Solution Manual For Business Ethics Ethical Decision Making and Cases 14th Edition by O. C. Ferrell,

Instructor Manual For: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 1: The Importance of Business Ethics

Instructor Manual For

Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 1: The Importance of Business Ethics

TABLE OF CONTENTS Purpose and Perspective of the Chapter ...........................................................................1 Chapter Objectives ..............................................................................................................1 What’s New in This Chapter .............................................................................................. 2 Chapter Outline ................................................................................................................... 2

PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of this chapter is to provide an understanding of the evolving landscape of business ethics. First, we develop a definition of business ethics and discuss why it has become an important topic in business education. Next, we examine the evolution of business ethics in North America and explore the benefits of ethical decision making in business. It explores how ethical conduct is increasingly integrated into organizational culture, emphasizing the roles of stakeholders, including employees, shareholders, and consumers, in demanding responsible behavior.

Additionally, this chapter examines the ethical challenges posed by emerging technologies like artificial intelligence and big data, and their potential to improve or complicate corporate social responsibility and ethical decision-making. Finally, we provide a framework for examining business ethics in this text.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 1-1

Define business ethics from an organizational perspective

1-2

Identify reasons for studying business ethics

1-3

Describe the historical development and evolution of business ethics

1-4

Discuss the importance of developing and supporting an ethical culture

1-5

Provide evidence that ethical value systems support business performance a

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Instructor Manual For: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 1: The Importance of Business Ethics

1-6

Discuss a model for studying business ethics

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: 

“The Importance of Business Ethics” has been revised with many new examples and survey results to describe issues and concerns important to business ethics.

[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Business Ethics Defined (LO 1-1, PPT Slides 4–7) i. Morals refer to an individual’s personal philosophies about what is right or wrong. The important point is that when one speaks of morals, it is personal or singular. ii. Principles are specific and pervasive boundaries for behavior that should not be violated and often become the basis for rules. iii. Morals, values, and principles describe positive or good traits that are often applied to the business organization or industry. iv. Investors, employees, customers, interest groups, the legal system, and the community often determine whether a specific action or standard is ethical or unethical. In a business context, groups that have a “stake” or claim in some aspect of a firm’s products, operations, markets, industry, and outcomes—customers, employees, investors, suppliers, government agencies, special interest groups, communities—are known as stakeholders. v. Ethics as behavior or decisions made within a group’s values or morals. In our case, we are discussing decisions made in business by groups of people representing the business organization. vi. Business ethics comprises organizational principles, values, and norms that may originate from individuals, organizational statements, or the legal system that primarily guide individual and group behavior in business.

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Instructor Manual For: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 1: The Importance of Business Ethics

vii. Corporate culture can be defined as a set of values, norms, and artifacts, including ways of solving problems that members (employees) of an organization share. viii. A difference between an ordinary decision and an ethical one lies in “the point where the accepted rules no longer serve, and the decision maker is faced with the responsibility for weighing values and reaching a judgment in a situation which is not quite the same as any he or she has faced before”. ix. To address these unique aspects of the business world, society has developed rules—both legal and implicit—to guide businesses in their efforts to earn profits in ways that help individuals or society and contribute to social and economic well-being.

II. Why Study Business Ethics? (LO 1-2, PPT Slides 8–14) a. A Crisis in Business Ethics i. The Global Business Ethics Survey (GBES) measures workplace integrity as the pressure to compromise organizational standards, observed misconduct, reporting of misconduct when observed, and retaliation against reports. ii. Business ethics decisions and activities have come under greater scrutiny by many different stakeholders, including consumers, employees, investors, government regulators, and special interest groups. iii. Social media and financial services have some of the lowest ratings, indicating that organizations in these sectors have not been able to restore their reputations after scandals over the last two decades. b. Specific Issues i. Several ethical issues must be addressed to prevent misconduct.

Misuse of company resources, abusive behavior, harassment, accounting fraud, conflicts of interest, defective products, bribery, counterfeit products, and employee theft are all problems cited as potential risk areas. ii. Ethics plays an important role in the public sector as well. In government or political ethics, several politicians and highranking officials have experienced significant negative publicity. iii. Every organization has the potential for unethical behavior. iv. Double standards are at least partly due to differences in wealth and the success between businesses and consumers. c. The Reasons for Studying Business Ethics i. Many people believe if a company hires good people with strong values, then it will be a “good citizen” organization. ii. A moral dilemma is defined as a situation where the person is faced with multiple choices, all of which are undesirable as defined by the person. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual For: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 1: The Importance of Business Ethics

iii. A value dilemma is the same, only that the individual’s beliefs are grounded in societal norms. iv. Just being a good person and having sound personal values may not be sufficient to handle the ethical issues that arise in a business organization. v. Failure to establish shared values and ethics codes will result in a wide range of conduct when faced with the same ethical issues. vi. Studying business ethics will help you begin to identify ethical issues when they arise and recognize the approaches available for resolving them.

III. The Development of Business Ethics (LO 1-3, PPT Slides 15–31) a. Before 1960: Ethics in Business i. Before 1960, the United States endured several agonizing phases of questioning the concept of capitalism. ii. In the 1930s came the New Deal that specifically blamed business for the country’s economic woes. iii. By the 1950s, the New Deal evolved into President Harry S. Truman’s Fair Deal, a program that defined such matters as civil rights and environmental responsibility as ethical issues that businesses had to address. iv. Until 1960, ethical issues related to business were often discussed within the domain of theology or philosophy or in the realm of legal and competitive relationships. v. The first book on business ethics was published in 1937 by Frank Chapman Sharp and Philip G. Fox. b. The 1960s: The Rise of Social Issues in Business i. During the 1960s, American society witnessed the development of an antibusiness trend when many critics attacked the vested interests that controlled the economic and political aspects of society—the so-called military-industrial complex. ii. The modern consumer movement is generally considered to have begun in 1965 with the publication of Ralph Nader’s Unsafe at Any Speed, which criticized the auto industry as a whole, and General Motors Corporation (GM) in particular, for putting profit and style ahead of lives and safety. iii. After Kennedy came President Lyndon B. Johnson and the “Great Society,” a series of programs that extended national capitalism and told the business community the U.S. government’s responsibility was to provide all citizens with some degree of economic stability, equality, and social justice. c. The 1970s: Business Ethics as an Emerging Field

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Instructor Manual For: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 1: The Importance of Business Ethics

i. Business ethics began to develop as a field of study in the 1970s.

Theologians and philosophers laid the groundwork by suggesting certain moral principles could be applied to business activities.

(1) Using this foundation, business professors began to teach and write about corporate social responsibility (CSR), an organization’s obligation to maximize its positive impact on stakeholders and minimize its negative impact. ii. By the end of the 1970s, several major ethical issues had emerged, including bribery, deceptive advertising, price collusion, product safety, and ecology. Business ethics became a common expression. d. The 1980s: Business Ethics Reaches Maturity i. In the 1980s, business academics and practitioners acknowledged business ethics as a field of study, and a growing and varied group of institutions with diverse interests promoted it. ii. In the 1980s, the Defense Industry Initiative on Business Ethics and Conduct was developed to guide corporate support for ethical conduct. In 1986, 18 defense contractors drafted principles for guiding business ethics and conduct. iii. Six principles (1) It supports codes of conduct and their widespread distribution.

(2) Member companies are expected to provide ethics training (3) Defense contractors must create an open atmosphere in which employees feel comfortable reporting violations without fear (4) Companies need to perform extensive internal audits and develop effective internal reporting and voluntary disclosure plans (5) Initiative insists that member companies preserve the integrity of the defense industry (6) Member companies must adopt a philosophy of public accountability e. The 1990s: Institutionalization of Business Ethics i. The administration of President Bill Clinton continued to support self-regulation and free trade. ii. The Federal Sentencing Guidelines for Organizations (FSGO), approved by Congress in November 1991, set the tone for organizational ethical compliance programs in the 1990s. iii. Under FSGO, if a company lacks an effective ethical compliance program and its employees violate the law, it can incur severe penalties.

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Instructor Manual For: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 1: The Importance of Business Ethics

iv. The heart of the FSGO is the carrot-and-stick approach—that is, by taking preventive action against misconduct, a company may avoid harsh penalties should a violation occur. f. The 2000s: Twenty-First Century Business Ethics i. Although business ethics appeared to become more institutionalized in the 1990s, new evidence emerged in the early 2000s that not all business executives and managers had fully embraced the public’s desire for high ethical standards. ii. To address the loss of confidence in financial reporting and corporate ethics, in 2002 Congress passed the Sarbanes–Oxley Act (SOX), the most far-reaching change in organizational control and accounting regulations since the Securities and Exchange Act of 1934. iii. The new law made securities fraud a criminal offense and stiffened penalties for corporate fraud. iv. Subsequent amendments to the FSGO require that a business’s governing authority be well informed about its ethics program concerning content, implementation, and effectiveness. v. In 2009, Barack Obama became president in the middle of the Great Recession, which was caused by a meltdown in the global financial industry. vi. The 2009 ACA, more commonly known as Obamacare, was a big move in social regulation.

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Instructor Manual For: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 1: The Importance of Business Ethics

g. The 2010s: New Challenges in Business Ethics i. The Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010 addressed some of the issues related to the financial crisis and the Great Recession. ii. Enforcement of the Foreign Corrupt Practices Act, enacted in the 1970s, became a top priority for the SEC in the 2010s, marked by the creation of a specialized unit to support enforcement of the FCPA. iii. The UK’s Bribery Act creates four main offenses: (1) Offering, promising, or giving of an advantage (2) Requesting, agreeing to receive, or accepting an advantage (3) Bribery of a foreign public official (4) Failure by a commercial organization to prevent a bribe from being paid to obtain or retain business or a business advantage iv. The European Union (EU) has made significant progress in enacting data protection legislation compared to other developed countries. v. In 2017, Donald Trump became the president after promising to decrease business regulation and eliminate environmental and financial regulations. vi. During the COVID-19 pandemic, which began in 2019 and spread into the United States in 2020, unemployment reached record levels, albeit temporarily. h. The 2020s and Beyond i. The regulatory environment is concerned with fair competition, eliminating corruption such as bribery, and truthful communications to consumers. ii. Environmental and social issues remain significant challenges for a variety of stakeholders. iii. Environmental issues are causing firms and governments to be more urgent in finding solutions to climate change. iv. Social issues related to gender equality, sexual harassment, mental health, and homelessness will continue to be major issues as well. Ethics initiatives and training in organizations will become more important and visible. v. Significant ethical issues relate to the growing use and capabilities of artificial intelligence (AI) and the acquisition and use of data. vi. In the 2020s, the organizational embrace of big data, the massive data files obtained from structured and unstructured corporate databases, continues to create privacy concerns and ethical issues.

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Instructor Manual For: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 1: The Importance of Business Ethics

IV. Developing Organizational and Global Ethical Cultures (LO 1-4, PPT Slide 32–35) i. The term ethical culture is the component of corporate culture that relates to the values, norms, artifacts, and established and enforced patterns of behavior employees use to identify and respond to ethical issues. ii. The goal of an ethical culture is to minimize the need for enforced compliance of rules and maximize the use of principles that contribute to ethical reasoning in difficult or new situations. iii. Corrupt organizational cultures support unethical behavior. These cultures have been identified as creating negative values and norms such as “the ends justify the means”. iv. Globally, businesses are working closely together to establish standards of acceptable behavior. v. Global Compact Set of 10 principles concerning human rights, labor, the environment, and anti-corruption; the purpose is to create openness and alignment among business, government, society, labor, and the United Nations.

V. The Benefits of Business Ethics (LO 1-5, PPT Slides 36–41) a. Ethics Contributes to Employee Commitment i. Employee commitment comes from workers who believe their future is tied to that of the organization and from a willingness to make personal sacrifices for the organization. ii. The more a company is dedicated to taking care of its employees, the more likely the employees will take care of the organization. iii. Social programs improving the ethical culture range from workfamily programs to stock ownership plans to community service. iv. A corporate culture that integrates strong ethical values and positive business practices has been found to increase group creativity and job satisfaction and decrease turnover. v. The ethical culture of a company matters to employees. One study found that a strong commitment to organizational values can strengthen a company’s organizational culture, and investing in shared values and ethical leadership can help reduce misconduct in the workplace. b. Ethics Contributes to Investor Loyalty i. Ethical conduct results in shareholder loyalty and contributes to success that supports even broader social causes and concerns. ii. Investors also recognize that an ethical culture provides a foundation for efficiency, productivity, and profits. Investors know, too, that negative publicity, lawsuits, and fines can lower stock prices, diminish customer loyalty, and threaten a company’s long-term viability. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance

iii. Investors look at the bottom line for profits or the potential for increased stock prices or dividends, and they also look for any potential flaws in the company’s performance, conduct, and financial reports. c. Ethics Contributes to Customer Satisfaction i. A company continues to develop and adapt products to keep pace with customers’ changing desires and preferences, it must also develop long-term relationships with its customers and stakeholders. ii. By focusing on customer satisfaction, a company continually deepens the customer’s dependence on the company, and as the customer’s confidence grows, the firm gains a better understanding of how to serve the customer so the relationship may endure. iii. The perceived ethicality of a firm is positively related to brand trust, emotional identification with the brand, and brand loyalty. iv. When an organization has a strong ethical environment, it usually focuses on the core value of placing customers’ interests first. d. Ethics Contributes to Profits i. A company cannot nurture and develop an ethical culture unless it has achieved adequate financial performance in terms of profits. ii. Ethical conduct toward customers builds a strong competitive position shown to positively affect business performance and product innovation. iii. Ample evidence shows being ethical pays off with better performance. Even the cost of equity and financing for socially responsible firms is less than for firms that do not engage stakeholders. iv. The World’s Most Ethical Companies index was developed through a methodology designed by a committee of leading attorneys, professors, and organization leaders. [return to top]

Instructor Manual Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance

TABLE OF CONTENTS Purpose and Perspective of the Chapter ......................................................................... 11 Chapter Objectives ............................................................................................................ 11 What’s New in This Chapter ............................................................................................. 11 Chapter Outline..................................................................................................................12

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance

PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of this chapter is to provide a comprehensive understanding of the roles of stakeholders in business ethics and their influence on corporate decisions. It describes social responsibility and corporate citizenship, emphasizing how businesses engage with social issues, consumer protection, sustainability, and corporate governance. This chapter examines the relationship between stakeholder orientation and social responsibility, and explores the role of corporate governance in structuring ethics and social responsibility within a company. Additionally, it lists the steps involved in implementing a stakeholder perspective and recognizes the challenges businesses face in balancing diverse stakeholder interests.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 2-1

Identify stakeholders’ roles in business ethics

2-2

Describe social responsibility and corporate citizenship

2-3

Discuss social responsibility issues related to social issues, consumer protection, sustainability, and corporate governance

2-4

Examine the relationship between stakeholder orientation and social responsibility

2-5

Explore the role of corporate governance in structuring ethics and social responsibility in business

2-6

List the steps involved in implementing a stakeholder perspective

2-7

Recognize the challenges of balancing stakeholder interests

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: ●

“Stakeholder Relationships, Social Responsibility, and Corporate Governance,” has been updated with new examples and issues.

[return to top]

a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Stakeholders Define Ethical Issues in Business (LO 2-1, PPT Slides 4–11) i. Stakeholders are customers, shareholders, employees, suppliers, government agencies, communities, and many others who have a “stake” or claim in some aspect of a company’s products, operations, markets, industry, and outcomes. ii. There are three approaches to stakeholder theory (1) The normative approach identifies ethical guidelines that dictate how firms should treat stakeholders.

(2) The descriptive approach focuses on the firm’s behavior and usually addresses how decisions and strategies are made for stakeholder relationships.

(3) The instrumental approach to stakeholder theory describes what happens if firms behave in a particular way. iii. Many firms experience conflicts with primary stakeholders, which can damage their reputations and shareholder confidence.

Starbucks, for example, has experienced negative publicity and employee walkouts due to its anti-union stance and activities. iv. Ethical misconduct and decisions that damage stakeholders generally affect the company’s reputation in terms of both investor and consumer confidence. v. Stakeholders apply their values and standards to diverse issues, including working conditions, consumer rights, environmental conservation, product safety, and proper information disclosure that may or may not directly affect an individual stakeholder’s own welfare. vi. Stakeholders provide resources critical to a firm’s long-term success. a. Identifying Stakeholders i. Primary stakeholders are those whose continued association and resources are critical to a firm’s survival.

(1) These include employees, customers, and shareholders, as well as the governments and communities that provide the necessary infrastructure. ii. Secondary stakeholders do not typically engage directly in transactions with a company and are therefore not essential to its survival.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance

(1) These include the media, trade associations, and special interest groups like the American Association of Retired People (AARP), a special interest group working to support retirees’ rights such as healthcare benefits. iii. Both primary and secondary stakeholders embrace specific values and standards that dictate acceptable and unacceptable corporate behaviors. iv. In this stakeholder interaction model, there are reciprocal relationships between the firm and a host of stakeholders. b. Stakeholder Orientation i. The degree to which a firm understands and addresses stakeholder demands can be referred to as a stakeholder orientation. ii. Orientation comprises three sets of activities: (1) The organization-wide generation of data about stakeholder groups and assessment of the firm’s effects on these groups.

(2) The distribution of this information throughout the firm (3) The responsiveness of the organization as a whole to this information. iii. Generating data about stakeholders begins with identifying the stakeholders relevant to the firm. iv. Given the variety of employees involved in the generation of information about stakeholders, the information gathered must be circulated throughout the firm. v. A stakeholder orientation is not complete without including activities that address stakeholder issues. vi. The organization-wide responsiveness to stakeholder intelligence consists of the actions and strategies the firm adopts to ensure it meets or exceeds stakeholder expectations and has a positive impact on stakeholder issues. vii. A stakeholder orientation can be viewed as a continuum in that firms are likely to adopt the concept to varying degrees.

II. Social Responsibility and Business Ethics (LO 2-2, PPT Slides 12–16) i. The terms ethics and social responsibility are often used interchangeably, but each has a distinct meaning. ii. Although corporate social responsibility (CSR) and business ethics are not the same, they are interrelated, and both are important to integrity. iii. Research indicates that ethical conduct in business has a stronger impact on both employee and brand attitudes than externally focused CSR initiatives. iv. There are four levels of social responsibility (1) At the most basic level, companies have an economic responsibility to be profitable at an acceptable level to satisfy shareholders and create value. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance

(2) Businesses are expected to obey all relevant laws and regulations (3) Business ethics, as previously defined, comprises principles and values that meet the expectations of stakeholders.

(4) Philanthropy relates to promoting human welfare and goodwill by making voluntary donations of money, employee time, and other resources that can contribute to communities and society. v. The term corporate citizenship is often used to express the extent to which businesses strategically meet the economic, legal, ethical, and philanthropic responsibilities placed on them by various stakeholders (1) Corporate citizenship has four interrelated dimensions: strong sustained economic performance, rigorous compliance, ethical actions beyond what the law requires, and voluntary contributions that advance the reputation and stakeholder commitment of the organization. vi. Reputation is one of an organization’s greatest intangible assets with tangible value.

(1) Corporate reputation, image, and brands are more important than ever and are among the most critical aspects of sustaining relationships with constituents including investors, customers, employees, media, and regulators.

(2) Even lower-level, frontline, and service contact employees identify and move with an organization if they perceive that management and the firm’s customers support social responsibility programs.

III. Issues in Social Responsibility (LO 2-3, PPT Slides 17–22) i. Social responsibility rests on stakeholder orientation ii. Each stakeholder is given due consideration. There needs to be a movement away from self-serving “co-optation” and a narrow focus on profit maximization. iii. Issues generally associated with social responsibility can be separated into four general categories: (1) Social issues are associated with the common good—the idea that because people live in a community, social rules should benefit the community. (a) Cybersecurity, especially as it relates to data privacy, is one of the most important social and ethical issues facing marketing today.

(2) The second major social responsibility issue is consumer protection, which often occurs in the form of laws passed to protect consumers from unfair and deceptive business practices. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance

(a) Deceptive advertising has been a hot topic in the consumer protection area. Covert marketing occurs when companies use promotional tools to make consumers believe the promotion is coming from an independent third party rather than from the company.

(3) The third major issue is sustainability. We define sustainability as the potential for the long-term well-being of the natural environment, including all biological entities, as well as the mutually beneficial interactions among nature and individuals, organizations, and business strategies.

(4) Corporate governance is the fourth major issue of CSR. Corporate governance involves the development of formal systems of accountability, oversight, and control. (a) Firms with strong corporate governance mechanisms that prompt them to disclose their social responsibility initiatives can establish legitimacy and trust among their stakeholders.

IV. Social Responsibility and the Importance of Stakeholder Orientation (LO 2-4, PPT Slide 23–25) i. Legal and economic responsibilities are generally accepted as the most important determinants of performance. ii. Friedman suggested that although those individuals guilty of wrongdoing should be held accountable, the market is a better deterrent to wrongdoing than new laws and regulations. iii. Friedman’s capitalism is a far cry from Adam Smith, one of the founders of capitalism. Smith introduced the concept of the invisible hand and explored the role of self-interest in economic systems. iv. The “common good is associated with six psychological motives and that each individual has to produce for the common good, with values such as Propriety, Prudence, Reason, Sentiment and promoting the happiness of mankind.” v. Evidence suggests caring about the well-being of stakeholders leads to increased profits.

