ncsu.edu/abuse/spam/discussion.php 6. Term papers on practically every subject imaginable are available on the internet. Many of those who post the papers defend their practice in two ways: (1) These papers are posted to assist in research in the same way any other resource is posted on the web and should simply be cited if used; and (2) these papers are posted in order to encourage faculty to modify paper 1-72 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

topics and/or exams and not to simply bring back assignments that have been used countless times in the past. Are you persuaded? Is there anything unethical about this service in general? If so, who should be held accountable, the poster, the ultimate user, or someone else?

Suggest that student use the ethical decision making model process to determine the ethics of the term paper service.

7. A college provided its security officers with a locker area in which to store personal items.

The security officers occasionally used the area as a dressing room. After incidents of theft from the lockers and reports that the employees were bringing weapons to campus, the college installed a video surveillance camera in the locker area. Did the employees have a reasonable expectation of privacy that was violated by the video surveillance? Explain.

Direct students to the discussion of ―reasonable expectation of privacy‖ on page 260.

8. While some companies block employee access to social networks such as Facebook and Twitter, others have a more permissive attitude. Explain several reasons why a company might choose to permit—or be indifferent to—employee access to social networks.

Some websites that may be helpful include: 

―TechDebate: Social Network Sites: Block or Not?‖ http://www.networkworld.com/community/tech-debate-block-social-networks (accessed September 24, 2022)



―10 Reasons Not to Block Social Media at Work‖ http://www.techrepublic.com/blog/10things/10-reasons-not-to-block-socialnetworking-at-work/3140



―The Debate About Blocking Social Media in the Workplace https://hiring.monster.com/hr/hr-best-practices/workforce-management/employeeperformance-management/blocking-social-media-us.aspx ―Pros and Cons of Blocking Social Media Use at Work https://hrdailyadvisor.blr.com/2016/05/25/pros-and-cons-of-banning-social-mediause-at-work/



9. You work as an accountant at large accounting firm where your job leaves you with a lot of down time at the office in between assignments. You spend this time on your office computer developing a program that can make your job even more efficient, and it might even be a breakthrough in the industry. This new product could be a huge success, and you could make a lot of money. You think of quitting your job and devoting all your time and resources to selling this new product. However, you have developed this product using company equipment and technology and also used the time you were at work. Do these facts raise any red flags in terms of ethical issues? What should you do?

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Lead students in a discussion of whether or not there are ethical dilemmas in this scenario? If dilemmas exist, how would students work through them? How would circumstances need to be different for it to be ok for you to sell the software you have developed?

10. As you learned in this chapter, drug testing in the workplace is a somewhat controversial issue in terms of employer responsibilities and employee rights. Using sources from the web, discuss the pros and cons of these programs.

During class discussion, visit websites that students find and use to answer this question.

Discuss with students if they think the corporate culture is different within companies that drug test in comparison with companies that do not. Is one more desirable than the other?

IM Chapter 8: Ethics and Marketing Chapter Objectives After reading this chapter, you will be able to: 1. Apply an ethical framework to marketing issues.

2. Describe the three key concerns of ethical analysis of marketing issues.

3. Describe three interpretations of responsibility and apply them to the topic of product safety.

4. Explain contractual standards for establishing business‘ responsibilities for safe products.

5. Articulate the tort standards for establishing business‘ responsibilities for safe products.

6. Analyze the ethical arguments for and against strict product liability.

7. Discuss how to evaluate both ethical and unethical means by which to influence people through advertising.

8. Explain the ethical justification for advertising.

9. Trace debates about advertising‘s influence on consumer autonomy.

10. Distinguish ethical from unethical target marketing, using marketing to vulnerable populations as an example.

11. Discuss business‘ responsibilities for the activities of its supply chain.

12. Explain how marketing can contribute toward a more sustainable business model.

Opening Decision Point Dark Marketing and “Dark Patterns” This is a new Opening Decision Point for this chapter. It can be used to introduce students to a wide range of ethical issues in marketing, from deception and unfairness, to consumer privacy and consumer autonomy. This example replaces the more general Opening Decision Point on digital marketing from the previous edition. The pervasiveness of digital devices and digital marketing has raised the salience of this set of issues.

Discussion questions that are aimed at raising some of these issues at the start of the chapter: 

Courts sometimes use the ―expectation of privacy‖ as a test for limiting governmental monitoring. Thus, for example, the police can monitor your behavior without a warrant when 1-74 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

you are in a public place but not when you are talking on your phone. What expectations of privacy do you have when you are surfing the web or using Google or Facebook? Ordering something from Amazon or Netflix?

Physically stalking someone can be a crime. Are there parallels between physically stalking someone and regularly monitoring their activities and location on the web? How are they similar? How are they different?

Most online tracking is done through the use of ―cookies,‖ small files stored on a computer or mobile device that provide information about past browsing history. Should consumers have a right to opt out, or should their explicit consent be required before cookies are installed?

Information about your online behavior is a commodity that can be bought and sold. Who should own this personal information? Should it be available for sale? By whom?

The judged quoted in the above case thought that ―even unsophisticated consumers‖ would know that they are being tracked by Google Apps. Do you think this is correct? Does it matter if a consumer if ―reasonable‖ or ―unsophisticated‖?

 

 

I.

Introduction a. Definition of Marketing: Some believe that the very purpose of business is found within the marketing function. i.

Marketing scholar, Theodore Levitt, explains the purpose of business as follows: ―The purpose of a business is to create and keep a customer. To do that, you have to produce and deliver goods and services that people want and value at prices and under conditions that are reasonably attractive relative to those offered by others.‖

ii.

The American Marketing Association defines marketing in a way that also suggests that it is at the heart of business activity, stating: ―an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.‖

iii.

The concept of an exchange between a seller and a buyer is central to the market economy and is the core idea behind marketing.

1. Marketing involves all aspects of creating a product or service and bringing it to market where an exchange can take place.

2. Marketing ethics, therefore, examines the responsibilities associated with bringing a product to the market, promoting it to buyers, and exchanging it with them.

iv.

Considerations: 1. Even before a product is created, a producer might first consider who, if anyone, is interested in purchasing it.

2. The product might then be redesigned or changed in light of what is learned about potential buyers from market research.

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3. Once the product is ready for market, the producer mist decided on a price that will be mutually acceptable.

4. The asking price should, at minimum, be the production cost plus some reasonable profit.

5. However, the producer might consider who the buyers are and what they can afford, how much price might influence future purchases, how the price might affect distributors and retailers, and what competitors are charging before settling on a price.

6. The producer might also consider advertising the product to attract new potential purchasers and promote the product among buyers.

7. Lost production that results from the trip to the market should also be considered.

8. Producers might be more concerned with cash flow than profit and therefore may be willing to ask a price that is below production costs.

The might also consider where and under what conditions the product is sold.

9. Throughout this entire process, the producer might conduct market research to gather information and use that information in production, pricing, promotion and placement decisions. b. The ―Four Ps‖ of Marketing: All of the factors considered and each decision made throughout this process are elements of marketing. The four main elements to consider when marketing to consumers are product, price, promotion, and placement. i.

II.

Each of the Four Ps raises important ethical questions: 1. Product: What responsibilities do producers have for the quality and safety of their products? Who is responsible for harms caused by a product? Are there some products that should not be produced, or does consumer demand decide all production questions?

2. Price: Is the consumer‘s willingness to pay the only ethical constraint on fair pricing? Should the ability to pay be a factor in setting price?

Do all customers deserve the same price, or can producers discriminate in favor of, or against, some consumers? What effects will price have on competitors? On retailers?

3. Promotion: Are deceptive or misleading ads ethical? What ethical constraints should be placed on sales promotions?

4. Placement: Is the information gathered in market research the property of the business that conducts the research? What privacy protections should be offered for marketing data? Is it ethical to target vulnerable populations such as children or the elderly? What responsibilities does a producer have when marketing in foreign countries? What responsibilities do producers have to retailers? To competitors? To suppliers?

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*Chapter Objective 1 Addressed Below* a. Ethical Framework: The simple model of a single exchange between two individuals is a useful way to introduce an ethical framework for marketing ethics.

This framework will assist the decision maker in arriving at an ethical decision but will not point to the ―correct‖ decision because it merely identifies rights, responsibilities, duties and obligations, causes and consequences. *Reference: Table 8.1—Ethical Issues in Marketing: A Framework* i.

This simple situation in which two parties come together and freely agree to an exchange is prima facie ethically legitimate.

ii.

The rights-based ethical tradition (described in Chapter 3) would see it as upholding respect for individuals by treating them as autonomous agents capable of pursuing their own ends.

1. This tradition presumes that each individual will abide by fundamental principles.

2. The utilitarian ethical tradition would take the two parties‘ agreement as evidence that both are better off then they were prior to the exchange and thus conclude that overall happiness has been increased by any exchange freely entered into.

iii.

This assessment is only prima facie because, like all agreements, certain conditions must be met before we can conclude that autonomy has, in fact, been respected and mutual benefit has been achieved.

1. We would need to establish that the agreement resulted from an informed and voluntary consent and that there was no fraud, deception, or coercion involved.

2. When these conditions are violated, autonomy is not respected, and mutual benefit is not attained.

3. Even when such conditions are met, other values may override the freedom of individuals to contract for mutually beneficial purposes. a. For example, the freedom of drug dealers to pursue mutually agreeable ends is overridden by society‘s concern to maintain law and order. *Chapter Objective 2 Addressed Below* b. It will be helpful to keep three main concerns in mind as we approach any ethical issue in marketing: i.

The rights-based ethical tradition would ask to what degree the participants are respected as free and autonomous agents rather than treated simply as means to the end of making a sale.

ii.

The utilitarian tradition would want to know the degree to which the transaction provided actual as opposed to merely apparent benefits.

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iii.

Every ethical tradition would also wonder what other values might be at stake in the transaction.

iv.

Overall, the three issues to consider are: (1) the degree to which individuals freely participate in an exchange; 2) the benefits and costs of each exchange; 3) other values that are affected by the exchange.

c. Respect in Marketing: It is not always easy to determine whether someone is being treated with respect in marketing situations. i.

One condition of respect is that the person must freely consent to the transaction.

1. Transactions under the threat of force are not voluntary and therefore are unethical. But, there are many degrees of voluntariness.

2. For example, the more consumers need a product, the less free they are to choose and therefore the more protection they deserve within the marketplace.

3. Example: The majority of computer users do not even choose the Windows operating system, it is their only option.

4. More dramatic examples of price gouging, price-fixing, and monopolistic pricing clearly raise the issue of freedom in marketing.

ii.

Practices aimed at vulnerable populations such as children and the elderly also raise questions of voluntariness.

iii.

An adequate analysis of marketing ethics challenges us to be sensitive to many ways in which consumer choice can be less than fully voluntary. *Reference: ―Reality Check—Impulse Buying‖* **Teaching Note: A key question to ask, and against which to challenge the above theories, is what responsibility do we have for the impact of our communications, as individuals and as corporations or other institutions of society? Is there any difference? Instructors may wish to ask students to take a look at a few of the key issues relating to responsibility and its sources in order to explore the possible answer. Faculty might ask students to consider, as well, how the moral theories they have explored would resolve this challenge. Faculty could use the movie ―Thank you for Smoking‖ (http://www.apple.com/trailers/fox_searchlight/thankyouforsmoking/trailer/) or advertisements/communications at www.afterthesemessages.com. d. Informed Consent: A second condition for respect requires that consent be voluntary as well as informed. i.

Informed consent has received a great deal of attention in the medical ethics literature because patients are at a distinct informational disadvantage when dealing with healthcare professionals.

1. Outright deception and fraud clearly violate this condition and are unethical.

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2. A consumer‘s consent to purchase a product is not informed if that consumer is being misled or deceived about the product. ii.

Serious ethical questions should be raised whenever marketing practices either deny consumers full information or rely on the fact that they lack relevant information or understanding.

1. The complexity of many consumer products and services can mean that consumers may not understand fully what they are purchasing.

2. While some businesses claim that ―an informed consumer is our best customer,‖ many other companies view uninformed consumers as targets for quick profits.

e. Alleged Benefits of Market Exchanges: i.

Economists commonly assume that consumers benefit, almost by definition, whenever they make an exchange in the marketplace. However, many purchases do not result in actual benefit.

1. Example: Many marketing techniques that promote impulse buying and similar consumer behavior cannot be justified by appeal to satisfying consumer interests since these purchases can lead to overspending and even bankruptcy.

2. Marketing may suggest that consumers can buy happiness, but the ever-increasing number of individual bankruptcies suggests that consumers cannot purchase happiness.

3. Studies provide evidence that greater consumption can actually lead to unhappiness, a condition that some call ―affluenza.‖ *Reference: ―Reality Check—Impulse Buying‖* ii.

Both parties to the marketing exchange are not benefited in situations in which one party is injured by the product.

1. Unsafe products do not further the utilitarian goal of maximizing overall happiness.

2. Consumers are not benefited if the desires that they seek to satisfy in the market are somehow contrived or manipulated by the seller.

f. Other Values: An ethical analysis of marketing must consider values other than those served by the exchange itself. i.

Primary social values such as fairness, justice, health, and safety are just some of the values that can be jeopardized by marketing practices.

1. Example: A bank that offers lower mortgage rates in affluent neighborhoods than it does in inner-city neighborhoods might be involved only in deals that are mutually beneficial since they do not, in fact, sell mortgages in the inner city. Such contracts would violate the social norms of equal treatment and fairness.

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ii.

Just because someone wants to buy something and someone is willing to sell it does not mean the transaction is ethically legitimate.

1. There is a market for children and organs and body parts and endangered species, but these are definitely not ethically legitimate markets.

iii.

An adequate ethical analysis of marketing must ask ―who else might be affected by the transaction?‖ 1. How, if at all, are the interests of these others represented?

2. What social goods are promoted, and which are threatened, by marketing this product?

iv.

True costs: An adequate ethical analysis of marketing must consider externalities, those costs that are not integrated within the exchange between buyer and seller.

1. Externalities show that even if both parties to the exchange receive actual benefits from the exchange, other parties external to the exchange might be adversely affected.

2. Example: Consider the environmental or health impact of marketing products such as SUVs, pesticides, and tobacco. ** Teaching Note: Again, if we are to consider the obligation that a marketing professional might owe to society, perhaps we should first determine the nature of that responsibility and then we can begin to judge.  Are marketing professionals obligated to contribute to society (or even/at least consider it)?  Do marketing professional have special responsibilities to vulnerable groups of consumers, for example, children, the elderly?  What does it mean for their work (ads, other communications) to be ―effective?‖  To what standards do you hold them?  To what standards do you hold us? o That is, let the ―perceiver‖ beware with regard to deception (later discussion) III.

Responsibility for Products: Safety and Liability *Chapter Objective 3 Addressed Below* a. Ethical Responsibility for Products and Services: Business has an ethical responsibility to design, manufacture, and promote its products in ways that avoid causing harm to consumers. i.

Responsibility has several meanings: 1. In one sense, responsibility is to be identified as the cause of something.

2. In another sense, responsibility involves accountability.

3. A third sense involves assigning fault or liability for something.

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ii.

Example: Hurricane Sandy was responsible for (caused) the damage in New York, but cannot be held responsible (accountable for paying for the damages), nor can it be faulted for it.

1. In other situations, such as an automobile crash, a careless driver would be identified as the cause of the accident and held accountable because they were at fault. *Reference: ―Reality Check—Caveat Emptor in Buying Drugs?

This is one place where we bring the Opening Decision Scenario from last edition‘s pharmaceutical case into this chapter. Prescription drugs are a good test case for how far society ought to go in respecting consumer sovereignty and the need to balance safety with the freedom to choose. iii.

Both law and ethics rely on a similar framework when evaluating cases in which business products or services cause harm in the marketplace.

iv.

The focus for much of the discussion of business‘s responsibility for product safety is on assigning liability (fault) for harms caused by unsafe products.

v.

The legal doctrine of strict liability is ethically controversial exactly because it holds a business accountable for paying damages whether or not it was at fault.

1. In a strict liability cases, no matter how careful the business is in its product or service, if harm results from use, the business is liable.

b. Contractual Standards for Product Safety *Chapter Objective 4 Addressed Below* i.

Caveat Emptor Approach: The standard of caveat emptor, or ―let the buyer beware,‖ understands marketing on a simple model of a contractual exchange between a buyer and a seller.

1. This perspective assumes that every purchase involves the informed consent of the buyer and therefore it is assumed to be ethically legitimate.

2. Buyers have the responsibility to look out for their own interests and protect their own safety when buying a product.

3. From this perspective, business has only the responsibility to provide a good or service at an agreed-upon price.

ii.

The social contract model holds that all ethical responsibilities can be understood within a contractual model, and the only duties we have are those that we have freely taken on within a social contract.

1. Individual contracts and promises are the basis of ethical duties.

2. The implication of this within the business sphere is that unless a seller explicitly warrants a product as safe and promises to be liable for harms suffered by the buyer, then buyers are liable for any harms they suffer.

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iii.

Even this simple mode of contractual market exchange places ethical constraints on the seller.

1. Sellers have a duty not to coerce, defraud, or deceive buyers.

2. Consumers who were injured by a product that was deceptively or fraudulently marketed would have legal recourse to recover damages from the seller.

iv.

Courts recognize an implicit promise, or implied warranty, that accompanies any product that is marketed.

v.

―Implied warranty of merchantability,‖ holds that in selling a product a business implicitly offers assurances that the product is reasonably suitable for its purpose.

1. Even without a verbal or written promise or contract, the law holds that business has a duty to insure that its products will accomplish their purpose.

2. How far does this duty reach? See the Reality Check ―The ‗Cause‘ of Obesity, Free Choice and Marketing to Children‖ for a discussion of this duty.

c. Implied Ethics: The ethics implicit within the contract approach assumes that consumers adequately understand products well enough that they can reasonably be expected to protect themselves. i.

Consumers do not always understand products fully, and they are not always free to choose not to purchase some things.

1. In effect, the implied warranty standard shifts the burden of proof from consumers to producers by allowing consumers to assume that products were safe for normal use.

2. Producers were implicitly promising that their products were safe under normal use.

3. The ethical basis for this decision is the assumption that consumers would not give their consent to a purchase if they had reason to believe that they would be harmed by it when used in a normal way.

ii.

If law will hold business liable for implicit promises, a prudent business will seek to limit its liability by explicitly disowning any promise or warranty.

iii.

Many businesses will issue a disclaimer of liability or offer an expressed and limited warranty. Most courts will not allow a business to completely disclaim the implied warranty of merchantability.

d. Tort Standards for Product Safety *Chapter Objective 5 Addressed Below* i.

The use of an implied warranty solved one set of problems with the contract law approach to product liability.

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1. Consumers would not need complex contracts in order to protect themselves from all possible harms that products might cause. ii.

If we hold business liable for only those promises made during the market exchange, then as the consumer gets further separated from the manufacturer by layers of suppliers and retailers, there may be no relationship at all between the consumer who gets harmed and the ultimate manufacturer or designer who was at fault. *Reference: ―Reality Check—Snapchat This 2015 case can be used to raise questions of contributory negligence and foreseeability in assessing business liability for harms caused by their products. Students might be asked to play the role of jurors in a legal suit brought in this case. Students should considering the following questions when assessing this scenario:  What facts would you want to know before deciding this case?  What alternatives would a jury face in deciding this case?  Who are the stakeholders of your decision? What is the impact of each alternative on each stakeholder you have identified?  What rights and duties are involved?  How would you decide the case? Is it mostly a matter of consequences, or are there important principles involved? e. Negligence: A concept from the area of law known as torts, provides a second avenue for consumers to hold producers responsible for their products. i.

Under a contract model, the only duties that a person owes are those that have been explicitly promised to another party.

ii.

The ethical perspective that underlies tort law holds that we all owe other people certain general duties, even if we have not explicitly and voluntarily assumed them.

1. I owe other people a general duty not to put them at unnecessary and avoidable risk.

2. Example: Although I have never explicitly promised anyone that I will drive carefully, I have an ethical duty not to drive recklessly down the street.

iii.

Negligence is a central component of tort law and involves a type of ethical neglect. Specifically it refers to neglecting one‘s duty to exercise reasonable care not to harm other people.

1. Many of the ethical and legal issues surrounding manufacturers‘ responsibilities for products can be understood as the attempt to specify what constitutes negligence in their design, production, and sale.

iv.

What duties, exactly, do producers owe consumers?

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1. One can think of possible answers to this question falling along a continuum, on one end is social contract, on the other, strict liability.

2. Social contract answer: Producers owe only those things promised to consumers in the sales agreement.

3. Strict liability: Producers owe compensation to consumers for any harm caused by their products.

4. In between these, two is a range of answers with different interpretations of negligence. v.

Negligence can be characterized as a failure to exercise reasonable care or ordinary vigilance that results in an injury to another.

1. People have done an ethical wrong when they cause harm to others in ways that they can reasonably be expected to have avoided.

2. Negligence includes acts of both commission and omission.

3. One can be negligent by doing something that one ought not (e.g., speeding in a school zone) or by failing to do something that one ought to have done (e.g., neglecting to inspect a product before sending it to market).

vi.

Negligence involves foreseeing the consequences of our acts and failing to take steps to avoid the likely harmful consequences

vii.

The standards of foreseeability raise interesting challenges 1. One standard of foreseeability would hold people liable only for those harms they actually foresaw occurring (actual foreseeability). But, if someone actually thinks that harms are likely to result from his acts and proceeds nonetheless, he has committed a serious wrong and deserves harsh punishment. a. This case seems more akin to recklessness, or even intentional harm, than negligence.

2. This standard also implies that thoughtless people cannot be negligent, since one escapes liability by not actually thinking about the consequences of one‘s acts. ―I never thought about that‖ would be an adequate defense if we used this standard of negligence.

3. Negligence is meant to encourage people to be thoughtful and to hold them liable when they are not.

viii.

A preferable standard would require people to avoid harms that, even if they have not actually thought about, they should have thought about had they been reasonable.

1. For example, in the well-known case of Leibeck v McDonald‘s (involving a customer who spilled hot coffee on herself after driving away from the drive-up window at McDonald‘s. Presumably McDonald‘s did not actually anticipate that customers would be severely burned by coffee. But, had its managers thought about what people who are served coffee at a drive-thru window might do to hold 1-84

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2.

