SOLUTIONS MANUAL for Business Ethics Now 6th Edition Andrew Ghillyer

SOLUTIONS MANUAL

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Complete Solution Manual For SM TB Business Ethics Now 6e Andrew Ghillyer

CHAPTER 1 Understanding Ethics Table of Contents Chapter Summary and Learning Outcomes Learning Outcomes Frontline Focus: ―Doing the Right Thing‖ Questions Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Learning Outcome 5 Life Skills Progress ✓Questions Ethical Dilemma Frontline Focus: ―Doing the Right Thing—Megan Makes a Decision‖ Questions Key Terms Review Questions Review Exercises Team Exercises Thinking Critically

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Chapter Summary This chapter begins by defining ethics and how people decipher between ―right‖ and ―wrong‖ or ―good‖ and ―bad‖ behavior. It explores how people live their lives according to a standard of ―right‖ or ―wrong‖ behavior and how their personal set of morals are formed. Society plays a role in the traditions and customs that shape the standards or moral set that people adopt.

Common standards shared among individuals can be called values or a values system. Some people have different definitions of ethics such as, personal integrity, rules of appropriate individual behavior, rules of appropriate behavior for a community or society, and some define ethics as simply ―doing the right thing.‖ The Golden Rule—do unto others as you would have them do unto you—is also a goal of living an ethical life by some. There are also some ethical theories discussed, which are divided into three categories—virtue ethics, ethics for the greater good, and universal ethics. The chapter concludes with a discussion on ethical relativism, applied ethics, ethical dilemmas, and how to resolve these situations.

Learning Outcomes After studying this chapter, the student should be able to: 1.

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Define ethics.

Explain the role of values in ethical decision making.

Understand opposing ethical theories and their limitations.

Discuss ethical relativism.

Explain an ethical dilemma and apply a process to resolve it.

Extended Chapter Outline Frontline Focus ―Doing the Right Thing‖ Questions 1.

What would be ―the right thing‖ to do here? How would the ―Golden Rule‖ relate to Megan‘s decision?

The ―right thing‖ to do here would be to run the Wilson‘s application through the standard procedure and approve their application, pending everything in the background check returns as acceptable. The Golden Rule—do unto others as you would have them do unto you—applies to Megan‘s decision because she wouldn‘t want someone to deny or purposely delay her application because of her ethnicity.

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How would you resolve this ethical dilemma? Review the three-step process in ‗Resolving Ethical Dilemmas‘ for more details.

2.

First, Megan needs to analyze the consequences. If she listens to Kate, she will hinder the Wilson‘s chances of getting an apartment. If she goes against Kate, she will jeopardize her job, but will do the ―right thing‖ with respect to the Golden Rule by not discriminating.

Second, Megan should analyze possible actions. Listening to Kate would be unethical, whereas disobeying Kate would be the honest, fair, and ―right thing‖ to do. Finally, Megan must make a decision.

3.

What should Megan do now?

Megan needs to make a decision. She needs to approach Kate in a professional manner and have a discussion on her ethical point of view. The ethical decision would be to follow through with the Wilson‘s application in the standard procedure just the same as any other family.

Learning Outcome 1: Define Ethics. 

Ethics is the manner by which we try to live our lives according to a standard of ―right‖ or ―wrong‖ behavior—in both how we think and behave toward others and how we would like them to think and behave toward us. o How people arrive at the definition of what‘s right and wrong is a result of many factors, including how they were raised, their religion, and the traditions and beliefs of their society.  Society is a structured community of people bound together by similar traditions and customs.

Learning Outcome 2: Explain the Role of Values in Ethical Decision Making. 

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Moral standards are principles based on religious, cultural, or philosophical beliefs by which judgments are made about good or bad behavior. o Culture is a particular set of attitudes, beliefs, and practices that characterize a group of individuals.

Beliefs can come from many different sources: o Friends o Family o Ethnic background o Religion

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o School o The media—television, radio, newspapers, magazines, or the Internet o Personal role models and mentors One‘s personal set of morals—morality—represents a collection of all these influences as they build up over one‘s lifetime.

Standards of ethical behavior are absorbed by osmosis as an individual observes the examples (both positive and negative) set by everyone around the individual—parents, family members, friends, peers, and neighbors. o When individuals share similar standards in a community, the terms values and value system are used. o The terms morals and values are often used to mean the same thing—a set of personal principles by which you aim to live your life.  A value system is a set of personal principles formalized into a code of behavior.

A person‘s values can be said to have a specific ―worth‖ for them. That worth can be expressed in two ways: o An intrinsic value—the quality by which a value is a good thing in itself and is pursued for its own sake, whether anything comes from that pursuit or not. For example, happiness, health, and self-respect. o An instrumental value—the quality by which the pursuit of one value is a good way to reach another value. For example, money is valued for what it can buy rather than for itself.

The impact of a person‘s or a group‘s value system can be seen in the extent to which his or her daily lives are influenced by those values. o The greatest test of any personal value system comes when an individual is presented with a situation that places those values in direct conflict with an action. For example:  Lying is wrong—but what if you were lying to protect the life of a loved one?  Stealing is wrong—but what if you were stealing food for a starving child?  Killing is wrong—but what if you had to kill someone in self-defense to protect your own life? o It is this grey area that makes the study of ethics so complex.

If individuals asked their friends and family what ethics means to them, they would probably arrive at a list of four basic categories: o Simple truth—right and wrong or good and bad. o A question of someone‘s personal character—his or her integrity. o Rules of appropriate individual behavior. o Rules of appropriate behavior for a community or society The first category—a simple truth—also may be be expressed as simply doing the right thing.

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The second category—personal integrity, demonstrated by someone‘s behavior—looks at ethics from an external rather than an internal viewpoint.

Rules of appropriate individual behavior represent the idea that the moral standards people develop for themselves impact their lives on a daily basis in their behavior and the other types of decisions they make.

Rules of appropriate behavior for a community or society remind people that they must eventually bring their personal value system into a world that is shared with people who will probably have both similar and very different value systems.

Each category represents a different feature of ethics. o On one level, the study of ethics seeks to understand how people make the choices they make—how they develop their own set of moral standards, how they live their lives on the basis of those standards, and how they judge the behavior of others in relation to those standards. o On a second level, people then try to use that understanding to develop a set of ideals or principles by which a group of ethical individuals can combine as a community with a common understanding of how they ―ought‖ to behave.

For some, the goal of living an ethical life is expressed by the Golden Rule—do unto others as you would have them do unto you, or treat others as you would like to be treated. o The danger with the Golden Rule is that not everyone thinks like you, acts like you, or believes in the same principles that you do, so to live your life on the assumption that your pursuit of an ethical ideal will match others‘ ethical ideals could get you into trouble.

Learning Outcome 3: Understand Opposing Ethical Theories and Their Limitations.  

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Ethical theories can be divided into three categories—virtue ethics, ethics for the greater good, and universal ethics.

Virtue ethics is a concept of living your life according to a commitment to the achievement of a clear ideal—what sort of person would I like to become, and how do I go about becoming that person? o The Greek philosopher Aristotle‘s belief in individual character and integrity established this concept. o The problem with virtue ethics is that societies can place different emphasis on different virtues.

Ethics for the greater good is more focused on the outcome of an individual‘s actions rather than the apparent virtue of the actions themselves—that is, a focus on the greatest good for the greatest number of people. o Originally proposed by a Scottish philosopher named David Hume, this approach is also referred to as utilitarianism—ethical choices that offer the greatest good for the greatest number of people.

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The problem with this approach to ethics is the idea that the ends justify the means.  If all an individual focuses on is doing the greatest good for the greatest number of people, no one is accountable for the actions that are taken to achieve that outcome.

Originally attributed to a German philosopher named Immanuel Kant, universal ethics argues that there are certain and universal principles that should apply to all ethical judgments. o Universal ethics refer to actions that are taken out of duty and obligation to a purely moral ideal rather than based on the needs of the situation, since the universal principles are seen to apply to everyone, everywhere, all the time. o The problem with this approach is the reverse of the weakness in ethics for the greater good.  If all an individual focuses on is abiding by a universal principle, no one is accountable for the consequences of the actions taken to abide by those principles.

Learning Outcome 4: Discuss Ethical Relativism.  