V. Corporate Governance Provides Formalized Responsibility to Stakeholders (LO 2-5, PPT Slides 26–37) i. Accountability refers to how closely workplace decisions align with a firm’s stated strategic direction and its compliance with ethical and legal considerations. ii. Oversight provides a system of checks and balances that limit employees’ and managers’ opportunities to deviate from policies and strategies aimed at preventing unethical and illegal activities. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance

iii. Control is the process of auditing and improving organizational decisions and actions. iv. A clear delineation of accountability helps employees, customers, investors, government regulators, and other stakeholders understand why and how the organization identifies and achieves its goals. v. Corporate governance also helps establish the integrity of all relationships. vi. A governance system without checks and balances creates opportunities for top managers to put their own self-interests before those of important stakeholders. vii. Corporate governance normally involves strategic decisions and actions by boards of directors, business owners, top executives, and other managers with high levels of authority and accountability. a. Views of Corporate Governance i. To better understand the role of corporate governance in business today, we must consider how it relates to fundamental beliefs about the purpose of business. ii. From these assumptions, we can derive two major approaches to corporate governance: the shareholder model and the stakeholder model.

(1) The shareholder model of corporate governance is founded in classic economic precepts, including the goal of maximizing wealth for investors and owners. (a) A shareholder orientation should drive a firm’s decisions toward serving the best interests of investors. Underlying these decisions is a classic agency problem in which ownership (investors) and control (managers) are separate. (b) The shareholder model has been criticized for its singular purpose and focus because there are other ways of “investing” in a business.

(2) The stakeholder model of corporate governance adopts a broader view of the purpose of business. (a) Once the primary groups are identified, managers must implement the appropriate corporate governance mechanisms to promote the development of long-term relationships. (b) This approach entails creating governance systems that consider stakeholder welfare in tandem with corporate needs and interests. (c) Most firms are moving toward a more balanced stakeholder model, as they see that this approach sustains the relationships necessary for long-term success. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance

b. The Role of Boards of Directors i. For public corporations, boards of directors hold the ultimate responsibility for their firms’ success or failure, as well as the ethics of their actions. ii. This governing body is held responsible by amendments to the Federal Sentencing Guidelines for Organizations (FSGO) for creating an ethical culture that provides leadership, values, and compliance. iii. Fiduciaries have what is called a duty of care, or a duty of diligence, a legal obligation to make informed and prudent decisions and avoid behavior that could cause harm to others. iv. Directors also have a duty of loyalty, which means that all their decisions should be in the best interests of the corporation and its stakeholders. v. Directors are not generally held responsible for negative outcomes if they have been informed and diligent in their decision making. vi. One issue for boards of directors is the compensation the directors themselves receive. vii. Directors’ knowledge about their company’s investments, business ventures, and stocks and bonds creates issues that could violate their duty of loyalty. c. Greater Demands for Accountability and Transparency i. Directors today are increasingly chosen for their expertise, competence, and ability to bring diverse perspectives to strategic discussions. ii. Many of the corporate scandals uncovered in recent years might not have occurred if the companies’ boards of directors were better qualified, knowledgeable, and less biased. iii. The concept of board members being linked to more than one company is known as an interlocking directorate. iv. Antitrust laws prevent interlocking directorates for direct competitors in order to prevent anticompetitive collusion. v. Boards have also faced pressure from activist shareholders to make changes, ostensibly to benefit a firm’s shareholders. d. Executive Compensation i. One of the biggest issues corporate boards of directors face is executive compensation—how executives are rewarded for their leadership, organizational service, and performance. ii. How executives are compensated for their leadership and performance has become a controversial topic. iii. In the 1970s, CEO pay was influenced by internal equity, or how executive pay is related to employee pay. iv. Later, companies switched to external equity, basing executive pay on what CEOs at other companies were paid. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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v. vi.

vii.

viii.

ix.

(1) This shift caused executive compensation to soar, and it continues to increase today.

Concerns often center on the relationship between the highestpaid executives and median employee wages in the company.

If this ratio is perceived as too large, critics believe employees are not being compensated fairly or high executive salaries represent an improper use of company resources.

Executives assume so much risk on behalf of the company, it can be argued that they deserve the rewards that follow from strong company performance.

Executive compensation is a difficult but important issue for boards of directors and other stakeholders to consider because it receives much attention in the media, sparks shareholder concern, and is hotly debated in discussions of corporate governance.

Another issue is whether performance-linked compensation encourages executives to focus on short-term performance at the expense of long-term growth.

VI. Implementing a Stakeholder Perspective (LO 2-6, PPT Slides 38–42) i. There are different approaches to this issue, we provide basic steps found effective in utilizing the stakeholder framework to manage responsibility and business ethics. a. Step 1: Assessing the Corporate Culture i. The purpose of this first step is to identify the organizational mission, objectives, values, norms, and behavior likely to have implications for social responsibility. ii. Relevant existing values and norms are those that specify the stakeholder groups to engage and stakeholder issues deemed most important by the organization. b. Step 2: Identifying Stakeholder Groups i. Stakeholders have a level of power over a business because they are in the position to withhold organizational resources to some extent. ii. Companies can be transparent or can use various avenues, including technology, to avoid communication and interaction. iii. In managing this stage, it is important to recognize stakeholder needs, wants, and desires. c. Step 3: Identifying Stakeholder Issues i. Consists of understanding the main issues of concern to these stakeholders. ii. Conditions for collaboration exist when problems are so complex that multiple stakeholders are required to resolve the issue, and adversarial approaches to problem solving are clearly inadequate. iii. The weight given to ethical issues may vary by society. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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d. Step 4: Assessing Organizational Commitment to Stakeholders and Social Responsibility i. Generating information about social responsibility among a variety of stakeholders in and around an organization. ii. This general definition will then be used to evaluate current practices and to select concrete social responsibility initiatives. iii. It has been found that social responsibility disclosures in company annual reports are directly related to the quality of corporate governance. e. Step 5: Identifying Resources and Determining Urgency i. The prioritization of stakeholders and issues and the assessment of past performance lead to the allocation of resources. ii. Two main criteria can be considered: (1) The level of financial and organizational investments required by different actions.

(2) The urgency when prioritizing social responsibility challenges. iii. When the challenge under consideration is viewed as significant and stakeholder pressures on the issue can be expected, the challenge is considered urgent. f. Step 6: Gaining Stakeholder Feedback i. Stakeholder feedback is acquired through a variety of means.

(1) First, stakeholders’ general assessment of a firm and its practices can be obtained through satisfaction or reputation surveys.

(2) Second, to gauge stakeholders’ perceptions of a firm’s impacts concerning specific issues, stakeholder-generated content such as social-media posts, blogs, websites, podcasts, and newsletters can be assessed.

(3) Third, more formal research may be conducted using focus groups, observation, and surveys.

VII. Contributions of a Stakeholder Perspective (LO 2-7, PPT Slides 43–44) i. While we provide a framework for implementing a stakeholder perspective, balancing stakeholder interests requires information and good judgment. ii. When businesses attempt to provide what consumers want, broader societal interests can create conflicts. iii. Balancing stakeholder interests clearly can be a challenging process. [return to top]

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 3: Sustainability: Social and Ethical Dimensions

Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 3: Sustainability: Social and Ethical Dimensions

TABLE OF CONTENTS Purpose and Perspective of the Chapter .........................................................................21 Chapter Objectives ............................................................................................................21 What’s New in This Chapter .............................................................................................21 Chapter Outline ................................................................................................................. 22

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 3: Sustainability: Social and Ethical Dimensions

PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of this chapter is to provide a comprehensive understanding of the roles of stakeholders in business ethics and their influence on corporate decisions. It describes social responsibility and corporate citizenship, emphasizing how businesses engage with social issues, consumer protection, sustainability, and corporate governance. This chapter examines the relationship between stakeholder orientation and social responsibility, and explores the role of corporate governance in structuring ethics and social responsibility within a company. Additionally, it lists the steps involved in implementing a stakeholder perspective and recognizes the challenges businesses face in balancing diverse stakeholder interests.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 3-1

Define sustainability

3-2

Relate sustainability to ethical decision making and social responsibility

3-3

Examine global environmental issues related to climate change, the atmosphere, water, land, and biodiversity

3-4

Review environmental legislation related to sustainability

3-5

Describe alternative forms of energy

3-6

Evaluate business responses to sustainability related to green marketing and greenwashing

3-7

Understand how a firm’s evaluation of and reporting on environmental, social, and governance (ESG) can provide a framework for evaluating its priorities in these areas

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: 

“Sustainability: Social and Ethical Dimensions,” has been significantly reorganized and updated with new examples, data, and issues related to sustainability and the environment.

[return to top]

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 3: Sustainability: Social and Ethical Dimensions

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Defining Sustainability (LO 3-1, PPT Slides 4–5) i. From a strategic business perspective, sustainability is the potential for the long-term wellbeing of the natural environment, including all biological entities, as well as mutually beneficial interactions among nature and individuals, organizations, and business strategies. ii. Sustainability includes the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles in the maintenance of the natural environment. iii. Sustainable development has become a top concern for many businesses as it involves meeting the needs of the present without compromising the ability of future generations to meet their own needs.

II. How Sustainability Relates to Ethical Decision Making and Social Responsibility (LO 3-2, PPT Slides 6–10) i. Sustainability falls into the social responsibility domain of maximizing positive and minimizing negative impacts on stakeholders. ii. Sustainability relates to ethical decision making in that business decisions about sustainability will be assessed as right or wrong by stakeholders. iii. A corporate culture that fosters a sustainability agenda or a CSR report can create long-term favorable stakeholder responses. iv. CSR performance can increase employees’ company identification and commitment. v. Values are an important part of an ethical culture and support an organization’s sustainability agenda. vi. Sustainability, social responsibility, and ethics should not be used interchangeably. vii. In practice, sustainability is often associated with CSR. Sustainability refers to those business practices that affect the environment—specifically biological entities, land, water, and air. viii. The concept of CSR—and, by relation, sustainability—has become a major corporate initiative because of stakeholder expectations. ix. There are four reasons social responsibility has become such an issue for organizations. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 3: Sustainability: Social and Ethical Dimensions

(1) First, socially responsible activities such as sustainable business practices can create competitive advantages.

(2) Second, both positive and negative information about products and organizations are more accessible than ever before.

(3) Third, organizations can use their products and brand identity to create social value, quality, and consumer loyalty.

(4) Finally, in this interconnected society, companies use their sustainable and socially responsible decisions to differentiate their firms and promote their products; III. Global Environmental Issues (LO 3-3, PPT Slides 11–19) i. The protection of air, water, land, biodiversity, and renewable natural resources emerged as major issues in the twentieth century in the face of increasing evidence that humankind was putting pressure on the long-term sustainability of these resources. ii. Some nonprofit organizations have stepped forward to provide leadership in gaining the cooperation of diverse groups in responsible business activities. a. Climate Change i. Climate change refers to long-term variations in average weather patterns. ii. The Earth has indeed experienced natural heating and cooling cycles for millennia. iii. One attempt at addressing climate change was the Kyoto Protocol, an international treaty, signed in 1997, meant to curb global greenhouse gas emissions by having countries voluntarily reduce national outputs. iv. The Doha Amendment was an extension to the Kyoto Protocol that focused on ensuring implementation agreements and included an agreement to consider loss and damage in developing countries that are vulnerable to the adverse effects of climate change. v. In the United States, the Affordable Clean Energy Rule (ACE) was issued by the Environmental Protection Agency (EPA) in 2019 to establish emission guidelines for states to use when developing plans to limit carbon dioxide at their coal-fired electric generating units. vi. A cap-and-trade program sets carbon emissions limits (caps) for businesses, countries, or individuals. vii. To improve on the Kyoto Protocol, world leaders in 2015 signed the Paris Agreement, which requires virtually all the world’s nations to curb their greenhouse gas emissions to hold rising global temperatures to 1.5° Celsius (3.6° Fahrenheit). a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 3: Sustainability: Social and Ethical Dimensions

b. Atmospherics i. Air Pollution: As emerging economies become more industrialized, air pollution is an increasingly serious issue. ii. Air pollution typically arises from three different sources: stationary sources such as factories and power plants; mobile sources such as cars, trucks, planes, and trains; and natural sources such as windblown dust and volcanic eruptions. iii. Recently, an air pollution concern emerged with the increased use of hydraulic fracturing, or fracking. Fracking occurs when water, chemicals, and sand are pumped into deep underground shale rock formations at high pressure. iv. Acid Rain: In addition to the health risks posed by air pollution, when nitrous oxides and sulfur dioxides are emitted from manufacturing facilities and then exposed to air and rain, they form new compounds, resulting in what is commonly called acid rain. v. The vital aspect of this type of pollution is that one country can produce it while a neighboring country can suffer its negative impacts. c. Water i. Water pollution is one of the biggest contributors to illnesses in developing countries. Chemicals found in commonly used fertilizers and pesticides can drain into water supplies with each rainfall. ii. For some corporations, the sustainability of water has become a major consideration. iii. While environmental groups in the United States criticize U.S. water policy, special interests make it even more difficult to regulate water pollution in other parts of the world. iv. Water Scarcity: In addition to concerns about the quality of water, some parts of the globe are increasingly worried about its quantity. v. Water scarcity harms poor and marginalized groups harder than others, requiring them to spend more time and resources to obtain water and threatening their health and livelihoods. vi. For many companies that want to be proactive, the first step is identifying the greatest users of water throughout their systems, and then developing water-stewardship strategies. d. Land i. Land pollution results from the dumping of residential and industrial wastes, strip mining, and poor forest conservation. ii. Waste Management (1) One of the biggest factors in land pollution is the use of landfills for waste management. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(2) Waste-to-energy, also called bioenergy or biomass, is used in many European plants to treat household waste and create energy from it.

(3) Electronic waste (e-waste)—a result of rapid innovations in computer hardware, which render machines obsolete after as little as 18 months—has become a big problem because it can release harmful toxins into the air and water. iii. Deforestation: The world’s forests, which cover more than 30 percent of the planet, are being destroyed.

(1) The FSC seeks to coordinate forest management around the world and develop a uniform set of standards. iv. Urban Sprawl: Urban sprawl began in the United States with the post–World War II building boom.

(1) Urban sprawl consumed wildlife habitat, wetlands, and farmland and has also contributed to land, water, and especially air pollution. e. Biodiversity i. Deforestation, pollution, development, and urban sprawl put increasing pressure on humans, wildlife, plants, and their habitats. ii. Genetically modified organisms (GMOs) are created through manipulating plant and animal DNA to produce a desired effect such as resistance to pests and viruses, drought resistance, or high crop yield. iii. Despite the controversy, interest in GM products remains high. iv. The long-term impact of this genetic tinkering is not known, although the Food and Drug Administration (FDA) has deemed GM food safe to consume. v. Many consumers are turning toward organic foods, creating a market opportunity for organic and all-natural grocery chains.

IV. Environmental Legislation (LO 3-4, PPT Slide 20–26) a. Environmental Protection Agency (EPA) i. The EPA was created in 1970 to coordinate environmental agencies involved in conducting environmental research, providing assistance in fighting pollution, and enforcing the nation’s environmental laws. ii. Establishing the EPA was the culmination of a decade of growing protests over the deterioration of environmental quality. iii. The agency’s mission is to “protect human health and the environment” by working to ensure that (1) Americans have clean air, land, and water (2) Efforts to reduce environmental risks are based on reliable scientific information a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 3: Sustainability: Social and Ethical Dimensions

(3) Federal laws related to protecting human health and the environment are administered and enforced fairly, effectively, and as intended (4) Factors such as natural resources, human health, economic growth, energy, transportation, agriculture, industry, and international trade are similarly considered in establishing environmental policy (5) All members of society, from individuals to businesses, have access to accurate information (6) Contaminated lands and toxic sites are cleaned up (7) Chemicals in the marketplace are reviewed for safety. b. Environmental Regulations i. The Clean Air Act (CAA) is a comprehensive federal law that regulates atmospheric emissions from a variety of sources. ii. The passage of the Endangered Species Act established a program to protect threatened and endangered species as well as the habitats in which they live. iii. Toxic Substances Control Act (TSCA) empowers the EPA with the ability to track the 75,000 industrial chemicals currently produced or imported into the United States. iv. In 1977, Congress amended the Federal Water Pollution Control Act of 1972 as the Clean Water Act (CWA). This law granted the EPA the authority to establish effluent standards on an industry basis and continued the earlier law’s requirements to set water quality limits for all contaminants in surface waters. v. The Pollution Prevention Act (1990) focuses on reducing pollution through cost-effective changes to production, operation, and raw materials use.

(1) Two competitive certification groups (a) Leadership in Energy and Environmental Design (LEED) is a certification program that recognizes sustainable building practices and strategies. (b) Green Globes is an alternative to LEED, giving officials an alternative for government-funded construction. vi. In 1996, the Food Quality Protection Act amended the Federal Insecticide, Fungicide, and Rodenticide Act and the Federal Food, Drug, and Cosmetic Act to fundamentally change the way the EPA regulates pesticides. vii. Signed into law in 2005, the Energy Policy Act’s focus is on promoting alternative forms of energy in the desire to lessen U.S. dependence on foreign oil.

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V. Alternative Energy Sources (LO 3-5, PPT Slides 27–34) a. Nuclear Power i. Countries throughout Europe managed to greatly reduce their carbon emissions through the implementation of nuclear power plants, yet this form of power remains controversial. ii. Because of the danger associated with nuclear meltdowns and radioactive waste disposal, nuclear power earned a bad reputation in the United States. iii. Nuclear power is pollution-free and cost-competitive. iv. Due to the engineering and time, as well as regulatory requirements in building nuclear power plants, nuclear power is less competitive with other sources of electricity, such as gas, coal, and renewable energy sources, such as solar power. v. Critics are concerned with the safety of nuclear power plants and the disposal of waste. vi. Because the generation of nuclear power gives off radiation, the safety of workers and the transport of nuclear waste is a prime concern. b. Wind Power i. Wind power holds great promise for the United States and has already taken off in many countries. ii. Wind is one of the fastest-growing and lowest-cost sources of electricity in the United States, and advances in technology have reduced the cost of wind energy generation. iii. Incentives from the Inflation Reduction Act of 2022 are expected to boost wind power generation significantly, both on land and just offshore, as well as spur the building of transmission lines. iv. Wind power also offers opportunities for businesses, even those for whom alternative energy might otherwise be perceived as a threat. c. Hydropower i. From the water-powered mills of centuries past to modern hydroelectric dams, water is a powerful renewable energy source that requires no fuel to produce. ii. One of the major downsides is the destruction of wildlife and human habitats when valleys are flooded using dams. iii. Hydroelectricity also disrupts the life cycles of aquatic life. iv. Its use also depends on reliable water levels, which is no longer a given due to the effects of climate change. v. However, the use of hydroelectric power decreases greenhouse gas emissions and air pollution. d. Solar Power i. Solar power is 100 percent renewable energy that can be converted into electricity through the use of either photovoltaic cells (solar cells) in solar panels on homes, businesses, and other structures or solar farms—fields of solar panels. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. The major disadvantages of solar power are that the panels are expensive to purchase and install, and the infrastructure for mass production of solar panels is not in place in many locations. iii. Solar energy is becoming an increasingly viable alternative for businesses to cut their pollution and emissions. e. Biomass and Biofuels i. Biomass as a source of energy comes from burning timber, agricultural, and other biotic (from plants and animals) waste, particularly to heat buildings. ii. Biomass can also be turned into liquid or gas fuels, such as ethanol. The use of ethanol is controversial, however. iii. Critics argue that manufacturing ethanol requires a lot of energy and is not much more sustainable than oil. iv. Opponents believe it decreases the world’s food supply and increases food prices. v. Some companies are beginning look at alternatives to corn ethanol, such as algae and nonedible plants like grasses. f. Geothermal Power i. Geothermal energy comes from the natural heat inside the Earth, which is extracted by drilling into steam beds. ii. Geothermal energy provides a constant source of heat, making it a more dependable energy source than some other forms of alternative energy. iii. Geothermal plants also emit fewer carbon emissions than coalpowered plants. iv. Geothermal energy is expensive, and suitable geothermal drilling sites are not available everywhere. v. Due to its reliability, geothermal power could be a good substitute for natural gas in powering buildings and homes in some parts of the United States.

VI. Business Response to Sustainability Issues (LO 3-6, PPT Slides 35–38) i. Many businesses today use Environmental, Social, and Governance (ESG) factors to report to stakeholders on their impacts and risks as they relate to protecting the environment, contributing to social causes, and engaging in responsible and ethical conduct. ii. Economic performance is still a necessary bottom line. Studies suggest improving a company’s environmental performance can in fact increase revenues and reduce costs. iii. Better environmental performance can increase revenue in three ways: through better access to certain markets, differentiation of products, and the sale of pollution-control technology. a. Green Marketing i. Green marketing is a strategy involving stakeholder assessment to create meaningful long-term relationships with customers while maintaining, supporting, and enhancing the natural environment. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. Producing clothing uses a lot of energy and generates greenhouse gases. Clothing firms are encouraged to cut back sharply on water and chemical use as well as increase the use of renewable energy. iii. The European Union supports the Eco-label program—which has been used in product categories as diverse as refrigerators, mattresses, vacuum cleaners, footwear, and televisions. iv. Consumers who desire green products find that green advertising provides more informational utility than it does for other consumers. b. Greenwashing i. Greenwashing involves misleading a consumer into thinking a good or service is more environmentally friendly than it really is. ii. Greenwashing ranges from making environmental claims required by law and therefore irrelevant (e.g., CFC-free) to puffery (exaggerating environmental claims) to outright fraud. iii. The most common reason for greenwashing is to attract environmentally conscious consumers. iv. Many consumers do not find out about the false claims until after the purchase. v. Greenwashing is negatively related to financial performance; therefore, companies that engage in greenwashing can expect to receive criticism and decreased sales in the long run. vi. To reduce this ambiguity, the Federal Trade Commission has issued green guidelines to help marketers determine the truthfulness of “green” claims. vii. Greenwashing has been found to destroy consumer trust and create consumer confusion and perceived risk associated with green products.