3.

4.

5.

their cups when they drive away from the window, they could have foreseen the likelihood of spills. Moreover, the fact that McDonald‘s had received more than 700 prior burn claims involving coffee over a 10-year period suggests that a reasonable person would have concluded that this was a dangerous practice.

This ―reasonable person‖ standard is the one most often used in legal cases and seems to better capture the ethical goals of the very concept of negligence.

People are expected to act reasonably and are held liable when they do not.

When one has actual notice of a likelihood of harm, such as in the case of the burning hot coffee at McDonald‘s, the reasonable person expectation is increased.

The issue of foreseeability comes up when a product might be misused.

f. Reasonable Person Standard can be interpreted in various ways. i.

A ―reasonable‖ person does what we could expect the ordinary, average person to do.

1. The average person does not always read, or understand, warning labels. The average, ordinary person may thoughtlessly place a cup of very hot coffee between her legs as she drives out of a parking lot and into traffic.

2. The ―average person‖ standard, when applied to consumers, risks exempting many consumers from taking responsibility for their own acts.

3. When applied to producers, the average person standard sets the bar too low. We can expect more from a person who designs, manufacturers, and sells a product than average and ordinary vigilance.

ii.

A ―reasonable‖ person assumes a standard of thoughtful, reflective, and judicious decision making. The problem with this assumption is that we may be asking more of average consumers than they are able to give.

1. This is particularly true if we think that the disadvantaged and vulnerable deserve greater protection from harm, we might conclude that this is too stringent a standard to be applied to consumer behavior.

iii.

On the other hand, given the fact that producers do have more expertise than the average person, this stronger standard seems more appropriate when applied to producers than to consumers.

g. Strict Product Liability *Chapter Objective 6 Addressed Below* 1-85 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

i.

The negligence standard of tort law focuses on the sense of responsibility that involves liability or fault. As such, it asks what the business person involved had foreseen or should have foreseen.

ii.

There are also cases in which consumers can be injured by a product in which no negligence was involved and no one was at fault. In these cases, the question of accountability remains.

1. Who should pay for damages when consumers are injured by products and no one is at fault?

2. The legal doctrine of strict product liability holds manufacturers accountable in such cases.

h. Ethical Debates on Product Liability: The business community is a strong critic of much of the legal standards of product liability. *Chapter Objective 6 Addressed Below* i.

Within the United States, calls to reform product liability laws, and in particular to ease or eliminate the strict product liability standard have been common. But criticism of strict products liability has not been universal.

1. The European Union, for example, has adopted clear strict liability standards.

2. The EU concluded that ―liability without fault [strict products liability] on the part of the producer is the sole means of adequately solving the problem, peculiar to our age of increasing technicality, of a fair apportionment of the risks inherent in modern technological production.‖ 3. The business community in the United States is a strong critic of much of the legal standards of product liability.

ii.

Liability standards, and the liability insurance costs in which they have resulted, have imposed significant costs on contemporary business.

1. Businesses believe that the standard is especially unfair to businesses because it holds business responsible for harms that were not the result of business negligence.

iii.

The rationale used to justify strict product liability is problematic.

1. Defenders of the strict product liability standard, including juries who decide in favor of injured consumers, often replay with two major claims: a. First: by holding business strictly liable for any harms their products cause, society creates a strong incentive for business to produce safer goods and services. b. Second: given that someone has to be accountable for the costs of injuries, holding business liable allocates the costs to the party best able to bear the financial burden.

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iv.

The incentive argument seems to misunderstand the nature of strict liability.

1. Holding someone accountable for a harm can provide an incentive only if they could have done otherwise.

2. Strict liability is not negligence and the harms caused by products such as asbestos were not foreseeable.

3. Holding business liable for these harms cannot provide an incentive to better product consumers in the future.

v.

The second rationale basically claims that business is best able to pay for damages. Many businesses have been bankrupted by product liability claims.

1. If it is unfair to hold business accountable for harms caused by their products, it is equally if not more unfair to hold injured consumers accountable. Neither party is at fault, yet someone must pay for the injuries.

vi.

A third argument for holding business accountable might be more persuasive.

Accountability focuses on those situations where no one is at fault, yet someone has to pay.

1. Accountability is not a matter of ethical principle in that no one deserves to pay for damages, but perhaps accountability is best understood as a matter of utilitarian efficiency rather than principle.

2. When business is held accountable, the costs for injuries will eventually fall on those consumers who buy the product through higher costs, especially higher insurance costs to business.

3. This amounts to the claim that external costs should be internalized and that the full costs of a product should be paid for by those who use the product.

4. Products that impose a cost on society through injuries will end up costing more to those who purchase them.

5. Companies that cannot afford to remain in business when the full costs of its products are taken into account perhaps ought not to remain in business.

Decision Point Digital Natives, Reasonable Consumers, Unsophisticated Consumers 

This is a new Decision Point. It is aimed at getting readers to think about the range of consumers of digital marketing, to situate themselves along a spectrum, and to encourage them to think about what rules should apply not just to marketing aimed at themselves, but at others with greater or lesser degrees of digital sophistication. Questions included are as follows:Do you think that it is reasonable to think that your personal information is being collected by every website you visit? Is this true even if you have disabled that platform‘s location history or tracking data feature?  Should even an ―unsophisticated‖ user know this?

Regarding digital marketing techniques, do you consider yourself a reasonable or unsophisticated user? How about your parents? Grandparents? Does this matter?

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IV.

Responsibility for Products: Advertising and Sales *Chapter Objective 7 Addressed Below* a. Advertising ethics has received significant legal and philosophical attention within business ethics. i.

The goal of all marketing is the sale, the eventual exchange between seller and buyer.

ii.

A major element of marketing is sales promotion, the attempt to influence the buyer to complete a purchase. See the Decision Point, ―Advertising Drugs‖ for an example.

iii.

Target marketing and marketing research are two important elements of product placement.

iv.

There are, of course, ethically good and bad ways to influence others.

1. Ethically commendable ways include persuading, asking, informing, and advising.

2. Unethical means include threats, coercion, deception, manipulation, and lying.

3. Unfortunately, all too often sales and advertising practices employ deceptive or manipulative means of influence or are aimed at audiences that are susceptible to manipulation or deception.

4. Perhaps the most infamous and maligned of all marketing fields is automotive sales, especially in used car markets.

v.

The concepts of manipulation, and its subset of deception, are central to ethical issues in marketing. **Teaching Note: A valuable resource on the power of images is the Dove Soap ―Real Beauty‖ and ―Evolution‖ Campaigns. Students can find out more about the ―Real Beauty‖ campaign at: http://www.dove.us/Social-Mission/campaign-for-real-beauty.aspx.

Manipulation by imagery is also explored at the Gender Ads Project, http://www.genderads.com/.

Decision Point GMO Labeling This decision point can be used to apply the marketing ethics framework introduced at the start of this chapter. To what degree are consumers making an informed decision if they lack the information provided by GMO labels? To what degree might they be mislead, and therefore not make an informed decisions, by such labels? This is an issue about which many students will have strong opinions, so it can be a good class debate topic: 

Would you support mandatory labeling for all GMO food products?



Besides the sellers and consumers, what other stakeholders should be considered in making this decision?

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

How would you respond the reasons offered by the side that disagrees with your views?



Is it reasonable to expect that some consumers will interpret the label as a warning that GMO foods are unhealthy? b. Manipulation: To manipulate something is to guide or direct its behavior. i.

Manipulation need not involve total control, and in fact, it more likely suggests a process of subtle direction or management.

ii.

Manipulating people implies working behind the scenes, guiding their behavior without their explicit consent or conscious understanding.

1. In this way, manipulation is contrasted with persuasion and other forms of rational influence.

iii.

When manipulating someone, you seek to bypass an individual‘s autonomy.

1. One of the ways in which we can manipulate someone is through deception, one form of which is an outright lie.

2. We can also manipulate someone without deception, through feelings of guilt, pity, a desire to please, anxiety, fear, low self-esteem, pride, and conformity can all be powerful motivators.

3. These examples raise a very crucial point because they suggest that the more I know about your psychology—your motivations, interests, desires, beliefs, dispositions, and so on—the better able I will be to manipulate your behavior.

iv.

Critics charge that many marketing practices manipulate consumers. Clearly, many advertisements are deceptive, and some are outright lies.

v.

We can also see how marketing research plays into this. The more one learns about customer psychology, the better able one will be able to satisfy their desires, but the better one will also be able to manipulate their behavior.

vi.

Critics argue that some marketing practices target populations that are particularly susceptible to manipulation and deception.

V. Ethical Issues in Advertising *Chapter Objective 8 Addressed Below* a. Ethical Defense of Advertising: The general ethical defense of advertising reflects both utilitarian and Kantian ethical standards. i.

Advertising provides information for market exchanges and therefore contributes to market efficiency and to the overall happiness.

ii.

Advertising information also contributes to the information necessary for autonomous individuals to make informed choices.

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iii.

Each of these rationales assumes that the information is true and accurate.

b. Objections to Manipulation: The rights-based tradition in ethics would have the strongest objections to manipulation. i.

Manipulation treats a person as a means to an end, as an object to be used rather than as an autonomous person in his or her own right.

1. This is a clear example of disrespect for persons since it bypasses their own rational decision making.

2. Because the evil rests with the intention to use another as a means, even unsuccessful manipulations are guilty of this ethical wrong.

ii.

The utilitarian tradition offers a more conditional critique of manipulation, depending on the consequences.

1. There surely can be cases of paternalistic manipulation, in which someone is manipulated for their own good. But even in such cases, unforeseen harms can occur.

2. Manipulation tends to erode bonds of trust and respect between persons. It can erode one‘s self-confidence and hinder the development of responsible choice among those manipulated.

3. In general, because most manipulation is done to further the manipulator‘s own ends at the expense of the manipulated, utilitarians would be inclined to think that manipulation lessens overall happiness.

4. Example: A general practice of manipulation, as critics would charge occurs in many sales practices, can undermine the very social practices (e.g., sales) that it is thought to promote as the reputation of sales is lowered. The used car sales example is a good one to illustrate this situation.

iii.

A particularly egregious form of manipulation occurs when vulnerable people are targeted for abuse.

1. Cigarette advertising aimed at children is one example that has received major criticism over the years.

2. Marketing practices targeted at elderly populations for such goods and services as insurance (particularly Medicare supplemental insurance), casinos and gambling, nursing homes, and funerals have been subjected to similar criticisms.

c. General Guidelines for Marketing Practices: i.

Marketing practices that seek to discover which consumers might already and independently be predisposed to purchasing a product are ethically legitimate.

1. Sending a targeted direct mail pieces to everyone within an area who matches particular criteria seems an ethically legitimate marketing practice.

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2. Marketing practices that seek to identify populations that can be easily influenced and manipulated, on the other hand, are not. ii.

Sales and marketing that appeal to fear, anxiety, or other nonrational motivations are ethically improper.

1. For example, an automobile dealer who knows that an unmarried or widowed woman is anxious about the purchase and who uses this anxiety as a way to sell extended warranty insurance, disability insurance, theft protection products, and the like, is unethical.

iii.

Marketing research seeks to learn something about the psychology of potential customers. But not all psychological categories are alike. Some are more cognitive and rational than others.

1. Targeting the considered and rational desires of consumers is one thing; targeting their fears, anxiety, and whims is another.

Reality check: Does Digital Marketing Raise New Ethical Issues?

This Reality Check explicitly brings the topic of consumer privacy into the discussion of marketing ethics in a way that it seldom arose with previous marketing technologies.

Students should be asked to return to Chapter 7 and the discussion of employee privacy to review the value of privacy, and return to this chapter‘s focus on consumers. We found many students today who are less concerned with their own privacy than students of earlier generations, so this can be a good point at which to discuss the value of privacy and whether the concern is with a loss of privacy per se, or with potential harms that might be done with information gathered? *Reference: ―Reality Check—New Challenges to Old Problems: From Redlining to Elining‖* **Teaching Note: One option for a student project at this point is to offer the following assignment: For our class discussion on ethics in marketing, you will need to attach to your response paper two advertisements: One advertisement should be one that you felt very good about, for whatever reason. The second advertisement should be an ad that you do not feel very good about, for whatever reason. Your response paper for this week should articulate why you felt good or bad about the advertisements and what implications this might have for the firms/stakeholders/organizations/issues involved. For both, what kind of audience do you believe they were directed toward? Which of the ethical theories we have discussed have a direct bearing on your assessment of each piece, in what way?

VI.

Marketing Ethics and Consumer Autonomy *Chapter Objective 9 Addressed Below a. Contribution to the Economy: Defenders of advertising argue that, despite cases of deceptive practices, overall advertising contributes much to the economy. i.

The majority of advertisements provide information to consumers, information that contributes to an efficient function of economic markets.

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ii.

These defenders argue that over time, market forces will weed out deceptive ads and practices. In fact, the most effective counter to a deceptive ad is a competitor‘s ad calling attention to that deception.

b. Effects of Advertising: Beyond the question of what advertising does for people, a second important ethical question asks what advertising, specifically, and marketing in general, does to people. i.

People may well benefit from business‘s marketing of its products. They learn about products they may need or want, they get information that helps them make responsible choices, sometimes they are even entertained.

ii.

But marketing helps shape culture and the individuals who develop and are socialized within that culture.

iii.

Marketing can have direct and indirect influence on the very persons we become.

1. How it does that, and the kind of people we become as a result, is of fundamental ethical importance.

2. Critics of such claims either deny that marketing can have such influence or maintain that marketing is only a mirror of the culture of which it is a part.

c. In his1958 book, The Affluent Society, economist John Kenneth Galbraith claimed that advertising and marketing was creating the very consumer demand that production then aimed to satisfy. i.

Dubbed ―the dependence effect,‖ this assertion held that consumer demand depended upon what producers had to sell. This fact had three major and unwelcome implications: 1. By creating wants, advertising stands the ―law‖ of supply and demand on its head. a. Rather than supply being a function of demand, demand turns out to be a function of supply.

2. Second, advertising and marketing tends to create irrational and trivial consumer wants and this distorts the entire economy. a. The ―affluent‖ society of consumer products and creature comforts is in many ways worse off than so-called ―undeveloped‖ economies because resources devoted to contrived, private consumer goods are therefore denied to more important public goods and consumer needs. b. Taxpayers deny school districts small tax increases to provide essential funding while parents drop their children off at school in $40,000 SUVs.

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c. A society that cannot guarantee vaccinations and minimal health care to poor children spends millions annually for cosmetic surgery to keep its youthful appearance.

3. Finally, by creating consumer wants, advertising and other marketing practices violate consumer autonomy. a. Consumers, who consider themselves free because they were able to purchase what they want, are not in fact free if those wants are created by marketing. b. In short, consumers are being manipulated by advertising. d. Ethically, the crucial point is the assertion that advertising violates consumer autonomy. i.

The law of supply and demand is reversed, and the economy of the affluent society is contrived and distorted, only if consumer autonomy can be violated, and consumers manipulated, by advertising‘s ability to create wants.

1. But can advertising actually violate consumer autonomy and, if it can, does this occur?

2. Consider the annual investment in this effort referenced in the Reality Check, ―Advertising Spending.‖ Given the large business investment in advertising, what does advertising do to people and to society?

Reality Check Brain Hacking This Reality Check is new to the 6th edition. It is based upon a 60 Minutes story on how tech companies use neuroscience to program software to shape the behavior of smartphone users. *Reference: ―Reality Check—Advertising Spending‖* ii.

An initial thesis in this debate claims that advertising controls consumer behavior.

1. Autonomy involves making reasoned and voluntary choices, and the claim that advertising violates autonomy might mean that advertising controls consumer choice.

2. Psychological behaviorists and critics of subliminal advertising would claim that advertising can control consumer behavior in this way.

However, this seems to be an empirical claim and the evidence suggests that it is false.

3. Example: Some studies show that more than half of all new products introduced in the market fail, a fact that should not be true if consumer behavior could be controlled by marketing.

4. Consumers certainly do not seem controlled by advertising in any obvious sense of that word.

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iii.

Consumer autonomy might be violated in a more subtle way. Perhaps advertising creates the wants and desires on the basis of which consumers act.

1. The focus here becomes the concept of autonomous desires rather than autonomous behavior.

2. Consumer autonomy is violated by advertising‘s ability to create nonautonomous desires.

iv.

To understand how desires might be nonautonomous, think about the reasons why people consume the way they do and why, in general, people go shopping. After certain basic needs are met, this is a valid question.

1. People buy things for many reasons, including the desire to appear fashionable, for status, to feel good, because everyone else is buying something, and so on.

2. The interesting ethical question at this point is where did consumers‘ desires originate? How much has marketing influenced these nonnecessity purchases?

3. Some of these questions/issues are addressed in the Decision Point, ―Advertising for Erectile Dysfunction.‖

Decision Point Advertising for Erectile Dysfunction This Decision Point deals with advertisements promoting prescription erectile dysfunction drugs.

Perhaps no marketing campaign has received as much critical attention as the Viagra, Cialis, and Levitra campaign to counteract erectile dysfunction. Much of the criticism has focused on the ad placements, particularly in places where young children would see them, such as during prime time television and during high-profile sporting events. Other criticisms suggest that although these drugs can be used to treat real medical conditions, they are being marketed as little more than recreational drugs and sex toys. Erectile dysfunction can be a problem for older men, and especially for men recovering from such medical treatments as prostate surgery. But, for younger and otherwise healthy men, the primary causes of erectile dysfunction are alcohol consumption, obesity, lack of exercise, smoking, and the use of other prescription drugs. All these causes are either easily addressed without reliance on pharmaceuticals or, as is the case with alcohol abuse, erectile dysfunction drugs are potentially unsafe.

Arguments in support of direct-to-consumer marketing of prescription drugs are that it provides information to consumers, respects consumer choice, encourages those who are reluctant to seek medical care to do so, gets more people into the health care system, addresses real public health issues, and increases competition and efficiency in the pharmaceutical industry. Opponents claim that these ads increase the unnecessary use of drugs; increase public harms, because all drugs have harmful side effects; manipulate and exploit vulnerable consumers; often provide misleading and incomplete information; alienate patients from physicians by bypassing the gatekeeper function of medical professionals; and treat social and behavior problems with medical and chemical solutions.

What is your judgment about the ethics of advertising Viagra, Cialis, and Levitra? Do the reasons for advertising prescription drugs in general apply equally well to these three drugs?

Students should consider the following questions in their assessment of the scenario: 1-94 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

   

What alternatives exist for marketing prescription drugs?

Who are the stakeholders of drug marketing?

What are the consequences of alternative marketing strategies?

What rights and duties are involved?

VII.

Marketing to Vulnerable Populations *Chapter Objective 10 Addressed Below* a. Consider two examples of Target Marketing: i.

One targeted campaign: Is based on market research supplied by the manufacturer, an automobile retailer learns that the typical customer is a single woman, between the ages of 30 and 40 years old with annual income over $30,000, who enjoys outdoor sports and recreation.

1. Knowing this information, the dealer targets advertising and direct mail to this audience.

2. Ads depict attractive and active young people using their product and enjoying outdoors activities.

ii.

A second targeted campaign: Is aimed at selling an emergency call device to elderly widows who live alone.

1. This marketing campaign depicts an elderly woman at the bottom of a stairway crying out ―I‘ve fallen and can‘t get up!‖ 2. These ads are placed in media that elderly women are likely to see or hear.

iii.

Challenge: Are these marketing campaigns on an equal ethical footing?

1. The first marketing strategy appeals to the considered judgments which consumers, presumably, have settled on over the courses of their lives. a. People with similar backgrounds tend to have similar beliefs, desires, and values and often make similar judgments about consumer purchasing. b. Target marketing in this sense is simply a means for identifying likely customers based on common beliefs and values.

2. The second strategy, marketing to the elderly woman, seems ethically offensive. This campaign aims to sell the product by exploiting the real fear and anxiety that many older people experience. a. This marketing strategy tries to manipulate people by appealing to non-rational factors such as fear or anxiety rather than relying on straightforward informative ads.

3. Is there anything to the claim that elderly women living alone are more ―vulnerable‖ than younger women and that this vulnerability creates greater responsibility for marketers? In general, do marketers have special responsibility to the vulnerable?

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b. Who Is Vulnerable? i.

In one sense, a person is vulnerable as a consumer by being unable in some way to participate as a fully informed and voluntary participant in the market exchange.

ii.

Valid market exchanges assume that the participants understand what they are doing, that they have considered their choice, and that they are free to decide.

iii.

Consumer vulnerability: occurs when a person has an impaired ability to make an informed consent to the market exchange.

1. A vulnerable consumer: lacks the intellectual capacities, psychological ability, or maturity to make informed and considered consumer judgments.

2. Children would be the paradigmatic example of consumer vulnerability.

iv.

The harm to which such people are susceptible is the harm of not satisfying one‘s consumer desires and/or losing one‘s money. Elderly people living alone are not necessarily vulnerable in this sense.

v.

See the Decision Point, ―Targeting Vulnerable People‖ for an example and discussion of this issue.

Decision Point Targeting Vulnerable People?

This Decision Point deals with a controversial case of marketing drugs to targeted populations involving the drug Strattera, Eli Lilly‘s prescription medication that controls attention deficit disorder and hyperactivity (ADHD) in children. The ad ran in magazines such as Family Circle (September 2003) under the simple title ―Welcome to Ordinary.‖ The ad pictured two boys holding up a model airplane that they have finished building, a challenging task for a child with ADHD. The ad reads: ―4:30 p.m. Tuesday. He started something you never thought he‘d finish.

5:20 p.m. Thursday. He‘s proved you wrong.‖ The ad suggests that, if a child with ADHD is not ―ordinary,‖ it is the parents who are ―wrong‖ because all it would take would be Strattera to solve their problem. The same issue of Family Circle contained ads for McNeil Pharmaceutical‘s Concerta and Shire Pharmaceutical‘s Adderall, the two major competitors to Strattera.

Are these marketing practices ethically responsible?

Students should consider the following questions when assessing this scenario:  What facts would you want to know before deciding this case?  What alternative marketing practices were open to these companies?  Who are the stakeholders of your decision? What is the impact of each alternative decision on each stakeholder you have identified?  What rights and duties are involved?  How would you decide the case? Would you primarily consider consequences, or are important principles involved?