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When faced with the requirement to select a model of how we ought to live our lives, many people choose the idea of ethical relativism.

Ethical relativism is the concept that the traditions of an individual‘s society, the individual‘s personal opinions, and the circumstances of the present moment define the individual‘s ethical principles.

The idea of relativism implies some degree of flexibility as opposed to strict black-andwhite rules. o It also offers the comfort of being a part of the ethical majority in a person‘s community or society instead of standing by the person‘s individual beliefs as an outsider from the group.

Learning Outcome 5: Explain an Ethical Dilemma and Apply a Process to Resolve It.    

Applied ethics is the study of how ethical theories are put into practice.

The basic assumption of ethical theory is that a person as an individual or community is in control of all the factors that influence the choices that he or she makes.

Ethical dilemma is a situation in which there is no obvious right or wrong decision, but rather a right or right answer.

Any idealized set of principles or standards inevitably faces some form of challenge. o For ethical theories, that challenge takes the form of a dilemma in which the decision people must make requires them to make a right choice knowing full well that they are:

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Leaving an equally right choice undone Likely to suffer something bad as a result of that choice Contradicting a personal ethical principle in making that choice Abandoning an ethical value of their community or society in making that choice In reality, the ―answer‖ to an ethical dilemma is often the lesser of two evils, it is questionable to assume that there will always be an acceptable answer—it‘s more a question of whether or not you can arrive at an outcome you can live with.

Two distinct approaches to handling ethical dilemmas can be identified: o One is to focus on the practical consequences of what people choose to do. o The other is to focus on the actions themselves and the degree to which they were the right actions to take.

The following is a three-step process for solving an ethical problem: o Step 1—analyze the consequences o Step 2—analyze the actions o Step 3—make a decision Arthur Dobrin identified eight questions people should consider when resolving an ethical dilemma: o What are the facts? o What can you guess about the facts you don‟t know? o What do the facts mean? o What does the problem look like through the eyes of the people involved? o What will happen if you choose one thing rather than another? o What do your feelings tell you? o What will you think of yourself if you decide one thing or another? o Can you explain and justify your decision to others?

The application of these steps is based on some key assumptions: o There is sufficient time for the degree of contemplation that such questions require; second o There is enough information available for people to answer the questions o The dilemma presents alternative resolutions for people to select from When people are attempting to resolve an ethical dilemma, they follow a process of ethical reasoning. o Ethical reasoning is a process of looking at the information available to us in resolving an ethical dilemma, and drawing conclusions based on that information in relation to our own ethical standards.

Lawrence Kohlberg developed a framework that presents the argument that people develop a reasoning process over time, moving through six distinct stages (classified into three levels of moral development) as they are exposed to major influences in our lives: o Level 1: Preconventional—at this lowest level of moral development, a person‘s

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perception of right and wrong is initially directly linked to the expectation of punishment or reward.  Stage 1: Obedience and punishment orientation—a person is focused on avoidance of punishment and deference to power and authority, i.e., something is right or wrong because a recognized authority figure says it is.  Stage 2: Individualism, instrumentalism, and exchange—as a more organized and advanced form of stage 1, a person is focused on satisfying his or her own needs, i.e., something is right or wrong because it helps the person get what he or she wants or needs. o Level 2: Conventional—a person continues to become aware of broader influences outside the family.  Stage 3: “Good boy/nice girl” orientation—a person is focused on meeting the expectations of family members, i.e., something is right or wrong because it pleases those family members. Stereotypical behavior is recognized, and conformity to that behavior develops.  Stage 4: Law-and-order orientation—a person is increasingly aware of his or her membership in a society and the existence of codes of behavior, i.e., something is right or wrong because codes of legal, religious, or social behavior dictate it. o Level 3: Postconventional—at this highest level of ethical reasoning, a person makes a clear effort to define principles and moral values that reflect an individual value system rather than simply reflecting the group position.  Stage 5: Social contract legalistic orientation—a person is focused on individual rights and the development of standards based on critical examination, i.e., something is right or wrong because it has withstood scrutiny by the society in which the principle is accepted.  Stage 6: Universal ethical principle orientation—a person is focused on selfchosen ethical principles that are found to be comprehensive and consistent, i.e., something is right or wrong because it reflects that person‘s individual value system and the conscious choices he or she makes in life.

Kohlberg‘s framework offers us a clearer view into the process of ethical reasoning—that is, that someone can arrive at a decision, in this case the resolution of an ethical dilemma— on the basis of a moral rationale that is built on the cumulative experience of his or her life. o Kohlberg also believed that a person could not move or jump beyond the next stage of his or her six stages.  It would be impossible for a person to comprehend the moral issues and dilemmas at a level so far beyond his or her life experience and education.

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Life Skills What Do You Stand For, Or What Will You Stand Against?

This Life Skills box discusses how one‘s personal value system is developed. It also talks about how this model helps people make difficult decisions. People‘s value systems are developed as a child from their parents, friends, society, and often their upbringing. It is unique to each person.

Progress ✓ Questions 1.

What is the definition of ethics?

Ethics is defined as the manner by which we try to live our lives according to a standard of ―right‖ or ―wrong‖ behavior—in both how we think and behave toward others and how we would like them to think and behave toward us.

2.

What is a moral compass, and how would you apply it?

An individual‘s morality, or personal set of morals, represents a collection of religious, cultural, or philosophical beliefs or influences as they are built up over a lifetime. The standards an individual learns or observes provide a moral compass, which is a sense of personal direction to guide them in the choices they make in their lifetime.

3.

Explain the difference between intrinsic and instrumental values.

Intrinsic value is the quality by which a value is a good thing in itself and is pursued for its own sake, whether anything comes from that pursuit or not. For example, happiness, health, and self-respect can all be said to have intrinsic value.

Instrumental value is the quality by which the pursuit of one value is a good way to reach another value. For example, money is valued for what it can buy rather than for itself.

4.

List the four basic categories of ethics.

The four basic categories of ethics are:  Simple truth—right and wrong or good and bad  A question of someone‘s personal character—his or her integrity  Rules of appropriate individual behavior  Rules of appropriate behavior for a community or society.

5.

What is the Golden Rule?

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The Golden Rule is do unto others as you would have them do unto you or treat others as you would like to be treated.

6.

List the three basic ethical theories.

The three basic ethical theories are:  Virtue ethics  Ethics for the greater good—utilitarianism  Universal ethics

7.

Identify the limitations of each theory.

Following are the limitations of each of the basic ethical theories:  The problem with virtue ethics is that societies can place different emphasis on different virtues so if the virtues people hope to achieve aren‘t a direct reflection of the values of the society in which they live, there is a real danger of value conflict.  The problem with the ethics for the greater good or utilitarianism is the idea that the ends justify the means. If all people focus on is doing the greatest good for the greatest number of people, no one is accountable for the actions that are taken to achieve that outcome.  The problem with the universal ethics approach is the reverse of the weakness in ethics for the greater good. If all people focus on is abiding by a universal principle, no one is accountable for the consequences of the actions taken to abide by those principles.

8.

Provide an example of each theory in practice.

Following are examples of each theory in practice:  An example of virtue ethics would be Christian societies‘ values based on faith, hope, and charity.  An example of utilitarianism would be when Adolf Hitler and his Nazi party launched a national genocide against Jews and ―defective‖ people on the utilitarian grounds of restoring the Aryan race.  An example of universal ethics would be ethically justifying stem cell research because of the potential to cure major illnesses, such as Parkinson‘s, cancer, heart disease, etc.

9.

Define ethical relativism.

Ethical relativism is the concept that the traditions of people‘s society, their personal opinions, and the circumstances of the present moment define their ethical principles.

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10. Define applied ethics.

Applied ethics is the study of how ethical theories are put into practice.

11. What is an ethical dilemma?

An ethical dilemma is a situation in which there is no obvious right or wrong decision, but rather a right or right answer.

12. Explain the three-step process for resolving an ethical dilemma.

Following is the three-step process for resolving an ethical dilemma:  Step 1. Analyze the consequences—in this step, people should ask themselves questions like, who will be helped by what they do? Who will be harmed? What kind of benefits and harm are we talking about? And, how does all this look over the long run as well as the short run?  Step 2. Analyze the actions—in this step, people should consider all the options from a different perspective, without thinking about the consequences.  Step 3. Make a decision—in this step, people should take both parts of their analysis into account, and make a decision.