VII. Strategic Implementation of Environmental Responsibility (LO 3-7, PPT Slides 39–46) i. The adoption of sustainability practices can be a strategy for differentiation that can lead to good financial performance. ii. Businesses need to be holistic in implementing sustainability practices. Improvements to sustainability can cause other problems to arise, especially when companies are pressured to act on just one aspect of sustainability. This is called singleimpact-driven decisions. iii. To accurately evaluate and justify decisions, a company must be aware of how an investment affects supply chain management. a. Recycling Initiatives i. Many organizations engage in recycling—the reprocessing of materials, especially steel, aluminum, paper, glass, rubber, and some plastics—for reuse. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. Paper is not the only recyclable material, however. As mentioned earlier, food waste—such as grains, vegetables, and animal bones—can be loaded into grinders and burned to create renewable energy. iii. Companies and local and regional governments are finding ways to recycle water to avoid discharging chemicals into rivers and streams and preserve diminishing water supplies. b. Stakeholder Assessment i. Stakeholder assessment is an important part of a highcommitment approach to environmental issues. This process requires acknowledging and actively monitoring the environmental concerns of all legitimate stakeholders. ii. To make accurate assumptions about stakeholder interests, managers need to conduct research, assess risks, and communicate with stakeholders about their respective concerns. iii. There are specific regulations and legal requirements that govern some aspects of stakeholder relationships, such as air and water quality. c. Risk Analysis i. Through industry and government research, an organization can usually identify environmental issues that relate to manufacturing, marketing, and consumption and use patterns associated with its products. ii. Through risk analysis, it is possible to assess the environmental risks associated with business decisions. iii. The real difficulty is measuring the costs and benefits of environmental decisions, especially in the eyes of interested stakeholders. Research studies often conflict, adding to the confusion and controversy over sustainability. iv. Through risk management, it is possible to quantify the tradeoffs to determine whether to accept or reject environmentally related activities and programs. v. The important point for high-commitment organizations is to continue to evaluate the latest information and maintain communication with all stakeholders. vi. A high-commitment organization will incorporate new information and insights into the strategic planning process as it becomes available. d. The Strategic Environmental Audit i. Organizations highly committed to sustainability and environmental responsibility may conduct an audit of their efforts and report the results to all interested stakeholders. ii. Such organizations may use globally accepted standards, such as ISO 14000, as benchmarks in a strategic environmental audit. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(1) The International Organization for Standardization (ISO) developed ISO 14000 as a comprehensive set of environmental standards that encourage a cleaner, safer, and healthier world.

(2) The goal of the ISO 14000 standard is to promote a common approach to environmental management and help companies attain and measure improvements in environmental performance. iii. The Environmental, Social, and Governance (ESG) framework provides a useful lens for companies to evaluate their priorities in these three areas relative to their industry, investor priorities, peer comparisons, and the cultural and leadership priorities of the organization. iv. The ESG framework is oftentimes related to investment products that stock analysts and other stakeholders assess to be ethical and socially responsible.

(1) Using the ESG framework as a risk-management tool can help businesspeople avoid investing in companies that have engaged in unethical or illegal behavior. [return to top]

Instructor Manual Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 4: The Institutionalization of Business Ethics

TABLE OF CONTENTS Purpose and Perspective of the Chapter ........................................................................ 32 Chapter Objectives ........................................................................................................... 32 What’s New in This Chapter ............................................................................................ 32 Chapter Outline ................................................................................................................. 33

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 4: The Institutionalization of Business Ethics

PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of the chapter is to provide a comprehensive overview of ethical boundaries within organizations, distinguishing between mandated, core, and voluntary conduct. It discusses legal compliance requirements in areas such as competition, consumers, and safety, and explains the Sarbanes-Oxley (SOX) legislation and its implementation by the SEC. This chapter also covers the Dodd-Frank Wall Street Reform Act, focusing on key provisions, and highlights the Federal Sentencing Guidelines for Organizations (FSGO) recommendations for fostering an ethical corporate culture. Additionally, it examines core practices, social responsibility, and the role of self-regulation in preventing misconduct with government support.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 4-1

Distinguish between mandated, core, and voluntary boundaries of ethical conduct

4-2

Discuss mandated requirements for legal compliance in specific subject matter areas related to competition, consumers, and safety

4-3

Explain the requirements of the Sarbanes–Oxley (SOX) legislation and implementation by the Securities and Exchange Commission (SEC)

4-4

Describe the Dodd–Frank Wall Street Reform and Consumer Protection Act along with some of its major provisions

4-5

Outline the recommendations and incentives for developing an ethical corporate culture contained in the Federal Sentencing Guidelines for Organizations (FSGO)

4-6

Summarize appropriate core practices and their relationship to social responsibility

4-7

Examine how industries can use self-regulation as a core practice to address misconduct, with the support of government agencies

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition:  “The Institutionalization of Business Ethics,” examines key elements of core or best practices in corporate America today along with legislation and regulation requirements that support business ethics initiatives.  The chapter is divided into three main areas: mandated, core, and voluntary practices. [return to top] a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual: Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 4: The Institutionalization of Business Ethics

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Managing Ethical Risk Through Mandated, Core, and Voluntary Practices (LO 4-1, PPT Slides 4–7) i. Mandated boundaries are externally imposed descriptions of appropriate conduct—such as laws, rules, and regulations. ii. Failure to adhere to antitrust and consumer protection laws results in civil and criminal penalties. iii. Laws and regulations are important in business ethics because they require absolute compliance. iv. Core practices are methods and strategies that are well documented and widely accepted and applied. v. The Better Business Bureau (BBB) is a leading self-regulatory body that provides directions for managing customer disputes and reviews advertising cases. vi. Core practices are appropriate and common practices that have industry acceptance and meet societal expectations.

(1) Norms are behavioral expectations that are not legally required, but there can be consequences for violating these expectations. vii. Voluntary boundaries are management-initiated prescriptions of conduct stemming from a firm’s beliefs, values, and voluntary contractual obligations. viii. Most firms engage in strategic philanthropy, giving back to communities and causes. ix. Organizations need to maintain an ethical culture and manage stakeholder expectations for appropriate conduct. x. Established laws and regulatory decisions leave limited flexibility to organizations in adhering to these standards. xi. As top managers have been required to increase transparency and complete disclosures, they have become more concerned about ethical risk and established programs to address it.

II. Mandated Requirements for Legal Compliance (LO 4-2, PPT Slides 8–15) i. Laws regulating business conduct are passed because some stakeholders believe businesses cannot be trusted to do what is right in certain areas, such as consumer safety and environmental protection. ii. Civil law defines the rights and duties of individuals and organizations (including businesses). a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iii. Criminal law not only prohibits specific actions—such as fraud, theft, or securities trading violations—but also imposes fines or imprisonment as punishment for breaking the law. iv. The primary difference between criminal and civil law is that the state or nation enforces criminal laws, whereas individuals (generally, in court) enforce civil laws. v. The Consumer Financial Protection Bureau was established through the Dodd–Frank Act after the latest financial crisis, which resulted in many consumers losing their homes. vi. The primary method of resolving conflicts and serious business ethics disputes is through civil lawsuits, or when one individual or organization uses civil laws to take another individual or organization to court. vii. Most of the laws and regulations that govern business activities fall into one of five groups: (1) Regulation of competition (2) Protection of consumers (3) Promotion of equity and safety (4) Protection of the natural environment (5) Incentives to encourage organizational compliance programs to deter misconduct a. Laws Regulating Competition i. When businesses compete unfairly, legal and social responsibility issues can result. ii. Size frequently gives some companies an advantage over others. iii. Competitive strategies may focus on weakening or driving a competitor out of business, ultimately reducing consumer choice. iv. The primary objective of U.S. antitrust laws is to distinguish competitive strategies that enhance consumer welfare from those that reduce it. v. Intense competition may lead companies to resort to corporate espionage to gain an edge. vi. Laws have been passed to prevent the establishment of monopolies, inequitable pricing practices, and other practices that reduce or restrict competition among businesses.

(1) These laws are sometimes called procompetitive legislation. b. Laws Protecting Consumers i. Laws that protect consumers require businesses to provide accurate information about their goods and services and follow safety standards. ii. Large groups of people with specific vulnerabilities have been granted special levels of legal protection relative to the general population. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iii. One organization that exists with the sole purpose of protecting consumers is the FTC’s Bureau of Consumer Protection, which protects consumers against unfair, deceptive, or fraudulent practices. iv. The Food and Drug Administration (FDA) regulates food safety, human drugs, tobacco, dietary supplements, vaccines, veterinary drugs, medical devices, cosmetics, products that give off radiation, and biological products. c. Laws Promoting Equity and Safety i. Title VII of the Civil Rights Act, originally passed in 1964 and amended several times since. Title VII specifically prohibits discrimination in employment based on race, sex, religion, color, or national origin. ii. Court clarified through the Bostock v Clayton County decision that Title VII also prohibits discrimination against individuals identifying as LGBQT+. iii. The Civil Rights Act also created the Equal Employment Opportunity Commission (EEOC) to enforce the provisions of Title VII. iv. The Equal Pay Act of 1963 mandates that women and men who do equal work must receive equal pay. v. Occupational Safety and Health Act of 1970, which mandates that employers provide safe and healthy working conditions for all workers.

(1) The Occupational Safety and Health Administration (OSHA) enforces the act and makes regular surprise inspections to ensure businesses maintain safe working environments.

III. The Sarbanes–Oxley (SOX) Act (LO 4-3, PPT Slides 16–22) i. In 2002, largely in response to widespread corporate accounting scandals, Congress passed the Sarbanes–Oxley Act (SOX) to establish a system of federal oversight of corporate accounting practices. ii. In addition to making fraudulent financial reporting a criminal offense and strengthening penalties for corporate fraud, the law requires corporations to establish codes of ethics for financial reporting and develop greater transparency in financial reporting to their investors and other stakeholders. iii. Sarbanes–Oxley aims to promote transparency, reduce conflicts of interest, and increase accountability. iv. The complex law imposed additional requirements and costs on executives. v. There are major benefits to the law, especially Section 406, which requires a code of ethics for top financial and accounting officers. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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a. Public Company Accounting Oversight Board (PCAOB) i. Public Company Accounting Oversight Board (PCAOB) monitors the accounting firms auditing public corporations and establishes standards and rules for auditors in accounting firms. ii. SOX requires corporations to take greater responsibility for their decisions and to provide leadership based on ethical principles. iii. The PCAOB has faced several challenges throughout the years, including a lawsuit claiming the board was unconstitutional. iv. The SEC has worked to overhaul PCAOB quality control rules to improve the board and its inspections. b. Auditor and Analyst Independence i. The Sarbanes–Oxley Act seeks to eliminate conflicts of interest among auditors, security analysts, brokers, dealers, and the public companies they serve to ensure enhanced financial disclosures of public companies’ true conditions. ii. Section 201 prohibits registered public accounting firms from providing both nonaudit and audit services to a public company. iii. National securities exchanges and registered securities associations have adopted similar conflict-of-interest rules for security analysts, brokers, and dealers who recommend equities in research reports. c. Whistleblower Protection i. Employees of public companies and accounting firms are expected to report unethical behavior. ii. The Sarbanes–Oxley Act intends to motivate employees to do so through whistleblower protections that prohibit employers from taking retaliatory actions against employees who report violations. iii. Whistleblowers in several high-profile cases in the early 2000s warned auditors and government officials of misconduct at their companies; several of the whistleblowers were fired or, after losing lawsuits filed against the offending company, were forced to pay large sums in back pay and attorney’s fees. d. Cost of Compliance i. The national cost of compliance with the Sarbanes–Oxley Act can be extensive and includes internal costs, external costs, and auditor fees. ii. Studies show that although compliance costs were high shortly after SOX was passed, they have declined over the years. iii. Companies are increasingly applying automation tools and technology to support their internal controls efficiently to simplify compliance and reduce associated expenses.

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IV. Dodd–Frank Wall Street Reform and Consumer Protection Act (LO 4-4, PPT Slide 23–27) i. The Dodd–Frank Wall Street Reform and Consumer Protection Act seeks to improve financial regulation, increase oversight of the industry, and prevent the types of risk taking, deceptive practices, and lack of oversight that led to the 2008–2009 financial crisis, also known as the Great Recession. ii. Critics have several concerns, including claims that the rules on derivatives are too burdensome, the belief that such wide-scale changes will create chaos in the regulatory system, and the fear the government will gain too much power. a. Financial Agencies Created by the Dodd–Frank Act i. One provision of the Dodd–Frank Act created two new financial agencies (1) Financial Research is charged with improving the quality of financial data available to government officials and creating a better system of analysis for the financial industry.

(2) The FSOC is responsible for maintaining the stability of the financial system in the United States by monitoring the market, identifying threats, promoting market discipline among the public, and responding to major risks that threaten stability. b. Consumer Financial Protection Bureau i. The Dodd–Frank Act created the Consumer Financial Protection Bureau (CFPB), an independent agency within the Federal Reserve System that “regulate[s] the offering and provision of consumer financial products or services under the Federal consumer financial laws”. ii. Average investors often do not understand the complex financial products they purchase, which is why the CFPB was created. iii. The CFPB has supervisory power over credit markets, as well as the authority to monitor lenders and ensure they comply with the law. iv. The CFPB also has the responsibility to curtail unfair lending and credit card practices, enforce consumer financial laws, and check the safety of financial products before their launch into the market. v. The goal of the CFPB is to create a more equitable and transparent financial environment for consumers. vi. Financial institutions are concerned the bureau’s powers could lead to strict sanctions or burdensome regulations.

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c. Whistleblower Rewards Program i. Whistleblowers who report financial fraud to the Securities and Exchange Commission and Commodities Exchange Commission are eligible to receive 10 to 30 percent of fines and settlements if their reports result in convictions of more than $1 million in penalties. ii. The SEC has awarded more than $1 billion since the program began; actions from whistleblower tips have netted $6 billion in financial remedies. iii. The SEC continues to attract a high volume of tips, though many alleged whistleblowers merely seek a monetary reward. Still, the SEC is optimistic, suggesting the number of credible whistleblower complaints will increase dramatically.

V. Federal Sentencing Guidelines for Organizations (LO 4-5, PPT Slides 28–35) i. Congress passed the FSGO in 1991 to create an incentive for organizations to develop and implement programs designed to foster ethical and legal compliance. ii. These guidelines, developed by the U.S. Sentencing Commission, apply to all felonies and class A misdemeanors committed by employees in association with their work. iii. The commission outlined the following seven key criteria companies must implement to establish an effective compliance program: (1) A firm must develop and disseminate effective compliance standards and procedures (2) There must be oversight by high-ranking personnel in the organization who are known to abide by the legal and ethical standards of the industry.

(3) No one with a known propensity to engage in misconduct should be put in a position of authority (4) Communications system must be in place to disseminate standards and procedures to all levels of employees (5) Organizational communications should include a way for employees to report misconduct without fearing retaliation (6) If misconduct is detected, the firm must take appropriate and fair disciplinary action (7) After misconduct has been discovered, the organization must take steps to respond to and prevent similar offenses in the future iv. A 2005 Supreme Court decision held that the federal sentencing guidelines are not mandatory but should serve only as recommendations for judges to use in their decisions.

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v. The 2007–2008 amendments to the FSGO extend the required ethics training to members of the board or governing authority, high-level personnel, employees, and the organization’s agents. vi. The 2010 amendment also made it possible for companies to have their penalties for misconduct reduced if their ethics programs met four conditions.

(1) The organization itself must have discovered the misconduct before it was discovered externally.

(2) The violation should be promptly reported to regulators (the expanded definition of the word “prompt” helps to clarify this condition).

(3) Nobody with operational responsibility can be involved in the misconduct.

(4) The compliance officer must have direct access to the governing authority to report the misconduct. vii. In 2014, the U.S. Sentencing Commission focused its attention on the sharing of best practices among regulatory and law enforcement agencies. viii. In 1999, the Holder memo (Deputy Attorney General Eric Holder’s 1999 memo to U.S. attorneys) provided guidance to prosecutors and judges in cases where corporations or their managers were prosecuted.

VI. Core Practices (LO 4-6, PPT Slides 36–41) i. The focus of core practices is on developing structurally sound organizational practices and integrity for financial and nonfinancial performance measures rather than on an individual’s morals. ii. The Open Compliance Ethics Group (OCEG) developed benchmarking studies that are available to organizations wanting to conduct self-assessments to compare the elements of their compliance programs to similar firms. iii. Core practices usually exist and can be identified in every industry. a. Voluntary Responsibilities i. Businesses that address their voluntary responsibilities improve their communities, reduce government involvement by assisting stakeholders, develop employee leadership skills, and foster an ethical culture and values that deter organizational misconduct. ii. The most common way businesses demonstrate their voluntary responsibilities is through donations to local and national charitable organizations. b. Cause-Related Marketing i. Cause-related marketing ties an organization’s product(s) directly to a social concern through a marketing program. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. With cause-related marketing, a company donates a percentage of a product’s sales to a cause that appeals to the target market. iii. Cause-related marketing also affects buying patterns. iv. Consumers may perceive a company’s cause-related campaign as merely social washing, a publicity stunt, especially if they cannot understand the link between the campaign and the company’s business practices. v. Cause-related campaigns are often for short durations, so consumers may not adequately associate the business with a particular cause. c. Strategic Philanthropy i. Strategic philanthropy is the synergistic and mutually beneficial use of an organization’s core competencies and resources to focus on key stakeholders to bring about organizational and societal benefits. ii. Companies that utilize strategic philanthropy recognize that companies do not operate independently of society and that improved social conditions could lead to improved economic benefits. iii. Strategic philanthropy can help organizations stand out from similar firms to give them a competitive advantage. iv. Strategic approach to philanthropy tends to create a better image for the company, increase customer loyalty, and enhance customer relationships. v. To be successful, a strategic philanthropy program should pertain to the mission and operations of the company. d. Social Entrepreneurship i. Social entrepreneurship occurs when an entrepreneur founds an organization to create social value. ii. Many social entrepreneurs choose to organize their enterprises as nonprofits. The mission of nonprofits is to perform some type of public service, and all profits are reinvested into the organization. iii. The major difference between a social enterprise and a nonprofit is the use of entrepreneurial principles and business-led strategies to create social change. iv. Clear differences exist between strategic philanthropy and social entrepreneurship. v. While strategic philanthropy is strongly integrated into a business’s operations, the organization is not necessarily organized around a philanthropic purpose.

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VII. Self-Regulation (LO 4-7, PPT Slides 42–45) i. Self-regulatory initiatives by trade associations provide guidance beyond these legal requirements. ii. Industry self-regulation exists when members of an industry, trade association, or sector of the economy establish and monitor adherence to legal and ethical standards. iii. Provides a mechanism to respond to legal, regulatory, and ethical issues and enhance the reputation of an industry iv. Ethical standards and expectations create a buffer zone to prevent employees or representatives from engaging in misconduct. v. Self-regulation has many advantages over government regulation (1) It can educate the industry on standards to prevent misconduct.

(2) It is flexible and can respond quickly to evolving practices, including new technology. vi. The FTC does provide guidance on how businesses can develop effective self-regulatory programs. vii. The FTC recognizes that business has the hands-on experience that enables it to address many issues more capably than a government agency. viii. The FTC is very active in helping industry self-regulation and establishing standards. ix. The FTC lists the top 10 characteristics of self-regulatory organizations.

(1) Authority to create and enforce its own policies (2) Governance, including independent boards, transparency, and a defined process (3) Conflict management that manages conflicts of interest with transparent mechanisms for resolution (4) Effective and transparent processes and procedures for oversight and regulating members of the industry (5) Appropriately resourced, technical, and advanced surveillance programs (6) Adequately funded enforcement program that polices misconduct (7) Regulatory database of information about outcomes that is accessible to stakeholders (8) Market disruption procedures in case of capacity, continuity, or computer failures that impact operations (9) Innovation to stay ahead of the curve (10) Dispute resolution process that employees find offers fair and transparent policies and procedures [return to top] a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Instructor Manual Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 5: Emerging Business Ethics Issues

TABLE OF CONTENTS Purpose and Perspective of the Chapter ........................................................................ 43 Chapter Objectives ........................................................................................................... 43 What’s New in This Chapter ............................................................................................ 43 Chapter Outline ................................................................................................................. 43

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PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of this chapter is to help understand ethical issues in organizations and how they relate to key values like honesty, fairness, and integrity. It looks at common problems such as misuse of company resources, bullying, conflicts of interest, bribery, discrimination, and financial misconduct. This chapter also discusses the difficulty of identifying what counts as an ethical issue in business. Overall, it aims to show how important it is to make ethical decisions to keep organizations honest and trustworthy.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 5-1

Define ethical issues in the context of organizational ethics

5-2

Relate ethical issues to the basic values of honesty, fairness, and integrity

5-3

Examine emerging ethical issues including misuse of company resources, abusive and intimidating behavior, lying, conflicts of interest, bribery, corporate intelligence, discrimination, sexual harassment, fraud, consumer fraud, financial misconduct, and insider trading

5-4

Examine the challenge of determining an ethical issue in business

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: 

“Emerging Business Ethics Issues,” provides expanded and updated coverage of ethical issues in the context of organizational ethics and highlights emerging ethical issues and dilemmas in business.