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vi.

A second sense of vulnerability is when the harm is other than the financial harm of an unsatisfactory market exchange.

1. Elderly people living alone are susceptible to injuries from falls, from medical emergencies, from expensive health care bills, from loneliness.

2. Alcoholics are susceptible to alcohol abuse, the poor are susceptible to bankruptcy 3. Single women walking alone at night are vulnerable to sexual assault, 4. Accident victims are susceptible to high medical expenses and loss of income, and so forth.

vii.

General vulnerability occurs when someone is susceptible to some specific physical, psychological, or financial harm.

c. Two Types of Marketing Target Vulnerable Populations: i.

Some marketing practices target consumers who are likely to be uninformed and vulnerable as consumers.

1. Marketing aimed at children, for example, aims to sell products to customers who are unable to make thoughtful and informed consumer decisions.

ii.

Other marketing practices target generally vulnerable populations such as when an insurance company markets flood protection insurance to homeowners living in a river‘s floodplain.

iii.

Are either, or both, types of targeting ethically legitimate?

1. As an initial judgment, we must say that marketing that is targeted at those individuals who are vulnerable as consumers is unethical.

2. Taking advantage of someone‘s frailty and manipulating it for one‘s own advantage certainly seems unethical.

3. The practice of marketing and sales targeting people who are vulnerable as consumers seems wrong.

iv.

Some people are vulnerable in both senses. Oftentimes people can become vulnerable as a consumer because they are vulnerable in some more general sense.

1. The vulnerability that many elderly have with respect to injuries and illness might cause them to make consumer choices based on fear or guilt.

2. A family member grieving over the death of a loved one might make choices in purchasing funeral services based on guilt or sorrow, rather than on considered judgment.

3. A person with a medical condition or disease is vulnerable, and the anxiety or fear associated with this vulnerability can lead to uninformed consumer choices.

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4. An inner-city resident who is poor, uneducated, and chronically unemployed is unlikely to weigh the full consequences of the choice of alcoholic beverage. d. Unethical Marketing Campaigns: A number of marketing campaigns seem to fit this model of manipulation of consumer or general vulnerability. i.

The most abhorrent (and stereotypical) example is the ambulance-chasing attorney seeking a client for a personal-injury lawsuit.

1. An accident victim is vulnerable to many harms and, while experiencing the stress of this situation, is unlikely to make a fully informed choice about legal representation.

ii.

Marketing campaigns that target the elderly for such products as supplemental medical insurance, life insurance, emergency call devices, funeral services and insurance often play on the fears, anxiety, and guilt that many elderly people experience.

1. See the Decision Points, ―Targeting Vulnerable People?‖ to consider examples of marketing to specific populations.

iii.

There can also be cases in which people become vulnerable to other harms because they are vulnerable as consumers.

1. Perhaps this strategy is the most abhorrent case of unethical marketing.

2. Certain products—tobacco and alcohol are the most obvious examples—can make an individual vulnerable to a wide range of health risks.

iv.

Marketing campaigns for products that target people who are vulnerable as consumers seem ethically repugnant.

1. This explains the particular public outrage directed at tobacco and alcohol companies that target young people.

2. Companies that market alcoholic beverages in poor inner-city neighborhoods must take this ethical guideline into account and acknowledge that many people in such situations are not fully autonomous consumers.

e. We Are All Vulnerable: We are each vulnerable when we are not aware that we are subject to a marketing campaign. i.

This type of marketing campaign is called ―stealth‖ or ―undercover‖ marketing and refers to those situations where we are subject to directed commercial activity without our knowledge.

ii.

Undercover marketing is an intentional effort to hide the true marketing element of the interaction.

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1. Example: Sony Ericsson Mobile Communications hired 60 actors to pose as tourists in New York City‘s Empire State Building. The actor/tourists were supposed to pretend they were tourists and to ask passersby if they would mind taking their pictures. In doing so, the unsuspecting passersby had a chance to see how easy the new Ericsson mobile phone cameras were to operate. The actors praised the phones and said how much they loved them, and the passersby left having had a good experience with the new product, unaware they were just involved in a product test! iii.

With the advent of blogs, stealth marketing has also hit the internet.

1. Internet users reading a product review cannot know if the individual posting the review is a user, the product‘s manufacturer, or even a competitor posting a negative review just to sway consumers away from the product.

2. Stealth marketing is considered extraordinarily effective because the consumer‘s guard is down.

3. The consumer is not questioning the message in the same way as he/she might challenge a traditional advertising campaign.

4. Consumers do not seek out the communicator‘s vested interest; they see the communication as more personal and often tend to trust the communicator much more than they would trust an advertisement or other marketing material.

iv.

―Buzz marketing,‖ where people are paid to create a ―buzz‖ around a new product by using it or discussing in ways that create media or other attention, also creates the potential for unspoken conflicts of interest.

1. There is a distinction between buzz marketing and word of mouth marketing practices.

v.

Where the marketing practice involves subversion and deception to encourage a product‘s use, or deception surrounding the fact that a practice is part of a marketing campaign, it is challenging to argue that the practice remains ethical.

1. There is a violation of trust in the communication, which could lead to a sense of betrayal so the consumer may no longer trust the company itself.

2. In addition, the consumer is no longer being treated as an end in itself but instrumentally only as a means to the manufacturer‘s end.

3. If stealth marketing becomes the universal practice, the erosion of trust could become so significant that our commercial interactions would disintegrate under burdens of disclosures that would then be necessary.

f. The utilitarian analysis does not support the ethics of these types of practices.

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i.

When a consumer cannot trust the company‘s communication, the consumer may also lose faith in the company as a whole and will choose to purchase products and services elsewhere.

ii.

Neither the company not the consumer benefits from this result. In fact both producer and consumer are harmed if a faulty marketing campaign causes a cease in production for a product or service that might otherwise be the most effective or efficient solution. **Teaching Note: As an additional area of inquiry, faculty may be interested in exploring competitive intelligence and the boundaries on ethical information gathering. Ask students what would be their personal rule? Their company rule?

The Society of Competitive Intelligence Professionals (www.scip.org) has a code of ethics that might prove to be effective in aiding a discussion on the issues.

VIII.

Supply Chain Responsibility *Chapter Objective 11 Addressed Below* a. By creating a product, promoting it, and bringing it into the market, the marketing function of a business involves a wide range of relationships with other entities. b. Supply-Chain Responsibility: In recent decades, the ethical spotlight has focused on the responsibility that a firm has for the activities of these other entities in the production process, what we shall refer to as supply-chain responsibility. c. Nike: Few businesses have received as much attention in this regard as Nike. i.

Nike is the world‘s largest athletic shoe and apparel maker. In 1999, it held over 30% of the world‘s market share for athletic footwear.

ii.

Decades after its start, Nike‘s Web site described its business philosophy in the following words: ―Our business model in 1964 is essentially the same as our model today: We grow by investing our money in design, development, marketing and sales and then contract with other companies to manufacture our products.‖

iii.

In the late 1990s, Nike was subjected to intense international criticism for the working conditions in the factories where its products were manufactured.

1. Critics charged that Nike relied on child labor and sweatshops in producing their shoes.

2. They charged that workers in these factories were paid pennies a day, were subjected to cruel, unhealthy, and inhumane working conditions, were harassed and abused, and were prohibited from any union or collective bargaining activities.

iv.

Nike initially seemed to ignore the critics and deflect any criticism by denying responsibility for the behavior of its suppliers.

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1. If local manufacturers treated their workers poorly, that was beyond Nike‘s responsibility.

2. At one point, Nike‘s vice president for Asia claimed that Nike did not ―know the first thing about manufacturing. We are marketers and designers.‖ 3. Nike soon learned that the public was not persuaded by this response. d. Who Is Responsible? Ordinarily, we do not hold a person responsible for the actions of someone else. Assuming that the other person is an autonomous agent, we believe that each person is responsible for their own actions. i.

Respondent superior is a legal parallel to the idea that a business should be held responsible for the actions of its suppliers.

1. Respondent superior is Latin for ―let the master answer,‖ and holds a principal (e.g., an employer) responsible for the actions of an agent (e.g., an employee) when that agent is acting in the ordinary course of his or her duties to the principal.

ii.

Thus, in the standard example, an employer can be held liable for damages caused by an accident involving an employee driving the company car on company business.

iii.

The justification for doing what might otherwise be considered unfair is that the agent is acting on the principal‘s behalf, at the principal‘s direction, and that the principal has direct influence over the agent‘s actions.

1. Thus, if someone is doing something for you, at your direction, and under your influence, then you must take at least some responsibility for that person‘s actions.

iv.

Most of the ethical rationale for business‘s responsibility for the actions of its suppliers stems from two of these conditions: 1. Suppliers often act at the direction of business.

2. Business often exercises significant influence over the actions of its suppliers.

e. In the multinational apparel and footwear industry, historically the corporate brands accepted responsibility only for their own organizations and specifically did not regard themselves as accountable for the labor abuses of their contractors. i.

As multinationals and others became more aware of working conditions in these factories and the lack of legal protections for workers, this conception has changed.

ii.

Today, multinationals customarily accept this responsibility and use their leverage to encourage suppliers to have positive working environments for workers.

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iii.

The new concept of responsibility travels far deeper throughout the entire supply chain system, as is depicted in Figure 8.1—―Evolved Concept of Responsibility: Multiple Lines of Responsibility to Diverse Stakeholders.‖ 1. Each element of a tremendously complicated set of interrelationships is based on the potential to influence or exercise leverage throughout the system.

2. How far down—or across—the supply chain should responsibility travel?

3. Should a firm like Nike truly be responsible for the entire footwear and apparel system? If not, where would you draw the line as a consumer, or where would you draw the line if you were the corporate responsibility vice president for Nike?

4. What response will most effectively protect the rights of those involved while creating the most appropriate incentives to achieve profitable, ethical results?

5. In today‘s increasingly complicated, globalized, multinational systems, stakeholders have yet to resolve this challenging dilemma.

Opening Decision Point Revisited: Regulating Digital Marketing The revisit of the Opening Decision Point shifts from digital marketing practices themselves to the question of regulation. The rapid growth of digital marketing has challenged traditional understanding of the role of the FTC in regulating advertising. In particular, this would provide a good occasion to return to issues of voluntary regulation and professional responsibilities introduced previously.

End of Chapter Questions, Projects, and Exercises 1. Are some products too dangerous to be marketed in any circumstance? What regulations, if any, would you place on marketing cigarettes? Handguns? Prescription drugs?

As a starting point, refer students to The American Marketing Association‘s Statement of Ethics, found at http://www.marketingpower.com/AboutAMA/Pages/Statement%20of%20Ethics.aspx which provides guidelines for marketing products. Students can then use that code to find other codes and perhaps regulations that may address this issue.

For websites that address some of the regulatory issues, you might direct students to the following:  



Phillip Morris website about legislation and regulation of tobacco marketing: www.philipmorrisusa.com The following site addressed the concept of marketing handguns specifically toward women. The site raises the issue of how far might be too far to go with marketing dangerous products: Brady Center to Prevent Gun Violence: http://www.gunlawsuits.org FDA—The Prescription Drug Marketing Act: http://www.fda.gov

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2. Conduct a classroom debate on the McDonald‘s spilt coffee case. Conduct an Internet search for this case (Liebeck v. McDonald’s) to find both legal and journalistic comments on this case. One-third of the class should play the role of Mrs. Liebeck‘s attorneys, one-third the role of McDonald‘s attorneys, and one-third the role of the judge and jury.

Direct students to do internet research and find information on the case. Some websites to visit are:  

And Now, the Rest of the Story … The McDonald‘s Coffee Lawsuit: http://www.jtexconsumerlaw.com/V11N1/Coffee.pdf McDonald‘s Scalding Coffee Case: The Real Facts: http://www.justice.org/cps/rde/xchg/justice/hs.xsl/14627_14633.htm

3. Research the case Pelman v. McDonald’s in which it was alleged that McDonald‘s was partially responsible for the health problems associated with the obesity of children who eat MacDonald‘s fast food. Should MacDonald‘s and other fast-food restaurants be judged negligent for selling dangerous products, failing to warn consumers of the dangers of a highfat diet, and deceptive advertising?

Some websites to look at regarding the McDonald‘s obesity case: 

U.S. judge dismisses obesity suit vs. McDonald‘s: http://money.cnn.com/2003/01/22/news/companies/mcdonalds/index.htm



U.S. District Court Southern District of New York Opinion: http://biotech.law.lsu.edu/cases/food/Pelman_v_McDonalds_SDNY.pdf



Food Fight: Obesity Raises Difficult Marketing Questions: http://knowledge.wharton.upenn.edu/article.cfm?articleid=1149&CFID=2756464& CFTOKEN=80757050

4. The Federal Trade Commission regulates advertising on the basis of two criteria: deception and unfairness. How can an ad be unfair? Who gets hurt by deceptive advertising?

Students can refer to the pages in the chapter related to fair advertising (pages 328– 339). They can use the decision making process to determine how an ad can be unfair, and examine the stakeholders to decide who gets hurt by deceptive advertising. 

For clarification, the Federal Trade Commission Advertising Guidance can be found at: http://www.ftc.gov/bcp/menus/resources/guidance/adv.shtm

5. Collect several sample prescription drug ads from magazines, newspapers, and television.

Based on the location of the ad, what do you think is the intended target audience? Are the ads in any way misleading? Are the required side effect warnings deceptive in any way? Do you believe that health care professionals provide adequate screening to insure that prescription drugs are not misused?

This is a suggested classroom activity for students to do individually or in groups.

6. Review the Decision Point, ―Marketing in Schools,‖ concerning marketing in the schools and Channel One. Reflect on your own educational experience. Assume you were offered a laptop computer as long as you understood that you would see a commercial every time you turned it on and for two minutes for every fifteen minutes of use. How would you feel about 1-103 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

this arrangement from a gut perspective? Considering it in greater detail, what types of restrictions on advertisements do you think the laptop manufacturer (or service provider who is responsible for managing the advertising messages) should impose if the laptops will be given to college-aged students? How would you develop standards for these restrictions?

Some websites to reference as you discuss marketing in schools: 

Commercialism in Children‘s Lives: http://blogs.worldwatch.org/transformingcultures/wpcontent/uploads/2010/12/Commercialism-in-Childrens-Lives-Linn.pdf



Campaign for Commercial Free Childhood: http://commercialfreechildhood.org/

7. Many sales people are compensated predominantly on a commission basis. In other words, though the salesperson receives a small base hourly rate, most of her or his compensation derives from a percentage of the price of items sold. Since basically the salesperson only makes money if you buy something and he or she makes more money if you spend more money, do you ever trust a salesperson‘s opinion? What would make you more likely to trust a commission-based salesperson or less likely? Is there anything a commissioned salesperson could do to get you to trust her or him? Best Buy, the consumer electronics store, communicates to consumers that it does not pay its salespeople based on commissions in order to encourage objectivity. Are you more likely to go to Best Buy as a result?

Facilitate classroom discussion using ethical theories to discuss the impact on stakeholders of various methods of salesperson compensation.

8. In 2001, TAP Pharmaceuticals pled guilty to participating in a criminal conspiracy with doctors by providing free samples of Lupron for which the doctors later billed Medicare and patients. Federal prosecutors also charged that TAP executives and midlevel managers with fraud, alleging that TAP employees bribed doctors and hospitals with cash, free vacations, and free samples as an incentive for them to prescribe Lupron. Defendants argued that the samples and gifts were standard industry practice and did not amount to a bribe. In December 2004, a jury acquitted the individuals involved. TAP itself settled their case with the government by agreeing to pay $150 million restitution to consumers and insurance companies for what the government charged were artificially inflated drug prices. The prices were inflated because of the alleged bribes paid to doctors. TAP did not admit to any wrongdoing, claiming that it settled to avoid further legal costs. Studies have shown that samples, as well as small gifts and lunches, can lead doctors to prescribe more expensive brand names when cheaper generic drugs would be as effective. What additional facts might you need to know to make a fully informed judgment in this case? What outcome do you believe the pharmaceutical companies are striving to achieve through these practices? What alternatives might be available to pharmaceutical companies to serve a similar outcome without incurring legal liability or crossing ethical lines? Do the doctors or hospitals bear any ethical responsibility under these circumstances? What duties do the pharmaceutical companies, doctors, or hospitals have? What does the principle of fairness require in this case? What rights are implicated?

Use the ethical decision making process to lead classroom discussion.

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9. Go to the FTC website (http://www.ftc.gov/bcp/grnrule/guides980427.htm) and review the cases in the Decision Point ―Examples of Greenwashing.‖ You will find the FTC‘s judgment on each case (and others). Do you agree with the FTC‘s assessment of misleading environmental marketing examples?

Lead students in discussion of disagreements with aspects of the FTC‘s assessment of misleading environmental marketing examples. In cases where students agree, what could be changed about the marketing to make it more ethical?

IM Chapter 9: Business and Environmental Sustainability Chapter Objectives After reading this chapter, you will be able to: 1. Explain how environmental challenges can create business opportunities.

2. Describe a range of values that play a role in environmental decision making.

3. Explain the difference between market-based and regulatory-based environmental policies.

4. Describe business‘s environmental responsibilities that flow from each approach.

5. Identify the inadequacies of sole reliance on a market-based approach.

6. Identify the inadequacies of regulatory-based environmental policies.

7. Define and describe sustainable development and sustainable business.

8. Highlight the business opportunities associated with a move toward sustainability.

9. Describe the sustainable principles of eco-efficiency, biomimicry, and service.

Opening Decision Point The Business of Food Food is a topic that can introduce a wide range of ethical issues in business, from marketing to product safety, and from worker safety to the environment and global responsibilities. We use food as the entry to a range of environmental responsibilities for business.

In particular, we use this Opening Decision Point to ask students to reflect on how their own choices made everyday are influenced by, and in turn influence, business decision making. What we eat, how we eat, when we eat, and why we eat all are influenced by business, and in most cases, every one of these choices have an environmental impact.

Food production and distribution also has a profound impact on issues related to environmental sustainability. Faculty might consider using the Decision Point, ―Marketing to the Base of the Pyramid‖ as a transition reading to move form marketing concerns to environmental concerns by considering how global food choices impact the natural environment.

I.

Introduction a. There is a tendency to believe that environmental challenges always create a burden on business and that environmental and business interests are always in conflict. i.

While it certainly can be the case that environmental regulation can add costs to business operations and restrict business choice, they can also provide opportunities for business.

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1. Where one automobile manufacturer sees government mandated fuel efficiency standards as a burden on its ability to sell large SUVs, another company sees it as an opportunity to market fuel-efficient hybrids. ii.

Many observers believe we have entered the sustainability revolution, an age in which the race to create environmentally and economically sustainable products and services is creating unlimited business opportunities.

iii.

As happened in the industrial revolution, there will be winners and losers in this sustainability revolution and, according to supporters, the economic winners will be the firms and industries that do the most environmental good.

b. Environmentalism and Environmental Degradation: As described by geographer Jarad Diamond in his in the best selling book, Collapse, human history provides many examples of societies that have run up against the environmental limits of their lifestyles. i.

The Industrial Revolution of the 18th and 19th centuries brought with it the ability to degrade the natural environment to a greater extent and at a faster rate than ever before.

1. The industrial model of growth and productive efficiency and seemingly unlimited energy supply continued along almost unchecked by environmental regulation until the latter half of the 20th century.

2. By the start of the 21st century, the earth was experiencing he greatest period of species extinction since the end of the dinosaurs 65 million years ago.

3. Humans are also threatened by global climate change.

4. Each of these monumental environmental events is largely due to human activity and specifically to our present arrangements of modern industrial society.

ii.

The way we have done business over the last two centuries has brought us up against the biophysical limits of the earth‘s capacity to support all human life.

It has already crossed those limits in the case of countless other forms of nowextinct life.

iii.

Thus, the major ethical question of this chapter is what responsibilities contemporary businesses have regarding the natural environment. *Reference: ―Reality Check—Insurance Industry and Climate Change *Teaching Note: A helpful exercise to explore what businesses think about the current state of the environment would be to have students research the insurance industry‘s response to climate change. Consider as well how such investment companies as BlackRock and Goldman Sachs view long-range investment surrounding fossil fuels and climate change.

How does the finance industry in general view fossil fuels companies?

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Triple Bottom Line Approach: The sustainable business and sustainable economic development seek to create new ways of doing business in which business success is measured in terms of economic, ethical, and environmental sustainability, often called the Triple Bottom Line approach.

1. The sustainability paradigm sees environmental responsibilities as a fundamental part of basic business practice.

2. Sustainable business ventures may find that environmental considerations offer creative and entrepreneurial businesses enormous opportunities.

3. See Reality Check: Is the Triple Bottom Line a Trojan Horse?‖ for a critical perspective on the triple bottom line. *Chapter Objective 1 Addressed Below* iv.

Opportunities available in the age of sustainability: The environmental research and consulting group The Natural Step uses an image of a funnel, with two converging lines, to help business understand the opportunities available in the age of sustainability.

1. The funnel shows that the resources necessary to sustain life are on a downward slope.

2. While there is disagreement about the angle of the slope, there is widespread agreement that available resources are in decline.

3. The second line represents aggregate worldwide demand, accounting for both population growth and the increasing demand of consumerist lifestyles.

4. Barring an environmental catastrophe, many but not all industries will emerge through the narrowing funnel into an era of sustainable living.

5. Businesses unable to envision that sustainable future will hit the narrowing wall. Innovative and entrepreneurial business will find their way through. *Reference Figure 9.1—The Natural Step‟s Funnel* We have used Figure 9.1 to introduce students interested in entrepreneurship to ethical issues and sustainability. Students can be challenged to ―backcast‖ from the projected future state to the products and services that might transform the present economy to a more sustainable one. The entrepreneur is exactly that person who knows the future and creates the means for arriving there. v.

The Natural Step challenges business to ―backcast‖ a path toward sustainability.

1. ―Backcasting‖ examines what the future will be when we emerge through the funnel.

2. Knowing what the future must be, creative businesses then look backward to the present and determine what must be done to arrive at that future.

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II.

vi.