13. What are the eight questions you should consider in resolving an ethical dilemma?

Following are the eight questions that people should consider while resolving an ethical dilemma:  What are the facts?  What can you guess about the facts you don‘t know?  What do the facts mean?  What does the problem look like through the eyes of the people involved?  What will happen if you choose one thing rather than another?  What do your feelings tell you?  What will you think of yourself if you decide one thing or another?  Can you explain and justify your decision to others?

14. What assumptions are we making in the resolution of a dilemma? What should you do if you can‘t answer these eight questions for the dilemma you are looking to resolve?

Some of the key assumptions in the application of these steps are:  There is sufficient time for the degree of contemplation that such questions require.

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There is enough information available to you to answer the questions.

The dilemma presents alternative resolutions for you to select from.

If the eight questions cannot be answered, then the analysis becomes a question of finding a palatable resolution that people can live with rather than the most appropriate solution.

15. What are Kohlberg‘s three levels of moral development?

Kohlberg‘s three levels of moral development are:  Preconventional  Conventional  Postconventional 16. What are the six stages of development in those three levels?

The six stages of development in Kohlberg‘s three levels of moral development are:  Level 1: Preconventional o Stage 1: Obedience and punishment orientation o Stage 2: Individualism, instrumentalism, and exchange  Level 2: Conventional o Stage 3: ―Good boy/nice girl‖ orientation o Stage 4: Law-and-order orientation  Level 3: Postconventional o Stage 5: Social contract orientation o Stage 6: Universal ethical principle orientation

Ethical Dilemma 1.1 – Peer Pressure 1.

In what ways does giving in to peer pressure constitute ethical relativism?

Students‘ responses will vary. In society, individuals and groups often feel pressured by their peers to perform tasks or to participate in other behaviors that they would not normally consider. Giving into peer pressure could constitute ethical relativism, where those traditions of the society, personal opinions, and the circumstances of the present moment define their ethical principles.

2.

How could you use your personal value system to fight back against peer pressure?

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Students‘ responses will vary. Individuals can choose not to contribute to peer pressure. For example, an individual can draw on their personal opinions, values, or beliefs to define their ethical principles and use those morals or traits to form an opinion against an action that contributes to peer pressure.

3.

How would you communicate the risks of sexting to students who are struggling to deal with peer pressure?

Students‘ responses will vary. Students need to be taught about the negative consequences and tragic incidents that have occurred related to sexting. Inform the students that they have the right to choose how they act or react towards peer pressure. Students need to be taught how to be individuals and how to make decisions that are legal and parallel with the traditions of society, their personal opinions, and their ethical principles.

4.

Is a change in the law the best option for addressing this problem? Why or why not?

Students‘ responses will vary. In some cases a change in the law could be beneficial by helping prosecute those who violate laws against sexting. In some cases individuals or groups perform acts because they know that it is against the law.

1.2 – The Overcrowded Lifeboat 1.

Did the captain make the right decision? Why or why not?

Students‘ responses will vary. This was a tough choice and the captain needed to analyze the consequences of his actions. He did not consider that the life boat may have been rescued before anyone died. The lives of innocent people cannot be sacrificed and the captain does not have the authority to decide who will or will not die.

2.

What other choices could the captain have made?

Students‘ responses will vary. The captain could have tried to contact emergency units or other nearby ships. The captain could have kept everyone on the lifeboat until help arrived, rather than sacrificing the weak.

3.

If you had been on the jury, how would you have decided? Why? Students‘ responses will vary. Some of them may support the captain‘s decision because saving the strong makes more sense than indirectly killing the strong because of the weak.

Others might oppose the captain‘s decision by saying that the captain wasn‘t the one who

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gave life to the people thus he was no one to decide whom to sacrifice.

4.

Which ethical theory or theories could be applied here?

Many of the students will tell that the ethics for the greater good theory and the universal ethics theory can be applied to this scenario. Ethics for the greater good theory focuses on the greatest good for the greatest number of people. The captain was trying to save as many people as possible, but in order to do that, he was willing to sacrifice others. Also, according to the universal ethics theory, actions are taken out of duty and obligation to a purely moral ideal rather than based on the needs of the situation and no one is accountable for the consequences of the actions taken. Sacrificing the weak could be seen as ethically justifiable because it saved some lives.

Frontline Focus ―Doing the Right Thing—Megan Makes a Decision‖ Questions 1.

Did Megan make the right choice here?

Megan did make the right choice by approving the Wilsons‘ application. As stated in the text, had Megan followed Kate‘s instructions, this would have been discriminatory and could have resulted in legal threats. Giving the apartment to the Wilsons will eliminate any guilty feelings Megan would have felt if she had followed Kate‘s instructions. Dealing with Kate will be much easier than legal suits.

2.

What do you think Kate‘s reaction will be?

Students‘ answers will vary. Kate could be very understanding or very angry with Megan. If she feels that she has something to prove as the new boss then Kate will most likely be angry and reprimand Megan for not following instructions.

3.

What would have been the risks for Oxford Lake if Megan had decided not to rent the apartment to the Wilsons?

Students‘ responses will vary. If Megan had listened to Kate and buried the Wilsons‘ file, Oxford Lake could have been brought into a legal situation for discriminatory action. Also, Oxford Lake‘s reputation was on the line with Megan‘s decision. A lawsuit could‘ve ruined the company‘s image and hurt their relationship with potential applicants/clients.

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Key Terms Applied Ethics: The study of how ethical theories are put into practice.

Culture: A particular set of attitudes, beliefs, and practices that characterize a group of individuals.

Ethical Dilemma: A situation in which there is no obvious right or wrong decision, but rather a right or right answer.

Ethical Reasoning: Looking at the information available to us in resolving an ethical dilemma and drawing conclusions based on that information in relation to our own ethical standards.

Ethical Relativism: Concept that the traditions of your society, your personal opinions, and the circumstances of the present moment define your ethical principles.

Ethics: The manner by which we try to live our lives according to a standard of ―right‖ or ―wrong‖ behavior—in both how we think and behave toward others and how we would like them to think and behave toward us.

The Golden Rule: Do unto others as you would have them do unto you.

Instrumental Value: The quality by which the pursuit of one value is a good way to reach another value. For example, money is valued for what it can buy rather than for itself.

Intrinsic Value: The quality by which a value is a good thing in itself and is pursued for its own sake, whether anything comes from that pursuit or not.

Society: A structured community of people bound together by similar traditions and customs.

Universal Ethics: Actions that are taken out of duty and obligation to a purely moral ideal rather than based on the needs of the situation, since the universal principles are seen to apply to everyone, everywhere, all the time.

Utilitarianism: Ethical choices that offer the greatest good for the greatest number of people.

Value System: A set of personal principles formalized into a code of behavior.

Virtue Ethics: A concept of living your life according to a commitment to the achievement of a clear ideal— what sort of person would I like to become, and how do I go about becoming that

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person?

Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions.

1.

Why do we study ethics?

Students‘ responses will vary. Individuals and groups study ethics to learn how and why people make right and wrong decisions.

2.

Why should we be concerned about doing ―the right thing‖?

Students‘ responses will vary. There are many laws and morals related to doing ―the right thing‖. Individuals learn to do the right thing to avoid going to prison or breaking the law.

3.

If each of us has a unique set of influences and values that contribute to our personal value system, how can that be applied to a community as a whole?

Students‘ responses will vary. Students can discuss the Golden Rule and how the greater good should be applied to community. Students should recall that in universal ethics, universal principles are applied to everyone. Individuals who have good personal value systems implement positive social change in their community.

4.

Is it unrealistic to expect others to live by the Golden Rule?

Students‘ responses will vary. Some students may respond that it is realistic to expect others to live by the Golden Rule—do onto others as you would have them do unto you.

5.

Consider how you have resolved ethical dilemmas in the past. What would you do differently now?

Students‘ responses will vary. Students should recall what they did to resolve an ethical dilemma in the past. Students should note the three-step process for resolving an ethical dilemma and how the outcome might have changed the resolution of the dilemma.

6.