[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

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I. Recognizing an Ethical Issue (Ethical Awareness) (LO 5-1, PPT Slides 3–6) i. An ethical issue is a problem, situation, or opportunity that requires an individual, group, or organization to choose among several actions that must be evaluated as right or wrong, ethical or unethical. ii. An ethical dilemma is a problem, situation, or opportunity that requires an individual, group, or organization to choose among several actions that have negative outcomes. iii. An ethical issue in business is simply a situation involving a group, a problem, or even an opportunity that requires thought, discussion, or investigation before a decision can be made. iv. Collusion is a secret agreement between two or more parties for a fraudulent, illegal, or deceitful purpose. v. Deceitful purpose is the relevant phrase regarding business ethics, as it suggests trickery, misrepresentation, or a strategy designed to lead others to believe something less than the whole truth.

II. Foundational Values for Identifying Ethical Issues (LO 5-2, PPT Slides 7–11) a. Integrity i. Integrity is one of the most important and oft-cited elements of virtue and refers to being whole, sound, and in an unimpaired condition. ii. Integrity is a global value that relates to all activities, not just business. iii. Organizations should not knowingly harm customers, clients, employees, or even other competitors through deception, misrepresentation, or coercion. b. Honesty i. Honesty refers to truthfulness or trustworthiness. To be honest is to tell the truth to the best of your knowledge without hiding anything. ii. Many argue that because people are not economically selfsufficient, they cannot with draw from the relationships of business.

(1) Business must not only make clear what rules apply, but also develop rules appropriate to the involuntary nature of its many participants. iii. Dishonesty can be broadly defined as a lack or absence of integrity, incomplete disclosure, and an unwillingness to tell the truth. iv. Lying can be described as (1) Untruthful statements that result in damage or harm (2) “White lies,” which do not cause damage but instead function as excuses or a means of benefiting others (3) Statements obviously meant to engage or entertain without malice. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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c. Fairness i. Fairness is the quality of being just, equitable, and impartial.

Fairness clearly overlaps with the concepts of justice, equity, and equality. ii. Three fundamental elements motivate people to be fair: (1) Equality (2) Reciprocity (3) Optimization iii. In business, equality is about the distribution of benefits and resources. iv. Reciprocity is an interchange of giving and receiving in social relationships.

(1) Reciprocity occurs when an action that affects another is reciprocated with an action that has an approximately equal effect. v. Optimization is the trade-off between equity (equality) and efficiency (maximum productivity).

(1) Discriminating based on gender, race, or religion is generally considered unfair because these qualities have little bearing on a person’s ability to do a job.

III. Emerging Ethical Issues and Dilemmas in Business (LO 5-3, PPT Slides 12–38) a. Misuse of Company Time and Resources i. Time theft can be difficult to measure but is estimated to cost companies hundreds of billions of dollars annually. ii. The average employee steals more than four hours per week due to arriving late, leaving early, taking long lunch breaks, using sick days inappropriately, excessive socializing, and engaging in personal activities such as online shopping, watching sports, scrolling social media while on the job, and even sleeping. iii. One of the greatest ways that employees misuse their work time and company resources is by using their company computers inappropriately. iv. Using company computer software and internet services for personal business is one of the most common ways employees misuse company resources. v. Because misuse of company resources is such a widespread problem, many firms have implemented policies delineating the acceptable use of such resources. b. Abusive or Intimidating Behavior i. Abusive or intimidating behavior is a common ethical problem for employees that may refer to physical threats, false accusations, being annoying, profanity, insults, yelling, harshness, ignoring someone, and unreasonableness. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. Within abusive behavior or intimidation, intent should be a consideration. iii. Wage theft is another way that employers create an abusive environment. iv. Bullying—where someone (or a group) considered a target is threatened, harassed, belittled, verbally abused, or overly criticized—creates what is referred to as a “hostile environment.”

(1) Some suggest employers take the following steps to minimize workplace bullying: (a) Create policies that provide consequences, such as reprimand letters and/or dismissal, for such behavior. (b) Emphasize mutual respect in the employee handbook. (c) Encourage employees who feel bullied to report the conduct via hotlines or other means. c. Lying i. Lying and how it relates to distorting the truth in some way. ii. There are three types of lies (1) Joking statements obviously meant to engage or entertain without malice.

(2) Commission lying is creating a perception or belief with words that intentionally deceive the receiver of the message.

(3) Omission lying is intentionally not informing others of any differences, problems, safety warnings, or negative issues relating to the product or company that significantly affects awareness, intention, or behavior. iii. The point at which a lie becomes unethical in business is based on the context of the statement and its intent to distort the truth. d. Conflicts of Interest i. A conflict of interest exists when an individual must choose whether to advance their own interests, those of the organization, or those of some other group. ii. To avoid conflicts of interest, employees must be able to separate their private interests from their business dealings. iii. Companies have strict rules related to handling confidential or proprietary information, accepting or giving gifts, and anything else that may generate a conflict of interest for employees or the company. e. Bribery i. Bribery is the practice of offering something (often money) to gain an illicit advantage from someone in authority.

(1) Active corruption or active bribery means the person who promises or gives the bribe commits the offense.

(2) Passive bribery is an offense committed by the official who receives the bribe. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. The key issue regarding whether or not something is considered bribery is whether it is used to gain an unfair advantage in a relationship. iii. Facilitation payments—small payments made to obtain or retain business or other improper advantages—do not constitute illegal bribery payments for U.S. companies operating in other countries in some situations. iv. When a government official accepts a bribe, it is usually from a business that seeks some advantage, perhaps to obtain business or the opportunity to avoid regulation. v. Federal and state antibribery laws exist in the United States under the U.S. Foreign Corrupt Practices Act (FCPA), making it illegal to bribe a foreign official. f. Corporate Intelligence i. Corporate intelligence (CI) is the collection and analysis of information on markets, technologies, customers, and competitors, as well as on socioeconomic and external political trends. ii. There are three distinct types of intelligence models: (1) A passive monitoring system for early warning (2) Tactical field support (3) Support dedicated to top-management strategy. iii. CI involves an in-depth effort to discover information from corporate records, court documents, regulatory filings, and press releases, as well as any other background information about a company or its executives. iv. Corporate intelligence, like other areas in business, can be abused if care is not taken to maintain legal and ethical methods of discovery. v. Computers, local-area networks (LANs), and the internet have made the theft of trade secrets very easy. g. Discrimination i. Discrimination based on race, color, religion, sex, marital status, sexual orientation, pregnancy status, public assistance status, disability, age, national origin, or veteran status is illegal in the United States. ii. A company in the United States can be sued if it (1) Refuses to hire an individual (2) Maintains a system of employment that unreasonably excludes an individual from employment (3) Discharges an individual (4) Discriminates against an individual concerning hiring, employment terms, promotion, or privileges of employment. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iii. More than 81,000 charges of discrimination were filed with the Equal Employment Opportunity Commission (EEOC), the federal agency that protects against workplace discrimination, in fiscal year 2023. iv. Race, gender, and age discrimination are major sources of ethical and legal debate in the workplace. v. The Age Discrimination in Employment Act specifically outlaws hiring practices that discriminate against people 40 years of age or older, as well as those that require employees to retire before the age of 70. vi. To help build workforces that reflect their customer base, many companies have initiated affirmative action programs, which involve efforts to recruit, hire, train, and promote qualified individuals from groups that have traditionally been discriminated against based on race, gender, or other characteristics. vii. To ensure affirmative action programs are fair, the Supreme Court established standards to guide their implementation: (1) There must be a strong reason for developing an affirmative action program (2) Must apply only to qualified candidates (3) Must be limited and temporary and therefore cannot include “rigid and inflexible quotas”. h. Sexual Harassment i. Sexual harassment can be defined as any repeated, unwanted behavior of a sexual nature perpetrated upon one individual by another. ii. Hostile work environment, which is a workplace in which offensive behavior or conduct directed at protected classes of individuals disrupts work activities or threatens an employee’s career advancement. iii. A dual relationship is defined as a personal, loving, and/or sexual relationship with someone with whom you share professional responsibilities. iv. To avoid sexual misconduct or harassment charges, a company should take at least the following steps: (1) Establish a statement of policy naming someone in the company as ultimately responsible for preventing harassment at the company.

(2) Establish a definition of sexual harassment that includes unwelcome advances, requests for sexual favors, and any other verbal, visual, or physical conduct of a sexual nature.

(3) Establish a nonretaliation policy that protects complainants and witnesses.

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(4) Establish specific procedures for prevention of such practices at early stages.

(5) Establish, enforce, and encourage victims of sexual harassment to report the behavior to authorized individuals.

(6) Establish a reporting procedure.

(7) Make sure the company has timely reporting requirements to the proper authorities. i.

Fraud i. Fraud is any purposeful communication that deceives, manipulates, or conceals facts to harm others. ii. Fraud can be a crime, and convictions may result in fines, imprisonment, or both. iii. Accounting fraud usually involves a corporation’s financial reports, in which companies provide important information on which investors and others base decisions involving millions of dollars.

(1) Ethical issues for accountants today include time, reduced fees, client requests to alter opinions concerning financial conditions or lower tax payments, and increased competition.

(2) Congress passed the Sarbanes–Oxley Act in 2002 to address many of the issues that create conflicts of interest for accounting firms auditing public corporations. iv. Marketing fraud—dishonestly creating, distributing, promoting, and pricing products— is another business area that generates potential ethical issues.

(1) Puffery can be defined as exaggerated advertising, blustering, and boasting upon which no reasonable buyer would rely and is not actionable under the Lanham Act. (2) Implied falsity means the message tends to mislead, confuse, or deceive the public.

(3) The characterization of an advertising claim as literally false can be divided into two subcategories: (a) Tests prove (establishment claims), when the advertisement cites a study or test that establishes the claim. (b) Bald assertions (nonestablishment claims), when the advertisement makes a claim that cannot be substantiated, as when a commercial states a certain product is superior to any other on the market.

(4) Advertising and direct sales communication can also mislead consumers by concealing the facts within the message. a

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j.

Consumer Fraud i. Consumer fraud occurs when consumers attempt to deceive businesses for their own gain.

(1) Retail shrinkage (losses incurred from employee theft, shoplifting, administrative errors, and supplier fraud) ii. With the high volume of online ordering, widespread forms of socalled friendly fraud include false claims that an order was never received, a service was never provided, a credit card transaction is not recognizable, or the goods were damaged. iii. Consumer fraud involves intentional deception to derive an unfair economic advantage by an individual or group over an organization.

(1) Collusion typically involves an employee who assists the consumer in fraud.

(2) Duplicity may involve a consumer staging an accident in a grocery store and then seeking damages against the store for its alleged lack of attention to safety.

(3) Guile is associated with a person who understands right/wrong behavior but uses tricks to obtain an unfair advantage. k. Financial Misconduct i. The failure to understand and manage ethical risks played a significant role in the global financial crisis of the early 2000s. ii. The Great Recession was caused, in part, by a failure of the financial industry to take appropriate responsibility for its decision to utilize risky and complex financial instruments. iii. Ethics issues emerged early in subprime lending, with loan officers receiving commissions on securing loans from borrowers with no consequences if the borrower defaulted on the loan. iv. “Liar loans” were soon developed to create more sales and higher personal compensation for lenders. v. Risk management in the financial industry remains a key concern. vi. This past widespread financial misconduct led to a call for financial reform. l. Insider Trading i. Insider trading is the buying and selling of stock or other securities by someone who possesses information not yet public. ii. There are two types of insider trading: (1) Illegal insider trading is the buying or selling of securities by insiders who possess information that is not yet public.

(2) Legal insider trading involves legally buying and selling stock in an insider’s own company, but not all the time. iii. Insider trading is often done in a secretive manner by an individual who seeks to take advantage of an opportunity to make quick gains in the market. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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IV. The Challenge of Determining an Ethical Issue in Business (LO 5-4, PPT Slides 39–41) i. Most ethical issues concerning a business will become apparent through stakeholder concerns about an event, activity, or the results of a business decision. ii. One way to determine whether a specific behavior or situation has an ethical component is to ask other individuals in the business how they feel about it and whether they view it as ethically challenging. iii. Trade associations and business self-regulatory groups, such as the Better Business Bureau, often provide direction for companies in defining ethical issues. iv. It is important to determine whether the organization adopted specific policies on the activity. v. Problems can become ethical issues as a result of changing societal values. vi. Artificial intelligence (AI) is providing a platform for processing big data sets utilizing predictive analytics to make decisions and interact with employees and customers. vii. Ethics issues exist because AI allows employees and consumers to make autonomous decisions. viii. Crisis management is the process of handling a high-impact event characterized by ambiguity and the need for swift action to assess and respond to potential damage. ix. There is a high degree of uncertainty because of the risks associated with making the wrong decision. [return to top]

Instructor Manual Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 6: Ethical Decision Making

TABLE OF CONTENTS Purpose and Perspective of the Chapter ........................................................................ 52 Chapter Objectives ........................................................................................................... 52 What’s New in This Chapter ............................................................................................ 52 Chapter Outline ................................................................................................................. 52

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PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of the chapter is to provide a comprehensive model for ethical decision making in business, highlighting the role of individual and organizational factors, as well as opportunity. It explains the importance of normative considerations in ethical choices and shows how leadership and corporate culture play a key role in shaping ethical decisions. This chapter also demonstrates how this ethical decision-making model can help individuals make better decisions in the workplace, ensuring they align with both personal values and organizational standards. It also offers guidance on navigating ethical dilemmas in a business setting.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 6-1

Provide a comprehensive model for ethical decision making in business, including the role of individual and organizational factors and opportunity

6-2

Describe normative considerations in ethical decision making

6-3

Recognize how leadership and corporate culture contribute to ethical decision making

6-4

Understand how the model for ethical decision making in business can help you make good decisions in the workplace

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: 

“Ethical Decision Making,” reflects current research and understanding of ethical decision making and includes many new examples.

[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

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I. A Framework for Ethical Decision Making in Business (LO 6-1, PPT Slides 3–12) i. Ethical decision-making process in business includes ethical issue intensity, individual factors, and organizational factors such as corporate culture and opportunity. ii. All these interrelated factors influence the evaluations of and intentions behind the decisions that produce ethical or unethical behavior. a. Ethical Issue Awareness and Intensity i. Ethical awareness is the ability to perceive whether a situation or decision has an ethical dimension. ii. Ethical issue intensity can be defined as the relevance or importance of an event or decision in the eyes of the individual, workgroup, and/or organization. iii. Ethical issue awareness and intensity reflect the ethical sensitivity of the individual and/or workgroup facing the ethical decision-making process. iv. Moral intensity relates to individuals’ perceptions of social pressure and the harm they believe their decisions will have on others. v. The perception of ethical issue intensity can be influenced by management’s use of rewards and punishments, corporate policies, and corporate values to sensitize employees. vi. Lack of preparedness makes it difficult for employees to respond appropriately when they encounter an ethical issue. vii. Organizations that consist of employees with diverse values and backgrounds must train workers in the way the firm wants specific ethical issues handled. b. Individual Factors i. Good personal values or morals have been found to decrease unethical practices and increase positive work behavior. ii. Although an individual’s intention to engage in ethical behavior relates to individual values, organizational and social forces also play a vital role. iii. Research regarding individual factors that affect ethical awareness, judgment, intent, and behavior include gender, education, work experience, nationality, age, and locus of control.

(1) Gender: Ethical decision-making shows that in many aspects there are no differences between men and women. When differences are found, women generally are more ethical than men in that they seem to be more sensitive to ethical scenarios and less tolerant of unethical actions.

(2) Education: People with more education or work experience make better ethical decisions. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(3) Nationality: Legal relationship between a person and the country in which they are born.

(4) Age: The older you are, the more ethical you are. iv. Locus of control relates to an individual’s general belief about how they are affected by internal versus external events or forces.

(1) Those who have an external locus of control (externals) believe the events in their lives are due to uncontrollable forces.

(2) Those who have an internal locus of control (internals) believe they control the events in their lives by their own effort and skill, viewing themselves as masters of their destinies and trusting in their capacity to influence their environment.

(3) Internal locus of control is positively correlated, whereas external locus of control is negatively correlated with ethical decisions. c. Organizational Factors i. Corporate culture as a set of values, norms, and artifacts, including ways of solving problems that members (employees) of an organization share. ii. The company reinforces its corporate culture with a defined list of values that drive job descriptions, training, and the day-to-day work environment. iii. Most industries have trade associations that establish guidelines developed over time by others in the industry. These rules help guide the decision-making process as well. iv. Ethical culture reflects the integrity of decisions made and is a function of many factors, including corporate policies, top management’s leadership on ethical issues, the influence of coworkers, and the opportunity for unethical behavior. v. Those who have influence in a workgroup, including peers, managers, coworkers, and subordinates are called significant others.

(1) They help workers daily with unfamiliar tasks and provide advice and information in both formal and informal ways. vi. Obedience to authority refers to people’s tendency to respect and obey superiors because of their perceived legitimate authority.

(1) Helps explain why many employees resolve business ethics issues by simply following the directives of a superior, even when those orders conflict with their own moral judgment.

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d. Opportunity i. Opportunity describes the conditions in an organization that limit or permit ethical or unethical behavior. ii. External rewards refer to what an individual expects to receive from others in the social environment in terms of overt social approval, status, and esteem. iii. Opportunity relates to individuals’ immediate job context where they work, whom they work with, and the nature of the work.

(1) The immediate job context includes the motivational “carrots and sticks” superiors use to influence employee behavior. iv. The opportunities that employees have for unethical behavior in an organization can be deterred with formal codes, policies, and rules adequately enforced by management. v. Despite the existence of rules, misconduct can still occur without proper oversight. vi. Opportunity also comes from knowledge. e. Business Ethics Intentions, Behavior, and Evaluations i. Ethical business issues and dilemmas involve problem-solving situations where the rules governing decisions are often vague or in conflict. ii. When intentions and behavior are inconsistent with their ethical judgment, people may feel guilty. iii. Guilt or uneasiness is the first sign an unethical decision may have occurred. The next step is changing the behavior to reduce such feelings. iv. The road to success depends on how the businessperson defines success.

(1) Success drives intentions and behavior in business either implicitly or explicitly.

II. Normative Considerations in Ethical Decision Making (LO 6-2, PPT Slides 13–18) i. Normative approaches refer to how organizational decision makers should approach an issue. ii. A normative approach in business ethics revolves around the standards of behavior within the firm as well as within the industry. iii. Most organizations develop and publicize a set of core values to establish ideals about what is appropriate conduct within the firm. iv. Normative business dimensions are rooted in social, political, and economic institutions as well as the recognition of stakeholder claims. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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v. By incorporating stakeholder objectives into corporate core values, companies begin to view stakeholders as significant. vi. Ethical decisions are often embedded in many organizational decisions, both managerial and societal. a. Institutions as the Foundation for Normative Values i. According to institutional theory, organizations operate according to deep-rooted norms and rules derived from institutions such as government, religion, and education. ii. Consider for a moment how political institutions influence the development of values. iii. Different types of industries have different standards and policies that either increase or decrease the effectiveness of ethical decision making. iv. Competition is also important to economic institutions and ethical decision making.

(1) The amount of competition in an industry can be determined and described according to the following: (a) Barriers to entry into the industry (b) Available substitutes for the products produced by the industry rivals (c) The power of the industry rivals over their customers (d) The power of the industry rivals’ suppliers over other rivals. v. Social institutions influence a firm’s normative values as well. vi. Organizations facing the same environmental norms or rules (e.g., those in the same industry) become isomorphic or institutionalized. vii. While industry-shared values promote organizational effectiveness when linked to goals, they can also hinder effectiveness if more efficient means of organization and structure are avoided in exchange for stability. b. Implementing Principles and Core Values in Ethical Business Decision Making i. Veil of ignorance, a thought experiment that examined how individuals would formulate principles if they did not know what their future position in society would be. ii. The liberty principle, also known as the equality principle, states that each person has basic rights that are compatible with the basic liberties of others. iii. The difference principle states that economic and social equalities (or inequalities) should be arranged to provide the most benefit to the least-advantaged members of society.

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iv. Companies take basic principles and translate them into core values. v. Core values provide abstract ideals that are distinct from individual values and daily operational procedures. These core values might include sustainability, collaboration and teamwork, and transparency.

III. Understanding Ethical Decision Making (LO 6-3, PPT Slides 19–20) i. An organizational ethical culture is shaped by effective leadership ii. An ethical corporate culture needs shared values along with proper oversight to monitor the complex ethical decisions being made by employees iii. Without top-level support for ethical behavior, the opportunity for employees to engage in their own personal approaches to business decision making will evolve. iv. Some companies with a strong reputation for ethical conduct sometimes fail to maintain their ethical culture. v. Normative perspectives set forth ideal goals to which organizations should aspire. vi. Normative considerations also provide the foundation needed to develop organizational principles and values, the building blocks of a firm’s ethical culture.