Sustainable business must use resources and produce wastes at rates that do not jeopardize human well-being by exceeding the earth‘s capacity to renew the resources and absorb the wastes.

vii.

Businesses that do so will succeed in moving through the funnel and emerge as successful in the age of sustainability.

viii.

Environmental issues are no longer at the periphery of business decisions, as burdens to be managed, if not avoided altogether; nor are they regulatory constraints in managerial decision making.

1. Environmental sustainability must accompany financial sustainability for business to survive in the 21st century.

2. For reasons of rights and duties, as well as for the overall social good, sustainable business is the wave of the future.

Business Ethics and Environmental Values *Chapter Objective 2 Addressed Below* a. Protection of the Natural Environment: Which values and decisions are supported by a concern with the natural environment? Why should we act in ways that protect the natural environment from degradation? Why should business be concerned with, and value, the natural world? i.

The most obvious answer to these questions is human self-interest.

1. Environmental concerns are relevant to business because human beings, both presently living and future generations of humans, depend on the natural environment in order to survive.

2. Human need clean water to drink, healthy air to breathe, fertile soil and oceans to produce food, an ozone layer to screen out solar radiation, and a biosphere that maintains the delicate balance of climate in which human life can exist.

3. Two aspects of contemporary environmental realities underscore the importance of self-interested reasoning.

ii.

As documented in Collapse, past human societies have often run up against the limits of the local environment‘s ability to sustain human life.

1. Historically, environmental degradation has been localized to a particular region and has seldom affected more than a generation.

2. In contrast, some contemporary environmental issues have the potential to adversely affect the entire globe and change human life forever.

3. Global climate change, species extinction, soil erosion and desertification, and nuclear wastes will threaten human life into the indefinite future.

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iii.

Second, the science of ecology and its understanding of the interrelatedness of natural systems have helped us to understand the wide range of human dependence on ecosystems.

1. Where we once might have thought that buried wastes were gone forever, we now understand how toxins can seep into groundwater and contaminate drinking water across great time and distances.

2. We now understand how pesticides accumulate throughout the food chain and pose greatest dangers not only to top predators such as bald eagles but to human beings as well.

3. Where we once thought the atmosphere too big to be changed by humans, we now understand the precise balance necessary to maintain life-supporting systems.

b. The Conservation Movement: The conservation movement, the first phase of modern environmentalism, advocated for a more restrained and prudent approach to the natural world. i.

From this perspective, the natural world was still valued as a resource, providing humans with both direct benefits (air, water, food), and indirect benefits (the goods and services produced by business).

ii.

Conservationists argued against the exploitation of natural resources as if they could provide an inexhaustible supply of material and made the case that business had good reasons for conserving natural resources.

iii.

The natural world, like capital, had the productive capacity to produce longterm income, but only if it is managed and used prudently.

c. Value of the Natural Environment: Besides these reasons to protect human life and health, the natural environment is essential and valuable to use for many other reasons. i.

The beauty and grandeur of the natural world provides great aesthetic and inspirational value; Many people value the natural world as a manifestation of religious and spiritual value; Parts of the natural world are valued for their symbolic value, their historical value, and for such diverse psychological values as serenity and exhilaration.

ii.

These values can clearly conflict with the use of the earth itself as a resource to physically, as opposed to spiritually, sustain those who live on it.

iii.

Aesthetic and inspirational values often play out in public debates about economic development. The 1970s song ―Big Yellow Taxi‖ captured this sentiment with the well-known lyric, ―they paved paradise and put up a parking lot.‖

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iv.

Many critics fault business for destroying natural beauty and replacing it with strip malls, neon signs, fast-food restaurants and parking lots. Consider these debates as you review the Decision Point, ―Commercialize an Historic Civil War Site?‖

Decision Point “Promoting Food Safety or Fighting Food Waste?”

This case can help students reflect on the many trade-offs that they can face in all issues but perhaps especially in issues involving food security/access to food and safety factors. At the most general level, this topic can include questions about productivity (the use of pesticides, industrial agriculture) and human and environmental safety.

1. If consumers have evolved a practice of treating printed ―best before‖ dates as ―unsafe after‖ dates, should the food industry instead be encouraged to print dates that more closely correspond to that evolved expectation?

2. Should the FSIS, whose name suggests consumer safety as its mission, be a mechanism for achieving environmental sustainability-focused goals?

3. Consumer-readable sell-by dating replaced an older system of symbols or numbers whose meaning was understood only by the retailer. It was replaced by consumerreadable date labels in an attempt to achieve increased consumer transparency. How should conflicts between demands for consumer transparency and the policy objective of reducing food waste be decided? d. Status of Animals: The moral status of animals has been the environmental value that, arguably, has raised the greatest challenge to business. i.

Variously referred to as the animal rights, animal liberation, or animal welfare movement, this approach attributes a moral standing to animals.

ii.

Such a status would create a wide variety of distinctive ethical responsibilities concerning how we treat animals and would have significant implications for many businesses. Two versions of this perspective are worth mentioning.

iii.

The first approach: emphasizes the fact that many animals, presumably all that have a central nervous system, have the capacity to feel pain.

1. Reminiscent of the utilitarian tradition, his view asserts an ethical responsibility to minimize pain.

2. Inflicting unnecessary pain is taken to be an ethical wrong; therefore, acts that inflict unnecessary pain on animals is ethically wrong.

3. Raising and slaughtering animals for food, particularly in the way it is done with poultry, hog, and cattle in industrial farming enterprises, would be an obvious case in which business would violate this ethical responsibility. This is argued in the following Reality Check— Treatment of Animals in Agriculture. *Reference: ―Reality Check—Treatment of Animals in Agriculture‖* 1-110 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

iv.

The second approach: argues that at least some animals have the cognitive capacity to posses a conscious life of their own.

1. Reminiscent of the Kantian ethical tradition, his view asserts that we have a duty not to treat animals as mere objects and means to our own ends.

2. Businesses that use animals for food, entertainment, or pets would violate the ethical rights of these animals.

III. Business‘ Environmental Responsibility: The Market Approach **Teaching Note: This issue can be connected back to the discussion of markets and ethics from chapter 3. a. Protecting the Environment: While debate continues to surround some environmental values, an overwhelming consensus exists about the self-interested and prudential reasons for protecting the natural environment: humans have a right to be protected from undue harm. i.

What is the best means for achieving this goal? Historically, this debate has focused on whether efficient markets or government regulation is the most appropriate means for meeting the environmental responsibilities of business. *Chapter Objective 3 Addressed Below* ii.

Each of these two approaches has significant implications for business.

1. From one perspective, if the best approach to environmental concerns is to trust them to efficient markets, then the responsible business manager simply ought to seek profits and allow the market to allocate resources efficiently. a. By doing this, business fills its role within a market system which, in turn, serves the greater overall (utilitarian) good.

2. On the other hand, if government regulation is a more adequate approach, then business ought to develop a compliance structure in order to insure that it conforms to those regulatory requirements.

iii.

A market-based approach to resolving environmental challenges is reminiscent of the narrow, economic view of CSR described in chapter 5.

1. Defenders of the market approach contend that environmental problems are economic problems that deserve economic solutions.

2. Fundamentally, environmental problems involve the allocation and distribution of limited resources.

3. Whether we are concerned with the allocation of scare nonrenewable resources such as gas and oil, or the earth‘s capacity to absorb industrial by-products such as CO2 or PCB, environmental challenges can be addressed through efficient markets. *Chapter Objective 4 Addressed Below* b. Implications of Pollution and Resource Conservation: 1-111 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

i.

In his well-known book, People or Penguins: The Case for Optimal Pollution, William Baxter argued that there is an optimal level of pollution that would best serve society‘s interests.

1. This optimal level is best attained, according to Baxter, by leaving it to a competitive market.

2. Denying that there is any ―natural‖ or objective standard for clean air or water, Baxter begins with a goal of ―safe‖ air and water quality and translates this goal to a matter of balancing risks and benefits.

3. Society could strive for pure air and water, but the costs that this would entail would be too high.

4. A more reasonable approach is to aim for air and water quality that is safe enough to breathe and drink without costing too much.

This balance, the ―optimal level of pollution‖ can be achieved through competitive markets. Society, through the activities of individuals, will be willing to pay for pollution reduction as long as the perceived benefits outweigh the costs. *Teaching Note: Challenge students to develop a parallel argument for issues of workplace safety and consumer products safety. Is there an ―optimal level‖ of workplace safety and products safety? ii.

iii.

The free market also provides an answer for resource conservation. From a strict market economic perspective, resources are ―infinite.‖ 1. History has shown that human ingenuity and incentive has always found substitutes for any shortages.

2. As the supply of any resources decreases, the price increases, thereby providing a strong incentive to supply more or provide a less costly substitute.

iv.

In economic terms, all resources are ―fungible,‖ meaning, they can be replaced by substitutes and in this sense resources are infinite. Resources that are not being used to satisfy consumer demand are being wasted.

v.

A similar case can be made for the preservation of environmentally sensitive areas.

1. Preservation for preservation‘s sake would be wasteful since it would use resources in inefficiently. *Chapter Objective 5 Addressed Below* c. Challenges to this narrow economic view of corporate social responsibility are familiar to both economists and ethicists. i.

A variety of market failures, many of the best known of which involve environmental issues, point to the inadequacy of market solutions.

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ii.

One example of market failure is the existence of externalities, the textbook example of which is environmental pollution.

1. Because the ―costs‖ of such things as air pollution, groundwater contamination and depletion, soil erosion, and nuclear waste disposal are typically borne by parties ―external‖ to the economic exchange (e.g., people downwind, neighbors, and future generations), free market exchanges cannot guarantee optimal results.

iii.

A second type of market failure occurs when no markets exist to create a price for important social goods.

1. Endangered species, scenic vistas, rare plants and animals, and biodiversity are just some environmental goods that typically are not traded on open markets.

2. Public goods such as clean air and ocean fisheries also have no established market price.

3. With no established exchange value, the market approach cannot even pretend to achieve its own goals of efficiently meeting consumer demand.

4. Markets alone fail to guarantee that such important public goods are preserved and protected. *Teaching Note: Again, you can challenge students to apply these objections to any of the market-based polices mentioned above: workplace health and safety and consumer products safety. iv.

A third way in which market failures can lead to serious environmental harm involves a distinction between individual decisions and group consequences.

1. Consequences of Individual Decisions: Important ethical and policy questions can be missed if we leave policy decisions solely to the outcome of individual decisions.

2. Consider the calculations that an individual consumer might make regarding the purchase of an SUV and the consequences of that decision on global warming. a. The additional CO2 that would be emitted by a single SUV is miniscule enough that an individual would likely conclude that her decision will make no difference. b. However, if every consumer made exactly the same decision, the consequences would be significantly different.

v.

The overall social result of individual calculations might be significant increases in pollution and such pollution-related diseases as asthma and allergies.

1. A number of alternative policies (e.g., restricting SUV sales, increasing taxes on gasoline, treating SUVs as cars instead of light trucks in calculating Corporate Automotive Fuel Efficiency [CAFE] Standards) that could address pollution and pollution-related disease would never be considered if we relied only on market solutions.

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vi.

These are important ethical questions which remain unasked from within market transactions, so we must conclude that markets are incomplete (at best) in their approach to the overall social good.

1. In other words, what is good and rational for a collection of individuals is not necessarily what is good and rational for a society.

d. Environmental Policy: Such market failures raise serious concerns for the ability of economic markets to achieve a sound environmental policy. i.

Defenders of a narrow economic view of corporate social responsibility and have responses to these challenges.

1. Internalizing external costs and assigning property rights to unowned goods, such as wild species, are two responses to market failures.

ii.

There are good reasons for thinking that such ad hoc attempts to repair market failures are environmentally inadequate.

1. One important reason is what has been called the first-generation problem.

2. Markets can work to prevent harm only through information supplied by the existence of markets failures. a. For example: Only when fish populations in the North Atlantic collapsed did we learn that free and open competition among the world‘s fishing industry for unowned public goods failed to prevent the decimation of cod, swordfish, Atlantic salmon, and lobster populations.

3. We learn about markets failures and thereby prevent harms in the future only by sacrificing the ―first-generation‖ as a means for gaining this information.

4. When public policy involves irreplaceable public goods such as endangered species, rare wilderness areas, and public health and safety, such a reactionary strategy is ill-advised. *Reference: ―Reality Check—Cap and Trade: A Mixed Approach?

This reality check asks students to consider ―cap and Trade‖ as a way to balance market values with regulatory goals.

IV.

Business‘ Environmental Responsibility: The Regulatory Approach *Chapter Objective 3 Addressed Below* a. Governmental Regulations: A broad consensus emerged within the United States in the 1970s that unregulated markets are an inadequate approach to environmental challenges. Instead, governmental regulations were seen as the better way to respond to environmental problems. i.

Much of the most significant environmental legislation in the United States was enacted during the 1970s: 1. The Clean Air Act of 1970 (amended and renewed in 1977) 1-114

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2. Federal Water Pollution Act of 1972 (amended and renewed as the Clean Water Act of 1977) 3. Endangered Species Act of 1973 4. Each law was originally enacted by a Democratic Congress and signed into law by a Republican president. ii.

These laws share a common approach to environmental issues.

iii.

Before this legislation was enacted, the primary legal avenue open for addressing environmental concerns was tort law.

1. Only individuals who could prove that they had been harmed by pollution could raise legal challenges to air and water pollution.

2. That legal approach placed the burden on the person who was harmed and, at best, offered compensation for the harm only after the fact.

iv.

Except for the incentive provided by the threat of compensation, U.S. policy did little to prevent the pollution in the first place.

1. Absent any proof of negligence, public policy was content to let the market decide environmental policy.

2. Because endangered species themselves had no legal standing, direct harm to plant an animal life was of no legal concern and previous policies did little to prevent harm to plant and animal life.

v.

Laws enacted during the 1970s established standards that effectively shifted the burden from those threatened with harm to those who would cause the harm.

1. Government established regulatory standards try to prevent the occurrence of pollution or species extinction rather than compensation after the fact.

2. We can think of these laws as establishing minimum standards to ensure air and water quality and species preservation.

3. Business was free to pursue its own goals as long as it complied with the side constraints established by these minimum standards.

vi.

As consumers, individuals could demand environmentally friendly products in the marketplace. As citizens, individuals could support environmental legislation.

vii.

As long as business responded to the market and obeyed the law, their environmental responsibilities were being met.

1. If environmentally suspect products, such as large gas-guzzling SUVs, were demanded by consumers and allowed by law, then one cannot expect business to forego the financial opportunities of marketing such products. *Chapter Objective 6 Addressed Below* 1-115 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

b. Does Business Have No Responsibility? Several problems suggest that this approach will prove inadequate over the long term. i.

This approach underestimates the influence that business can have in establishing the law.

ii.

The CAFE Standards mentioned previously provide a good example of how this can occur.

1. A reasonable account of this law suggests that the public very clearly expressed a political goal of improving air quality by improving automobile fuel efficiency goals and thereby reducing automobile emissions.

2. The automobile industry was able to use its lobbying influence to exempt light trucks and SUVs from these standards. Of course light trucks and SUVs at the time represented the largest selling, and most profitable, segment of the auto industry.

iii.

Second, this approach also underestimates the ability of business to influence consumer choice.

iv.

To conclude that business fulfills its environmental responsibility when it responds to the environmental demands of consumers is to underestimate the role that business can play in shaping public opinion.

1. Advertising is a $200 billion a year industry in the United States alone.

2. It is surely misleading to claim that business passively responds to consumer desires and that consumers are unaffected by the messages that business conveys.

3. Assuming that business is not going to stop advertising its products or lobbying government, this model of corporate environmental responsibility is likely to prove inadequate for protecting the natural environment.

v.

If we rely on the law to protect the environment, environmental protection will extend only as far as the law extends.

vi.

Most environmental issues, pollution problems especially, do not respect legal jurisdictions.

1. New York State might pass strict regulations on smokestack emissions, but if the power plants are located downwind in Ohio or even further west in the Dakotas or Wyoming, New York State will continue to suffer the effects of acid rain.

2. Similarly, national regulations will be ineffective for international environmental challenges.

3. While hope remains that international agreements might help control global environmental problems, the failure of the Kyoto agreement suggests that this might be overly optimistic.

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vii.

Finally, and perhaps most troubling from an environmental standpoint, this regulatory model assumes that economic growth is environmentally and ethically benign.

Regulations establish side-constraints on business‘ pursuit of profits and accept as ethically legitimate whatever road to profitability is chosen by management.

1. What can be lost in these discussions is the very important fact that there are many different ways to pursue profits within the sideconstraints of law.

2. Different roads toward profitability can have very different environmental consequences, as discussed in the Reality Check, “Cap and Trade—A Mixed Approach.” *Reference: Reality Check—―Cap and Trade—A Mixed Approach?”* viii.

V.

Business‘ Environmental Responsibilities: The Sustainability Approach *Chapter Objective 7 Addressed Below* a. New Business Model: Beginning in the 1980s, a new model for environmentally responsible business began to take shape, one that combines financial opportunities with environmental and ethical responsibilities. i.

The concept of sustainable development and sustainable business practice suggests a radically new vision for integrating financial and environmental goals, compared to the growth model that preceded it (as explored in the Reality Check, ―Why Sustainability?‖). *Reference: ―Reality Check—Why Sustainability?‖* ii.

These three goals, economic, environmental, and ethical sustainability, are often referred to as the three pillars of sustainability. Assessing business activity along these three lines is often referred to as the ―triple bottom line.‖ (For a critical perspective on the Triple Bottom Line, see Reality Check Triple Bottom Line: A Trojan Horse?‖

b. Sustainable Development: The concept of sustainable development can be traced to a 1987 report from the United Nations‘ World Commission on Environment and Development (WCED), more commonly known as the Brundtland Commission. i.

The Brundtland Commission offered what has become the standard definition of sustainable development: ―Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.‖

c. Innovative Approach to Economic Theory: Economist Herman Daly has been among the leading thinkers who have advocated an innovative approach to economic theory based on the concept of sustainable development.

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i.

Daly makes a convincing case for an understanding of economic development that transcends the more common standard of economic growth.

1. Unless we change the way we do business, we will fail to meet some very basic ethical and environmental obligations.

2. According to Daly, we need a major paradigm shift in how we understand economic activity.

ii.

We can begin with the standard understanding of economic activity and economic growth. What is sometimes called the ―circular flow model‖ explains the nature of economic transactions in terms of a flow of resources from businesses to households and back again: 1. Business produces goods and services in response to the market demands of households.

2. These goods and services are shipped to households in exchange for payments back to business.

3. Payments are in turn sent back to households in the form of wages, salaries, rents, profits, and interests.

4. These payments are received by households in exchange for the labor, land, capital and entrepreneurial skills used by business to produce goods and services. *Reference: Figure 9.2—The Circular Flow Model* d. Circular Flow Model: Two aspects of this circular flow model are worth noting. i.

First, it does not differentiate natural resources from the other factors of production.

1. This model does not explain the origin of resources; they are simply owned by households from which they, like labor, capital, and entrepreneurial skill, can be sold to business.

2. Economist Julian Simon has argued, ―As economists or consumers, we are interested in the particular services that resources yield, not in the resources themselves.‖ 3. Those services can be provided in many ways and by substituting different factors of production.

4. In Simon‘s terms, resources can therefore be treated as ―infinite.‖

ii.

A second observation is that this model treats economic growth as both the solution to all social ills and also as boundless. The possibility that the economy cannot grow indefinitely is simply not part of this model.

1. To keep up with population growth, the economy must grow.

2. To provide for a higher standard of living, the economy must grow.

3. To alleviate poverty, hunger, and disease, the economy must grow.

iii.

The 3 points summarized in the Reality Check, ―Why Sustainability?‖ suggest why this growth-based model will be inadequate.

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1. According to some estimates, the world‘s economy would need to grow by a factor of five-to-tenfold over the next 50 years in order to bring the standard of living of present populations in the developing world into line with the standard of living in the industrialized world.

2. Yet, within those 50 years, the world‘s population will increase by more than 3 billion people, most of which will be born in the world‘s poorest economies.

3. The only source for all this economic activity is the productive capacity of the earth itself. e. Economic Growth: Daly argues that neoclassical economics, with its emphasis on economic growth as the goal of economic policy, will inevitably fail to meet these challenges unless it recognizes that the economy is but a subsystem within earth‘s biosphere. i.

Economic activity takes place within this biosphere and cannot expand beyond its capacity to sustain life.

ii.

All the factors that go into production—natural resources, capital, entrepreneurial skill, and labor—ultimately originate in the productive capacity of the earth.

iii.

In light of this, the entire classical model will prove unstable if resources move through this system at a rate that outpaces the productive capacity of the earth or of the earth‘s capacity to absorb the wastes and by-products of this production.

1. We need to develop an economic system that uses resources only at a rate that can be sustained over the long term and that recycles or reuses both the by-products of the production process and the products themselves. *Reference: Figure 9.2—A Model of the Economy (or Economic System) as a Subset of the Biosphere (or Ecosystem)* f. A Sustainable Economic Model: Figure 9.3 differs from Figure 9.2 in several important ways. i.

First, there is a recognition that the economy exists within a finite biosphere that encompasses little more than a few miles-wide band surrounding the earth‘s surface.

1. From the first law of thermodynamics, we recognize that neither matter nor energy can truly be ―created,‖ it can only be transferred from one form to another.

ii.

Second, energy is lost at every stage of economic activity. Consistent with the second law of thermodynamics, the amount of usable energy decreases over time.

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1. ―Waste energy‖ is continuously leaving the economic system and thus new, low entropy energy, must constantly flow into the system.

2. Ultimately, the only source for low-entropy energy is the sun.

VI.

iii.

Third, natural resources are no longer treated as an undifferentiated and unexplained factor of production emerging from households.

1. Natural resources come from the biosphere and cannot be created ex nihilo.

iv.

Finally, it recognizes that wastes are produced at each stage of economic activity and these wastes are dumped back into the biosphere.

v.

The conclusion that should be drawn from this new model is relatively simple: 1. Over the long term, resources and energy cannot be used, nor waste produced, at rates at which the biosphere cannot replace or absorb them without jeopardizing its ability to sustain (human) life.