What would you do if your resolution of an ethical dilemma turned out to be the wrong approach and it actually made things worse?

Student responses will vary. Many of them may say that they would learn from the situation

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and try to take a different decision the next time such a situation arises.

Review Exercises 1.

You buy a candy bar at the store and pay the cashier with a $5 bill. You are mistakenly given change from a $20 bill. What do you do?

Students‘ responses will vary. Some of the students may feel that they should tell the cashier that they paid with a $5 bill because after analyzing the consequences they should realize that the cashier‘s money drawer would be short that night and the cashier would probably be reprimanded. Also, following the virtue ethics theory discussed in the chapter, telling the cashier is the honorable and fair action to take.

2.

You are riding in a taxicab and notice a $20 bill that has obviously fallen from someone‘s wallet or pocketbook. What do you do?

Students‘ responses will vary. For some students the right thing to do would be to tell the cab driver. It may or may not be his payment/tip from a previous passenger. Others may take a more relativistic approach and decide that the earlier passenger may not notice the loss, and that the cab driver would probably keep the money if he/she found it, therefore it‘s ‗found money.‘

3.

You live in a small Midwestern town and have just lost your job at the local bookstore. The best-paying job you can find is at the local meatpacking plant, but you are a vegetarian and feel strongly that killing animals for food is unjust. What do you do?

Students‘ responses will vary. Most of the students may feel that they must analyze the consequences and actions of each option. If they feel strongly about working at the meatpacking plant, then should stay true to their values and begin looking for other options.

Are there other opportunities in the area? Can they commute or move to another town?

4.

You are having a romantic dinner with your spouse to celebrate your wedding anniversary.

Suddenly, at a nearby table, a man starts yelling at the young woman he is dining with and becomes so verbally abusive that she starts to cry. What do you do?

Students‘ responses will vary. Most of the students may feel that no one deserves to be abused, physically or verbally. One option could be to say something to your waiter/waitress and have management address the issue. Another option could be to approach the man; however, this would be interfering in a situation where you know very little of the facts.

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5.

You are shopping in a department store and observe a young man taking a watch from a display stand on the jewelry counter and slipping it into his pocket. What do you do?

Students‘ responses will vary. Most of the students may feel that the man is obviously stealing and should be punished for his actions. The most appropriate action would be to inform a store manager or employee that you witnessed the young man stick the watch in his pocket. Also, there may be some who feel indifferent about the action and may altogether ignore the incident.

6.

You are the manager of a nonprofit orphanage. At the end of the year, a local car dealer approaches you with a proposition. He will give you a two-year-old van worth $10,000 that he has just taken as a trade-in on a new vehicle if you will provide him with a tax-deductible donation receipt for a new van worth $30,000. Your current transportation is in very bad shape, and the children really enjoy the field trips they take. Do you accept his proposition?

Students‘ responses will vary. Most of the students may feel that this goes against values such as integrity, fairness, honor, etc. Although the children may really enjoy field trips and the orphanage may need new transportation, it would be unethical to accept this proposition.

The orphanage should fundraise for new transportation, rather than giving into a bribe.

Internet Exercises 1.

Visit the Center for the Study of Ethics in the Professions (CSEP) at the Illinois Institute of Technology: http://ethics.iit.edu. a.

What is the stated mission of CSEP? The Center for the Study of Ethics in the Professions (CSEP) was established in 1976 to promote research and teaching on practical moral problems in the professions. It generates professional ethics courses at IIT and assists faculty at other universities to prepare for teaching professional ethics and to develop courses and programs (http://ethics.iit.edu/about/history-mission-center).

b.

Identify and briefly summarize a current CSEP research project.

Student responses will vary. They may choose from the Codes of Ethics Collection, CSEP Publications, Ethics Education Library, NanoEthics Bank, Software Engineering Archive, Ethics in the Natural Course of Research, or IIT Code of Ethics.

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c.

Explain the purpose of the ―NanoEthicsBank.‖ The NanoEthicsBank is a database conceived as a resource for researchers, scholars, students, and the general public who are interested in the social and ethical implications of nanotechnology. It is part of the larger Harvard-based database NanoConnection to Society (http://ethics.iit.edu/research/nano-ethics-bank).

d.

Do you think that an ―Ethics Bowl‖ competition at your institution would be useful in discussing the issues of professional ethics? Why or why not?

Student responses may vary. Most of the students may feel that having an ―Ethics Bowl‖ at institutions would be useful as this would combine the excitement and fun of a competitive tournament with a valuable educational experience for the students.

2.

In these days of increasing evidence of questionable ethical practices, many organizations, communities, and business schools are committing to ethics pledges as a means of underscoring the importance of ethical standards of behavior in today‘s society. Using Internet research, find two examples of such pledges and answer the following questions: a.

Why did you select these two examples specifically?

Students‘ responses will vary.

b.

Why did each entity choose to make an ethical pledge?

Students‘ responses will vary based on the examples they choose.

c.

In what ways are the pledges similar and different?

Students‘ responses will vary based on the examples they choose.

d.

If you proposed the idea of an ethics pledge at your school or job, what do you think the reaction would be?

Students‘ responses will vary.

Team Exercises 1.

Take me out to the cheap seats.

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Divide into two groups and prepare arguments for and against the following behavior: My dad takes me to a lot of baseball games and always buys the cheapest tickets in the park.

When the game starts, he moves to better, unoccupied seats, dragging me along. It embarrasses me. Is it OK for us to sit in seats we didn‟t pay for?

Students‘ responses will vary. Some students may feel it is not OK to sit in seats that one didn‘t pay for. This is essentially stealing from the baseball park. The park is a business and their product is the ticket. Stealing is unethical and this person and his/her father should be sitting in the seats that they paid for. Others may argue that since the seats are going to waste anyway, where‘s the harm?

2.

Umbrella exchange.

Divide into two groups and prepare arguments for and against the following behavior: One rainy evening I wandered into a shop, where I left my name-brand umbrella in a basket near the door. When I was ready to leave, my umbrella was gone. There were several others in the basket, and I decided to take another name-brand umbrella. Should I have taken it, or taken a lesser-quality model, or just gotten wet?

Students‘ responses will vary. For most, stealing is unethical and this is what this scenario displays. This person should not have taken any other umbrella. It is unfortunate that the person‘s umbrella was stolen or mistakenly picked up, but that does not justify taking someone else‘s umbrella.

3.

A gift out of the blue.

Divide into two groups and prepare arguments for and against the following behavior: I‟m a regular customer of a men‟s clothing mail-order company, and it sends me new catalogs about six times a year. I usually order something because the clothes are good quality with a money-back guarantee, and if the item doesn‟t fit or doesn‟t look as good on me as it did in the catalog, the return process is very easy. Last month I ordered a couple of new shirts.

When the package arrived, there were three shirts in the box, all in my size, in the three colors available for that shirt. There was no note or card, and the receipt showed that my credit card had been charged for two shirts. I just assumed that someone in the shipping department was recognizing me as a valuable customer—what a nice gesture, don‟t you think?

Students‘ responses will vary. This would be a nice gesture if that was the case. This person is simply rationalizing why he should keep the shirts. If they were a gift, most likely there would have been a note accompanying his order explaining that the extra shirts were his

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valuable customer gift. Some of the students may feel that the person needs to call the company and tell them about the mistake.

4.

Renting a dress?

Divide into two groups and prepare arguments for and against the following behavior: My friend works for a company that manages fund-raising events for nonprofit organizations— mostly gala benefits and auctions. Since these events all take place in the same city, she often crosses paths with the same people from one event to the other. The job doesn‟t pay a lot, but the dress code is usually very formal. To stretch her budget and ensure that she‟s not wearing the same dress at every event, she buys dresses, wears them once, has them professionally dry-cleaned, reattaches the label using her own label gun, and returns them to the store, claiming that they were the wrong color or not a good fit. She argues that the dry-cleaning bill is just like a rental charge and she always returns them for store credit, not cash. The dress shop may have made a sale, but is this fair?

Students‘ responses will vary. Rationalization is taking place in this situation. Some students may feel that just because the store is making a sale does not mean that it is ethical to continuously return dresses for store credit after wearing them.

Thinking Critically 1.1 – Three Cups of Tea: Mismanagement or Fraud?