IV. Using the Ethical Decision-Making Model to Improve Ethical Decisions (LO 6-4, PPT Slides 21–23) i. The ethical decision-making model presented cannot tell you if a business decision is ethical or unethical. ii. The model is intended to provide you with insights and knowledge about typical ethical decision-making processes in business organizations. iii. Business ethics scholars developing descriptive models have focused on identifying consistent patterns in decision making and understanding how different factors interact in a dynamic environment to produce predictable behavioral patterns. iv. Gaining an understanding of the factors that influence ethical decision making in business will sensitize you concerning whether a business problem is an ethical issue or dilemma. v. Nonbusiness factors such as friends, family, and the economic reality of an employee’s situation can lead to unethical business decisions. vi. Knowledge of moral philosophies or values must be balanced with business knowledge and an understanding of the complexities of the dilemma requiring a decision. vii. Business competence must exist, along with personal accountability, in ethical decisions. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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viii. While formal codes, rules, and compliance are essential in organizations, a firm built on informal relationships is more likely to develop a high level of integrity within an organization’s culture. ix. The bottom line is that the more you know about ethical decision making in business, the more likely you will make good decisions. [return to top]

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TABLE OF CONTENTS Purpose and Perspective of the Chapter ........................................................................ 59 Chapter Objectives ........................................................................................................... 59 What’s New in This Chapter ............................................................................................ 59 Chapter Outline ................................................................................................................. 59

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PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of the chapter is to provide an understanding of moral philosophies and how they influence ethical decision making in business, both individually and within groups. It compares and contrasts various moral perspectives, including teleological, deontological, relativist, virtue, and justice. This chapter discusses the impact of these philosophies on business ethics and explores the stages of cognitive moral development. It also relates white-collar crime to moral philosophies, values, and corporate culture while recognizing the complexities of the interrelationships among these elements in the business context.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 7-1

Define moral philosophies and understand how moral philosophies and values influence individual and group ethical decision making in business

7-2

Compare and contrast the teleological, deontological, relativist, virtue, and justice perspectives of moral philosophy

7-3

Discuss the impact of philosophies on business ethics

7-4

Recognize the stages of cognitive moral development

7-5

Relate white-collar crime to moral philosophies, values, and corporate culture

7-6

Recognize the complexities of the interrelationships among moral philosophies, values, and business

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: 

“Individual Factors: Moral Philosophies and Values,” explores the role of moral philosophies and moral development as individual factors in the ethical decision-making process, including examples to illustrate them.

[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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I. Moral Philosophy Defined (LO 7-1, PPT Slides 4–8) i. Moral philosophy refers to the specific principles or values people use to decide what is right and wrong. ii. Moral philosophies are guidelines for “determining how conflicts in human interests are to be settled and for optimizing mutual benefit of people living together in groups.” iii. Moral philosophies are often used to defend a particular type of economic system and individuals’ behavior within these systems. iv. Adam Smith is considered the father of free-market capitalism.

(1) Smith believed business was and should be guided by the morals of good people.

(2) Under capitalism, some managers view profit maximization as the ultimate goal of an enterprise and may not be concerned about the impact of their firms’ decisions on society. v. The economist Milton Friedman supported this viewpoint, contending the market will reward or punish companies for unethical conduct without the need for government regulation. vi. The concept of economic freedom is based on self-ownership, the right to choose, personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights. vii. Moral philosophies are ideal perspectives that provide individuals with abstract principles for guiding their social existence. viii. The concept of the economic value orientation is associated with values quantified by monetary means; according to this theory, if an act produces more economic value for its effort, then it should be accepted as ethical. ix. Idealism is a moral or value philosophy that places special emphasis on ideas and ideals as products of the mind. Idealism refers to the efforts required to account for all objects in nature and experience and to assign to them a higher order of existence. x. Realism is the view that an external world exists independent of our perceptions. Realists assume humankind is not naturally benevolent and kind but, instead, inherently self-centered and competitive.

II. Moral Philosophies (LO 7-2, PPT Slides 9–25) a. Instrumental and Intrinsic Goodness i. Monists believe only one thing is intrinsically good, and pluralists believe two or more things are intrinsically good.

(1) Monists are often characterized by hedonism—the idea that pleasure is the ultimate good, or the best moral end involves the greatest balance of pleasure over pain. (a) Moral philosophers describe those who believe more pleasure is better as quantitative hedonists and those who believe it is possible to get too much of a good thing (such as pleasure) as qualitative hedonists. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. Pluralists, also known as nonhedonists, take the opposite position that no one thing is intrinsically good. iii. Plato argued that the good life is a mixture of (1) Moderation and fitness (2) Proportion and beauty (3) Intelligence and wisdom (4) Sciences and arts (5) Pure pleasures of the soul. iv. A more modern view is expressed in the instrumentalist position.

Sometimes called pragmatists, instrumentalists reject the ideas that (1) Ends can be separated from the means that produce them (2) Ends, purposes, or outcomes are intrinsically good in and of themselves v. Goodness theories typically focus on the end result of actions and the goodness or happiness created by them. vi. Obligation theories emphasize the means and motives by which actions are justified and are divided into the categories of teleology and deontology b. Teleology i. Teleology refers to moral philosophies in which an act is considered morally right or acceptable if it produces some desired result, such as pleasure, knowledge, career growth, the realization of self-interest, utility, wealth, or even fame. ii. Teleological philosophies assess the worth of a behavior by looking at its consequences, and thus philosophers today often refer to these theories as consequentialism. iii. Two important teleological philosophies that often guide decision making in individual business decisions are egoism and utilitarianism.

(1) Egoism defines right or acceptable behavior in terms of its consequences for the individual.

(2) Enlightened egoism takes a long-range perspective and allows for the well-being of others, although their own self-interest remains paramount. iv. Utilitarianism is concerned with consequences, but unlike the egoist, the utilitarian seeks the greatest good for the greatest number of people.

(1) Utilitarian decision making relies on a systematic comparison of the costs and benefits to all affected parties.

(2) These rule utilitarians determine behavior based on principles or rules designed to promote the greatest utility, rather than on individual examinations of each situation they encounter. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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v. Act utilitarians examine specific actions, rather than the general rules governing them, to assess whether they will result in the greatest utility. c. Deontology i. Deontology refers to moral philosophies that focus on the rights of individuals and the intentions associated with a particular behavior rather than its consequences. ii. Deontological philosophies regard certain behaviors as inherently right, and the determination of this rightness focuses on the individual actor, not on society.

(1) These perspectives are sometimes referred to as nonconsequentialism, a system of ethics based on respect for persons. iii. Categorical imperative: “Act as if the maxim of thy action were to become by thy will a universal law of nature.” iv. Rule deontologists believe conformity to general moral principles based on logic determines ethicalness.

(1) Rule deontology is determined by the relationship between the basic rights of the individual and a set of rules governing conduct. v. Act deontologists hold that actions are the proper basis to judge morality or ethicalness.

(1) Act deontologists suggest people simply know that certain acts are right or wrong, regardless of their consequences. d. Relativist Perspective i. From the relativist perspective, definitions of ethical behavior are derived subjectively from the experiences of individuals and groups. ii. Descriptive relativism relates to observations of other cultures. iii. Meta-ethical relativism proposes that people naturally see situations from their own perspectives, and there is no objective way of resolving ethical disputes between different value systems and individuals. iv. At the individual level of reasoning, we have normative relativism.

Normative relativists assume one person’s opinion is as good as another’s. v. The relativist observes the actions of members of an involved group and attempts to determine that group’s consensus on a given behavior. vi. One problem with relativism is that it emphasizes people’s differences while ignoring their basic similarities.

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e. Virtue Ethics i. Virtue ethics argues that ethical behavior involves not only adhering to conventional moral standards but also considering what a mature person with a “good” moral character would deem appropriate in a given situation. ii. The virtue ethics approach to business can be summarized as follows: (1) Good corporate ethics programs encourage individual virtue and integrity.

(2) By the employee’s role in the community (organization), these virtues form a good person.

(3) An individual’s ultimate purpose is to serve society’s demands and the public good and be rewarded in their career.

(4) The well-being of the community goes hand in hand with individual excellence. iii. The difference between deontology, teleology, and virtue ethics is that the first two are applied deductively to problems, whereas virtue ethics is applied inductively. f. Justice i. Justice is fair treatment and due reward in accordance with ethical or legal standards, including the disposition to deal with perceived injustices of others.

(1) Distributive justice is based on the evaluation of the outcomes or results of a business relationship.

(2) Procedural justice considers the processes and activities that produce a particular outcome.

(3) Interactional justice is based on the relationships between organizational members, including the way employees and management treat one another. ii. All three types of justice—distributive, procedural, and interactional—could be used to measure a single business situation and the fairness of the organization and individuals involved.

III. Applying Moral Philosophy to Ethical Decision Making (LO 7-3, PPT Slides 26–27) i. Individuals use different moral philosophies depending on whether they make a personal or work-related decision. ii. Two things may explain this behavior.

(1) First, in the business arena, some goals and pressures for success differ from the goals and pressures in a person’s life outside of work.

(2) The second reason people change moral philosophies is the corporate culture where they work. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iii. The concept of a moral philosophy is inexact. iv. Moral philosophies must be assessed on a continuum rather than as static entities. v. Problems arise when employees encounter ethical situations they cannot resolve. vi. Sometimes gaining a better understanding of their decision rationale helps employees choose the right solutions. vii. Sometimes a company makes questionable decisions from the perspective of an individual worker’s values and moral philosophies.

IV. Cognitive Moral Development and Limitations (LO 7-4, PPT Slides 28–31) i. Many people believe individuals advance through stages of moral development as their knowledge and socialization progress. ii. Kohlberg’s model of cognitive moral development (CMD) theory, in which people make different decisions in similar ethical situations because they are in different moral development stages iii. The six stages identified by Kohlberg are as follows: (1) The stage of punishment and obedience. An individual in Kohlberg’s first stage defines right as literal obedience to rules and authority. A person in this stage responds to rules and labels of “good” and “bad” in terms of the physical power of those who determine such rules.

(2) The stage of individual instrumental purpose and exchange.

An individual in stage 2 defines right as what serves their own needs. In this stage, individuals no longer make moral decisions solely based on specific rules or authority figures; they evaluate behavior based on its fairness to them.

(3) The stage of mutual interpersonal expectations, relationships, and conformity. Individuals in stage 3 emphasize the interests of others rather than simply their own, although ethical motivation is still derived from obedience to rules.

(4) The stage of the social system and conscience maintenance.

Individuals in stage 4 determine what is right by considering their duty to society, not just to certain other people.

(5) The stage of prior rights, social contract, or utility. In stage 5, individuals are concerned with upholding the basic rights, values, and legal contracts of society.

(6) The stage of universal ethical principles. A person in this stage believes right is determined by universal ethical principles everyone should follow. Stage 6 individuals believe certain inalienable rights exist that are universal in nature and consequence. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iv. Kohlberg’s six stages can be reduced to three levels of ethical concern.

(1) At the first level, a person is concerned with their own immediate interests and with external rewards and punishments.

(2) At the second level, an individual equates right with conformity to the expectations of good behavior of the larger society or some other significant reference group.

(3) At the third or “principled” level, an individual sees beyond the norms, laws, and authority of groups or individuals. v. Several problems with cognitive moral development relate back to its origins. These problems have been termed the three strikes theory.

(1) When Kohlberg applied Piaget’s theory to adults, he did not take into account the full functioning and development of the adult brain (Strike One).

(2) From a philosophical perspective, CMD argues for a hierarchical or step-like progression of moral philosophies starting from the lowest and going to the highest. This contradicts basic moral philosophy because there is no hierarchy. Each moral philosophy should be equal to the others (Strike Two).

(3) Research suggests that CMD has a high reliability but not validity. If a person shoots at a target and the shots are all close together, you can state there is high reliability.

However, if the shots are all down and to the right, and the goal was to hit the center, then you have low validity (Strike Three).

V. White-Collar Crime (LO 7-5, PPT Slides 32–35) i. White-collar crime (WCC) Illegal misconduct perpetrated every year by nonviolent business criminals. ii. It does more damage in monetary and emotional loss in one year than violent crimes do over several years combined. iii. White-collar criminals tend to be highly educated people in positions of power, trust, respectability, and responsibility within a business or organization. iv. WCC is often associated with corruption, with a number of individuals working together to engage in fraud. v. Common cause of WCC is the views and behaviors of an individual’s acquaintances within an organization. vi. The incidence of WCCs tends to increase in the years following economic recessions. vii. Criminals in the general population, there is the possibility some businesspeople may have inherently criminal personalities. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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viii. The Federal Sentencing Guidelines for Organizations state that all organizations should develop effective ethics and compliance programs as well as internal controls to prevent WCCs. VI. Individual Factors in Business Ethics (LO 7-6, PPT Slides 36-38) i. Individual values are not the only main driver of ethical behavior in business. ii. This belief can be a stumbling block in assessing ethical risk and preventing misconduct in an organizational context. iii. The development of strong abilities in ethical reasoning will probably lead to more ethical business decisions in the future than individualized character education for each employee. iv. Equipping employees with intellectual skills that allow them to understand and resolve the complex ethical dilemmas they encounter in complex corporate cultures will help them make the right decisions. v. The West Point model for character development focuses on the fact that competence and character must be developed simultaneously. This model assumes ethical reasoning has to be approached in the context of a specific profession. [return to top]

Instructor Manual Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 8: Organizational Factors: The Role of Ethical Culture and Relationships

TABLE OF CONTENTS Purpose and Perspective of the Chapter ........................................................................ 67 Chapter Objectives ........................................................................................................... 67 What’s New in This Chapter ............................................................................................ 67 Chapter Outline................................................................................................................. 67

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PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of the chapter is to provide an understanding of corporate culture and its influence on business ethics. It examines how organizational structure relates to ethical decision making and explores the role of workgroups in shaping ethical behavior. This chapter also explains how variability in individual employee conduct can impact overall organizational culture. Additionally, it discusses the extent to which individuals can control organizational decision making, highlighting the complex interaction between personal actions and broader corporate norms and practices.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 8-1

Understand the concept of corporate culture

8-2

Examine the influence of corporate culture on business ethics

8-3

Assess how organizational structure may relate to business ethics

8-4

Explore how workgroups influence ethical decisions

8-5

Discuss how the variability in individual employee conduct may affect overall organizational culture

8-6

Debate how much control individuals can actually exert over organizational decision making

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: 

“Organizational Factors: The Role of Ethical Culture and Relationships,” considers organizational influences on business decisions, such as role relationships, differential association, and other organizational pressures, as well as whistleblowing.

[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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I. Defining Corporate Culture (LO 8-1, PPT Slides 3–7) i. Corporate culture includes shared values, norms, and artifacts that influence employees and determine behavior, including ways of solving problems that members (employees) of an organization share. ii. Top managers in a company have ideas about how they should manage themselves and other employees, and how they should conduct their business(es). iii. All organizations, not just corporations, have some sort of culture, and, therefore, we use the terms organizational culture and corporate culture interchangeably. iv. A company’s history and unwritten rules are a part of its culture. v. Leaders are responsible for the actions of their subordinates, and corporations should have ethical corporate cultures. vi. The characteristics of an ethical corporate culture were codified within the Sarbanes–Oxley 404 compliance section, which requires that management assess the effectiveness of the organization’s internal controls and commission audits of these controls by an external auditor in conjunction with the audit of its financial statements. vii. Section 404 requires firms to adopt a set of values that form a portion of the company’s culture. viii. Section 406 of Sarbanes-Oxley requires a code of ethics specifically for top financial officers. ix. In many firms, an ethical corporate culture is measured in the following ways: (1) Management and the board demonstrate their commitment to integrity, core values, and ethics codes through their communications and actions.

(2) Every employee is encouraged and required to have handson involvement in compliance, especially internal control systems and reporting systems.

(3) Employees are expected to receive communication through resolutions and corrective actions related to ethical issues.

(4) Employees can report policy exceptions anonymously to any member of the organization, including the chief executive officer (CEO), other members of management, and the board of directors. x. While these definitions of culture vary greatly, they share three common elements: (1) “Culture is shared among individuals belonging to a group or society.”

(2) “Culture is formed over a relatively long period of time.”

(3) “Culture is relatively stable.” a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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II. The Role of Corporate Culture in Ethical Decision Making (LO 8-2, PPT Slides 8–19) i. Corporate culture has been associated with a company’s success or failure. ii. Explicit statements of values, beliefs, customs, and expected behavior usually come from upper management. iii. Corporate culture is often expressed informally through statements, both direct and indirect, that communicate the wishes of management. iv. A culture that emphasizes the importance of ethics and social responsibility can reduce misconduct, such as earnings manipulation, in the finance area. v. The “tone at the top” is a determining factor in the creation of a high-integrity organization. a. Ethical Frameworks and Evaluations of Corporate Culture i. Two basic dimensions to describe an organization’s culture: (1) Concern for people—the organization’s efforts to care for its employees’ well-being.

(2) Concern for performance—the organization’s efforts to focus on output and employee productivity. ii. Organizational cultures can generally be classified based on their degree of focus on people and performance as apathetic, caring, exacting, or integrative.

(1) An organization with an apathetic culture shows minimal concern for either people or performance.

(2) An organization with a caring culture exhibits high concern for people but minimal concern for performance issues.

(3) An organization with an exacting culture shows little concern for people but a high concern for performance; it focuses on the interests of the organization.

(4) An organization with an integrative culture combines a high concern for people and performance. b. Ethics as a Component of Corporate Culture i. The ethical component of corporate culture is a significant factor in ethical decision making. ii. If the culture dictates hiring people with specific, similar values, and if those values are perceived as unethical by society, society will view the organization and its members as unethical. iii. If a company’s primary objective is to make as much profit as possible through whatever means, its culture may foster behavior that conflicts with other stakeholders’ ethical values.

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iv. If an organization values ethical behaviors, it rewards them. It is important to handle recognition and awards for appropriate behavior in a consistent and balanced manner. All employees should be eligible for recognition. v. Employees appreciate working in an environment designed to enhance workplace experiences through goals that encompass more than just maximizing profits. vi. Along with implementing CSR within the organization, an additional benefit for some organizations is an ability to charge a premium price for their products. c. Compliance Versus Values-Based Ethical Cultures i. A firm with a compliance culture adopts a legalistic approach to ethics. It uses laws and regulatory rules to create codes, rules, and policies. ii. Codes of conduct are established with compliance as their focus, with rules and policies enforced by management. iii. A problem with the compliance approach, however, is its lack of long-term focus on values and integrity. iv. A values-based ethics culture relies on an explicit mission statement that defines the core values of the firm and how customers and employees should be treated. v. The crux of any ethical culture is a top-down integrity approach with shared values, norms that provide guides for behavior, and visible artifacts such as codes of ethics that provide a standard of conduct. d. Differential Association i. Differential association is the idea that people learn ethical or unethical behavior while interacting with others who are part of their role-sets or belong to other intimate personal groups. ii. The learning process is more likely to result in unethical behavior if the individual associates primarily with people who behave unethically. iii. A variety of research supports the notion that differential association influences ethical decision making, and superiors in particular have a strong influence on the ethics of their subordinates. iv. Employees, especially young managers, tend to go along with their superiors’ moral judgments to demonstrate loyalty. e. Whistleblowing i. Whistleblowing means exposing an employer’s wrongdoing to outsiders such as the media or government regulatory agencies. ii. The term whistleblowing is sometimes used to refer to internal reporting of misconduct to higher levels of management, especially through anonymous reporting mechanisms often called hotlines. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iii. Legal protection for whistleblowers exists to encourage reporting misconduct. iv. Under the Sarbanes–Oxley Act, the U.S. Department of Labor (DOL) directly protects whistleblowers who report violations of the law and refuse to engage in any action made unlawful. v. The Dodd–Frank Act proposed additional incentives for whistleblowers. vi. The Sarbanes–Oxley Act and the Federal Sentencing Guidelines for Organizations (FSGO) institutionalized internal whistleblowing to encourage discovery of organizational misconduct. vii. If an employee provides information to the government about a company’s wrongdoing under the Federal False Claims Act, the whistleblower is known as a qui tam relator. viii. Whistleblowing requires that the individual have adequate knowledge of wrongdoing that could damage society. ix. Sarbanes–Oxley and Dodd–Frank make it illegal to “discharge, demote, suspend, threaten, harass, or in any manner discriminate against” a whistleblower and set penalties of up to 10 years in jail for executives who retaliate against whistleblowers. x. FSGO provides rewards for companies that systematically detect and address unethical or illegal activities.

III. Organizational Structure (LO 8-3, PPT Slides 20–21) i. In a centralized organization, decision-making authority is concentrated in the hands of top-level managers, and little authority is delegated to lower levels.

(1) This structure is especially suited to organizations that make high-risk decisions and have lower-level managers who are not highly skilled in decision making.

(2) These organizations are usually bureaucratic, and the division of labor is typically well defined.

(3) Codes of ethics may specify the techniques used for decision making.

(4) Other ethical concerns may arise in centralized structures because they typically have little upward communication. ii. In a decentralized organization, decision-making authority is delegated as far down the chain of command as possible.

(1) They focus instead on increasing the flow of information in both directions.

(2) One of the main strengths of decentralized organizations is their adaptability and early recognition of external changes.

(3) With greater flexibility, managers can react quickly to changes in their environment.

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iii. Because of the strict formalization and implementation of ethics policies and procedures in centralized organizations, they tend to be more ethical in their practices than decentralized organizations.

IV. Group Dimensions of Corporate Structure and Culture (LO 8-4, PPT Slides 22– 26) a. Types of Groups i. Formal Groups (1) A formal group is defined as an assembly of individuals with an organized structure that is explicitly accepted by the group.

(2) Formal groups can be divided into committees, workgroups, and teams. (a) A committee is a formal group of individuals assigned to a specific task. (b) Workgroups are used to subdivide duties within specific functional areas of a company. (c) Teams bring together the expertise of employees from several different areas of the organization— such as finance, marketing, and production—on a single project, like developing a new product. ii. Informal Groups (1) An informal group is defined as two or more individuals with a common interest but without an explicit organizational structure.

(2) Informal groups help develop informal channels of communication, sometimes called the grapevine, that are important in every organization.