2. These are what Daly calls the ―biophysical limits to growth.‖ The biosphere can produce resources indefinitely, and it can absorb wastes indefinitely but only at a certain rate and with a certain type of economic activity.

vi.

Finding the correct rate and type of economic activity and creating a sustainable business practice is the ultimate environmental responsibility of business.

The ―Business Case‖ for a Sustainable Economy *Chapter Objective 8 Discussed Below* a. While the regulatory and compliance model tends to interpret environmental responsibilities as constraints upon business, the sustainability model is a more forward-looking and may present business with greater opportunities than burdens. i.

The model offers a vision of future business that many entrepreneurial and creative businesses are already pursuing.

ii.

Many observers argue that a strong economic and financial case can be made for the move toward a sustainable future (but also see the Reality Check, ―Should Every Business be Sustainable?‖ for further discussion of this issue). *Reference: ―Reality Check—Should Every Business be Sustainable?”

This reality check asks students to take a critical look at the concept of ―sustainability.‖ The growing popularity of the concept suggests that it has perhaps come to mean everything for everyone. By asking students if every industry and every firm can be made sustainable, students are challenges to consider the possibility that ―sustainability‖ may mean little more than a continuation of the status quo.

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b. First, sustainability is a prudent long-term strategy. i.

As the Natural Step‘s funnel image suggests, business will need to adopt sustainable practices in order to insure long-term survival.

ii.

Firms that fail to adapt to the converging lines of decreasing availability of resources and increasing demand risk their own survival.

c. Second, there is a huge unmet market potential among the world‘s developing economies that can only be met in sustainable ways. i.

Enormous business opportunities exist in serving the billions of people who need, and are demanding, economic goods and services.

ii.

The base of the economic pyramid represents the largest and fastest growing economic market in human history. (Review Decision Point: Marketing to the Base of the Pyramid‖)

iii.

The sheer size of these markets alone makes it impossible to meet this demand with the environmentally damaging industrial practices of the 19th and 20th centuries.

1. For example, if China were to consume oil at the same rate as the United States, it alone would consume more than the entire world‘s daily production and would more than triple the emission of atmospheric carbon dioxide.

2. Obviously, new sustainable technologies and products will be required to meet the Chinese demand.

d. Third, significant cost savings can be achieved through sustainable practices.

Business stands to save significant costs in moves toward eco-efficiency. i.

Savings on energy use and materials will reduce not only environmental wastes but spending wastes as well.

ii.

Minimizing wastes make sense on financial grounds as well as on environmental grounds.

e. Fourth, competitive advantages exist for sustainable businesses. i.

Firms that are ahead of the sustainability curve will have an advantage serving environmentally conscious consumers, as well as enjoying a competitive advantage attracting workers who will take pride and satisfaction in working for progressive firms.

f. Finally, sustainability is a good risk management strategy.

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i.

Refusing to move toward sustainability offers many downsides that innovative firms will avoid.

1. Avoiding future government regulation is one obvious benefit. Firms that take the initiative in moving toward sustainability will also likely be the firms who set the standards of best practices in the field. When regulation does come, these firms will likely play a role in determining what those regulations ought to be.

2. Avoiding legal liability for unsustainable products is another potential benefit. As social consciousness changes, the legal system may soon begin punishing those firms who are now negligent in failing to foresee harms caused by their unsustainable practices.

3. Consumer demand and consumer boycotts of unsustainable firms are also a risk to be avoided.

g. The facts suggest that the earth‘s biosphere is under stress and that much of this comes from the type of global economic growth that has characterizes industrial and consumerist societies.

VII.

ii.

The ethical issues that develop from these facts include: 1. Fairness in allocating scare resources.

2. Justice in meeting the real needs of billions of present and future human beings.

3. The values and rights associated with environmental conservation and preservation.

iii.

The stakeholders for these decisions include, quite literally, all life on earth.

iv.

Relying on our own moral imagination, we can envision a future in which economic activity can meet the real needs of present generations without jeopardizing the ability of future generations to meet their own needs.

v.

Sustainability seems to be the vision that is needed.

Principles for a Sustainable Business *Chapter Objective 9 Addressed Below* a. Sustainable Business Model: Figure 9.3 provides a general model for understanding how firms can evolve toward a sustainable business model. i.

In the simplest terms, resources should not enter into the economic cycle from the biosphere at rates faster than which they are replenished.

ii.

Ideally, waste should be eliminated or, at a minimum, not produced at a rate faster than which the biosphere can absorb them.

iii.

The energy to power the economic system should be renewable, ultimately relying on the sun, the only energy that is truly renewable.

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b. Implications of Sustainability: The precise implications of sustainability will differ for specific firms and industries. Three general principles will guide the move toward sustainability: i.

Firms and industries must become more efficient in using natural resources.

ii.

Firms should model their entire production process on biological processes.

iii.

Firms should emphasize the production of services rather than products.

c. Eco-efficiency: Has long been a part of the environmental movement. ―Doing more with less‖ has been an environmental guideline for decades. i.

Just as individuals can make improvements in their energy efficiency (e.g., riding a bike instead of riding in a bus or car), business firms can improve energy and materials efficiency in such things as lighting, building design, product design, and distribution channels.

1. The LEED building standards described in this chapter‘s opening Decision Point incorporate many such eco-efficiency ideas.

ii.

Some estimates suggest that with present technologies alone, business could readily achieve a fourfold increase in efficiency, and even as much as a tenfold increase.

iii.

Consider that a fourfold increase, called ―Factor-Four‖ in the sustainability literature, would make it possible to achieve double the productivity from onehalf the resource use.

1. When applied to the additional costs for buildings associated with LEED standards, for example, such a return on investment means that companies can quickly recoup this environmental investment.

d. A second principle of business sustainability is known as ―Closed-loop Production.‖ Imagine the waste that is leaving the economic cycle is being turned back into the cycle as productive resource. i.

―Closed-loop‖ production seeks to integrate what is presently waste back into production.

ii.

In an ideal situation, the waste of one firm will become the resource of another and such synergies can create eco-industrial parks.

iii.

Just as biological processes such as photosynthesis cycle the ―waste‖ of one activity into the resource of another, this principle is often referred to as biomimicry.

e. Eliminate Waste: The ultimate goal of biomimicry is to eliminate waste altogether rather than reducing it.

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i.

If we truly mimic biological processes, the end result of one process (e.g., leaves and oxygen produced by photosynthesis) is ultimately reused as the productive resources (e.g., soil and water) of another process (plant growth) with only solar energy added.

ii.

The evolution of business strategy toward biomimicry can be understood along a continuum.

1. The earliest phase has been described as ―take-make-waste.‖ Business takes resources, makes products out of them, and discards whatever is left over.

2. A second phase envisions business taking responsibility for its products from the ―cradle to grave.‖ Sometimes referred to as ―life cycle‖ responsibility, this approach has already found its way into both industrial and regulatory thinking.

3. Cradle-to-grave, or life cycle responsibility, holds that a business is responsible for the entire life of its products, including the ultimate disposal even after the sale.

4. For example, a cradle-to-grave model would hold a business liable for groundwater contamination caused by its products even years after they had been buried in a landfill.

iii.

Cradle-to-cradle responsibility extends this idea even further and holds that a business should be responsible for incorporating the end results of its products back into the productive cycle.

1. This responsibility, in turn, would create incentives to redesign products so that they could, efficiently and easily, be recycled.

iv.

The environmental design company McDonough and Braungart, founded by architect William McDonough and chemist Michael Braungart, has been a leader is helping businesses reconceptualize and redesign business practice to achieve sustainability.

1. Their book, Cradle to Cradle, traces the life cycle of several products, providing case studies of economic and environmental benefits attainable when business takes responsibility for the entire life cycle of products.

f. Beyond Eco-Efficiency and Biomimicry: A third sustainable business principle involves a shift in business model from products to services. i.

Traditional economic and managerial models interpret consumer demand as the demand for products, for example, washing machines, carpets, lights, consumer electronics, air conditioners, cars, computers, and so forth.

ii.

A service-based economy interprets consumer demand as a demand for services, for example, for clothes cleaning, floor-covering, illumination, entertainment, cool air, transportation, word processing, and so forth.

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1. The book Natural Capitalism provides examples of businesses that have made such a shift in each of these industries.

2. This change produces incentives for product redesigns that create more durable and more easily recyclable parts. iii.

I.

Example: Interface Corporation, led by CEO, Ray Anderson, has made a business transition. The company has transitioned from selling carpeting to leasing floor-covering services.

1. On the traditional model, there is little incentive here to produce longlasting or easily recyclable carpeting. Once Interface shifted to leasing floor-covering services, incentives were created to produce longlasting, easily replaceable and recyclable carpets.

2. Interface accepts responsibility for the entire life cycle of the product.

3. Redesigning their carpets and shifting to a service lease has also improved production efficiencies and reduced material and energy costs significantly.

4. Consumers benefit by getting what they truly desire at lower costs and fewer burdens.

Sustainable Marketing [moved from chapter 8] *Chapter Objective 12 Addressed Below* a. ―Sustainability‖ is an approach to Corporate Social Responsibility that is gaining influence in all areas of business. i.

Sustainable, or ―green marketing,‖ is one aspect of this approach that has already changed how many firms do business.

ii.

The four characteristics of marketing introduced earlier in this chapter— product, price, promotion, and placement—are a helpful way to structure an understanding of sustainable, green marketing.

b. The most significant progress toward sustainability will depend upon the sustainability of products themselves. i.

Discovering what the consumer ―really wants‖ and developing the products to meet those wants have always been among the primary marketing challenges.

ii.

Meeting the real needs of present and future generations within ecological constraints can be understood simply as a refinement of this traditional marketing objective.

iii.

Example: Consider the business differences between marketing the physical pieces of computer hardware and marketing computing services.

1. Should Dell or HP be in the business of selling computer components, or are they selling the service to provide consumers with up-to-date computing processing, software, data storage?

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2. The marketing department should be at the forefront of identifying the real needs of consumers so that a business can develop the long-term relationships with consumers that will insure both financial and ecological sustainability. iv.

The design and creation of products is another aspect of marketing.

1. William McDonough has often described environmental regulation as a design problem; a product or production process that pollutes and wastes resources is a poorly designed product or process.

2. Regulatory mandates usually result when business has a poorly designed product or process.

3. Marketing departments should also be involved in the design of products, finding ways to build sustainability into the very design of each product.

v.

Marketing professionals have an opportunity to influence the packaging of products.

1. Overpackaging and the use of petroleum-based plastics are packaging issues already under environmental scrutiny.

2. Imagine the marketing opportunities if a major soft drink bottler such as Coke or Pepsi turned to corn-based biodegradable plastics for their bottles.

3. Imagine what the marketing department of a major mail order companies such as Land‘s End or L.L. Bean could do if their catalogues were printed on recycled paper.

4. Imagine the marketing opportunities, and responsibilities, of a company such as Procter & Gamble moving toward recycled cardboard for its packaging.

vi.

These three areas come together clearly within the context of extended producer responsibility and take-back legislation, in which a firm is held responsible to take back and recycle all the products it introduces into the marketplace.

1. These regulatory developments, now taking hold especially in Europe, will be seen as barriers to profit by some firms.

2. Take-back legislation provides strong incentives for redesigning products in ways that make it easier to reuse and recycle.

c. Price is a second aspect of marketing. i.

Sustainability asks us to focus on the environmental costs of resources, the ―natural capital‖ on which most firms rely.

1. Environmental costs are seldom factored into the price of most products.

2. Marketing professionals should play a role in setting prices that reflect a product‘s true ecological cost.

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ii.

Government regulation is more likely to move business than voluntary action.

1. Without government mandate across the board of an industry, internalize the costs of natural capitalism into one‘s products will put a company at a comparative disadvantage.

2. On the other hand, setting prices in such a way that more sustainable products are priced competitively with other products is a more reasonable strategy for sustainable marketing.

iii.

Ultimately, the actual price is whatever buyer and seller agree upon.

However, this simple model misses some important complexities.

1. Example: Like any new product, a hybrid automobile required investments in research, design, production, and marketing long before it could be brought to market. a. Setting a price for this product involves a complicated process of projecting sales, markets, and a product‘s life cycle. b. In one sense, the very first hybrid cost millions of dollars to manufacture, well beyond an affordable and marketable price. c. Businesses normally takes a loss on a new product until such time as economies of scale kick in to lower costs and market share develops sufficiently to produce a revenue stream that can begin to pay down the initial investment and generate profits. d. Marketing professionals who are aware of sustainability concerns have much to contribute in establishing prices that protect sustainable products from short-term cost–benefit analyses.

iv.

Consider how price functions with such business practices as sales, manufacturer‘s rebates, cash-back incentives to consumers, bonuses to sales staff, and the use of lost leaders in retail.

1. Obviously price is often manipulated for many marketing reasons to help gain a foothold in a market.

2. Short-term losses are often justified in pricing decisions by appeal to long-term considerations.

v.

Perhaps nowhere is price a more crucial element of marketing than it is in marketing to the base of the economic pyramid.

1. Small profit margins and efficient distribution systems within large markets, as demonstrated so clearly by such large retailers as Walmart, can prove to be a highly successful business model.

2. An ethically praiseworthy goal would be to export this marketing ingenuity to serve the cause of global sustainability.

3. The Decision Point, ―Marketing to the Base of the Pyramid,‖ explains the mechanics of this process.

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Decision Point Marketing to the Base of the Pyramid This Decision Point is based on a recent book in which business scholar C.K. Prahalad details the business opportunities that exist for firms that develop markets among the world‘s poorest people.

Done correctly, marketing to the 4 billion people at the base of the global economic pyramid would employ market forces in addressing some of the greatest ethical and environmental problems of the 21st century.

Obviously, helping to meet the needs of the world‘s poorest people would be a significant ethical contribution. The strategy involves another ethical consideration as well: A market of this size requires environmentally sustainable products and technologies. If everyone in the world used resources and created wastes at the rate Americans do, the global environment would suffer immeasurably. Businesses that understand this fact face a huge marketing opportunity.

Accomplishing such goals will require a significant revision to the standard marketing paradigm.

Business must, in Prahalad‘s phrase, ―create the capacity to consume‖ among the world‘s poor.

Creating this capacity to consume among the world‘s poor would create a significant win-win opportunity from both a financial and an ethical perspective.

Prahalad points out that the world‘s poor do have significant purchasing power, albeit in the aggregate, rather than on a per capita basis. Creating a capacity to consume among the world‘s poor will require a transformation in the conceptual framework of global marketing and some creative steps from business. Prahalad mentions 3 principles as key to marketing to the poor: affordability, access, and availability.

Consider how a firm might market such household products as laundry soap differently in India than in the United States. Marketing in the United states can involve large plastic containers, sold at low per-unit cost. Trucks transport cases from manufacturing plant to wholesale warehouses to giant big-box retailers where they can sit in inventory until purchase. Consumers wheel the heavy containers out to their cars in shopping carts and store them at home in the laundry room.

The aggregate soap market in India could be greater than the market in the United States, but Indian consumers would require smaller and more affordable containers. Prahalad therefore talks about the need for single-size servings for many consumer products. Given longer and more erratic work hours and a lack of personal transportation, the poor often lack access to markets.

Creative marketing would need to find ways to provide easier access to their products. Longer store hours and wider and more convenient distribution channels could reach consumers otherwise left out of the market.

So, too, can imaginative financing, credit, and pricing schemes. Microfinance and microcredit arrangements are developing throughout less developed economies as creative means to support the capacity of poor people to buy and sell goods and services. Finally, innovative marketing can ensure that products are available where and when the world‘s poor need them. Base-of-thepyramid consumers tend to be cash customers with incomes that are unpredictable.

A distribution system that ensures product availability at the time and place when customers are ready and able to make the purchase can help create the capacity to consume. Prahalad‘s approach—tied to the moral imagination discussed previously—responds both to the consumers and to the corporate investors and other for-profit multinational stakeholders.

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be done? What responsibilities, ethical and economic, do firms face when marketing in other countries and among different cultures? Imagine that you are in the marketing department of a firm that manufacturers a consumer product such as laundry detergent or shampoo. Describe how it might be marketed differently in India.

Students should consider the following questions when assessing this scenario:  What are the key facts relevant to your judgment?  What ethical issues are involved in a firm‘s decision to market its products among the world‘s poor by creating the capacity to consume?  Who are the stakeholders of your decision?  What alternatives does a firm have with regard to the way in which it markets its products?  How do the alternatives compare; how do the alternatives you have identified affect the stakeholders?

II.

Promotion and advertising of products is the third aspect of marketing. a. Marketing also has a responsibility to help shape consumer demand, encouraging consumers to demand more sustainable products from business. i.

Marketing has played a major role in creating various social meanings for shopping and buying.

ii.

Sustainable marketing can help create the social meanings and consumer expectations supportive of sustainable goals.

iii.

An often overlooked aspect of advertising is its educational function.

1. Consumers learn from advertising and marketers have a responsibility as educators.

2. Helping consumers learn the value of sustainable products and helping them become sustainable consumers, is an important role for sustainable marketing. *Reference: Reality Check ―Terra Choice‟s Seven Sins of Greenwashing‖*

b. One aspect of product promotion will involve the ―green labeling.‖ i.

Just as ingredient labels, nutrition labels, and warning labels have become normal and standardized, environmental pressure may well create a public demand for environmental and sustainable labeling.

ii.

―Greenwashing‖ is the practice of promoting a product by misleading consumers about the environmentally beneficial aspects of the product.

Labeling products with such terms as ―environmentally friendly,‖ ―natural,‖ ―eco,‖ ―energy efficient,‖ ―biodegradable,‖ and the like, can help promote products that have little or no environmental benefits.

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1. The Decision Point, ―Examples of Greenwashing?‖ demonstrates several greenwashing claims, along with some sincere ones. Take a look and see if you can tell the difference.

Decision Point Examples of Greenwashing?

Which of the following corporate marketing initiatives would you describe as an example of ―greenwashing‖? 

An ad for the GM Hummer which describes the truck as ―thirsty for adventure, not gas.‖ The Hummer was rated at 20 mpg on the highway.  A major rebranding of the oil company British Petroleum by renaming itself ―BP‖ for ―beyond petroleum.‖  An ―eco-shaped‖ bottle for the bottle water brand Ice Mountain. For that matter, any bottled water described as ―natural,‖ ―pure,‖ or ―organic.‖ Which of the following examples, all taken from the Federal Trade Commission, are cases of misleading Greenwashing? 

A box of aluminum foil is labeled with the claim ―recyclable,‖ without further elaboration.

Unless the type of product, surrounding language, or other context of the phrase establishes whether the claim refers to the foil or the box, the claim is deceptive if any part of either the box or the foil, other than minor, incidental components, cannot be recycled.  A trash bag is labeled ―recyclable‖ without qualification. Because trash bags will ordinarily not be separated out from other trash at the landfill or incinerator for recycling, they are highly unlikely to be used again for any purpose.  An advertiser notes that its shampoo bottle contains ―20% more recycled content.‖ The claim in its context is ambiguous. Depending on contextual factors, it could be a comparison either to the advertiser's immediately preceding product or to a competitor's product.  A product wrapper is printed with the claim ―Environmentally Friendly.‖ Textual comments on the wrapper explain that the wrapper is "Environmentally Friendly because it was not chlorine bleached—a process that has been shown to create harmful substances.‖ The wrapper was, in fact, not bleached with chlorine. However, the production of the wrapper now creates and releases to the environment significant quantities of other harmful substances  A product label contains an environmental seal, either in the form of a globe icon, or a globe icon with only the text "Earth Smart" around it. Either label is likely to convey to consumers that the product is environmentally superior to other products.  A nationally marketed bottle bears the unqualified statement that it is ―recyclable.'‖ Collection sites for recycling the material in question are no available to a significant percentages of the population.  The seller of an aerosol product makes an unqualified claim that its product ―Contains no CFCs.‖ Although the product does not contain CFCs, it does contain HCFC-22, another ozone-depleting ingredient.

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 

What are the ethical issues involved in ―greenwashing?‖ Who are the stakeholders and how are they affected by this practice?

III.

Placement a. Channels of distribution that move a product from producer to consumer is the final aspect of marketing. b. Professor Patrick E. Murphy suggests two directions in which marketing can develop sustainable channels: i.

As typically understood, marketing channels involve such things as transportation, distribution, inventory, and the like.

1. Recent advances in marketing have emphasized just in time inventory control, large distribution centers, and sophisticated transportation schemes.

ii.

Murphy foresees new sustainability options being added to this model which emphasize fuel efficiency and alternative fuel technologies used in transportation, more localized and efficient distribution channels, and a greater reliance on electronic rather than physical distribution.

1. More efficient distribution channels can also serve underserved base of the pyramid consumers as well.

iii.

Example: the publishing industry has evolved its channels of distribution over the years. Originally, books, magazines, catalogues, or newspapers were printed in one location and then distributed via truck, rail, or air across the country.

1. More modern practices involve sending electronic versions of content to localized printers who publish and distribute the product locally.

2. As subscriptions to hard-copy publications decline, some publishers are taking this one step further and moving toward exclusively online publishing.

c. ―Reverse channels‖ refers to the growing marketing practice of taking back one‘s products after their useful life. i.

The life cycle responsibility and ―take-back‖ models described in previous chapters will likely fall to marketing departments.

ii.

The same department that is responsible for sending a product out into the marketplace should expect the responsibility for finding ways to take back that product to dispose of, recycle it, or reuse it. *Teaching Note: Have students research other companies that focus on cradle-tocradle responsibility and discuss whether or not students believe these companies will be successful in the long-run.

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Opening Decision Point Revisited Building Design and Values Consumer demand plays a powerful, yet ambiguous, role in the food industry. There clearly is a market demand for super-sized, high salt, high-fat, sugary, highly processed food. But legitimate questions can be raised about the consumer‘s understanding of their own needs, and their ability to influence food production.

In a 2015 report, the United States Centers for Disease Control and Prevention found that childhood obesity in the United States nearly tripled between 1980 and 2012, resulting in a wide range of serious health problems including heart disease, high blood pressure and diabetes. In this sense, millions of people are eating too much of the wrong type of food. Oversized portions of high-calorie, high-fat, and sugary food products directly contribute to significant health problems for children and adults.