1. Based on the evidence presented in this case study, was Mortenson‘s work at the CAI an example of deliberate fraud or mismanagement? Defend your position.

Students‘ responses will vary based on their opinions or stands they take based on the information provided in the case. Specific details in the case support the allegations that much of Mortenson‘s story was either significantly embellished or fabricated. Mortenson, by contrast, blamed his coauthor‘s ―artistic license‖ and ―time compression‖ in telling his story as being at the root of much of the confusion and misinformation. Also, Penguin Publishing, the publisher, has admitted that minimal fact checking was performed in reviewing the first draft of the book.

2. How does the conduct of the CAI board relate to this case?

Students‘ responses will vary. The Central Asia Institute (CAI) board shouldn‘t have spent 2 million on private charter flights for Mortenson‘s speaking engagements, even when he was reimbursed for travel fees by event organizers. Further, it should have taken a bigger share

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(may be 45 to 49 percent) for its work in Central Asia. Although the CAI removed Mortenson from day-to-day operations (though he remains in a ―visionary‖ capacity with the organization), and appointed a new, larger, board of directors, these actions might have come in a bit late and may not be enough.

3. From a business ethics perspective, which was worse, the conduct of the CAI board or the conduct of Mortenson himself? Why? Students‘ responses will vary. Most students may feel Mortenson‘s conduct was worse because it was his actions that led to the CAI‘s conduct.

4. Why would CAI want to keep Mortenson in a ―visionary‖ capacity?

Students‘ responses will vary. Some of the students may feel that CAI kept Mortenson in a ―visionary‖ capacity because the idea of building schools in Korphe and other areas of Central Asia was originally his.

5. If Mortenson‘s claims have misled donors, should the CAI return the money? Why or why not?

Students‘ responses will vary. Some of the students may feel that since, Mortenson‘s claims have misled donors it will only be right or ethical for the CAI to return their money. Others may feel otherwise stating that it was not the CAI who misled the donors so there is no need to return the money, rather the CAI should make all possible fresh attempts to work toward building the schools.

6. What should be done to restore the reputation of the CAI? Students‘ responses will vary. Students may feel that the CAI should stay true and continue with its mission by building even more schools in Central Asia and actively supporting them.

1.2 – The Man Who Shocked the World 1. Critics of Milgram‘s research have argued that the physical separation between the participant and the teacher in one room and the learner in the other made it easier for the participant to inflict the shocks. Do you think that made a difference? Why or why not?

Students‘ responses will vary. The physical separation could have been a variable in the experiment affecting the outcome. However, the participants were still aware that the higher voltage shocks were supposed to be causing potentially fatal pain. The actor was still visible

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and participants were able to see the ―pain‖ they were causing by the shocks. It may have had a more dramatic effect on the participants to be in the same room as the learner.

2. The treatment of the participants in the study raised as much criticism as the results the study generated. Was it ethical to mislead them into believing that they were really inflicting pain on the learners? Why? Students‘ responses will vary. It was not unethical to mislead them in believing that they were really inflicting pain. This is essentially the same as medical experiments when patients are given a placebo pill or sugar pill. In addition, the participants were informed at the conclusion of the experiment.

3. The participants were introduced to the learners as equal participants in the study—that is, volunteers just like them. Do you think that made a difference in the decision to keep increasing the voltage? Why? Students‘ responses will vary. It is possible that participants continued increasing the voltage because they were under the impression that the learner was volunteering; although, it still should not have mattered when it came to a point of possible death. Volunteering to die is not an excuse to kill someone.

4. What do you think Milgram‘s research tells us about our individual ethical standards?

Students‘ responses will vary. Milgram‘s research tells us that our individual ethical standards are based on selfish reasons or on what we‘re told to do, rather than thinking of others.

5. Would you have agreed to participate in this study? Why or why not?

Students‘ responses will vary based on individual beliefs and value systems.

6. Do you think if the study were repeated today we would get the same kind of results? Why? Students‘ responses will vary. Many of them may say that if the study were repeated today, we wouldn‘t get the same kind of results because today people may come forward and accept that such experiments are wrong and shouldn‘t be done.

1.3 – Life and Death 1. Should people have the moral right to end their lives if they so please?

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Students‘ responses will vary. Suicide is not a moral right. Although some may feel that it will simply eliminate their pain and suffering, they are not thinking of all the pain and suffering that it will cause family and friends.

2. Does being near the end of one‘s life make the decision to end it justified?

Students‘ responses will vary. This would still be ending one‘s life earlier than it is meant to end. People will have differing opinions and views on these issues based on their personal or religious beliefs and upbringing.

3. What might the phrase ―right to die‖ mean?

Students‘ responses will vary. Many people use the phrase ―it‘s a free country‖ or push the issue of human rights. Just because it is your life doesn‘t give you the right or option to end it; if you do, it would still be classified as a suicide.

4. Do people have the right to seek assistance in dying?

Students‘ responses will vary. Assistance in dying would constitute unethical behavior. Our lives are meant to take their natural course, not to be ended by ourselves or anyone else.

5. Do people have the right to give assistance in dying?

Students‘ responses will vary. Some students may feel that people, who have no chance of recovering, are suffering, or are only being kept alive through man-made machines should have the right to be assisted in dying. These people should, after gaining the consent of their family, be taken off the machines and then allowed to let their natural life take its course.

6. What kind of restrictions, if any, should there be on assisted suicide?

Students‘ responses will vary.

CHAPTER 2 Defining Business Ethics

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Table of Contents Chapter Summary and Learning Outcomes Learning Outcomes Frontline Focus: ―The Customer is Always Right‖ Questions Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Learning Outcome 5 Learning Outcome 6 Life Skills Progress ✓Questions Ethical Dilemma Frontline Focus: ―The Customer is Always Right—Carol Makes a Decision‖ Questions Key Terms Review Questions Review Exercises Internet Exercises Team Exercises Thinking Critically

2-2 2-2 2-2 2-3 2-3 2-4 2-5 2-5 2-6 2-6 2-7 2-10 2-13 2-13 2-14 2-15 2-16 2-16 2-19

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Chapter Summary This chapter begins by defining how ethics are applied to business behavior. It describes and explains who the stakeholders are in an organization, their interests in the organization, and the impact on them from unethical behavior. Many people, because of the track record over the past two decades, believe that business ethics is an oxymoron, the combination of two contradictory terms. This chapter also discusses the history of business ethics and the dramatic changes that have taken place in the business environment over the last five decades. It continues going into deeper detail about the definition and resolution of ethical dilemmas. It discusses four commonly held rationalizations that can lead to misconduct. In conclusion, this chapter begins looking at the aspects in building and operating an ethical business.

Learning Outcomes After studying this chapter, the student should be able to: 1.

2.

3.

4.

5.

6.

Define the term business ethics.

Identify an organization‘s stakeholders.

Discuss the position that business ethics is an oxymoron.

Summarize the history of business ethics.

Identify and propose a resolution for an ethical dilemma in your work environment.

Explain how executives and employees seek to justify unethical behavior.

Extended Chapter Outline Frontline Focus ―The Customer is Always Right‖ Questions 4. Look at Figures 2.1 and 2.2, and identify which stakeholders would be directly impacted by Dave‘s plan to sabotage the new healthy menu.

The stakeholders that would be directly impacted by Dave‘s plan would include customers, employees, and stockholders or shareholders.

5.

Describe the ethical dilemma that Carol is facing here.

Carol is faced with the ethical dilemma of whether to abide or not to abide by Dave‘s new plan.

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6.

What should Carol do now?

Carol must decide if her values are strong enough to stand up to this dilemma. She could go along with Dave‘s plan and limit the number of new items and push side items and desserts; or, if her values do not agree with Dave‘s, Carol could leave the company or could express her opinion to Dave‘s boss.

Learning Outcome 1: Define the Term Business Ethics.  





Business ethics is the application of ethical standards to business behavior.

Students of business ethics can approach the topic from two distinct perspectives: o A descriptive summation of the customs, attitudes, and rules that are observed within a business. o A normative (or prescriptive) evaluation of the degree to which the observed customs, attitudes, and rules can be said to be ethical.

In either case, business ethics should not be applied as a separate set of moral standards or ethical concepts from general ethics. o Ethical behavior, it is argued, should be the same both inside and outside a business situation.