(3) The grapevine is an important source of information for individuals to assess ethical behavior within their organization. b. Group Norms i. Group norms are standards of behavior groups expect of their members. ii. Just as corporate culture establishes behavior guidelines for an organization’s members, group norms help define acceptable and unacceptable behavior within a group. iii. Norms provide explicit ethical directions. iv. Norms have the power to enforce a strong degree of conformity among group members. v. At the same time, norms define the different roles for various positions within the organization. vi. Sanctions may be necessary to bring in line a group whose norms deviate sharply from the overall culture. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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V. Variation in Employee Conduct (LO 8-5, PPT Slides 27–30) i. 10 percent of employees will take advantage of situations to further their own personal interests.

(1) These individuals are more likely to manipulate, cheat, or act in a self-serving manner ii. Another 40 percent of workers go along with the workgroup on most matters.

(1) These employees are most concerned about the social implications of their actions and want to fit into the organization. iii. About 40 percent of a company’s employees (1) Always try to follow company policies and rules.

(2) These workers not only have a strong grasp of their corporate culture’s definition of acceptable behavior but also attempt to comply with codes of ethics training, and other communications about appropriate conduct. iv. The final 10 percent of employees try to maintain formal ethical standards that focus on rights, duties, and rules.

(1) They embrace values that assert certain inalienable rights and actions, which they perceive to be always ethically correct.

VI. Can People Control Their Actions Within a Corporate Culture? (LO 8-6, PPT Slides 31–33) i. Many people find it hard to believe an organization’s culture can exert so strong an influence on individuals’ behavior within the organization. ii. Ethical decisions within organizations are often made by committees and formal and informal groups, not by individuals. iii. Most new employees in highly bureaucratic organizations have limited input into the basic operating rules and procedures for getting things done. iv. Individuals entering business usually need several years of experience within a specific industry to understand how to resolve ethical close calls. v. Congruence between individual and organizational values is greater in the private sector. vi. If people believe their personal ethics severely conflict with the ethics of the workgroup and those of superiors in an organization, their only alternative may be to leave the organization. [return to top]

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Ferrell & Fraedrich, Business Ethics: Ethical Decision Making and Cases, 14e, 2026, 9798214043098; Chapter 9: Developing and Implementing an Effective Ethics Program

TABLE OF CONTENTS Purpose and Perspective of the Chapter ........................................................................ 75 Chapter Objectives ........................................................................................................... 75 What’s New in This Chapter ............................................................................................ 75 Chapter Outline................................................................................................................. 76

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PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of this chapter is to provide an understanding of a corporation’s responsibility to its stakeholders, emphasizing the need for businesses to implement ethics programs. It explains the essential components of an effective ethics program, including minimum requirements and the role of codes of ethics in addressing corporate risks. This chapter explores the role of ethics officers, successful ethics training methods, and program goals. It examines how ethical standards are monitored, audited, and enforced, highlighting the critical function of ethics audits in maintaining corporate integrity and accountability.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 9-1

Understand the corporation’s responsibility to stakeholders

9-2

Explain why businesses need ethics programs

9-3

List the minimum requirements for an ethics program

9-4

Describe the role of codes of ethics in identifying key corporate risk areas

9-5

Discuss the role of ethics officers

9-6

Identify factors in successful ethics training, program types, and goals

9-7

Examine the ways ethical standards are monitored, audited, and enforced

9-8

Describe the role of the ethics audit

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: ●

“Developing and Implementing an Effective Ethics Program,” discusses corporate best practices for developing effective ethics programs and examines the role of the ethics audit.

●

Such audits can help companies pinpoint problem areas, measure their progress in improving conduct, and even provide a “debriefing” opportunity after a crisis.

[return to top]

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. The Responsibility of the Corporation to Stakeholders (LO 9-1, PPT Slides 4–6) i. Increasingly, corporations are viewed not merely as profit-making entities but also as moral agents accountable for their conduct to their stakeholders. ii. Through legislation and court precedents, society holds companies accountable for the conduct of their employees, as well as for their decisions and the consequences of those decisions. iii. As moral agents, companies are required to obey the laws and regulations that define acceptable business conduct. iv. Because companies are not human, laws and regulations are necessary to provide formal structural restraints and guidance. v. Corporations can be held accountable when they are found to be operating in a manner inconsistent with major legal requirements. vi. Coherent ethical corporate culture does not evolve through independent individual and interpersonal relationships. vii. Implementing a centralized corporate ethics program can provide a cohesive, internally consistent set of statements and policies representing the corporation as a moral agent.

II. The Need for Organizational Ethics Programs (LO 9-2, PPT Slides 7–10) i. One reason ethics programs are required in one form or another is to sensitize employees to the potential legal and ethical issues within their work environments. ii. Ethics scandals in U.S. businesses have destroyed employees’ trust in top management and significantly lowered the public’s trust in business. iii. Understanding the factors that influence the ethical decisionmaking process can help companies encourage ethical behavior and discourage undesirable conduct. iv. Fostering ethical decision making within an organization requires terminating unethical employees and improving the firm’s ethical standards. v. To promote legal and ethical conduct, an organization should develop a program by establishing, communicating, and monitoring the ethical values and legal requirements that characterize its history, culture, industry, and operating environment. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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vi. A strong ethics program includes a written code of conduct; an ethics officer to oversee the program; careful delegation of authority; formal ethics training; and rigorous auditing, monitoring, enforcement, and revision of program standards. vii. To satisfy the public’s escalating demands for ethical decision making, companies need to develop plans and structures for addressing ethical considerations.

III. An Effective Ethics Program (LO 9-3, PPT Slides 11–14) i. A company must have an effective ethics program to ensure all employees understand its values and comply with the policies and codes of conduct. ii. Research provides evidence that unethical behavior occurs less frequently in organizations that have a well-implemented ethics program. a. An Ethics Program Can Help Avoid Legal Problems i. The FSGO encourages companies to assess their key risk areas and customize a compliance program to address these risks and satisfy key effectiveness criteria. ii. An effective risk assessment involves not only examining legal issues but also environmental, health and safety, and other risk areas. iii. It is also important to monitor and weigh the risks of third-party suppliers and/or business partners because a company can be damaged by misconduct that occurs in the supply chain. iv. FSGO is a “carrot-and-stick” philosophy.

(1) Companies that act to prevent misconduct by establishing and enforcing ethical and legal compliance programs may receive a “carrot” and avoid penalties should a violation occur.

(2) The ultimate “stick” is the possibility of being fined or put on probation if convicted of a crime. v. The Foreign Corrupt Practices Act guidelines recommend incorporating incentives into the firm’s corporate culture to encourage ethical behavior. vi. The FSGO obliges federal judges to increase fines for organizations that continually tolerate misconduct and to reduce or eliminate fines for firms with extensive compliance programs that make due diligence attempts to abide by legal and ethical standards. vii. An ethics program can help a firm avoid civil liability, but the company still bears the burden of proving it has an effective program.

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b. Values versus Compliance Programs i. A compliance orientation creates order by requiring employees to identify with and commit to specific required conduct. ii. The advantage of a values orientation is that it gives employees a clearly defined basis on which to make decisions. iii. Diversity in employees’ experience and personal values requires explicit communication and training on subject matter areas such as financial reporting, use of company resources, and intellectual property. iv. Research into compliance- and values-based approaches reveals both types of programs can interact or work toward the same end, but a values orientation has the added benefit of sparking ethical reasoning among employees. v. In the final analysis, both orientations can be used to help employees and managers; however, a values-based program is the foundation of an organizational ethical culture.

IV. Codes of Conduct (LO 9-4, PPT Slides 15–20) i. A code of ethics is the most comprehensive and consists of general statements, sometimes altruistic or aspirational, that serve as principles and as the basis for rules of conduct. ii. A code of conduct is a written document that may contain some aspirational statements but mainly specifies acceptable and unacceptable types of behavior. iii. The final type of ethical statement is a value statement that serves the general public and also addresses distinct groups, such as stakeholders. iv. Code of ethics should reflect upper managers’ desires for compliance with the values, rules, and policies that support an ethical culture. v. The development of a code of ethics should involve the board of directors, CEO, and executive officers who will implement the code. vi. Legal staff should also be called on to ensure the code has correctly assessed key areas of risk and provides buffers for potential legal problems. vii. Employee involvement enables the empowerment of all members of the organization to create shared values. Involving employees has a systematic and far-reaching impact on advancing ethical decisions. viii. The six values that have been suggested as being desirable for codes of ethics are: (1) Trustworthiness (2) Respect (3) Responsibility (4) Fairness a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(5) Caring (6) Citizenship ix. Some of the key reasons that codes of ethics are not effective include the following: (1) The code is not promoted, and employees do not read it.

(2) The code is not easily accessible.

(3) The code is written too legalistically and therefore is not understandable by average employees.

(4) The code is written too vaguely, providing no accurate direction.

(5) Top management never refers to the code in body or spirit. x. Employees at organizations with effective codes of conduct tend to be less tolerant of unethical behavior toward stakeholders than those at companies without codes. xi. Codes of ethics or conduct will not resolve every ethical issue encountered in daily operations, but they help employees and managers deal with ethical dilemmas by prescribing or limiting specific activities.

V. Ethics Officers (LO 9-5, PPT Slides 21–23) i. Ethics officers are high-level executives responsible for managing their organizations’ ethics and legal compliance programs. ii. They are usually responsible for (1) Assessing the needs and risks an organization-wide ethics program must address (2) Developing and distributing a code of conduct or ethics (3) Conducting training programs for employees (4) Establishing and maintaining a confidential service to answer employees’ questions about ethical issues (5) Making sure the company complies with government regulation (6) Monitoring and auditing ethical conduct (7) Taking action on possible violations of the company’s code (8) Reviewing and updating the code iii. Sarbanes–Oxley and the amendments to the FSGO increased the responsibility ethics officers and boards of directors have for oversight of financial reporting. iv. Ethics officers often report directly to the chief executive officer and may have some access to the board.

VI. Ethics Training and Communication (LO 9-6, PPT Slides 24–28) i. A major step in developing an effective ethics program is implementing a training program and communication system to educate employees about the firm’s ethical standards. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. Training can educate employees about the firm’s policies and expectations, relevant laws and regulations, and general social standards. iii. Training programs can also make employees aware of available resources, support systems, and designated personnel who can assist them with ethical and legal advice. iv. Training can empower employees to ask tough questions and make ethical decisions. v. Ethical decision making is influenced by corporate culture, coworkers and supervisors, and the opportunities available to engage in unethical behavior. vi. Full awareness of a company’s philosophy of management, rules, and procedures can strengthen both the corporate culture and the ethical stance of employees and supervisors. vii. A key component of managing an effective and efficient ethics and compliance program is a firm grasp of techniques that clearly convey the company’s values, culture, and policies for dealing with ethical issues to employees. viii. Another useful training device is the behavioral simulation, which gives participants a short, hypothetical ethical issue situation to review. ix. When measuring the effectiveness of an ethics program, it is important to get input from employees.

VII. Systems to Monitor and Enforce Ethical Standards (LO 9-7, PPT Slides 29–33) i. Observing employees, conducting internal audits and investigations, circulating surveys, and instituting reporting systems are ways a company can assess compliance with its ethical code and standards. ii. To determine if a person is performing their job adequately and ethically, observers might focus on how the employee handles an ethically charged situation. iii. Many businesses employ role-playing exercises when they train salespeople and managers. iv. Ethical issues can be introduced into the discussion, and the results can be videotaped so participants and their superiors can evaluate the outcome of the ethics dilemma. v. Questionnaires can serve as benchmarks in an ongoing assessment of ethical performance. vi. The existence of an internal system that allows employees to report misconduct is especially useful for monitoring and evaluating ethical performance. vii. Companies are increasingly turning to consultants that provide professional case-management services and software. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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viii. If a company is not making progress toward creating and maintaining an ethical culture, it needs to determine why and take corrective action, either by enforcing current standards more strictly or setting higher standards. ix. Consistent enforcement and necessary disciplinary action are essential to a functional ethics or compliance program. x. Efforts to deter unethical behavior are important to companies’ long-term relationships with their employees, customers, and community. a. Continuous Improvement of an Ethics Program i. Implementation requires designing activities to achieve organizational objectives using available resources and given existing constraints. ii. Implementation translates a plan for action into operational terms and establishes a means by which an organization’s ethical performance will be monitored, controlled, and improved. iii. People’s attitudes and behavior must be guided by a shared commitment to the business rather than by mere obedience to traditional managerial authority. iv. Encouraging diversity of perspectives, disagreement, and the empowerment of people helps align the company’s leadership with its employees. v. If a company determines its ethical performance has been less than satisfactory, executives may want to change how certain kinds of decisions are made. b. Common Mistakes in Designing and Implementing an Ethics Program i. Many business leaders recognize the need to have an ethics program ii. Not setting realistic and measurable program objectives iii. Senior management’s failure to take ownership of the ethics program iv. Developing program materials that do not address the needs of the average employee v. Transferring a U.S. program to a firm’s international operations vi. Designing an ethics program that is little more than a series of lectures VIII. The Ethics Audit (LO 9-8, PPT Slides 34–45) i. An ethics audit is a systematic evaluation of an organization’s ethics program and performance to determine effectiveness. ii. A major component of the ethics program, the ethics audit should include regular, thorough, and documented metrics of compliance with the company’s published policies and procedures. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iii. Because ethics audits are voluntary, there are fewer standards a company can apply concerning reporting frequency, disclosure requirements, and remedial actions that it should take in response to results. iv. The auditing process can highlight trends, improve organizational learning, and facilitate communication and working relationships. v. The process of ethics auditing also helps an organization identify potential risks and liabilities and improve its compliance with the law. vi. The audit report may help document a firm’s compliance with legal requirements as well as demonstrate its progress in areas where it previously failed to comply. vii. Auditing process improves relationships with stakeholders who desire greater transparency. viii. An ethics audit should be unique to each company, reflecting its size, industry, corporate culture, and identified risks as well as the regulatory environment in which it operates. a. The Auditing Process i. The first step in conducting an audit is securing the commitment of the firm’s top management and/or its board of directors. ii. The second step is establishing a committee or team to oversee the audit process. iii. The third step is defining the scope of the audit, which depends on the type of business, the risks faced by the firm, and available opportunities to manage ethics. iv. The fourth step is a review of the firm’s mission, values, goals, and policies. v. The fifth step is identifying the tools or methods available to measure the firm’s progress and collecting and analyzing the relevant information. vi. The sixth step is having an independent party—such as a social/ethics audit consultant, a financial accounting firm that offers social auditing services, or a nonprofit special interest group with auditing experience—verify the results of the data analysis. vii. The final step in the audit process is reporting the audit findings to the board of directors and top executives and, if approved, to external stakeholders. b. Informal Ethics Audits i. Performing interviews of employees and management can be a way to self-audit an organization’s ethics program.

(1) This can be beneficial to provide key areas for improvement where management can better lead or educate employees in company ethics. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. The questions should gauge employees’ opinion on awareness, preparedness, and confidence over the existing ethics and compliance program. c. Integrity Measurement Frameworks i. There are integrity measurement frameworks that report economic, ethical, and socially responsible organizational performance. ii. Widely used approaches to measurement (1) The balanced scorecard is a performance management tool that details a company’s performance through financial and nonfinancial perspectives, giving management a comprehensive view of the business. (a) The company’s short- and long-term goals are aligned with the measures on the scorecard, and the actions employees take to reach the goals are broken down further into four card levels: (i) Strategy review (ii) Operations review (iii) Business unit (iv) Individual employee (2) The triple bottom line provides a perspective that takes into account the social, environmental, and financial impacts of decisions made within an organization. (a) The triple bottom line consists of the three Ps: (i) Profits represent the traditional accounting data that details the company’s performance strictly by the numbers. (ii) People represent the company’s internal and external efforts to make society a better place by paying equitable wages, providing assistance with higher learning, and/or giving back to society through charitable contributions. (iii) Planet refers to how the company’s practices affect the environment.

(3) ESG is defined as companies’ impacts and risks as they relate to protecting the environment, contributing to social causes, and engaging in responsible and ethical conduct. (a) The environmental considerations include issues related to climate change, natural resources, and pollution and waste. (b) The social considerations include how treatment of key stakeholders (human capital), product liability,

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potential stakeholder opposition, and varying social opportunities. (c) Governance relates to corporate governance and corporate positive (e.g., business ethics programs and transparency) and negative behavior.

(4) The Global Reporting Initiative (GRI), another prominent framework that companies have adopted to report their social and sustainability progress, focuses on the same variables as ESG: environmental, social, and governance. iii. ISO 37301 is a management system standard which sets out the requirements and provides guidelines for establishing, developing, implementing, evaluating, maintaining, and continually improving a compliance system.

(1) Organizations that implement ISO standards and achieve ISO 37301 certification have an easier time developing a compliance management system to enhance their compliance efforts. d. Implementing Programs, Audits, and Measurements to Sustain an Ethical Culture i. Organizations are responsible for developing and managing an ethical culture. ii. Ethics programs are necessary to sensitize employees and managers to recognize and navigate ethical issues. iii. Risk areas are different for every organization, and ethical leadership is necessary to guide ethical decision making. iv. Codes of ethics provide directions for both aspirational and required conduct to develop a strong ethical culture. v. Ethics officers provide necessary oversight for implementing the program. vi. An ethics audit can keep the program on track and provide the opportunity for organizational learning. vii. Management frameworks such as balanced scorecard, triple bottom line, ESG, and ISO 37301 provide benchmarks that are external measurement tools to assess performance across important dimensions that can create success. [return to top]

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TABLE OF CONTENTS Purpose and Perspective of the Chapter ........................................................................ 86 Chapter Objectives ........................................................................................................... 86 What’s New in This Chapter ............................................................................................ 86 Chapter Outline ................................................................................................................. 86

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PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of this chapter is to provide an understanding of global values, goals, and business practices within the context of ethics. It explores the role of economics in shaping business ethics and assesses how multinational corporations influence ethical practices worldwide. This chapter also describes the roles of various global organizations in supporting business responsibility and highlights key ethical issues faced by businesses globally. By emphasizing the importance of making ethical decisions in the global environment, this chapter aims to raise awareness of the complexities and responsibilities that come with conducting business across diverse cultures and economies.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 10-1

Discuss global values, goals, and business practices within ethics

10-2

Understand the role of economics as a factor in business ethics

10-3

Assess the role of multinational corporations in business ethics

10-4

Describe the roles of different global organizations in support of business responsibility

10-5

Gain awareness of global ethical business issues

10-6

Understand the importance of making ethical decisions in the global environment

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: 

“Global Business Ethics Issues,” has been updated to reflect the complex and dynamic events that occur in global business. This chapter will help students understand the major issues involved in making decisions in a global environment.

[return to top]

CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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I. Global Culture, Values, and Practices (LO 10-1, PPT Slides 3–7) i. Global business commerce that brings together people from countries with different cultures, values, laws, and ethical standards. ii. National culture is a much broader concept than organizational culture and includes everything in our surroundings made by people, both tangible items, such as artifacts, and intangible entities, such as concepts and values. iii. The pressure employees feel to compromise their organizations’ ethics standards, policies, or the law in the workplace varies widely around the globe. iv. Many have developed frameworks for classifying behavior patterns that can help businesspeople who work in different countries. v. Hofstede identified four cultural dimensions that can have a profound impact on the business environment: (1) The individualism/collectivism dimension of culture refers to how self-oriented members of a culture are in their behavior.

(2) The power distance dimension refers to the power inequality between superiors and subordinates.

(3) Uncertainty avoidance refers to how members of a society respond to uncertainty or ambiguity.

(4) Self-reference criterion is the idea that “we” differ from “them” and an unconscious reference to one’s own cultural values, experiences, and knowledge. vi. Cultural relativism is the concept that morality varies from one culture to another and that “right” and “wrong” are defined differently. vii. Global common values and morals are certain values and morals broadly accepted worldwide.

II. Economic Foundations of Business Ethics (LO 10-2, PPT Slides 8–16) i. The global financial market is a highly interconnected system that can exhibit a lack of transparency in decision making, accountability, and accounting methods. ii. Our financial system is complex, and this complexity provides ample opportunity to take excessive risks and manipulate various stakeholders. iii. Risk compartmentalization occurs when profit centers within corporations are unaware of the overall consequences of their actions on the firm as a whole. iv. Economic and social disasters and country conflicts have intensified the risks and challenges global businesses encounter. v. Economic stability is affected by the supply and commodity price fluctuations caused by political events. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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a. Economic Systems i. Adam Smith was a professor of logic and moral philosophy during the late eighteenth century, as noted earlier, and developed critical economic ideas still considered important today.

(1) His idea of laissez-faire, or the “invisible hand,” is critical to capitalism because it assumes the market, through its own inherent mechanisms, keeps commerce in equilibrium. ii. The second form of capitalism gained support at the beginning of the Great Depression.

(1) During the 1930s, John Maynard Keynes argued that the state could stimulate economic growth and improve stability in the private sector through controlling interest rates, taxation, and public projects. iii. The third and most recent form of capitalism is associated with Milton Friedman and represents a swing to the right of the U.S. political spectrum. iv. Both Keynes and Friedman agreed that (1) People have rational preferences among outcomes that can be identified and associated with a value (2) Individuals maximize utility and firms maximize profits (3) People act independently on the basis of full and relevant information v. Socialism refers to economic theories advocating the creation of a society in which wealth and power are shared and distributed evenly based on the amount of work expended in production. vi. Social democracy allows private ownership of property and also features a large government equipped to offer services such as education and healthcare to its citizens. vii. Bimodal wealth distribution occurs when the middle class shrinks, resulting in highly concentrated wealth among the rich and increased numbers of poor people with few resources. viii. To understand the future global perspective, it is helpful to understand the difference between rational and behavioral economics.