In addition to obesity, many other health issues can be traced to what we eat. Artificial food colorings; artificial sweeteners; food additives such as monosodium glutamate, trans fats, nitrates, and high fructose corn syrup; and artificial preservatives such as sodium benzoate have all been linked to human health problems. All of these products are added to food by the food industry.

Defenders of the food industry will point out that business is only responding to consumer demand in providing ―super-sized‖ portions and tasty, inexpensive, and convenient food products. Many additives are included to increase shelf-life of food, make it more tasty and attractive, or to lower costs.

In 2015, for example, General Mills announced that it would be phasing out the use of synthetic artificial dyes and flavors in its breakfast cereals. In explaining their decision, General Mills claimed that ―people eat with their eyes‖ and want cereals that were ―fun‖ and had ―vibrant colors‖ and ―fruity flavor.‖xxxvi Assuming this market demand as a given, General Mills still had the discretion to change how they would meet that demand and chose to reduce the health risks posed by artificial colors and flavors.

But, of course, the consumer demand for colorful, sugary breakfast treats is itself something over which General Mills has at least some influence. Childhood obesity is a major health problem and marketing high-sugar breakfast treats to children cannot be said to be meeting needs, although it seems to meet consumer preferences. A business also cannot escape responsibility for failing to meet needs for nutritional foods by claiming that it is merely responding to what consumers want if it has spent hundreds of millions of dollars creating and promoting colorful high-sugar treats as ―part of a complete breakfast.‖ Yet in other ways, consumer demand is changing the nature of the food industry. Organic food sales in the United States have grown by an average of 14% annually since the year 2000.

Globally, the organic food sales volume almost doubled, from $57 billion to $104 billion, between 2010 and 2015. Major retailers such as Whole Foods, Walmart, Kroger, and Costco actively promote organic and sustainably grown food products. Major food producers such as General Mills and Unilever have moved aggressively into the organic and sustainable food market.  To what degree should the movement toward organic and sustainably raised food be left to the market? What role, if any, should government regulation play in this regard? What responsibilities does the food industry, including restaurants and grocers, have?

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 

Many food products are marketed as ―natural.‖ Can you think of any such products that raise ethical problems? Is everything that is natural also good?

Sustainable products should be designed to meet the needs or present and future generations.

Who decides what people need? Can every product be sustainable?

End of Chapter Questions, Projects, Exercises 1. As a research project, choose a product with which you are familiar (one with local connections is best), and trace its entire life cycle. From where does this product originate?

What resources go into its design and manufacture? How it is transported, sold, used, disposed? Along each step in the life cycle of this product, analyze the economic, environmental, and ethical costs and benefits. Consider if a service could be exchanged for this product. Some examples might include you local drinking water, food items such as beef or chicken, any product sold at a local farmer‘s market, building materials used in local projects.

This is a great term-length project or group project.

2. Conduct a web search for ecological footprint analysis. You should be able to find a selfadministered test to evaluate your own ecological footprint. If everyone on earth lived as you do, how many earths would be required to support this lifestyle?

Direct students to the Terra Pass website, http://www.terrapass.com, where they can calculate their "carbon footprint," which estimates the total carbon dioxide emissions we create when we drive, fly or use electricity. The website also provides examples of how the Terra Pass works for flying, driving, or in the home. Students might also find interesting the web site for Timberland boots and shoes (http://responsibility.timberland.com/product/) which represents the impact of its production as a footprint, as well.

3. Research corporate sustainability reports. How many corporations can you find that issue annual reports on their progress toward sustainability? Can you research a company that does not and explore why they do not (perhaps through its critics), or whether it has plans to change?

The corporate sustainability reporting concept began in the 1990‘s. In 1991, 7 companies had published these reports. As of October 2005, 714 firms report in accordance with or with reference to the Global Reporting Initiative; more than 75% of the S&P 100 Index have individual social and/or environmental reports; and more than 2,500 firms worldwide publish some type of stand-alone report on citizenship, sustainability, environmental and/or social concerns.

Students can research critics of corporate sustainability reporting to find companies that do not participate and why not.

4. A movement within the European Union requires that business take back their products at the end of their useful life. Can you learn the details of such laws? Discuss whether or not you believe such a law could be passed in the United States. Should the United States have similar laws?

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Students can research the European Union law requiring businesses to take back their products at the end of their useful life. For more information about this law, direct students to the Environment Agency website: http://www.environment-agency.gov.uk/ 5. Apply the concept of sustainability to a variety of businesses and industries. What would sustainable agriculture require? What are sustainable energy sources? What would sustainable transportation be? What would be required to turn your home town into a sustainable community?

Lead class discussion after students conduct their research about sustainability. What did they find and what do they think about these approaches? Would they be happy to see their hometown turned into a sustainable community? Why or why not?

6. Investigate what is involved in an environmental audit. Has such an audit been conducted at your own college or university? In what ways has your own school adopted sustainable practices? In what ways would your school need to change to become more sustainable?

Direct students to the EPA‘s website (http://www.epa.gov), specifically to the section dealing with Environmental Audits. The following links provide the EPA‘s audit policy and the protocol for conducting such audits:  Policy: http://www.epa.gov/compliance/incentives/auditing/auditpolicy.html  Protocol: http://www.epa.gov/compliance/resources/policies/incentives/auditing/apcolcercla.pdf Students can do research to find out if their college or university has conducted an environmental audit.

7. Do you believe that business has any direct ethical duties to living beings other than humans?

Do animals, plants, or ecosystems have rights? What criteria have you used in answering such questions? What is your own standard for determining what objects count, from a moral point of view?

Direct students to this chapter‘s discussion of the value of protecting living beings such as plants, animals, and ecosystems. To enhance discussion, also refer them to themes from chapters 2 and 3, such as social responsibility.

8. Investigate LEED (Leadership in energy and Environmental Design) building designs. If possible, arrange a visit to a local building designed according to LEED principles. Should all new buildings be required by law to adopt LEED design standards and conform to the LEED rating system?

Students can learn about LEED on the U.S. Green Building Council‘s website: http://new.usgbc.org/ Perhaps a group project can be assigned on this topic.

APPENDIX A WRITING/RESEARCH PAPER ASSIGNMENT Life Cycle Paper (For an in-depth discussion of this assignment, see; ―Learning What it really Costs: Teaching Business Ethics through Life Cycle Case Studies,‖ Joe DesJardins and Ernest Diedrich, Journal of Business Ethics (2003) 1-134 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

All products have a life cycle. They are ―born,‖ get used in some fashion, and then they ‖die‖ and are no longer deemed useful. Your assignment is to first, pick a product (e.g., drinking water, beef, coffee, plastic bottle) or production process (e.g., agriculture, carpet manufacturing) and then trace the product from its origins (as raw materials) through the manufacturing process, the consumption process, and finally, the disposal stage.

While you are tracing the material stages, discuss the possible reasons for the product‘s existence (its role in our society, its function in our economy) and its impact on our culture and character as well as on the environment. Essentially, you will be assessing the product‘s sustainability … how it contributes to economic viability, ecological integrity, and social ―equity/health.‖ As you trace this product‘s life cycle, examine the product in terms of the three pillars of sustainability: is it economically, environmentally, and ethically sustainable?

Sample Economic Questions: How efficient is this production process? Are ―wastes‖ utilized in any way? Could services be substituted for this product? Is this company investing in natural capital?

Can you identify any externalities in the process? Are the full costs of externalities internalized?

Could they be?

Is this product filling human needs? If not, is it using resources that otherwise could be devoted to human needs?

Could the decisions/practices involved be applied or practiced by all similar producers without compromising the ability of future producers to do likewise? If not, is there a reason to exempt this firm/industry from such a common standard?

Are there any government subsidies for this product?

Sample Ecological/Environmental Questions: What natural resources go into this product? Are there alternatives? Are these resources renewable or are they being used at a sustainable rate?

What are the sources for the energy that is used by this firm /industry? Are there alternative energy sources that would be environmentally more benign?

What happens to any wastes produced by this firm/industry? Can they be used in other ways?

Are they recyclable?

Are there ways for ―closing the loop‖ of this production process?

Sample Social/Ethical Questions: What are the benefits and burdens associated with this product? Who benefits from this product?

Who pays the costs? Who or what decides how the benefits and burdens are distributed?

Who are the workers who are involved in production? How are they treated? Who is responsible for their wages? Health & safety protected?

How is government or other public agencies involved in this product? Are any subsidies being paid? If so, how are they justified?

What goods/values are served by this product? How does this product address human needs?

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APPENDIX B CALCULATE YOUR ECOLOGICAL FOOTPRINT Ecological Footprint analysis is a tool that can be used to estimate the effect of one‘s lifestyle choices on the earth‘s capacity to sustain life. Online versions of this tool can be found in various locations. In class, one can do the exercise with several students and project the results for all to see. Have students from different economic or geographic backgrounds take the test, or ask students to compare their present footprint with the family‘s lifestyle. If students have lived in countries outside the United States, comparison footprints can be very instructive.

Versions of this test can be found at: 

http://www.earthday.org/footprint-calculator



http://www.soil-net.com/ecoquiz/



http://www.carbonfootprint.com/



http://myfootprint.org/

APPENDIX C CASE STUDIES OF SUSTAINABLE BUSINESS Information on sustainable businesses can be found at these various sites: 

The McDonough and Braungart site: http://www.mbdc.com/



The resource directory for Sustainable Business: http://www.sustainablebusiness.com/resourcedirectory/



The National Center for Appropriate Technologies site: http://www.smartcommunities.ncat.org/business/buintro.shtml



The World Business Council for Sustainable Development: http://www.wbcsd.org/



Business and Sustainable Development: http://www.bsdglobal.com/ IM Chapter 10: Trust in Corporate Governance, Accounting, and Finance

The title of this chapter has been revised, to reflect the emphasis on trust that has always been a central feature of the chapter.

Chapter Objectives After reading this chapter, you will be able to: 1.

2.

3.

4.

Explain the role of accountants and other professionals as ―gatekeepers.‖ Describe how conflicts of interest can arise for business professionals.

Outline the requirements of the Sarbanes–Oxley Act. Describe the COSO framework.

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5. Define the ―control environment‖ and the means by which ethics and culture can impact that environment.

6. Discuss the legal obligations of a member of a board of directors.

7. Explain the ethical obligations of a member of a board of directors.

8. Highlight conflicts of interest in financial markets and discuss the ways in which they may be alleviated.

9. Describe conflicts of interest in governance, created by excessive executive compensation.

10. Define insider trading and evaluate its potential for unethical behavior.

Opening Decision Point Volkswagen‘s Diesel Fraud The Volkswagen scandal remained in the headlines as this edition of the text went to press (summer 2017). While this VW case can be used to highlight numerous ethical issues (e.g., corporate culture, stakeholder responsibility, employee participation, professional responsibilities), many of the core issues deal with decision-making and governance at all levels of the VW organization. Many of these core issues are addressed in the discussion questions:  How would you assign responsibility for the VW scandal? What should have been done differently and by whom?  Who are the stakeholders in this case? How were the interests of each stakeholder represented?  Is it fair to expect any employee, including professionals such as engineers and accountants, to confront management over directives that they believe are unethical?  What changes to the VW board would you recommend that might help prevent future scandals?  The codetermination principle was created to ensure that employees have a role in managerial decision making, thus creating a more democratic workplace. What are the benefits of this model? What are the disadvantages?  What do you understand by ―independent‖ board member? Who or what should an independent board member represent that would be different from other board members?

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I.

Introduction a. The first edition of this textbook was written in 2006, soon after a wave of major corporate scandals had shaken the financial world. i.

Recall those companies involved in the ethical scandals during the early years of this century: Enron, WorldCom, Tyco, Adelphia, Cendant, Rite Aid, Sunbeam, Waste Management, Health-South, Global Crossing, Arthur Andersen, Ernst &Young, ImClone, KPMG, J. P., Morgan, Merrill Lynch, Morgan Stanley, Citigroup Salomon Smith Barney, Marsh & McLennan, Credit Suisse First Boston, and even the New York Stock Exchange itself.

ii.

At the center of these scandals were fundamental questions of corporate governance and responsibility.

iii.

Significant cases of financial fraud, mismanagement, criminality, and deceit were not only tolerated, but in some cases were endorsed by those people in the highest levels of corporate governance who should have been standing guard against such unethical and illegal behavior.

b. Sadly, the very same issues are as much alive today as they were several years ago. i.

Consider the rash of problems associated with the financial meltdown in 2007–2008 and the problems faced by such companies as AIG, Countrywide, Lehman Brothers, Merrill Lynch, Bear Stearns, and of the financier Bernard Madoff.

ii.

Consider the VW scandal described in the Opening Decision Point

iii.

Once again, we have witnessed financial and ethical malfeasance of historic proportions and the inability of internal and external governance structures to prevent it.

c. At the heart of the biggest ethical and business failures of the past decade were aspects of financial and accountings misconduct: i.

Misconduct ranged from manipulating special purpose entities to defraud lenders, to cooking the books, to instituting questionable tax dodges, to allowing investment decisions to warp the objectivity of investment research and advice, to Ponzi schemes, to insider trading, to excessive pay for executives, to dicey investments in sub-prime mortgages and hedge funds, to risky credit default swaps.

ii.

Ethics in the governance and financial arenas has been perhaps the most visible issue in business ethics during the first years of the new millennium.

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iii.

Accounting and investment firms that were once looked upon as the guardians of integrity in financial dealings have now been exposed corrupt violators of the fiduciary responsibilities entrusted to them by their stakeholders.

d. Many analysts contend that this corruption is evidence of a complete failure in corporate governance structures. i.

As we reflect on the ethical corruption and financial failures of the past decade, some fundamental questions should be asked: 1. What happened to the internal governance structures within these firms that should have prevented these disasters?

2. In particular, why did Boards, auditors, accountants, lawyers, and other professionals fail to fulfill their professional, legal, and ethical duties?

3. Could better governance and oversight have prevented these ethical disgraces?

4. Going forward, can we rely on internal governance controls to provide effective oversight, or are more effective external controls and government regulation needed?

** Teaching Note: To link governance to the discussion of ethics throughout the text, consider asking students how ethics plays a role in governance. How does ethics play a role in these governance arenas?  Shareholder rights  Executive compensation  Mergers and acquisitions  Composition and structure of the board of directors  Auditing and control  Risk management  CEO selection and executive succession plans Reality Check: Trust This Reality Check is new to the 6th edition. It is designed to highlight the focus on trust that is implied throughout this chapter. Questions posed at the end of this Reality Check include:     II.

Consider all the ways in which you trust others during your daily life.

How would your life change if you could not trust others?

What institutions do you trust?

What and who do you not trust?

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i.

The watershed event that brought the ethics of finance to prominence at the beginning of the 21stcentury was the collapse of Enron Corporation and its accounting firm Arthur Andersen.

ii.

The Enron case ―has wreaked more havoc on the accounting industry than any other cases in U.S. history,‖ including the demise of Arthur Andersen.

** Teaching Note: The trailers from the Enron movie never cease to amaze students, even years later: http://www.youtube.com/watch?v=0zMakN-EMLg, yet many instructors still prefer ―greed is good‖ from ―Wall Street‖: http://www.americanrhetoric.com/MovieSpeeches/moviespeechwallstreet.html. iii.

Ethical responsibilities of accountants were not unheard of prior to Enron, but the events that led to Enron‘s demise brought into focus the necessity of the independence of auditors and the responsibilities of accountants like never before.

b. Accounting is one of several professions that serve very important functions within the economic system itself. i.

Even a staunch defender of free market economics such as Milton Friedman believes that markets can function effectively and efficiently only when certain rule-based conditions are met.

1. It is universally recognized that markets must function within the law and they must be free from fraud and deception.

2. The LIBOR rate scandal described in the following Decision Point is a case of how fraud can undermine the integrity of an entire financial system.

3. Some argue that only government regulation can ensure that these rules will be followed.

4. Others argue that enforcement of these rules is the responsibility of important internal controls that exist within market-based economic systems.

5. Business and economic markets require business professionals to operate with integrity and fairness. *Chapter Objective 1 Addressed Below* ii.

Professions like attorneys, auditors, accountants, and financial analysts can be thought of as ―gatekeepers‖ ―or ―watchdogs‖ in the marketplace.

1. Their role is to insure that those who enter into the marketplace are playing by the rules and conforming to the very conditions that ensure the market functions as it is supposed to function.

2. These roles provide a source for rules from which we can determine how professionals ought to act.

3. In entering into a profession, we accept responsibilities based on our roles.

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iii.

These professions can also be understood as intermediaries, acting between the various parties in the market, and they are bound to ethical duties in this role as well.

iv.

All the participants in the market, especially investors, boards, management, and bankers, rely on these gatekeepers: 1. Auditors verify a company‘s financial statements so that investors‘ decisions are free from fraud and deception.

2. Analysts evaluate a company‘s financial prospects or creditworthiness, so that banks and investors can make informed decisions.

3. Attorneys ensure that decisions and transactions conform to the law.

Indeed, even boards of directors can be understood in this way.

4. Boards function as intermediaries between a company‘s stockholders and its executives and should guarantee that executives act on behalf of the stockholders‘ interests.

*Chapter Objective 2 Addressed Below* Decision Point: LIBOR Cheating This Decision Point has been updated. It was originally adapted from the Opening Decision Point for this chapter in a previous edition. The LIBOR scandal demonstrated widespread corruption and failure of gatekeepers throughout the financial industry in both the United Kingdom. and the United States. This case can be used to highlight the role of organizational gatekeepers for insuring the integrity of wider, more systemic operations. The banking system itself requires individuals working at private firms to operate in ways that might sacrifice short-term personal benefit for the well-being of the system itself. Thus, this case can also provide a lead-in to the agency problem introduced below. c. Conflicts of Interest: The most basic ethical issue facing professional gatekeepers and intermediaries in business contexts involves conflict of interests. i.

A conflict of interest exists where a person holds a position of trust that requires that they exercise judgment on behalf of others, but where their personal interests and/or obligations conflict with those others.

1. Example: A friend knows that you are heading to a flea market and asks if you would keep your eyes open for any beautiful quilts you might see. She asks you to purchase one for her if you see a ―great buy.‖ You are going to the flea market for the purpose of buying your mother a birthday present. You happen to see a beautiful quilt at a fabulous price, the only one at the market. In fact, your mother would adore the quilt. You find yourself in a conflict of interest—your friend trusted you to search the flea market on her behalf. Your personal interests are now in conflict with the duty you agreed to accept on behalf of your friend.

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ii.

Conflicts of interest can also arise when a person‘s ethical obligations in their professional duties clash with personal interests.

1. Example: A financial planner who accepts kickbacks from a brokerage firm to steer clients into certain investments fails in their professional responsibility by putting personal financial interests ahead of client interest.

2. Such professionals are said to have fiduciary duties—a professional and ethical obligation—to their clients, duties that override their own personal interests.

Decision Point How to Solve the ―Agency Problem‖ This Decision Point explores what many observers call ―a deep problem‖ at the heart of modern capitalist economies. Modern economies rely on some individuals, called ―agents,‖ who work for the best interests of others, the ―principals.‖ For the system to work, agents must be loyal representatives of their principal‘s interests, even in those situations when their own personal interest is at stake. For example, a member of a board of directors acts as an agent for the stockholders, executives act as agents of boards, and attorneys and accountants act as agents for their clients. This agent-principal model assumes that individuals can put their own interests on hold, and be sufficiently motivated to act on behalf of another. But, this would seem to run counter to a view of human nature that is assumed by much of modern economic theory: individuals are self-interested. Thus, the ―agency problem.‖ How can we trust self-interested individuals to act for the well-being of others in cases where their own self-interest must be sacrificed?

Many of the ethical failures described in this chapter can be seen as examples of the agency problem. These are precisely those situations where boards have failed to protect the interests of stockholders, executives have failed to serve their boards, accountants, lawyers, and financial analysts have failed to act on behalf of their clients.

Economics and management theorists have offered several solutions to the agency problem.

Some argue that the best solution is to create incentives that connect the agent‘s self-interest with the self-interest of the principal. Linking executive compensation to performance by making bonuses contingent on stock price means that an executive gains only when stockholders gain.

Another approach is to create structures and institutions that restrict an agent‘s actions. Strict legal constraints would be the most obvious version of this approach. Agents have specific legal duties of loyalty, confidentiality, and obedience and face criminal punishments if they fail to uphold those duties. Professional or corporate codes of conduct and other forms of selfregulation are also versions of this approach.

These two most common answers share a fundamental feature; the agency problem can be solved by connecting motivation to act on the principal‘s behalf back to the agent‘s own self-interest. In the first case, motivation is in the form of the ―carrot‖ and the agent benefits by serving the principal; in the second case, motivation is in the form of the ―stick,‖ and the agent suffers if one fails to serve their principal.

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A third answer to the agency problem denies that there truly is a problem by denying that selfinterest dominates human motivation. This third approach points out that, in fact, humans regularly act from loyalty, trust, and altruism. Human relationships are built on trust and reliability; and these motivations are just as basic, just as common, as self-interest. Thus, this approach would encourage corporations to look to moral character and develop policies and practices that reinforce, shape, and condition people to want to do the right thing.

Students should consider the following questions when assessing this scenario:  Can you think of examples in your own experience where someone is required to work as an agent for another, or when you were involved as an agent? How is the agent motivated in this particular case?  If you were asked to design a policy that would provide a solution to the agency problem in the company that you work, where would you begin?  Review the section on virtue ethics in Chapter 3 and explain how the agency problem would be viewed from that perspective.  Under what circumstances, or for what kinds of tasks, do you think agency problems are most likely to be a challenge? iii.

iv.

Many of these professional intermediaries are paid by the businesses over which they keep watch, and perhaps are also employed by yet another business.

1. For example, David Duncan was the principal accounting professional employed by Arthur Andersen, though he was hired by and assigned to work at Enron.

2. As the Arthur Andersen case so clearly demonstrated, this situation can create real conflicts between a professional‘s responsibility and their financial interests.

Certified public accountants (CPAs) have a professional responsibility to the public. But their clients‘ financial interests are not always served by full, accurate, and independent disclosure of financial information.

1. CPAs work daily with and are hired by a management team that itself might have interests that conflict with the interests of the firm represented by the board of directors.