By recognizing the challenging environment of business, people are acknowledging the identity of the key players impacted by any potentially unethical behavior—the stakeholders. o In addition, people can identify the troubling situation where their personal values may be placed in direct conflict with standards of behavior they feel are expected of them by their employer.

Learning Outcome 2: Identify an Organization’s Stakeholders. 

 

Figure 2.1 maps out the relevant stakeholders for any organization and their respective interests in the ethical operation of that organization—stockholders or shareholders, employees, customers, suppliers/vendor partners, retailers/wholesalers, federal government, creditors, and community.

A stakeholder is someone with a share or interest in a business enterprise.

Not every stakeholder will be relevant in every business situation. o Not all companies use wholesalers to deliver their products or services to their customers. o Customers would not be involved in payroll decisions between the organization and its employees.

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

Of great concern is the involvement of stakeholders with the actions of the organization and the extent to which they would be impacted by unethical behavior.

Learning Outcome 3: Discuss the Position that Business Ethics is an Oxymoron.  









Over the last two decades, the ethical track record of many organizations would lead people to believe that no ethical policies or procedures have been in place.

Corporate governance is the system by which business corporations are directed and controlled. o It is the extent to which the officers of a corporation are fulfilling the duties and responsibilities of their offices to the relevant stakeholders.

The standard of corporate governance appears to be at the lowest level in business history: o Several prominent organizations—Enron, WorldCom, Lehman Brothers, Bear Stearns—have been found to have hidden the true state of their precarious finances from their stakeholders. o Others—Adelphia Cable, Tyco, and Merrill Lynch—have been found to have senior officers who appeared to regard the organization‘s funds as their personal bank accounts. o Financial reports are released that are then restated at a later date. o Products are rushed to market that have to be recalled due to safety problems at a later date (Toyota). o Organizations are being sued for monopolistic practices (Microsoft), race and gender discrimination (Walmart, Texaco, Denny‘s), and environmental contamination (GE). o CEO salary increases far exceed those of the employees they lead. o CEO salaries have increased while shareholder returns have fallen. o CEOs continue to receive bonuses while the stocks of their companies underperform the market average and thousands of employees are being laid off.

Therefore, it is understandable that many observers would believe that the business world lacks any sense of ethical behavior whatsoever. o Some would even argue that the two words are incompatible and ―business ethics‖ is really an oxymoron—the combination of two contradictory terms, such as ―deafening silence‖ or ―jumbo shrimp‖.

While these may not be the best of times for business ethics, it could be argued that the recent negative publicity has served as a wake-up call for many organizations to take a more active role in establishing standards of ethical conduct in their daily operations. o One of the key indicators in this process has been the increased prominence of a formal code of ethics in an organization‘s public statements.

Code of ethics is a company‘s written standards of ethical behavior that are designed to guide managers and employees in making the decisions and choices they face every day.

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o

The code of ethics can be seen to serve a dual function:  As a message to the organization‘s stakeholders, the code should represent a clear corporate commitment to the highest standards of ethical behavior.  As an internal document, the code should represent a clear guide to managers and employees in making the decisions and choices they face every day.

Learning Outcome 4: Summarize the History of Business Ethics o

Figure 2.3 illustrates several dramatic changes that have taken place in the business environment over the last five decades: o The increased presence of an employee voice has made individual employees feel more comfortable speaking out against actions of their employers that they feel to be irresponsible or unethical. o The issue of corporate social responsibility has advanced from an abstract debate to a core performance-assessment issue with clearly established legal liabilities. o Corporate ethics has moved from the domain of legal and human resource departments into the organizational mainstream with the appointment of corporate ethics officers with clear mandates. o Codes of ethics have matured from cosmetic public relations documents into performance-measurement documents that an increasing number of organizations are now committing to share with all their stakeholders. o The 2002 Sarbanes-Oxley Act has introduced greater accountability for chief executive officers and boards of directors in signing off on the financial performance records of the organizations they represent.

Learning Outcome 5: Identify and Propose a Resolution for an Ethical Dilemma in Your Work Environment. 

 

When employees observe unethical behavior (e.g., fraud, or theft of company property) or are asked to do something that conflicts with their own personal values, the extent of the guidance available to them is often a series of clichés: o Consult the company code of ethics. o Do what‘s right for the organization‘s stakeholders. o Do what‘s legal. o Do what you think is best (―use your best judgment‖). o Do the right thing.

Ethical dilemma is a situation in which there is no obvious right or wrong decision, but rather a right or right answer.

Resolution of an ethical dilemma can be achieved by first reorganizing the type of conflict people are dealing with:

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o



Truth versus loyalty—do you tell the truth or remain loyal to the person or organization that is asking you not to reveal that truth? o Short-term versus long-term—does your decision have a short-term consequence or a longer-term consequence? o Justice versus mercy—do you perceive this issue as a question of dispensing justice or mercy? (Which one are you more comfortable with?) o Individual versus community—will your choice affect one individual or a wider group or community?  In the examples given above, both sides are right to some extent, but since people can‘t take both actions, they are required to select the better or higher right based on their own resolution process.

Once people have reached a decision as to the type of conflict they are facing, three resolution principles are available to them: o Ends-based—which decision would provide the greatest good for the greatest number of people? o Rules-based—what would happen if everyone made the same decision as you? o

The Golden Rule—do unto others as you would have them do unto you.  None of these principles can be said to offer a perfect solution or resolution to the problem because one cannot possibly predict the reactions of the other people involved in the scenario.  However, the process of resolution at least offers something more meaningful than ―going with your gut feeling‖ or ―doing what‘s right.‖

Learning Outcome 6: Explain How Executives and Employees Seek to Justify Unethical Behavior. 

Saul Gellerman identified ―four commonly held rationalizations that can lead to misconduct‖: o A belief that the activity is within reasonable ethical and legal limits—that is, that it is not “really” illegal or immoral. o A belief that the activity is in the individual‟s or the corporation‟s best interests— that the individual would somehow be expected to undertake the activity. o A belief that the activity is safe because it will never be found out or publicized—the classic crime-and-punishment issue of discovery. o A belief that because the activity helps the company, the company will condone it and even protect the person who engages in it.

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Life Skills Making Tough Choices This Life Skills box discusses what happens when your personal values appear to directly conflict with those of your employer. Three options are open—leave and find another job; keep your head down, do what you have been asked to do, and hold on to the job; or, talk to someone in the company about how uncomfortable the situation is making you feel and see if you can change things. All three options are tough choices.

Progress Questions 1.

Explain the term business ethics.

Business ethics is the application of ethical standards to business behavior.

2.

Explain the difference between a descriptive and prescriptive approach to business ethics.

A descriptive approach is a descriptive summation of the customs, attitudes, and rules that are observed within a business. This involves documenting what is happening.

A prescriptive approach is a prescriptive evaluation of the degree to which the observed customs, attitudes, and rules can be said to be ethical. This involves recommending what should be happening.

3.

Identify six stakeholders of an organization.

Stakeholders of an organization can include stockholders or shareholders, employees, customers, suppliers or vendor partners, retailers or wholesalers, federal government, creditors, and community.

4.

Give four examples of how stakeholders could be negatively impacted by unethical corporate behavior.

The following are four examples of how stakeholders could be negatively impacted by unethical corporate behavior:  Stockholders could lose value of their stock ownership.  Employees could lose their job.  Customers could receive poor service quality.  Suppliers may not be paid for invoices when a company declares bankruptcy.

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5.

Define the term oxymoron and provide three examples.

An oxymoron is the combination of two contradictory terms, such as ―deafening silence,‖ ―jumbo shrimp,‖ or ―authentic reproduction.‖

6.

Is the term business ethics an oxymoron? Explain your answer.

Student answers will vary. Given the ethical track record of organizations over the last several decades, many students may believe that the business world lacks any sense of ethical behavior. Thus, they will argue that the two words ―business‖ and ―ethics‖ are as incompatible as in an oxymoron.

7.

Define the term corporate governance.

Corporate governance is the system by which business corporations are directed and controlled.

8.

Explain the term code of ethics.

A code of ethics is a company‘s written standards of ethical behavior that are designed to guide managers and employees in making the decisions and choices they face every day.