(1) Rational economics is based on the assumption that people are predictable and will maximize the utility of their choices relative to their needs and wants.

(2) Behavioral economics assumes humans act irrationally because of genetics, emotions, learned behavior, and heuristics, or rules of thumb. Heuristics are based on past experiences and do not always yield the most rational response. ix. The conflict between capitalism and socialism stems partly from the Great Depression of the 1930s and the Cold War. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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x. Many in the United States perceive socialism as Marxism, but they are not the same. xi. Sweden is an example of a socialist–capitalist hybrid. xii. India and China have introduced the free market into their systems, although their models are different.

(1) States in India can adjust their economic systems to accommodate more local interests.

(2) China’s large communist government blurs the lines between organizations, businesses, and government to form national social capitalism. xiii. Corporations take varying views of corporate social responsibility (CSR). xiv. Ethical questions businesses and governments need to address as they operate on a globalized scale.

III. Multinational Corporations (LO 10-3, PPT Slides 17–20) i. Multinational corporations (MNCs) are public companies that operate on a global scale without significant ties to any one nation or region. ii. MNCs represent the highest level of international business commitment and are characterized by a global strategy focusing on opportunities throughout the world.

(1) MNCs have been accused of increasing the gap between rich and poor nations and of misusing and misallocating scarce resources.

(2) Critics believe the size and power of MNCs create ethical issues involving the exploitation of both natural and human resources.

(3) Critics also accuse MNCs of exploiting the labor markets of host countries.

(4) The activities of MNCs also raise issues of unfair competition. iii. MNCs’ unethical or illegal conduct that grabs world headlines, many MNCs do strive to be good global citizens with strong ethical values. iv. Business for Social Responsibility (BSR) (1) BSR tracks emerging issues and trends, provides information on corporate leadership and best practices, conducts educational workshops and training, and assists organizations in developing practical business ethics tools. v. The ethical problems MNCs face arise from the opposing viewpoints intrinsic to multicultural situations. vi. Differences in culture, protectionism, and political and economic stability are challenging MNCs’ growth. vii. The U.S. model of the MNC is fading as developing countries such as China, India, Brazil, and South Korea form MNCs as alliances, joint ventures, and wholly owned subsidiaries. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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IV. Global Organizations that Support Responsible Business (LO 10-4, PPT Slides 21–28) a. United Nations Global Compact i. The United Nations created the United Nations Global Compact, a set of 10 principles that promote human rights, sustainability, and the eradication of corruption.

(1) Human Rights (a) Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights. (b) Principle 2: Make sure that they are not complicit in human rights abuses.

(2) Labor (a) Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining. (b) Principle 4: The elimination of all forms of forced and compulsory labor. (c) Principle 5: The effective abolition of child labor. (d) Principle 6: The elimination of discrimination in respect of employment and occupation.

(3) Environment (a) Principle 7: Businesses should support a precautionary approach to environmental challenges. (b) Principle 8: Undertake initiatives to promote greater environmental responsibility. (c) Principle 9: Encourage the development and diffusion of environmentally friendly technologies.

(4) Anticorruption (a) Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery. ii. The Association to Advance Collegiate Schools of Business (AACSB) International, an organization that represents about 1,900 members, joined with groups such as the United Nations Global Compact to inspire a set of six principles for business schools. b. Global Business Organizations that Affect Ethical Behavior i. Accounting Codes (1) General accounting standards should be primarily used: rules-based or principles-based accounting standards.

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(a) Rules-based standards are comprehensive and precise, providing specific directions to follow every word of the rule. (i) Advantages: Simple comparisons of financial statement data between companies, decreased likelihood of accounting-related lawsuits, and stable instructions to call upon in the future. (ii) U.S. Generally Accepted Accounting Principles (US GAAP) and the American Institute of Certified Public Accountants (AICPA) are often considered champions for rules-based standards. (b) Principles-based standards are simple and more flexible standards that ask users to observe a set of overarching principles instead of precise rules. (i) International Financial Reporting Standards (IFRS) have adopted principles-based standards, and these standards are currently observed by a vast majority of the world. The International Ethics Standards Board for Accountants (IESBA) is also referred to as a principles-based code. (ii) Advantages: Increased flexibility, the allowance of professional judgment to find new and creative ways to solve problems, and the removal of unreasonably complex language in the standards. ii. Financial Codes (1) The CFA Institute’s mission is to generate value for core investment management professionals and engage with the core investment management industry to advance ethics, market integrity, and professional standards of practice, which collectively contribute value for the ultimate benefit of society. iii. Management Codes (1) The Academy of Management (AOM) Code of Ethics is the only general code for managers.

(2) Members ensure that attention is paid to the rights and well-being of all organizational stakeholders.

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(3) Members seek to help managers, employers, and public officials develop informed judgments and choices concerning the impact of business practices on individual employees and society, both nationally and globally. iv. Marketing Codes (1) Within marketing, there are two major codes of ethics from the American Marketing Association (AMA) and the Association of National Advertisers (ANA). (a) AMA does no harm, fosters trust in the marketing system, and embraces ethical values. (b) ANA has a large consumer affairs department that handles thousands of consumer inquiries about marketing offers. (i) ANA staff and their Ethics Operating Committee work with companies to address and resolve consumer inquiries and to bring companies into compliance.

V. Global Ethics Issues (LO 10-5, PPT Slides 29–42) i. Risks require organizations conducting business globally to make ethical business decisions. Some of these risks are described as follows: (1) Corruption continues to be one of the most visible global and economic risks.

(2) Variations in international regulation can create problems for global companies as they must adjust their business strategies to comply with varying laws.

(3) Supply chain issues involving human rights violations can be hard to detect in global supply chains involving many different nations. a. Bribery i. Bribery is a difficult topic because its acceptance and legal definition vary from country to country. ii. It is not unusual for managers in BRIC countries (Brazil, Russia, India, and China) to offer favors to achieve business goals. iii. U.S. Foreign Corrupt Practices Act (1) The U.S. Foreign Corrupt Practices Act (FCPA) prohibits American companies from making payments to foreign officials to obtain or retain business.

(2) In 1988, Congress became concerned that American companies operated at a disadvantage compared to foreign companies whose governments allowed bribes.

(3) To facilitate or expedite routine governmental actions (known as facilitation or “grease” payments). a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iv. U.K. Bribery Act (1) The U.K.’s Bribery Act overlaps with the U.S. Foreign Corrupt Practices Act, but it takes further steps to curb bribery.

(2) The law also considers “grease payments” to speed up services.

(3) The former director of the SFO set forth criteria that can be used to determine whether top-level bribery has occurred: (a) Cases that undermine confidence in the U.K. Financial PLC and/or the City of London (b) Cases that compromise a fair playing field (c) Cases of serious bribery and corruption (d) Cases that have a strong public interest dimension b. Antitrust Activity i. Fair competition is viewed favorably in many countries, with the belief that competition yields the best products at the best prices. ii. U.S. corporations began using what today would be considered anticompetitive practices, creating high barriers to entry for potential competitors in an attempt to dominate markets. iii. Issues of competition become more complicated when companies do business in countries with laws differing from their own. iv. A vertical system results when a channel member (manufacturer, wholesaler, distributor, or retailer) has control of an entire business system, via ownership or contract, or through its purchasing ability.

(1) Vertical systems create inertia, causing channel members to remain with their various retailers and distributors even though competitors may have better products and prices. c. Internet Security and Privacy i. Today’s computer hackers can use malware, computer viruses, and sophisticated software to commit corporate espionage, launch cyber-attacks against government infrastructures, engage in ransom attacks against organizations that maintain records with sensitive personal information, and steal confidential information. ii. The United States admits to cyber hacking as a form of national security, as does China. iii. The nature of the internet has given hackers and other cybercriminals access to all institutions globally. iv. While some internet privacy violations, such as breaking into users’ accounts and stealing their financial information, are clearly unethical, many other situations present more challenging ethical issues. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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d.

e.

f.

g.

v. Another ethical dilemma regarding privacy is the use of personal information by companies.

(1) The EU Data Protection Directive also sets forth principles to protect the privacy of EU citizens.

(2) The Chinese government routinely uses an internetfiltering system called the “Great Firewall” to censor internet sites.

Human Rights i. The term human rights is defined as an inherent dignity with equal and inalienable rights and the foundation of freedom, justice, and peace in the world. ii. Many large corporations have basic human rights policies listed in their documents, including nondiscrimination and the right to join unions, other rights in the U.N. Human Rights Declaration, such as the right to privacy, right to work, and equal pay, are mentioned far less.

Healthcare i. Globally, a billion people lack access to healthcare systems. ii. Global concern about the priorities of pharmaceutical companies is on the rise. iii. Patents are another challenging issue. iv. A related issue affecting both developing and developed countries is the affordability of healthcare. v. Global healthcare fraud is a serious ethics issue, costing businesses and governments millions and depriving individuals of funds needed for critical care. vi. The fundamental issue leading some businesses into ethical and legal trouble around the world is the question of whether healthcare is a right or a privilege.

Supply Chain i. Most companies operate with minimal stock in reserve to reduce expenses and increase their return on assets (ROA).

(1) This means if you have less inventory but more deliveries with the same profit margins, a firm automatically increases its ROA. ii. Disrupting the global supply chain can also create ethical, social, and economic issues.

Labor and Right to Work i. Another global issue businesses encounter is labor. ii. Global labor issue involves gender pay inequality. iii. Equal pay is recognized as a fundamental right by the U.N. Human Rights Declaration, and gender pay inequality is illegal in many countries.

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iv. In addition to equal pay, Article 23 of the U.N. Human Rights Declaration discusses the right to work and join trade unions. v. Article 25 of the U.N. Human Rights Declaration mentions a standard of living and special rights related to pregnancy. vi. The United States lags behind other industrialized nations in its treatment of new parents. h. Compensation i. A Living Wage (1) A living wage refers to the minimum wage workers require to meet basic needs in their communities.

(2) Some MNCs choose to outsource their labor to other countries where no minimum wage exists.

(3) While not necessarily unethical in and of itself, this practice becomes a significant ethical dilemma when the public perceives the organization as paying foreign laborers unfair wages. ii. Executive Compensation (1) There is a global demand for better alignment between managerial performance and compensation.

(2) The Swiss government, after bailing out several organizations, passed a referendum called “say-on-pay” that requires a yearly shareholder vote determining executive pay.

(3) This kind of mentality on executive pay, often called “shareholder activism,” is spreading to American companies as well. i. Consumerism i. Consumerism is the belief that the interests of consumers, rather than those of producers, should dictate the economic structure of a society. ii. It refers to the theory that the consumption of goods at an everincreasing rate is economically desirable and equates personal happiness with the purchase and consumption of material possessions. iii. Made-to-break, or planned obsolescence, products are better for business because they keep consumers returning to buy more. iv. Consumerism issues include the desire for high quality and adequate global food supply, alternatives to animal products, and “meat” made from vegetables and even insects to put higher nutrition into the nation’s food supply as the world’s population grows. v. These consumption statistics point to a different lifestyle for the future, and global business will drive it.

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VI. The Importance of Ethical Decision Making in Global Business (LO 10-6, PPT Slides 43–46) i. Ethical decision making is essential if a company is to operate successfully within a global business context. ii. Without a clear understanding of the complexities of global ethics, companies will face a variety of legal and political snares that could result in disaster. iii. Many companies choose to adopt global business codes of ethics to provide guidelines for their international operations. iv. For multinational corporations, risk management and global ethics are so integral to the stability of their overseas operations, they have created special officers or committees to oversee global compliance issues. v. The successful implementation of a global ethics program requires more than just a global ethics committee. vi. A global firm cannot succeed simply by applying its domestic ethical programs to other global environments. vii. Global Principles for Ethical Business Conduct (1) Require accountability and transparency in all relationships.

(2) Comply with the spirit and intent of all laws.

(3) Build trust in all stakeholder relationships through a commitment to ethical conduct.

(4) Be mindful and responsible in relating to communities where there are operations.

(5) Engage in sustainable practices to protect the natural environment.

(6) Provide equal opportunity, safety, and fair compensation for employees.

(7) Provide safe products and create value for customers.

(8) Respect human rights as defined in the United Nations Global Compact.

(9) Support the economic viability of all stakeholders.

(10) Respect the property of others. [return to top]

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TABLE OF CONTENTS Purpose and Perspective of the Chapter ........................................................................ 98 Chapter Objectives ........................................................................................................... 98 What’s New in This Chapter ............................................................................................ 98 Chapter Outline ................................................................................................................. 99

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PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of this chapter is to provide an understanding of ethical leadership, including its definition, requirements, and the benefits it offers to organizations. It explores the relationship between leadership, power, and motivation in ethical decision making and highlights various conflict management styles. This chapter emphasizes the importance of ethical crisis management, empowering employees to take on responsibilities, and the role of communication in ethical leadership. It also examines leader-follower dynamics, compares leadership styles, and shows how they influence ethical practices. Finally, the RADAR model is introduced to demonstrate how ethical leaders address misconduct situations.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 11-1

Define ethical leadership

11-2

Describe the requirements for ethical leadership

11-3

Identify the benefits that come from effective ethical leadership

11-4

Relate leadership, power, and motivation to ethical decision making in organizations

11-5

Identify different styles of conflict management

11-6

Understand the importance of ethical crisis management

11-7

Understand how employees can be empowered to take on responsibilities in ethical leadership

11-8

Examine ethical leadership communication skills

11-9

Examine leader–follower relationships

11-10 Compare leadership styles and describe how they influence ethical leadership 11-11

Apply the RADAR model to determine how ethical leaders handle misconduct situations

[return to top]

WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: 

“Ethical Leadership,” defines ethical leadership and discusses its impact on organizational culture.

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Defining Ethical Leadership (LO 11-1, PPT Slides 4–6) i. Leadership is the ability or authority to guide and direct others toward a goal. Most people agree that effective leadership is essential for any organization. ii. Ethical decisions are one dimension of leadership. iii. A corporate culture evolves on its own to reflect the values and norms of the company. iv. An ethical corporate culture must be maintained through effective leadership at all times during the firm’s existence. v. Leadership has a significant impact on ethical decision making because leaders have the power to motivate others and enforce the organization’s norms, policies, and viewpoints. vi. Ethical leadership is not simply allowing employees to follow their own moral codes. vii. Ethical leadership has a positive relationship with the organizational citizenship of employees and a negative relationship with deviance or misconduct. viii. Normative myopia occurs when managers overlook or stifle the importance of core values in their business decisions. This tendency is thought to occur for three reasons: (1) The belief that normative values do not apply to managerial decisions (2) The belief that facts and values can be separated in decision making (3) The belief that normative values are outside the realm of business.

II. Requirements for Ethical Leadership (LO 11-2, PPT Slides 7–10) i. While ethical leaders need good character and competence, they also require skills to lead and guide others. ii. Ethical leadership skills develop through years of training, experience, and learning other best practices of leadership. iii. Ethical leaders should (1) model organizational values (2) place what is best for the organization over their own interests (3) train and develop employees throughout their careers, establish reporting mechanisms a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(4) understand employee values and perceptions (5) recognize the limits of organizational rules and values (6) make sure transactions in corrupt countries are transparent (7) never operate in a silo of decision making (8) encourage employees to reach their full potential and emphasize their role in helping to create value for key stakeholders (9) acquire knowledge and experience to make the right decisions (10) be passionate about the organization and act in the organization’s best interests (11) There is general agreement that ethical leadership is highly unlikely without a strong personal character.

(12) not wait for ethical problems to arise III. Benefits of Ethical Leadership (LO 11-3, PPT Slides 11–13) i. Has a direct impact on the corporate culture of the firm ii. Encourages employees to act ethically in their day-to-day work environment iii. Leads to higher employee satisfaction and employee commitment iv. Can create competitive advantages through employee satisfaction and productivity v. Creates strong relationships with external stakeholders vi. Impacts the long-term market valuation of the firm IV. Ethical Leadership and Organizational Culture (LO 11-4, PPT Slides 14–22) i. Ethical leaders recognize that organizational culture will directly impact employee conduct and make a greater effort to promote a culture of ethics and compliance. ii. Ethical leaders generally adopt one of two approaches to leadership: a compliance-based approach or an integrity-based approach. iii. Leaders who adopt a compliance-based approach emphasize obedience to rules and regulations and set processes in place to ensure compliance. iv. An integrity-based approach views ethics as an opportunity to implement core values.

(1) Leaders who adopt an integrity-based approach take responsibility for the firm’s ethical culture and hold employees accountable for practicing ethical behaviors and core practices.

(2) It helps the firm understand where questionable practices are occurring and where possible new ethical issues are arising. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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v. Leader types include the following categories: (1) The unethical leader is usually egocentric and often does whatever it takes to achieve personal and organizational objectives. (a) This leader looks at laws as minimum guidelines and searches for loopholes. (b) The justification used for breaking laws or rules is usually that doing so serves a greater good and the risk of getting caught is low. (i) Psychopathic leaders, or corporate psychopaths, are characterized by having superficial charm, no conscience, grandiose self-worth, little or no empathy, and enjoyment in flouting the rules.

(2) Apathetic leaders are not necessarily unethical, but they care little for ethics within the company. (a) Apathetic leaders often display no passion for the firm or the mission of the organization. (b) Employees do not see the sacrifices in them that other managers or leaders display.

(3) Ethical leaders include ethics at every operational level and stage of the decision-making process. (a) There will always be ethical lapses in any organization, but ethical leaders address issues as soon as they appear. (b) Oftentimes ethical leaders try to create participative organizational cultures to which employees are encouraged to provide input. (c) Ethical leaders view such employee collaboration as an important resource. vi. Organizational leaders can shape and influence corporate culture, resulting in ethical or unethical leadership. vii. Effective leaders get followers to their common goals or objectives in the most effective and efficient way. a. Power i. Power refers to the influence leaders and managers have over the behavior and decisions of subordinates. ii. Individuals have power over others when their presence causes others to behave differently. iii. The status and power of leaders is directly correlated to the amount of pressure they exert on employees to get them to conform to expectations. iv. There are five power bases from which one person may influence another: a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(1) Reward Power (a) Reward power refers to a person’s ability to influence the behavior of others by offering them something desirable. (b) Rewards could encourage individuals to act in their own self-interest, not necessarily in the interest of stakeholders.

(2) Coercive Power (a) Coercive power is essentially the opposite of reward power. Instead of rewarding a person for doing something, coercive power penalizes actions or behavior.

(3) Legitimate Power (a) Legitimate power stems from the belief that a certain person has the right to exert influence, and certain others have an obligation to accept it. (b) Dysfunctional leaders, defined as abusive and who treat employees with contempt and disrespect, can use legitimate power to pressure subordinates into unethical conduct.

(4) Expert Power (a) Expert power is derived from a person’s knowledge (or a perception that a person possesses knowledge). (b) Expert power may cause ethical problems when used to manipulate others or gain an unfair advantage.

(5) Referent Power (a) Referent power may exist when one person perceives that their goals or objectives are similar to another’s. v. The five bases of power are not mutually exclusive. vi. People typically use several power bases to effect change in others. b. Motivating Ethical Behavior i. Motivation is a force within the individual that focuses their behavior toward achieving a goal. ii. Job performance is considered to be a function of ability and motivation and can be represented by the equation: job performance ability motivation. iii. An organization offers positive incentives that encourage employees to work toward organizational objectives.

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iv. Individual’s career stage, age, organization size, and geographic location affect the relative priority given to satisfying respect, self-esteem, and basic physiological needs.

(1) Relatedness needs are satisfied by social and interpersonal relationships (2) Growth needs are satisfied by creative or productive activities V. Managing Ethical Business Conflicts (LO 11-5, PPT Slides 23–29) i. Ethical business conflicts occur when one or more positions on a decision conflict with organizational goals. ii. Sometimes ethical conflicts emerge because employees feel uncomfortable about their own or their coworkers’ decisions. iii. Before describing ethical conflict management styles, note that ethical conflict issues will not be brought to management’s attention without effective mechanisms for transparent communication. iv. Leaders must take an authentic, proactive approach to communication. v. Employees themselves should be trained to handle conflict situations. a. Conflict Management Styles i. We categorize conflict management into five styles: (1) Leaders having a competing conflict management style are highly assertive and not very cooperative. (a) Competing leaders believe in winning at any cost and measure success by how much the other side loses. (b) These leaders are usually not considered to be ethical because their conflict style makes them abusive and less likely to consider the concerns of employees and other stakeholders.

(2) Avoiding style of conflict management (a) Leaders with this approach are not effective because they avoid conflict at any costs—even if it leads to misconduct. They are uncooperative and non-assertive. (b) Even if they are aware of misconduct, they have no desire to manage it.

(3) Accommodating style of conflict management (a) Leaders who adopt this style are highly cooperative but nonassertive. (b) Individuals with this approach to conflict give in to the other side even if it means sacrificing their own interests and values. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(4) Compromising style of conflict management (a) Leaders who adopt this management style are in between the assertiveness and cooperativeness dimensions. (b) Leaders believe the best approach to resolving conflicts is for each side to give something up in order to gain something of value. (c) This management style is useful in resolving ethical dilemmas when all solutions have disadvantages.

(5) Collaborating style of conflict management (a) The collaborating style is the most advantageous. (b) Leaders who adopt a collaborating style to conflict management are cooperative and assertive. (c) Rather than immediately compromising, collaborative leaders collaborate with others to find a creative way to obtain a beneficial solution. (d) Collaborative leaders desire to meet the needs of stakeholders. ii. While we have separated conflict management into five styles, in reality, effective leaders can use different styles depending on the situation. iii. Ethical leaders should also have the ability to identify the conflict management styles of others. iv. An ethical leader must know which style of conflict management to apply to a particular issue.