2. Real and complex conflicts can exist between professional duties and a professional‘s self-interest.

*Reference: Figure 10.1—Conflicts of Interest in Public CPA Activity* v.

In one sense, the ethical issues regarding such professional responsibilities are clear.

1. Because professional gatekeeper duties are necessary conditions for economic legitimacy, they should trump other responsibilities an employee might have.

2. Example: David Duncan‘s responsibilities as an auditor should have overridden his role as an Andersen employee, in large part because he was hired as an auditor.

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3. But, knowing ones duties and fulfilling those duties are two separate issues.

Decision Point What to Do When Faced with Conflicts of Interests Conflicts of interest are quite common in modern commerce, and in life more generally, due to the large number of situations in which individuals need to put their trust in the advice or judgment of other people. We trust our doctors to take care of us when we are ill; we trust our lawyers to give us good legal advice; and we trust our investment advisor to give us good advice regarding investments. In each case, we would rightly worry if we found that the professional we are relying on had some interest, such as a financial or personal interest, in the issue at hand. We expect them to focus on our interests, not theirs.

It is important to see that conflict of interest is not an accusation—it is a situation. You can easily find yourself in a conflict of interest, through no fault of your own. Sometimes conflicts of interest are impossible to avoid entirely. The real question, from an ethical point of view, is how you handle the situation.

One solution that is generally not appropriate is simply to ―try hard‖ to act in an unbiased way.

That is, individual integrity is not a solution. Many biases are unconscious, and, when in a conflict of interest, even a person of the highest integrity has reason to mistrust their own judgment.

Here are the standard steps that most experts recommend, when you find yourself in a conflict of interest: 1. Notify the relevant stakeholders. (If you‘re on a hiring committee, for example, and you notice your sister‘s CV in the pile, you should speak up immediately to notify the rest of the committee that you are in a conflict of interest.)

2. If possible, remove yourself from the decision making. In the hiring example, you should excuse yourself from the committee entirely, if possible. If that‘s impossible—perhaps you have special expertise that the committee is relying on—then you should at least leave the room while your sister‘s CV is being considered and ranked. But that is a distant second best! d. Ethical Implications: implications.

Agency

responsibilities

generate

many

ethical

i.

If we recognize that the gatekeeper function is necessary for the very functioning of economic markets, and if we also recognize that self-interest can make it difficult for individuals to fulfill their gatekeeper duties, then society has a responsibility to create institutions and structures that will minimize these conflicts.

1. For example: As long as auditors are paid by the clients on whom they are supposed to report, there will always be an apparent conflict of interest between their duties as auditors and their personal financial interests.

ii.

This conflict is a good reason to make structural changes in how public accounting operates.

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1. Perhaps boards rather than management ought to hire and work with auditors because auditors are more likely reporting on the management activities rather than those of the board.

2. Perhaps public accounting somehow ought to be paid by public fees.

3. Perhaps legal protection or sanctions ought to be created to shield professionals from conflicts of interests. iii.

These changes would remove both the apparent as well as the actual conflicts of interest created by the multiple roles—and therefore multiple responsibilities—of these professionals.

iv.

From the perspective of social ethics, certain structural changes would be an appropriate response to the accounting scandals of recent years.

e. Broken Trust: Perhaps the most devastating aspect of the banking industry meltdown of the first decade of this century was the resulting deterioration of trust that the public has in the market and in corporate America. i.

Decision makers in large investment banks and other financial institutions ignored their fiduciary duties to shareholders, employees, and the public in favor of personal gain.

1. This was a direct conflict of interest leading not only to extraordinary personal ruin but also to the demise of some of the largest investment banks in the world.

2. The fact is that major federal legislation enacted after Enron to provide regulatory checks on such behavior failed to prevent it from happening.

ii.

Despite these government rules, the watchdogs still have little ability to prevent harm.

iii.

Changes within the accounting industry stemming from the consolidation of major firms and avid ―cross-selling‖ of services such as consulting and auditing within single firms have virtually institutionalized conflicts of interests.

f. Answers to these inherent challenges are not easy to identify. i.

Imagine an executive is paid based on how much they impact the share price and will be ousted if that impact is not significantly positive.

1. A large boost in share price, even for the short term, serves as an effective defense to hostile takeovers and boosts a firm‘s equity leverage for external expansion.

2. In addition, with stock options as a major component of executive compensation structures, a higher share price is an extremely compelling quest to those in leadership roles.

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ii.

That same executive, however, has a fiduciary duty to do what is best for the stakeholders in the long term, an obligation that is often at odds with that executive‘s personal interests.

iii.

These conflicts create a very challenging environment for executive decision making. Consider the options available in the Decision Point, ―Crony Capitalism: Is Government Business Partnership the Answer?‖

Decision Point Crony Capitalism: Is Government Business Partnership the Answer?

This case explores the political values at stake when government cooperates too closely with business organizations. Just as individuals within an organization can face conflicts of interests, so can government regulators, the very structure that is designed to address fraud and malfeasance.

III.

The Sarbanes–Oxley Act of 2002 a. Government Intervention: The string of corporate scandals since the beginning of the millennium has taken its toll on investor confidence. The more it is clear that deceit, evasiveness and cutting corners go on in the markets and in the corporate environment, the less trustworthy those engaged in financial services become. i.

Because reliance on corporate boards to police themselves was not working, Congress passed the Public Accounting Reform and Investor Protection Act of 2002, commonly known as the Sarbanes–Oxley Act, which is enforced by the Securities and Exchange Commission (SEC).

1. The act applies to over 15,000 publicly held companies in the United States and some foreign issuers.

2. In addition, a number of states have enacted legislation similar to Sarbanes–Oxley that apply to private firms and some private forprofits and nonprofits have begun to hold themselves to Sarbanes– Oxley standards even though they are not necessarily subject to its requirements.

*Chapter Objective 3 Discussed Below* b. Regulation and Protection: Sarbanes–Oxley strived to respond to the scandals by regulating safeguards against unethical behavior. i.

Because one cannot necessarily predict each and every lapse of judgment, no regulatory ―fix‖ is perfect. However, the act is intended to provide protection where oversight did not previously exist.

ii.

Sarbanes–Oxley seeks to provide oversight in terms of direct lines of accountability and responsibility.

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iii.

The following provisions have the most significant impact on corporate governance and boards: 1. Section 201: Services outside the scope of auditors (prohibits various forms of professional services that are determined to be consulting rather than auditing).

2. Section 301: Public company audit committees (requires independence), mandating majority of independents on any board (and all on audit committee) and total absence of current or prior business relationships.

3. Section 307: Rules of professional responsibility for attorneys (requires lawyers to report concerns of wrongdoing if not addressed).

4. Section 404: Management assessment of internal controls (requires that management file an internal control report with its annual report each year to delineate how management has established and maintained effective internal controls over financial reporting).

5. Section 406: Codes of ethics for senior financial officers (required).

6. Section 407: Disclosure of audit committee financial expert (requires that they actually have an expert).

iv.

Sarbanes–Oxley includes requirements for certification of the documents by officers.

v.

When a firm‘s executives and auditors are required to literally sign off on these statements, certifying their veracity, fairness, and completeness, they are more likely to personally ensure their truth.

c. One of the most significant criticisms of the act is that it imposes extraordinary financial costs on the firms. And the costs are even higher than anticipated. i.

A 2005 survey of firms with average revenues of $4 billion conducted by Financial Executives International reports that Section 404 compliance averaged $4.36 million, which is 39% more than those firms thought it would cost in 2004.

ii.

The survey also reported that more than half the firms believed that Section 404 gives investors and other stakeholders more confidence in their financial reports, making it a valuable asset.

iii.

The challenge is in the balance of costs and benefits: 1. Some say that Section 404 is well intentioned, but the implementation effort can be overkill.

2. In response, 1 year after its implementation, in May 2005, the Public Company Accounting Oversight Board (PCAOB) released a statement publicly acknowledging the high costs and issuing guidance for

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implementation ―in a manner that captures the benefits of the process without unnecessary and unsustainable costs.‖ 3. The PCAOB now advocates a more risk-based approach where the focus of internal audit assessments is better aligned with high-risk areas than those with less potential for a material impact.

4. For a comparison of the application of Sarbanes–Oxley in the European Union, see the Reality Check, ―Global Consistencies: The European Union 8th Directive.‖ *Reference: “Reality Check—Global Consistencies: The European Union 8th Directive”* IV.

The Internal Control Environment *Chapter Objective 4 Addressed Below* a. Sarbanes–Oxley and the European Union‘s 8th Directive are external mechanisms that seek to insure ethical corporate governance, but there are internal mechanisms as well. i.

One way to ensure appropriate controls within the organization is to utilize a framework advocated by the Committee of Sponsoring Organizations (COSO).

ii.

COSO is a voluntary collaboration designed to improve financial reporting through a combination of controls and governance standards called the Internal Control-Integrated Framework.

1. Established in 1985 by five of the major professional accounting and finance associations, originally to study fraudulent financial reporting and later to develop standards for publicly held companies.

iii.

The elements that comprise the control structure include: 1. Control environment—the tone or culture of a firm: ―the control environment sets the tone of an organization, influencing the control consciousness of its people.‖ 2. Risk assessment—risks that may hinder the achievement of corporate objectives.

3. Control activities—policies and procedures that support the control environment.

4. Information and communications—directed at supporting the control environment through fair and truthful transmission of information.

5. Ongoing monitoring—to provide assessment capabilities and to uncover vulnerabilities.

*Chapter Objective 5 Addressed Below*

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b. Control Environment: Refers to cultural issues such as integrity, ethical values, competence, philosophy, and operating style. Many of these terms were addressed in Chapter 4‘s discussion of corporate culture. i.

COSO is one of the first efforts to address corporate culture in a quasiregulatory framework in recognition of its significant impact on the satisfaction of organizational objectives.

ii.

Control environment can also refer to more concrete elements (that can better be addressed in an audit) such as the division of authority, reporting structures, roles and responsibilities, the presence of a code of conduct, and a reporting structure.

c. Shift to Organizational Environment: The COSO standards for internal controls moved audit, compliance, and governance from a numbers orientation to concern for the organizational environment. i.

The discussion of corporate culture in Chapter 4 reminds us that both internal factors such as the COSO controls and external factors, such as the Sarbanes– Oxley requirements, must be supported by a culture of accountability.

ii.

These shifts impact not only executives and boards; internal audit and compliance professionals also are becoming more accountable for financial stewardship, resulting in greater transparency, greater accountability, and a greater emphasis on effort to prevent misconduct.

iii.

In fact, all the controls one could implement have little value if there is no unified corporate culture to support it or mission to guide it.

d. Enterprise Risk Management: COSO developed the Enterprise Risk Management—Integrated Framework to serve as a framework for management to evaluate and improve their firms‘ prevention, detection, and management of risk.

V.

i.

This system expands on the prior framework in that it intentionally includes ―objective setting‖ as one of its interrelated components, recognizing that both the culture and the propensity toward risk are determined by the firm‘s overarching mission and objectives.

ii.

Enterprise risk management assists an organization or its governing body in resolving ethical dilemmas based on the firm‘s mission, its culture, and its appetite and tolerance for risk.

Going Beyond the Law: Being an Ethical Board Member a. Accountability: The corporate failures of recent years would seem to suggest a failure on the part of corporate boards, as well as a failure of government to impose high expectations of accountability on boards of directors.

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i.

It is the board‘s fiduciary duty to guard the best interests of the firm itself.

ii.

However, in many cases, boards and executives operated well within the law.

1. For instance: It is legal for boards to vote to permit an exception to a firm‘s conflicts of interest policy, as happened in the Enron case. The actions may not necessarily be ethical or in the best interests of stakeholders; but they were legal nonetheless.

iii.

The law offers some guidance on minimum standards for board member behavior, but is the law enough?

*Chapter Objective 6 Addressed Below* b. Legal Duties of Board Members: The law imposes three clear duties on board members, the duties of care, good faith, and loyalty. i.

The duty of care involves the exercise of reasonable care by a board member to ensure that the corporate executives with whom they work carry out their management responsibilities and comply with the law in the best interests of the corporation.

1. Directors are permitted to rely on information and opinions only if they are prepared or presented by corporate officers, employees, a board committee, or other professionals the director believes to be reliable and competent in the matters presented.

2. Board members are also directed to use their ―business judgment as prudent caretakers.‖ 3. The director is expected to be disinterested and reasonably informed, and to rationally believe that the decisions made are in the firm‘s best interest.

4. The bottom line is, the director does not need to be an expert or actually run the company.

ii.

The duty of good faith is one of obedience, which requires board members to be faithful to the organization‘s mission.

1. Board members are not permitted to act in a way that is inconsistent with the central goals of the organization.

2. Their decisions must always be in line with organizational purposes and direction, strive toward corporate objectives, and avoid taking the organization in any other direction.

iii.

The duty of loyalty requires faithfulness; a board member must give undivided allegiance when making decisions affecting the organization.

1. Conflicts of interest are always to be resolved in favor of the corporation.

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2. A board member may never use information obtained through their position as a board member for personal gain, but instead must act in the best interests of the organization. c. Board Member Conflicts of Interest: Board member conflicts of interest present issues of significant challenges because of the alignment of their personal interests with those of the corporation. i.

Board members usually have some financial interest in the future of the firm, even if it is only through their position and reputation as a board member.

1. If a board member owns stock, then their interests may be closely aligned with other stockholders, removing a possible conflict there.

2. However, if the board member does not hold stock, perhaps they are best positioned to consider the long-term interests of the firm in lieu of a sometimes enormous windfall that could occur as the result of a board decision.

ii.

In the end, a healthy board balance is usually sought.

d. Ethics and Compliance: i.

The Federal Sentencing Guidelines (FSG), promulgated by the U.S. Sentencing Commission and (since a 2005 Supreme Court decision) discretionary in nature, do offer boards some specifics regarding ways to mitigate eventual fines and sentences in carrying out these duties by paying attention to ethics and compliance.

ii.

The board must work with executives to analyze the incentives for ethical behavior.

iii.

The board must also be truly knowledgeable about the content and operation of the ethics program. Being ―knowledgeable‖ involves having a clear understanding of the process by which the program evolved, its objectives, its process, and next steps.

iv.

The FSG also suggest that the board should exercise ―reasonable oversight‖ with respect to the implementation and effectiveness of the ethics/compliance program by ensuring that the program has adequate resources, appropriate level of authority and direct access to the board.

v.

In order to ensure satisfaction of the FSG and the objectives of the ethics and compliance program, the FSG discuss periodic assessment of risk of criminal conduct and of the program‘s effectiveness.

vi.

In order to assess their success boards should evaluate: 1. Their training and development materials.

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2. Their governance structure and position descriptions.

3. Their individual evaluation processes.

4. Their methods for bringing individuals onto the board or removing them 5. All board policies, procedures and processes, including a code of conduct and conflicts policies. *Chapter Objective 7 Discussed Below* e. Beyond the Law, There Is Ethics: The law answers only a few questions with regard to boards of directors. i.

Certainly Sarbanes–Oxley has strived to answer several more, but a number of issues remain open to board discretionary decision making.

ii.

One question we would expect the law to answer, but that instead remains somewhat unclear, is whom the board represents.

1. Who are its primary stakeholders?

2. By law, the board of course has a fiduciary duty to the owners of the corporation—the stockholders.

3. However, many scholars, jurists, and commentators are not comfortable with this limited approach to board responsibility and instead contend that the board is the guardian of the firm‘s social responsibility as well.

4. For one perspective on a board‘s additional, ethical responsibilities, see the Reality Check, ―The Basics.‖

*Reference: ―Reality Check—The Basics‖* iii.

Some executives may ask whether the board even has the legal right to question the ethics of its executives and others.

1. If a board is aware of a practice that it deems to be unethical but that is completely within the realm of the law, on what basis can the board require the executive to cease the practice?

2. The board can prohibit actions to protect the long-term sustainability of the firm.

3. Unethical acts can negatively impact stakeholders such as consumers or employees, who can, in turn, negatively impact the firm, which could eventually lead to a firm‘s demise.

4. It is in fact the board‘s fiduciary duty to protect the firm and, by prohibiting unethical acts, it is doing just that.

*Reference: ―Reality Check—The Concerns of Corporate Directors‖ iv.

Malcom Salter warned that perhaps one of the most important lessons from Enron was that ―corporate executives can be convicted in a court of law for a pattern of deception that may or may not be illegal.‖ 1-152

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1. Salter also says, ―at the end of the day, we are a principles-based society, rather than a rules-based society, even though rules and referees are important.‖ v.

Though our rules and processes offer guidance in terms of corporate decision making from a teleological, utilitarian perspective, if corporate executives breach common principles of decency and respect for human dignity, society will exact a punishment, nonetheless.

1. A board has an obligation to hold its executives to this higher standard of ethics rather than simply following the legal rules.

vi.

Fortune journalists Ram Charan and Julie Schlosser suggest that board members have additional responsibilities beyond the law to explore and to investigate the organizations that they represent.

1. They suggest that an open conversation is the best method for understanding, not just what board members know, but also what they do not know.

2. They suggest that board members often ignore even the most basic questions such as how the firm actually makes its money and whether customers and clients truly do pay for products and services.

3. Board members should also be critical in their inquiries about corporate vulnerabilities—what could drag the firm down and what could competitors do to help it along that path? Ensuring that information about vulnerabilities is constantly and consistently transmitted to the executives and the board creates effective prevention.

4. Board members need to understand where the company is heading and whether it is realistic that it will get there.

vii.

It is the board members‘ ultimate duty to provide oversight, which is impossible to do without knowing the answers to the preceding questions.

**Teaching Note: The U.S. is considered the ―bad boy‖ of governance since Enron, but is Europe any better? Italy has a reputation for poor corporate governance combined with the shameless exploitation of minority shareholders, but much the same can be said of other European countries, including France, the Netherlands and Switzerland. Most European countries have mere codes of practice for corporate governance, rather than legal statutes, and progress toward meeting the standards of the codes has been patchy at best. In Germany, a governmentappointed commission published recommendations for the reform of corporate governance in February 2002 (Germany‘s first governance code ever) but majority is voluntary (though firms that do not comply have to explain to shareholders why).

The biggest difference in governance practices among EU members lies in the role of the employee and the strength of shareholders‘ influence.

VI.

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*Chapter Objective 8 Addressed Below* a. Conflicts of interest, while common in many situations among both directors and officers also extend beyond the board room and executive suite throughout the financial arena. In fact, trust is an integral issue for all involved in the finance industry. i.

What more can an auditor, an accountant, or an analyst offer than their integrity and trustworthiness? There is no real, tangible product to sell, nor is there the ability to ―try before you buy.‖ 1. Treating clients fairly and building a reputation for fair dealing may be a finance professional‘s greatest assets.

2. Conflicts—real or perceived—can erode trust, and often exist as a result of varying interests of stakeholders.

ii.

Public accountants are accountable to their stakeholders and therefore should always serve in the role of independent contractor to the firms they audit.

1. Companies would love to be able to direct what that outside accountant says because people believe the ―independent‖ nature of the audit.

2. However, if accountants were merely rubber stamps for the word of the corporation, they would no longer be believed or considered ―independent.‖

iii.

Accounting offers us a system of rules and principles that govern the format and content of financial statements.

1. By its very nature, it is a system of principles applied to present the financial position of a business and the results of its operations and cash flows.

2. It is hoped that adherence to these principles will result in fair and accurate reporting of this information.

3. Does an accountant stand guard or instead seek out problematic reporting? The answer to this question may depend on whether the accountant is employed internally by a firm or works as outside counsel.

iv.

Linking public accounting activities to those conducted by investment banks and securities analysts creates tremendous conflicts between one component‘s duty to audit and certify information with the other‘s responsibility to provide guidance on future prospects of an investment.

1. Ten of the top investment firms in the country had to pay fines in 2005 for actions that involved conflicts of interest between research and investment banking.

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2. Companies that engaged in investment banking pressured their research analysts to give high ratings to companies whose stocks they were issuing, whether those ratings were deserved or not. b. The ethical issues and potential for conflicts surrounding accounting practices go far beyond merely combining services. i.

They may include underreporting income, falsifying documents, allowing or taking questionable deductions, illegally evading income taxes, and engaging in fraud.

ii.

In order to prevent accountants from being put in these types of conflicts, the American Institute of CPAs publishes professional rules.

iii.

In addition, accounting practices are governed by generally accepted accounting principles (GAAP), established by the Financial Accounting Standards Board that stipulate the methods by which accountants gather and report information.

iv.

The International Accounting Standards Committee, working with the U.S. SEC, is in the process of creating ―convergence‖ between the International Financial Reporting Standards and the GAAP, with compliance required by 2009.

1. Beyond the prospect of standards simply being translated appropriately and effectively, the standards themselves can be complex, modifying the standards becomes infinitely more complicated, small global firms may realize a greater burden than larger multinationals, and differences in knowledge bases between countries may pose strong barriers.

v.

Accountants are also governed by the American Institute of Certified Public Accountants‘ (AICPA) Code of Professional Conduct. The code relies on the judgment of accounting professionals in carrying out their duties rather than stipulating specific rules.

c. Can standards keep pace with readily changing accounting and financing activities in newly emerging firms? In complex cases, it can take regulators, legislature, and courts years to catch up with the changing practices in business. d. Would Regulatory Standards Be Enough? Scholar Kevin Bahr identifies a number of causes for conflicts in the financial markets that may or may not be resolved through simple rule-making: 1. The financial relationship between public accounting firms and their audit clients.

2. Conflicts between services offered by public accounting firms.

3. The lack of independence and expertise of audit committee.

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4.

5.

6.

7.

8.

Self-regulation of the accounting profession.

Lack of shareholder activism.

Short-term executive greed versus long-term shareholder wealth.

Executive compensation schemes.

Compensation schemes for security analyst.

e. A Case for Regulation: Scholar Eugene White contends that, in part based on the preceding challenges, markets are relatively ineffective and the only possible answer is additional regulation.

VII.

i.

Bahr argues that there may be means by which to resolve conflicts, such as due notice and separation of research and auditing activities.

ii.

White maintains that conflicts cannot be eliminated. ―Financial firms may hide relevant information and disclosure may reveal too much proprietary information.‖

iii.