9.

Identify a major ethical dilemma in each of the last five decades.

Following are some of the major ethical dilemmas in each of the last five decades:  1960s—environmental issues, increased employee-employer tension, civil rights issues dominate, honesty, the work ethic changes, and drug use escalates.  1970s—employee militancy, human rights issues surface, and some firms choose to cover rather than correct dilemmas.  1980s—bribes and illegal contracting practices, influence peddling, deceptive advertising, financial fraud, and transparency issues arise.  1990s—unsafe work practices in Third World countries, increased corporate liability for personal damage, and financial mismanagement and fraud.  2000s—cyber crime, increased corporate liability, privacy issues, financial mismanagement, international corruption, loss of privacy, and intellectual property theft.

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10. Identify a key development in business ethics in each of the last five decades.

Following are the key developments in business ethics in each of the last five decades:  1960s: o Companies begin establishing codes of conduct and values statements o Birth of social responsibility movement o Corporations address ethics issues through legal or personnel departments  1970s: o Ethics Resource Center (ERC) founded (1977) o Compliance with laws highlighted o Federal Corrupt Practices Act passed in 1977 o Values movement begins to move ethics away from compliance orientation to being ―values centered‖  1980s: o ERC develops the U.S. Code of Ethics for Government Service o ERC forms first business ethics office at General Dynamics o Defense Industry Initiative established o Some companies create ombudsman positions in addition to ethics officer roles o False Claims Act (government contracting)  1990s: o Federal Sentencing Guidelines (1991) o Class action lawsuits. o Global Sullivan Principles (1999 o In re Caremark o ERC establishes international business ethics centers o Royal Dutch/Shell International begins issuing annual reports on its ethical performance  2000s: o Business regulations mandate stronger ethical safeguards (Federal Sentencing Guidelines for Organizations; Sarbanes-Oxley Act of 2002) o Anticorruption efforts grow o Shift to emphasis on corporate social responsibility and integrity management o Formation of international ethics centers to serve the needs of global business o OECD Convention on Bribery (1997-2000) 11. Which decade saw the most development in business ethics? Why? The 1990s saw the most developments in business ethics because of global expansion and the emergence of the Internet.

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12. Which decade saw the most ethical dilemmas? Why? The 2000s saw the most ethical dilemmas because of the Internet, international expansion, and financial mismanagement.

17. Give four examples of the clichés employees often hear when faced with an ethical dilemma.

Some examples of the clichés employees often hear when faced with an ethical dilemma are:  Consult the company code of ethics.  Do what‘s right for the organization‘s stakeholders.  Do what‘s legal.  Do what you think is best (―use your best judgment‖).  Do the right thing.

18. List the four types of ethical conflict.

The four types of ethical conflict are:  Truth versus loyalty  Short-term versus long-term  Justice versus mercy  Individual versus community 19. List the three principles available to you in resolving an ethical dilemma.

The three principles for resolving an ethical dilemma are:  Ends-based  Rules-based  The Golden Rule 20. Give an example of an ethical business dilemma you have faced in your career, and explain how you resolved it, indicating the type of conflict you experienced and the resolution principle you adopted.

Students‘ responses will vary. The ethical dilemma described should fit the definition—a situation in which there is no obvious right or wrong decision, but rather a right or right answer.

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Ethical Dilemma 2.1 – The Ford Pinto 1.

Should a manufacturer go beyond government standards if it feels there may be a potential safety hazard with its product?

Students‘ responses will vary. Students may argue that a manufacturer should go above and beyond the government‘s standards if it feels there may be a potential safety hazard with its products. Other will argue that a manufacturer will only do what is required by government standards. However, to remain competitive in the marketplace, a manufacturer can go above and beyond to ensure that the consumer is safe. This strategy not only benefits the stakeholders, but also establishes a positive reputation within the industry.

2.

Once the safety issue became apparent, should Ford have recalled the vehicle and paid for the retrofit? Should it have invited owners to pay for the new barrier if they so chose? If only half the owners responded to the recall, what would the company‘s obligation be?

Student responses will vary. Some of the students may feel that Ford should have recalled the vehicle and paid for the retrofit once they knew that there was a safety issue. Ford‘s obligation would be far less if only half the owners responded to the recall; and the company needed to pay for the new barrier to project to consumers that they care about consumers‘ wellness and business.

3.

Is there a difference for a consumer between being able to make a conscious decision about upgrading safety features (such as side airbags) and relying on the manufacturer to determine features such as the tensile strength of the gas tank?

Student responses will vary. There is a huge difference between being able to make a conscious decision about a safety-feature upgrade and relying on a manufacturer to determine the safety features. Typically, manufacturers only have the obligation to offer basic or required safety features on the automobiles sold to consumers.

4. Once Pintos had a poor reputation, they were often sold at a discount. Do private sellers have the same obligations as Ford if they sell a car they know may have design defects? Does the discount price absolve sellers from any responsibility for the product?

Student responses will vary. Private owners should have the same obligation as Ford if they sell a car they know may have design defects. A discount price should not absolve sellers

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from any responsibility for the product. It is important for sellers to have a strong code of ethics in their business transactions.

2.2 – Three-Card Monte 5.

Summarize the positions of both critics and supporters of these tax strategies.

Critics call the tax strategies (the movement of those funds) by many companies as deliberate tax avoidance; and supporters call it profit maximization.

6.

Supporters and critics of these tax strategies agree that corporations are making use of legal financial options that are available to them under current tax law. However, does that equate to ethical business conduct? Why or why not?

Student responses will vary. Some of them may say that what Microsoft, Apple, HewlettPackard (HP), and Google are doing does not equate to ethical business conduct. They may cite the following reasons to support their answer:  Microsoft elected to shift the intellectual property (IP) rights for software that the company developed in America to Puerto Rico, Ireland, and Singapore. As a result, the earnings from those IP rights can now be taxed at a much lower local rate rather than at the American rate of as much as 35 percent, which contributes significantly to Microsoft‘s overall tax rate of only 4 percent.  Google avoided almost $2 billion in worldwide income taxes in 2011 by moving $9.8 billion in revenues to a Bermuda shell company (where there is no corporate income tax). o Should any one of these companies ever need any of the money being held overseas, rather than ―repatriating‖ the funds (and paying taxes), the company simply borrows the money from its subsidiary as a short-term loan (and pays no taxes). o Students may not find this deliberate act to avoid tax an ethical business conduct.

7.

The French chairman and CEO of Louis Vuitton, Bernard Arnault, recently announced that he was leaving France for Belgium, allegedly to avoid the new highest-income tax rate of 75 percent. Is that any different from what corporations are doing? Why or why not?

Student responses will vary. Arnault is leaving France just to avoid paying high income taxes. This is no different from what corporations are doing because. Microsoft, for example, elected to shift the intellectual property (IP) rights for software that the company developed in America to Puerto Rico, Ireland, and Singapore so that the earnings from those IP rights can be taxed at a much lower local rate rather than at the American rate of as much

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as 35 percent, which contributes significantly to Microsoft‘s overall tax rate of only 4 percent. Should it ever need of any of the money being held overseas, rather than ―repatriating‖ the funds (and paying taxes), the company simply borrows the money from its subsidiary as a short-term loan (and pays no taxes).

8.

Is there a potential solution that would represent a more ethical business approach to the payment of corporate taxes? Explain your answer.

Student responses will vary. Some of them may suggest that corporations who pay their taxes on time could be given some kind of a subsidy.

Frontline Focus ―The Customer Is Always Right—Carol Makes a Decision‖ Questions 4. Did Carol make the right choice here?

Students‘ answers will vary. Carol did a good job of keeping track of the sales and information needed to show Dave that he wouldn‘t have to purposely run out of new items.

She also was able to keep customers happy while she gathered the information. However, she will need to present this information to Dave in a professional and courteous manner so that she does not to insult him or his idea.

5. What do you think Dave‘s reaction will be?

Students‘ answers will vary. Dave‘s reaction will depend on how Carol approaches him with the information. If she accuses him of being unethical and wrong, Dave will not be happy and probably reprimand Carol for not following instructions. If Carol can portray the information in a manner that does not insult Dave, she may be rewarded for taking initiative as an innovative and inspiring team leader.