VI. Ethical Crisis Management and Recovery (LO 11-6, PPT Slides 30–32) i. Just as companies develop crisis management plans to respond to and recover from natural disasters, they should also prepare for ethical disasters that can result in substantial legal and financial costs and disrupt routine operations, paralyze employees, reduce productivity, destroy organizational reputation, and erode stakeholder confidence. ii. Ethical disasters, large-scale unethical activity, follow recognizable phases of escalation, from ethical issue recognition and the decision to act unethically to the organization’s discovery of and response to the act. iii. The process of ethical disaster-recovery planning involves assessing an organization’s values, developing an ethics program, performing an ethics audit, and developing contingency plans for potential ethical disasters. iv. The ethics audit itself provides the key to preventing ethical disasters.

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VII. Ethical Leaders Empower Employees (LO 11-7, PPT Slides 33–35) i. Ethical leaders must empower employees to make ethical decisions and take responsibility for their conduct. ii. Employee empowerment is an essential component of a valuesbased organizational culture. iii. A values-based culture encourages employees to express concerns, bring up ethical issues, and take a proactive approach toward resolving conflicts. iv. There is still disagreement between company leaders and employees regarding how this process is implemented. v. Ethical leadership training for both managers and employees is helpful. vi. Employee empowerment is important in creating employeecentered ethical leadership.

VIII. Ethical Leadership Communication (LO 11-8, PPT Slides 36–40) i. The way an ethical leader communicates to employees has just as much impact on the firm’s ethical culture. ii. A narcissistic leader is highly controlling and does not tolerate any criticism of their leadership decisions. iii. Ethical leaders, on the other hand, communicate with employees regularly regarding expectations and progress toward company goals. iv. Two major dimensions of ethical communication.

(1) Transparency: Ethical leaders create transparency by developing a culture where ethics is frequently discussed.

(2) Reporting: It is a two-way process in which the communicator communicates with superiors and subordinates. (a) Formal reporting happens in environments such as meetings and conferences. Formal processes of reporting also include anonymous reporting systems. (b) Informal reporting occurs when leaders interact among employees, keeping them informed about company decisions, policies, and ethical expectations. a. Ethical Leadership Communication Skills i. Interpersonal communication is the most well-known form of communication and occurs when two or more people interact with one another.

(1) An ethical method of communicating treats the other person with respect.

(2) It is often difficult to communicate with a superior. ii. Small group communication is growing in organizations. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(1) Organization’s ethical decisions are made in teams, and these decisions affect the ethical success of the firm.

(2) Small groups can increase collaboration and generate a variety of different perspectives and opinions on a particular issue.

(3) Groupthink occurs when one or more group members feel pressured to conform to the group’s decision even if they personally disagree.

(4) Group polarization refers to the fact that a group is more likely to move toward a more extreme position than the group members might have done individually. iii. Nonverbal communication (1) Expressed through actions, body language, expressions, or other forms of communication not written or oral.

(2) Nonverbal communication provides major clues about an individual’s emotional state.

(3) Paralanguage is the way we talk, such as volume, inflection, tone, and rhythm. iv. Listening involves paying attention to both verbal and nonverbal behavior.

(1) Listening is just as important as speaking.

(2) Ethical leaders developing good listening skills tend to establish credibility and trustworthiness with employees.

IX. Leader–Follower Relationships (LO 11-9, PPT Slides 41–45) i. Leader–follower congruence occurs when leaders and followers share the same vision, ethical expectations, and objectives for the company. ii. The leader-exchange theory claims that leaders form unique relationships with followers through social interactions. iii. Because organizational leaders often occupy managerial positions, their job responsibilities are likely to differ from lowerlevel employees. a. Ethics Programs and Communication i. Perhaps one of the most observable ways of communicating ethical values to employees is through codes of ethics and training in how to make ethical decisions.

(1) Codes of ethics provide important guidelines for employees on how to act in different situations.

(2) Ethical training is another important way values are communicated. ii. Interpersonal communication, both formal and informal, is also important between leaders and followers.

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b. Power Differences and Workplace Politics i. Differences between managers and employees within the organization, ethical leaders must attempt to reduce these differences when ethical communication is involved. ii. Ethical leaders can mitigate power differences through frequent communication with workers. iii. Workplace politics can be another detriment to communication in the workplace. c. Feedback i. Ethical leaders understand the importance of both positive and negative feedback for employees. ii. Negative feedback, while sometimes difficult to convey, is important to inform employees of weaknesses and provide constructive ways for improving them. iii. While most companies understand the need for leader-tofollower feedback, not as many recognize the need for organizational leaders to get feedback from their employees. iv. Employee feedback can be generated in many different ways, including interviews, anonymous surveys, ethics audits, and websites.

X. Leadership Styles and Ethical Decisions (LO 11-10, PPT Slides 46–48) i. Leadership styles influence many aspects of organizational behavior, including employees’ acceptance of and adherence to organizational norms and values. ii. Ethical leadership by a CEO requires an understanding of their firm’s vision and values, as well as of the challenges of responsibility and the risks involved in achieving organizational objectives. iii. Emotional intelligence is an individual’s ability to manage themselves and their relationships with others effectively, characterized by selfawareness, self-control, and relationship building. iv. Six leadership styles that are based on emotional intelligence have been identified by Daniel Goleman.

(1) The coercive leader demands instantaneous obedience and focuses on achievement, initiative, and self-control.

Although this style can be very effective during times of crisis or a turnaround, it otherwise creates a negative climate for organizational performance.

(2) The authoritative leader—considered to be one of the most effective styles—inspires employees to follow a vision, facilitates change, and creates a strongly positive performance climate.

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(3) The affiliative leader values people, their emotions, and their needs and relies on friendship and trust to promote flexibility, innovation, and risk taking.

(4) The democratic leader relies on participation and teamwork to reach collaborative decisions. This style focuses on communication and creates a positive climate for achieving results.

(5) The pacesetting leader can create a negative climate because of the high standards that they set. This style works best for attaining quick results from highly motivated individuals who value achievement and take the initiative.

(6) The coaching leader builds a positive climate by developing skills to foster long-term success, delegating responsibility, and skillfully issuing challenging assignments. ii. Another way to consider leadership styles is to classify them as transactional or transformational.

(1) Transactional leaders attempt to create employee satisfaction through negotiating, or “bartering,” for desired behaviors or levels of performance.

(2) Transformational leaders strive to raise employees’ level of commitment and foster trust and motivation. iii. Both transformational and transactional leaders can positively influence the corporate culture. iv. Another leadership style gaining attention recently is known as authentic leadership.

(1) Authentic leaders are passionate about the company, live out corporate values daily in their behavior in the workplace, and form long-term relationships with employees and other stakeholders.

(2) Authentic leaders do not mimic other leaders, but they do learn by observing them.

(3) Authentic leaders display principle-centered power because they can effectively handle difficult situations and display a strong commitment to their organizations.

XI. The RADAR Model (LO 11-10, PPT Slides 49–50) i. RADAR to describe an ethical leader’s duty to (1) Recognize ethical issues (2) Avoid misconduct whenever possible (3) Discover ethical risk areas (4) Answer stakeholder concerns when an ethical issue comes to light (5) Recover from a misconduct disaster by improving upon weaknesses in the ethics program a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. The first step in preventing misconduct is recognizing the firm’s ethical risk areas. Ethical leaders must determine what issues the firm is most likely to face so controls can be implemented to limit the opportunity for misconduct.

(1) Part of the recognition process should include plans for how to address ethical issues once identified and whether disciplinary action is warranted. iii. After identifying ethical risk areas, ethical leaders should develop policies and procedures for detecting and avoiding misconduct. iv. Discovery involves proactively uncovering ethical risk areas that could lead to misconduct. v. The last two steps of the process occur when a firm is faced with an ethical conflict or dilemma. vi. Recovery involves a four-step process: (1) Take corrective action (2) Compensate stakeholders harmed by the misconduct (3) Express regret for the misconduct (4) Reinforce the firm’s reputation with positive messages. [return to top]

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TABLE OF CONTENTS Purpose and Perspective of the Chapter ....................................................................... 110 Chapter Objectives .......................................................................................................... 110 What’s New in This Chapter ........................................................................................... 110 Chapter Outline ................................................................................................................ 110

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PURPOSE AND PERSPECTIVE OF THE CHAPTER The purpose of this chapter is to provide an understanding of the impact of technology on business and the ethical challenges it presents. It explores how innovative technologies, such as artificial intelligence and automation, are creating new opportunities and challenges for businesses. This chapter also delves into the ethical issues arising from technological advancements, including data privacy, bias, and fairness. It examines ways to manage these ethical concerns and offers insights into making responsible decisions in the workplace.

CHAPTER OBJECTIVES The following objectives are addressed in this chapter: 12-1

Describe the characteristics of technology, including how innovative technologies are creating new challenges for business

12-2

Explore some of the ethics issues created by technology

12-3

Examine ways to manage ethics issues in technology

12-4

Discuss the future of technology ethics make good decisions in the workplace

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WHAT’S NEW IN THIS CHAPTER The following elements are improvements in this chapter from the previous edition: 

“Technology: Ethics and Social Responsibility Issues,” examines technology and its economic impact as well as the ethical implications of technology using updated examples and statistics.

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CHAPTER OUTLINE The following outline organizes activities (including any existing discussion questions in PowerPoints or other supplements) and assessments by chapter (and therefore by topic), so that you can see how all the content relates to the topics covered in the text.

I. Defining Technology (LO 12-1, PPT Slides 3–15) i. Technology is the application of scientific knowledge to solve real-world problems efficiently. ii. Technology is created through research and development in businesses, government agencies, and nonprofit organizations. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iii. Technology involves both reach and self-sustaining growth to stimulate new innovations.

(1) Reach relates to the broad nature of technology as it moves through society.

(2) Self-sustaining in that it acts as a catalyst to spur even faster development. iv. Technology disruption is when new innovations replace existing systems and habits. v. The Internet of Things (IoT) refers to the system of connected devices—smartphones, virtual assistants, and wearable technology—that provides the ability to send and receive information over the internet. a. Technology Ethics i. Communication patterns are especially affected by new technologies. ii. Predictive analytics uses data to forecast the future in some way. It applies advanced tools to historical data to provide data-backed decision options. iii. Any technology used to predict human behavior can raise ethical questions. iv. Risks evolve when technology is used that goes beyond human decision makers without human control. v. Organizations have become highly dependent on information systems to operate, and these systems are vulnerable to attack or abuse that could have damaging, unethical, and even illegal consequences. vi. There are some differences in managing ethical issues created by the use of technology.

(1) The existing ethical culture and ethics initiatives should provide the framework for ensuring ethical conduct.

(2) While AI-enabled technology can solve problems beyond human abilities, including complex tasks as well as data about relationships, it does not have the common sense of a human being. vii. There is limited ability to use algorithms and statistical rules to address unintentional ethical consequences. At this point, machines cannot master the attributes of human intelligence. b. Technologies to Watch i. Artificial Intelligence (1) Artificial intelligence (AI) refers to technology that allows machines to learn and perform tasks that typically require human intelligence using algorithms and data.

(2) An algorithm is a set of rules providing instructions for problem solving. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(3) AI provides the foundation or underlying platform that enables other technologies to be programmed to simulate human behavior.

(4) While AI offers many benefits to society, there are ethical concerns about how technology is used that cannot be ignored.

(5) AI is the ability to automate repetitive tasks so that employees can focus on more complex, high-value work.

(6) AI solutions are appealing because they can automate tasks, decrease response times, personalize interactions with customers, and predict the needs of customers.

(7) AI used in business will lead to widespread job loss. Jobs involving food service, manufacturing, retail, and transportation could be heavily affected, among others.

(8) AI is also used in recruiting software to match job seekers with relevant employers, which could cause some issues.

(9) Generative AI is a branch of AI that can be used to create new content based on input from text, images, videos, audio, and the like. It has been used primarily as chatbots in customer service applications. ii. Big Data (1) The term big data refers to large volumes of structured and unstructured data that need to be processed and analyzed at very fast speeds.

(2) Examples of big data include consumer shopping habits, social media activity, web browsing history, and more.

(3) Because of the nature of big data, businesses need to use advanced software to analyze and interpret the data efficiently.

(4) Insights gleaned from big data can inform business strategies.

(5) Companies of all sizes have unprecedented access to vast amounts of data, which invites concern for consumer privacy. This raises the ethical issue of how data should be shared and used in business. iii. Blockchain (1) Blockchain is a decentralized record-keeping technology that stores an immutable record of data “blocks” (or ledgers) over time.

(2) Benefits (a) Because data is locked into the system without a central control, businesses are using this technology to increase transparency and security.

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(b) Because it is not centralized, there is a lower risk of cyberattacks. It’s also effective for improving supply chains and food safety. (c) It creates an audit trail that protects both consumers and businesses from fraud, serving as a solution to digital fraud and privacy breaches in various industries. (d) The way information is stored allows for effective record keeping while protecting the privacy of individual users.

(3) Organizations using blockchain should consider ethical principles and codes to address challenges. iv. Drones (1) Unmanned aerial devices known as drones that are programmed with AI can be used to gather aerial imagery, deliver products, and collect environmental data such as temperature and humidity.

(2) They can be used by businesses to reduce employee health and safety risks.

(3) Organizations that employ drones will need to consider ways to protect consumer privacy when using them for surveillance activities. v. Robotics (1) Today’s robots come in all shapes and sizes and can be programmed to perform a variety of tasks ranging from painting a new car on an assembly line to helping a surgeon replace a patient’s hip.

(2) AI-enabled robots can learn, reason, use language, and formulate original ideas through machine learning.

(3) Robots are also being employed in industries with significant labor shortages.

(4) Roboethics, also known as machine ethics, is concerned with the design and implementation of a code of conduct that must be programmed into the AI of a robot. (a) AI and its other enablers, privacy is a concern with robotics because systems may collect sensitive data (e.g., location data) that could violate an individual’s privacy. (b) Similar to drones, robots may be equipped with surveillance tools, such as cameras, whether the intention is to capture photos and videos or not.

II. Ethics Issues in Technology (LO 12-2, PPT Slides 16–28) i. Ethical technology issues relate to opportunities and problems evaluated as right or wrong, or ethical or unethical. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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ii. Ethical issues usually relate to conflicts between various stakeholders about acceptable behavior. There could be a tradeoff between privacy and access to information. iii. Privacy is a major issue related to technology. Issues include monitoring employees, consumer privacy, and tracking individuals while online. a. Privacy i. Data Protection (1) Cookies track website browsing activity, which can be beneficial to both the web user and the website operator.

(2) Third-party cookies have attracted criticism from consumer privacy groups who believe this level of tracking is invasive.

(3) Right to Be Forgotten ruling gives internet users in the European Union (EU) a process to have unwanted links removed from Google search results.

(4) EU passed the General Data Protection Regulation (GDPR), requiring businesses to obtain permission from consumers to collect their data. (a) While data protection is beneficial to society, it comes at a cost. (b) The United States has held off on creating its own data protection legislation, but California forged ahead with its California Consumer Privacy Act (CCPA). (c) Major concern is the protection of data for at-risk populations (i) Children’s Online Privacy Protection Act (COPPA), which directs the Federal Trade Commission (FTC) to create and enforce regulations governing the online privacy of children. (ii) The FTC modified the rules surrounding COPPA in 2013 to vastly expand coverage in response to the rise of mobile phone applications. (d) Businesses must also behave ethically in how they use customer and client data. ii. Surveillance (1) Surveillance tools such as cameras and beacons are all around us.

(2) Many fear that the technology is still not accurate enough and will lead to widespread misidentification of passengers. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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(3) Many fear the technology could inaccurately identify people of color and women and be used for surveillance of citizens.

(4) Though these technologies are implemented in the name of student safety, this type of software has the potential to put student privacy and security at risk and often decreases students’ perception of safety.

(5) Businesses that create surveillance tools as well as those that implement them should take a proactive approach to considering the technology’s impact. iii. Employee Privacy (1) There are few legal protections for an employee’s right to privacy, which allows businesses a great deal of flexibility in establishing policies regarding employee privacy while using company equipment on company property.

(2) The Electronic Communications Privacy Act of 1986 prohibits the interception of electronic communication and access to stored electronic communications.

(3) Electronic monitoring allows a company to determine whether productivity is being reduced because employees spend too much time on personal activities. b. Intellectual Property i. A company’s intellectual property—intangible ideas and creative materials—can often be more valuable than tangible assets. ii. Businesses attempt to protect their intellectual property with copyrights, trademarks, and patents, but technological advancements are increasingly challenging the ownership of such property. iii. Copyright laws protect original works, both published and unpublished, including musical, literary, dramatic, and artistic works. iv. The Digital Millennium Copyright Act (DMCA) was passed in 1998 to protect copyrighted materials on the internet. v. A trademark protects words, phrases, symbols, and designs. 50 Trademarks are also at risk in this digital age. vi. Patent infringement occurs when an organization makes, uses, or sells a patented item without permission.

(1) Patent litigation is costly, but failing to protect intellectual property can be even more costly in the long run. c. Cybercrime i. With massive amounts of consumer data being collected and stored, cybercriminals can take advantage of vulnerable systems.. ii. Fraud is any purposeful communication that deceives, manipulates, or conceals facts, usually for financial or personal gain. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iii. Phishing—a cybercrime in which attackers disguise themselves as a legitimate business to obtain sensitive information such as passwords and credit card details—is a highly successful form of attack. d. The Digital Divide i. The digital divide refers to the varying levels of access to technology across social, geographical, and geopolitical groups. ii. Americans rely on the internet more than ever for education, work, medical needs, purchasing goods, and more. iii. The digital divide was further highlighted during the COVID-19 pandemic when people were asked to stay at home. iv. The problem is significantly worse in developing countries where less than one in five people have an internet connection. v. Supporters of 5G believe that the technology will help narrow the digital divide because it is available over low-band frequencies, extending access to rural areas that currently lack coverage. vi. In 2021, Congress passed the Infrastructure Investment and Jobs Act and the American Rescue Plan Act, which together designated about $90 billion to help get more Americans hooked up with high-speed internet, even in rural areas. e. Biotechnology i. Bioethics is the ethical application and implication of ethics in medicine, healthcare, biotechnology, and the environment. ii. The benefits of genetic engineering could be staggering, but it does come with ethical challenges.

(1) With this knowledge in mind, some parents might decide to terminate a pregnancy, which can be a very controversial issue. iii. Inequalities in wealth could lead to significant biological differences between the rich and the economically marginalized. iv. Biotechnology is the exploitation of biological processes for industrial and other purposes, especially the genetic manipulation of microorganisms to produce antibiotics, hormones, and other items.

(1) Biotechnology is fraught with global concerns such as weaponizing mutated organisms and creating designer babies.

(2) The first apparent inequity is the price of biotechnologies to consumers.

(3) DNA sequencing inequalities are also related to cost.

(4) The argument that companies are not sensitive to inequalities is only valid for a few and revolves around patents.

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v. If a business does not foresee the social ramifications of their products and harm is caused, an outcry begins. This stimulates governments to enact laws that can reduce profits and eliminate jobs, which could impact the very people who were harmed in the first place.

III. Managing Ethics Issues in Technology (LO 12-3, PPT Slides 29–32) i. Businesses are responsible for the ethical use of technology.

(1) It can be difficult to identify potential issues with emerging technology, especially as the rate of technological development increases; however, firms have an obligation to take a proactive approach to technology that considers social responsibility.

(2) Proactive technology management requires developing a plan for utilizing resources to take advantage of competitive opportunities in a responsible way.

(3) Effective programs should take a strategic approach with an overall mission, strategy, and coordination of all functional activities, including a concern for social responsibility.

(4) Chief privacy officer (CPO), an executive responsible for developing and implementing policies and procedures related to privacy protection.

(5) A CPO should be knowledgeable about privacy and data protection laws as well as crisis management. ii. A technology assessment is a procedure that helps organizations evaluate the possible effects that new processes, systems, and products will have on business operations and stakeholders.

(1) In addition to self-regulation efforts, there is a need for the government to maintain basic infrastructure and support for technology.

(2) Law enforcement agencies ranging from the Federal Bureau of Investigation (FBI) to local police forces are struggling to recruit and retain officers and prosecutors who are knowledgeable about the latest technology and the ways criminals and businesses can exploit it.

IV. The Future of Technology Ethics (LO 12-4, PPT Slides 33–36) i. AI is one of the most important trends to watch going forward. ii. AI using machine learning can mimic or even go beyond human abilities. iii. Another exciting development is machine-to-machine (M2M) communication that allows connected devices to interact without human intervention. a © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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iv.

v. vi. vii.

viii. ix. x.

(1) RFID is like barcoding in that data from a tag or label is captured by a device that stores the data in a database.

(2) Tracking the activities and decisions of humans creates ethical challenges.

The global increase in bandwidth will enable machines, robots, and autonomous vehicles to collect and transfer more data than ever, leading to advances in the area of the IoT and smart machinery.

While 5G will unlock the IoT’s potential, it will also raise new ethical issues related to personal data privacy.

While 5G is rapidly advancing, there are many ethical issues beyond privacy, such as health concerns.

The FCC has reaffirmed that radiofrequency radiation (RFR) exposure limits should be considered. There are concerns about electromagnetic effects related to biological health issues.

Long-term exposure could pose risks of skin diseases such as melanoma.

Challenges in technology ethics relate to finding competent managers and developing frameworks to address ethics.

The future of technology ethics relates to recognizing that current knowledge and requirements about business ethics will have to be adjusted when machines are programmed to make decisions.

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