There remains no perfect solution; instead the investment community has no choice but to rely in part on the ethical decision making of the agent who acts within the market, constrained to some extent by regulation.

iv.

Moreover, there is not simply just one solution.

1. Consider how the financial community needed to reply on the honesty of individuals reporting their lending rates for the LIBOR benchmark.

2. It is difficult to imagine an adequate response to this scandal that does not include everything from individual integrity to government regulation, both nationally and internationally.

Executive Compensation a. Excessive Compensation: Few areas of corporate governance and finance have received as much public scrutiny in recent years as executive compensation. i.

In 1960, the after-tax average pay for corporate chief executive officers (CEO) was 12 times the average pay earned by factory workers. By 1974, that factor had risen to 35 times the average. By 2000, it had risen to a high of 525 times the average pay received by factory workers! In 2005, it had reached an estimated ratio of 411 times a worker‘s average pay.

1. These numbers only address the average pay; the differences would be more dramatic if we compared the top salary for CEOs and minimumwage workers.

2. In 2005, total direct compensation for CEOs rose by 16% to reach a median figure of $6.05 million, not including pensions, deferred compensation, and other perks.

*Reference: ―Reality Check—Average CEO to Average Worker Compensation Ratio‖ 1-156 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

ii.

Forbes reported that the CEOs of 800 major corporations received an average 23% pay raise in 1997 while the average U.S. worker received around 3%.

1. The median total compensation for these 800 CEOs was reported as $2.3 million.

2. Half of this amount was in salary and bonuses, and 10% came from such things as life insurance premiums, pension plans and individual retirement accounts, country club memberships, and automobile allowances. Slightly less than half came from stock options.

**Teaching Note: Have students conduct research on current executive compensation data and compare to the current average worker‘s salary. Discuss some of the reasons for and against executives making so much money. iii.

It is relevant to note that CEO pay and the S&P 500 Index seem to follow similar trajectories. One might expect something along these lines since ―pay for performance‖ is often based on stock price as one element of measurable performance.

iv.

Notice that actual corporate profits, not to mention worker pay, have not increased at the same rate as CEO pay.

1. Though CEOs have seen an increase, the corporations themselves— and the workers who contribute to their successes—have not reaped equivalent benefits.

2. This lack of balance in the distribution of value has led to the perception of unfairness with regard to executive compensation, as we will discuss below.

v.

Example: Compensation packages paid to the top executives of ExxonMobil drew harsh public criticism in 2005, amid rising gas prices and soaring profits.

b. Ethics of Excessive Executive Compensation Packages: Skyrocketing executive compensation packages raise numerous ethical questions. i.

Greed and avarice are the most apt descriptive terms for the moral character of such people from a virtue ethics perspective.

ii.

Fundamental questions of distributive justice and fairness arise when these salaries are compared to the pay of average workers or to the billions of human beings who live in abject poverty on a global level. Consider Tyco‘s Dennis Kozlowski‘s justification of his salary in the Reality Check, ―How Do Salaries Motivate?”

*Reference: ―Reality Check—How Do Salaries Motivate?‖* *Chapter Objective 9 Addressed Below* 1-157 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

iii.

Serious ethical challenges are raised against these practices even from within the business perspective.

1. Both Fortune and Forbes magazines have been vocal critics of excessive compensation while remaining staunch defenders of corporate interests and the free market.

2. Beyond issues of personal morality and economic fairness, however, excessive executive compensation practices also speak to significant ethical issue of corporate governance and finance.

c. In theory, lofty compensation packages are thought to serve corporate interests in two ways. i.

They provide an incentive for executive performance (a consequentialist justification), and they serve as rewards for accomplishments (a rightsbased justification).

ii.

In terms of ethical theory, they have a utilitarian function when they act as incentives for executives to produce greater overall results, and they are a matter of ethical principle when they compensate individuals on the basis of what they have earned and deserve.

iii.

In practice, reasonable doubts exist about both of these rationales.

1. First, there is much less correlation between pay and performance than one would expect. At least in terms of stock performance, executives seem to reap large rewards regardless of business success.

2. It might be argued that in difficult financial times, an executive faces greater challenges and therefore perhaps deserves his salary more than in good times.

iv.

There are several reasons why excessive compensation may evidence a failure of corporate boards to fulfill their fiduciary duties.

1. First, is the fact that in many cases there is no correlation between executive compensation and corporate performance?

2. Second, there is also little evidence that the types of compensation packages described above are actually needed as incentives for performance.

v.

The fiduciary duty of boards ought to involve approving high enough salaries to provide adequate incentive, but not more than what is needed.

1. Surely there is a diminishing rate of return on incentives beyond a certain level.

2. Does a $40 million annual salary provide twice the incentive of $20 million, four times the incentive of $10 million, and 40 times the return of a $1 million salary?

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d. Use of Stocks in Executive Compensation: Another crucial governance issue is the disincentives that compensation packages, and in particular the heavy reliance on stock options, provide. i.

When executive compensation is tied to stock price, executives have a strong incentive to focus on short-term stock value rather than long-term corporate interests.

ii.

One of the fastest ways to increase stock price is through layoffs of employees.

1. This may not always be in the best interests of the firms, and there is something perverse about basing the salary of an executive on how successful they can be in putting people out of work.

iii.

A good case can be made that stock options have also been partially to blame for the corruption involving managed earnings.

1. Two academic studies concluded that there is a strong link between high levels of executive compensation and the likelihood of misstating or falsely reporting financial results.

2. When huge amounts of compensation depend on quarterly earnings reports, there is a strong incentive to manipulate those reports in order to achieve the money.

e. Excessive executive compensation can also involve a variety of conflicts of interest and cronyism. i.

The board‘s duties should include ensuring that executives are fairly and not excessively paid.

They also have a responsibility to evaluate the executive‘s performance.

1. Often, the executive being evaluated and paid also serves as chair of the board of directors.

2. The board is often comprised of members hand-selected by the senior executives.

In addition, the compensation board members receive is determined by the chief executive officer, creating yet another conflict of interest. ii.

VIII.

*Reference: Reality Check: The Concerns of Corporate Directors i.

One of the larger concerns to have arisen in recent years has been the crossfertilization of boards.

1. The concern spawned a website called www.theyrule.net, which allows searching for links between any two given companies.

2. For example, PepsiCo board member Robert Allen sits on the BristolMyers Squibb board alongside Coca-Cola board member James D. Robinson III. This type of situation lends itself to the appearance of impropriety and gives rise to a question of conflicts.

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ii.

Cronyism or basic occurrences of overlapping board members might occur, of course, simply because particular individuals are in high demand as a result of their expertise.

1. Where the overlap results in a failure of oversight and effective governance the implications can be significant to all stakeholders involved.

2. In one example, three individuals served on the boards of three companies, with each serving as CEO and chairman of one of the companies. Unfortunately, the companies were found to have backdated stock options, and each firm found itself subject to either SEC inquiries or civil legal proceedings.

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IX.

Insider Trading *Chapter Objective 10 Addressed Below* a. No discussion of the ethics of corporate governance and finance would be complete without consideration of the practice of insider trading by board members, executives, and other insiders. i.

The issue became front page news in the 1980s when financier Ivan Boesky was sent to prison for the crime of insider trading. ii.

It once again gained iconic status when Ken Lay and his colleagues at Enron were accused of insider trading when they allegedly dumped their Enron stock, knowing of the inevitable downturn in the stock‘s worth, while encouraging others to hold on to it.

iii.

More recent cases involving financiers and bankers such as Raj Rajaratnam, the billionaire founder of the hedge fund Galleon Group (discussed below), and Fidelity Investments employee David K. Donovan Jr., who was convicted in 2009 for giving his own mother inside information on which she then traded.

b. The definition of insider trading: Trading by shareholders who hold private inside information that would materially impact the value of the stock and that allows them to benefit from buying or selling stock. i.

Illegal insider trading also occurs when corporate insiders provide ―tips‖ to family members, friends, or others and those parties buy or sell the company's stock based on that information.

ii.

―Private information‖ would include privileged information that has not yet been released to the public.

iii.

That information is deemed material if it could possibly have a financial impact on a company's short- or long-term performance or if it would be important to a prudent investor in making an investment decision.

Decision Point Should Members of Congress Be Allowed to Buy and Sell Individual Stocks?

This Decision Point is new to the 6th edition. It is in the section on Insider Trading, but it is also very much related to the discussion in the earlier section on Conflict of Interest. Questions for discussion include: 

Do you think that members of Congress should be allowed to buy and sell stocks?



Do you have trust in the fairness of the stock market? Do you trust members of Congress?

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

Some observers have argued that insider trades actually help the efficiency of markets by providing important information to traders. When an insider sells, that is important information for other traders to have and therefore this increases the efficiency of the market.

Do you agree with this? c. Insider Trading Defined: The Securities and Exchange Commission defines insider information in the following way: ‗Insider trading‘ refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include ―tipping‖ such information, securities trading by the person ―tipped‘ and securities trading by those who misappropriate such information.

Examples of insider trading cases that have been brought by the Commission are cases against: corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments; friends, business associates, family members, and other ―tippers‖ of such officers, directors, and employees, who traded the securities after receiving such information; employees of law, banking, brokerage and printing firms who were given such information in order to provide services to the corporation whose securities they traded; government employees who learned of such information because of their employment by the government; and other persons who misappropriated, and took advantage of, confidential information from their employers. i.

Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the commission has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.

ii.

If an executive gets rid of a stock one knows is going to greatly decrease in worth because of bad news in the company that no one knows except a few insiders, they take advantage of those who bought the stock from him without full disclosure.

iii.

Insider trading may also be based on a claim of unethical misappropriation of proprietary knowledge, that is, knowledge only those in the firm should have, knowledge owned by the firm and not to be used by abusing one‘s fiduciary responsibilities to the firm.

iv.

The law surrounding insider trading creates a responsibility to protect confidential information, proprietary information, and intellectual property.

1. That responsibility also exists based on the fiduciary duty of ―insiders‖ such as executives.

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2. Misappropriation of this information undermines the trust necessary to the proper functioning of a firm and is unfair to others who buy the stock.

3. Insider trading is considered patently unfair and unethical since it precludes fair pricing based on equal access to public information. d. Ethical Defense: Trading on inside information is not without its ethical defense. i.

If someone has worked very hard to obtain a certain position in a firm and, by virtue of being in that position, the individual is privy to inside information, is not it just for that person to take advantage of the information since they have worked so hard to obtain the position? Is it really wrong? Unethical?

1. Another example: If your brother has always been successful in whatever he does in the business world, is it unethical to purchase stock in the company he just acquired? Others do not know quite how successful he has been, so are you trading on inside information?

Would you tell others?

2. What about officers in one company investing in the stocks of their client companies? No legal rules exist other than traditional SEC rules on insider trading, but is there not something about this that simply feels ―wrong?‖

Decision Point The Know-It-Alls This Decision Point poses the question: Where does a private investor find information relevant to stock purchases? Barring issues of insider trading, do all investors actually have equivalent access to information about companies?

Students should consider the following questions when assessing this scenario:  What are the ethical issues involved in access to corporate information?  Where do private investors go to access information about stock purchases? On whose opinion do they rely? Does everyone have access to these same opinions? If not, what determines access to information in an open market? Instead, is there equal opportunity to have access to information?  Who are the stakeholders involved in the issue of access? Who relies on information relevant to stock purchases?  Who has an interest in equal access to information?  What alternatives are available when considering access to information? How can we perhaps best ensure equal access?  How do the alternatives compare, and how do the alternatives affect the stakeholders? e. Access: Some people do seem to have access to more information than others, and their access does not always seem to be fair.

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i.

ii.

iii. iv.

v.

vi.

vii.

Example: Consider how Martha Stewart found herself in jail. Stewart was good friends with Sam Waksal, who was the founder and CEO of a company called ImClone. Waksal had developed a promising new cancer drug and had just sold an interest in the drug to Bristol Myers for $2 billion.

Unfortunately, though everyone thought the drug would soon be approved, Waksal learned that the Food and Drug Administration had determined that the data was not sufficient to allow the drug to move to the next phase of the process. When this news became public, ImClone‘s stock price was going to fall significantly. On learning the news (December 26, 2001), Waksal contacted his daughter and instructed her to sell her shares in ImClone. He then compounded his violations by transferring 79,000 of his shares (worth almost $5 million) to his daughter and asking her to sell those shares, too.

Though the SEC would likely uncover these trades, given the decrease in share price, it was not something he seemed to consider at the time. Waskal was eventually sentenced to more than 7 years in prison for his actions.

How does Martha Stewart fit into this picture? The public trial revealed that Stewart‘s broker ordered a former Merrill Lynch & Co. assistant to tell Martha that Waksal was selling his stock, presumably so that she would also sell her stock. One day after Waksal sold his shares, Stewart sold almost 4,000 shares.

Some investors do seem to have access to information not necessarily accessible to all individual investors.

A similar, but more far-ranging situation, was revealed in November 2009 when the FBI and U.S. Attorneys announced arrests stemming from a large insider-trading operation at the hedge fund Galleon Group. The Securities and Exchange Commission accused the billionaire Raj Rajaratnam and dozens of others associated with the Galleon Group of insider trading that resulted in more than $33 million in profit. They were accused of trading on secret details of corporate takeovers and quarterly earnings leaked to them by company insiders.

If others are not in the public eye (like Waskal, Stewart and Rajaratnam), can the SEC truly police all inappropriate transactions? Is there a sufficient deterrent effect to discourage insider trading in our markets today?

If not, what else can or should be done?

Or, is this simply the nature of markets, and those who have found access to information should use it to the best of their abilities? What might be the consequences of this latter, perhaps more Darwinian, approach to insider trading, and whose rights might be violated if we allow it?

Consider whether we might have learned anything from the experiences of the past decade, and how we might proceed most effectively, as you review the Decision Point, ―The Winds of Change.‖

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Opening Decision Point Revisited Government Regulation and the VW Scandal Much of the media attention to the VW cheating scandal focused on the internal decision making within VW. But this case also provides an opportunity to consider how government functions in this case. The revisit suggests that several government agencies played a leading role in uncovering, stopping, and compensating victim of the VW fraud.

End of Chapter Questions, Projects, and Exercises 1. You have been asked by the board of a large corporation to develop a board assessment and effectiveness mechanism, which could be a survey, interviews, an appraisal system, or other technique that will allow you to report back to the board on both individual and group effectiveness. What would you recommend?

Some helpful websites for this exercise:  From the Free Management Library (www.managementhelp.org) there are several links off of the Free Complete Toolkit for Boards (http://www.managementhelp.org/boards/boards.htm#anchor683160) to assist in Board evaluation:  For a Board Self-Evaluation: http://www.managementhelp.org/boards/brd_eval.htm  For Individual Board Member Self-Evaluation: http://nonprofit.adelphi.edu/files/2012/09/Individual-Board-Member-SelfEvaluation.pdf  For Individual Board Member Evaluation: https://managementhelp.org/boards/evaluating-board.htm 2. You have been asked to join the board of a large corporation. What are some of the first questions that you should ask and what are the answers that you are seeking?

Refer students to the section in this chapter dealing with the duties of boards.

3. Scholars have made strong arguments for required representation on boards by stakeholders beyond stockholders such as employees, community members, and others, depending on the industry. What might be some of the benefits and costs of such a process?

Students can do research to explore the benefits and costs of requiring representation on boards from all stakeholders. At a minimum, benefits may include increased dialogue with broad stakeholder groups that will inform decisions at the board level, thus allowing the firm to better anticipate long-term implications. Moreover, by involving these stakeholders at the decision-making level, firms are more likely to address issues at a time when they can be resolved rather than when it may be too late. In addition, the board can gain similar benefits to those earned by having a more diverse board from any perspective. To the contrary, however, when the board represents too many divergent interests, it risks a failure to reach any consensus at all, and the desire to please all parties when that might not be possible at all times.

4. You are an executive at a large nonprofit. Some of your board members suggest that perhaps the company should voluntarily comply with Sarbanes–Oxley. What are some of the reasons the company might consider doing so or not doing so?

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Compliance with Sarbanes–Oxley has both benefits and costs. Students can refer to the Internet for arguments on both sides. A website providing discussion on the topic is:  ―Critics say Sarbanes–Oxley‘s costs are too high,‖ by Deborah Solomon, Wall Street Journal, October 17, 2005: http://accounting.pro2net.com/x50243.xml 5. You are on the compensation committee of your board and have been asked to propose a compensation structure to be offered to the next CEO. Explore some of the following websites on executive compensation and then propose a structure or process for determining CEO compensation at your corporation. http://www.aflcio.org/Corporate-Watch http://www.rileyguide.com/execpay.html http://www.eri-executive-compensation.com/?TrkID=479-82 Engage students in a discussion about CEO compensation after they have visited these sites and conducted their research.

6. What are the strongest, most persuasive arguments in favor of a board‘s consideration of its social responsibility when reaching decisions?

Refer students to the discussion in Chapter 5 on the enlightened self-interest model.

7. A press release has a significant negative impact on your firm‘s stock price, reducing its value by more than 50% in a single day of trading! You gather from conversations in the hallway that the company‘s fundamentals remain strong, aside from this one-time event. You see this as a great opportunity to buy stock. Is it appropriate to act on this and to purchase company stock?

Does it make a difference whether you buy 100 shares or 1,000 shares? Is it OK to discuss the ―dilemma‖ with family members and friends? What should you do if you do mention it to family and friends but then later feel uncomfortable about it?

Refer to the definition of insider trading in this chapter.

8. Modify slightly the facts of the previous question. Assume that you are also privy to the annual forecast of earnings, which assures you that the fundamentals remain strong. Stock analysts and investors are also provided this same information. Do your answers change at all?

Refer to the definition of insider trading in this chapter.

9. In connection with the two previous questions, assume instead that you think something significant is about to be made public because all officers have consistently stayed late, a special board meeting has been called, you and your boss have been advised to be on call throughout the weekend, and various rumors have been floating throughout the company. You are not aware of the specifics, but you can reasonably conclude that it is potentially good or bad news. You decide to call a friend in the accounting department who has been staying late to find out what she knows. In this situation, do your answers about what you might do change? Is it appropriate to partake in the ―rumor mill?‖ Is it appropriate to discuss and confide your observations with family and friends? Is it appropriate to buy or sell company stock based upon these observations (you may rationalize that it is only speculation and you do not know the facts)?

Refer to the definition and discussion of insider trading in this chapter.

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10. Have you ever been in, or are you familiar with, a conflict of interest situation? How was it resolved? Can you think of any rules or any practices that could have prevented the situation from occurring? Can you think of any initiatives, structures or procedures that could make it easy to avoid such conflicts in the future?

Ask students who have experience working for or with publicly traded companies to share situations they have been exposed to that could have resulted in a conflict of interest. How did they handle the situation? What could have been done differently to alleviate the conflict in a more ethical way? How do today‘s ethical standards differ from standards from previous decades?

i

Linstock Consultants and Imagination, Added Values? Measuring the “value relevance” of sustainability reporting (London, February 2004) at Section 1: Case studies & discussion. ii Goel R., Guide to Instruments of Corporate Responsibility (York University Toronto, 2005), p. 3. iii McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility,‖ Ethical Corporation Magazine (January 2003), pp. 22–29. iv McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ v McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ vi Global Reporting Initiative, ―Dialogue on Current and Future Directions: Some Key Issues and Perspectives for and from Our Stakeholders,‖ http://www.globalreporting.com (accessed January 20, 2003). vii McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ viii Global Reporting Initiative, ―Organisations using the GRI,‖ http://www.globalreporting.com (accessed February 2, 2005). ix Global Reporting Initiative, ―Global Reporting Initiative & Global Sullivan Principles,‖ http://www.globalreporting.com. (accessed September 24, 2022) x McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ xi McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ xii Global Reporting Initiative, ―Global Reporting Initiative & SA8000,‖ http://www.globalreporting.com. xiii Global Reporting Initiative, ―Global Reporting Initiative & Global Sullivan Principles,‖ http://www.globalreporting.com. xiv McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ xv United Nations Global Compact, ―The Global Compact: About the GC,‖ http://www.unglobalcompact.com. xvi United Nations Global Compact, ―The Global Compact: About the GC,‖ http://www.unglobalcompact.com. xvii UN Global Compact, ―The Global Compact: Nine Principles,‖ http://www.unglobalcompact.com. xviii UN Global Compact, ―The Global Compact: FAQ,‖ http://www.unglobalcompact.com. xix UN Global Compact, ―The Global Compact: Overview,‖ http://www.unglobalcompact.com. xx McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ xxi Global Reporting Initiative, ―Global Reporting Initiative & OECD Guidelines for MNEs,‖ http://www.globalreporting.com. xxii Global Reporting Initiative, ―Global Reporting Initiative & OECD Guidelines for MNEs,‖ http://www.globalreporting.com. xxiii McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ xxiv International Labor Organization (ILO), ―What are International Labour Standards?,‖ http://www.ilo.org. xxv McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ xxvi Global Reporting Initiative, ―Global Reporting Initiative & AA1000 and AA1000 Series,‖ http://www.globalreporting.com (accessed March 27, 2003). xxvii Global Reporting Initiative ―Global Reporting Initiative & AA1000 and AA1000 Series.‖

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xxviii

Global Reporting Initiative ―Global Reporting Initiative & AA1000 and AA1000 Series.‖ AccountAbility ―AA1000 Series: Introducing AA1000,‖ http://www.accountability.org/ (accessed March 28, 2003). xxx AccountAbility ―AA1000 Series: Introducing AA1000.‖ xxxi Global Reporting Initiatives, "GRI and other initiatives ISO 14000," http://www.globalreporting.com (accessed March 27, 2003). xxxii Global Reporting Initiatives, "GRI and other initiatives ISO 14000.‖ xxxiii McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ xxxiv McIntosh Malcolm Thomas Ruth et al., ―International Standards for Corporate Responsibility.‖ xxix

xxxv

ECC Kohtes KlewesGmbH, ―Global Stakeholder Report 2003: Shared Values?‖ (accessed November, 2003).

xxxvi James Hamblen, ―Lucky Charms, the New Superfood,‖ The Atlantic June 23, 2015

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