6. What would the risk have been for the restaurant if it had implemented Dave‘s plan and deliberately run out of the new items?

Students‘ answers will vary. The risk would have been the loss of customers, both old and new. Customers loyal to the old menu items would continue to purchase those items, with an occasional new item. However, new customers would be driven away and frustrated if they were constantly told that the restaurant was out of an item and offered something else instead.

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Key Terms Business Ethics: The application of ethical standards to business behavior.

Code of Ethics: A company‘s written standards of ethical behavior that are designed to guide managers and employees in making the decisions and choices they face every day.

Corporate Governance: The system by which business corporations are directed and controlled.

Ethical Dilemma: A situation in which there is no obvious right or wrong decision, but rather a right or right answer.

Oxymoron: The combination of two contradictory terms, such as ―deafening silence‖ or ―jumbo shrimp.‖ Stakeholder: Someone with a share or interest in a business enterprise.

Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions.

4.

Based on the history of business ethics reviewed in this chapter, do you think the business world is becoming more or less ethical? Explain your answer.

Students‘ responses will vary. Some students may say that the business world is becoming less ethical based on the number of bailouts that resulted from the financial crisis in 2008 and 2009. Government is increasing the laws, regulations, and the punishment associated with unethical behavior and in the long run this will make businesses become more ethical.

Others may say regulation is creating more problems, rather than solving them.

5.

How would you propose the resolution of an ethical dilemma using The Golden Rule?

Student responses will vary. Students need to propose an ethical dilemma and use the Golden Rule—do unto others as you would have them do unto you—in their responses.

6.

Why should a short-term or long-term consequence make a difference in resolving an ethical dilemma?

Student responses will vary. The resolution of any ethical dilemma requires the recognition of the type of conflict at hand. Individuals can see both the short-term and long-term

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consequences that result in unethical behavior. Short-term consequences may require a different resolution principle. For example, for a long-term consequence, the manager could consider an ends-based resolution principle; and for a short-term consequence, the manager may consider the Golden Rule resolution principle or the rules-based resolution principle.

7.

Of the four commonly held rationalizations for unethical behavior proposed by Saul Gellerman, which one do you think gets used most often? Why? The students‘ responses will vary based on their perceptions, but students are expected to include one of Gellerman‘s four rationalizations in their responses.

8.

Is it ever acceptable to justify unethical behavior? Why or why not?

Student responses will vary. However, it is never acceptable to justify unethical behavior.

Most organizations have formal code of ethics and they expect their employees to adhere to them.

9.

Explain what ―doing the right thing‖ in a business environment means to you.

The students‘ responses will vary. The student should explain his/her view of what ―doing the right thing‖ in a business environment means to the individual student.

Review Exercises 7.

Since you are traveling on company time, does the free ticket belong to you or your company? Defend your choice.

Student responses will vary. The ticket belongs to the company. The company is paying for your travel expenses; therefore, the ―right thing to do‖ is to professionally and ethically represent your company and complete the assignment at the best of your ability.

8.

If the later flight was actually the next day (and the airline offered you an accommodation voucher along with the meal vouchers) and you would be late getting into work, would you make the same choice? Explain your answer.

Student responses will vary. If there was no way around this situation, then this would be fine. However, if you simply chose to take the late flight to receive the upgrades, then it would not be fair to your employer. A better choice would be to take the flight that was originally booked and return to work as scheduled.

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9.

What if the offer only reached a $100 discount coupon on another ticket —would you still take it? If so, would you hold the same opinion about whether the coupon belonged to you or your company?

Student responses will vary. The amount of extra time spent waiting for the late flight would not be worth the $100 discount on another ticket, especially if it means getting to work late.

If the discount were taken, the coupon would belong to the company.

10. Should your company offer a clearly stated policy on this issue, or should it trust its employees to ―do the right thing?‖ Explain your answer.

Student responses will vary. There should be a clearly stated policy regarding traveling on company time and resources. However, there will always be situational issues that arise that may or may not be covered, in which case the company should trust their employees, along with giving them ethical training.

Internet Exercises 1.

Locate the website for the Ethics Compliance Initiative (ECI) and review the ‗Ethics Compliance Toolkit‘. The ‘PLUS Ethical Decision-Making Model‘ lists seven steps to ethical decision making. What are they?

Step 1: Define the problem Step 2: Seek out relevant assistance, guidance and support.

Step 3: Identify alternatives.

Step 4: Evaluate the alternatives.

Step 5: Make the decision Step 6: Implement the decision Step 7: Evaluate the decision

2.

The Ethics Resource Center (www.ethics.org) is also part of the ECI. a. What is the stated mission of the ECI? When accessed on May 27, 2019, the following information was available on the website: The Ethics & Compliance Initiative (ECI) is a non-profit organization that empowers its members across the globe to operate their businesses at the highest levels of integrity. The organization provides research and a best practice community, as well as certification opportunities for ethics & compliance professionals. Through its membership, ECI represents entities across nearly every industry, located in 37 countries on six continents each dedicated to promoting the highest levels of integrity.

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b.

List the three categories of ECI research.

1. Workplace integrity 2. Ethical standards 3. Compliance processes and practices.

c.

Identify the topic of the most recent Global Business Ethics Survey When accessed on May 27, 2019, the site listed a four-part series for 2018:  The State of Ethics & Compliance in the Workplace  Measuring the Impact of Ethics & Compliance Programs  Building Companies Where Values and Ethical Conduct Matter.  Interpersonal Misconduct in the Workplace

Team Exercises 5. Thanks for the training!

Divide into two groups and prepare arguments for and against the following behavior: You work in the IT department of a large international company. At your annual performance review, you were asked about your goals and objectives for the coming year and you stated that you would like to become a Microsoft Certified Systems Engineer (MCSE). You didn‟t get much of a pay raise (yet another cost-cutting initiative!), but your boss told you there was money in the training budget for the MCSE course—you‟re attending the training next week. However, after receiving the poor pay raise, you had polished your resume and applied for some other positions. You received an attractive job offer from another company for more money, and, in the last interview, your potential new boss commented that it was a shame you didn‟t have your MCSE certification because that would qualify you for a higher pay grade. The new company doesn‟t have the training budget to put you through the MCSE training for at least two years. You tell the interviewer that you will complete the MCSE training prior to starting the new position in order to qualify for the higher pay grade. You choose not to qualify that statement with any additional information on who will be paying for the training. You successfully gain the MCSE certification and then give your two weeks‟ notice. You start with your new company at the higher pay grade. Is that ethical?

Group responses will vary. Many people do move on to new jobs after receiving training from one company. If there is no stipulation in the company policy stating the employee must work for a specified time period upon completion of training to be fully paid for by the company, then it is the employee‘s right to search for other jobs. Many companies will only

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pay for certification courses if the employee agrees to work for them for a certain time period; otherwise, if the employee decides to leave, then the certification is their financial obligation.

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6. What you do in your free time…

Divide into two groups and prepare arguments for and against the following behavior: You are attending an employee team-building retreat at a local resort. During one of the free periods in the busy agenda, you observe one of your colleagues in a passionate embrace with a young woman from another department. Since you work in HR and processed the hiring paperwork on both of them, you know that neither one of them is married, but your benefit plan provides coverage for “life partners,” and both of them purchased health coverage for life partners. As you consider this revelation further, you are reminded that even if they have both ended their relationships with their respective partners, the company has a policy that expressly forbids employees from dating other employees in the company. Both you and the colleague you observed have applied for the same promotion—a promotion that carries a significant salary increase. What is your obligation here? Should you report him to your boss?

Group responses will vary. This is a tough scenario. If you do not inform your boss of your colleague, then there are potential problems if something should happen between the two ―partners‖ or if someone else were to see them together. Plus, if the company has a clearly stated policy on employees not dating other employees, then your colleague should be reported. However, if you do report your colleague, it may seem as though you are motivated by the promotion for which you and the colleague are both applying. This may cause some inter-office conflict, especially if the colleague discovers who reported his actions to the boss.

7. Treatment or prevention?

Divide into two groups and prepare arguments for treatment (Group A) and prevention (Group B) in the following situation: You work in your city for a local nonprofit organization that is struggling to raise funds for its programs in a very competitive grant market. Many nonprofits in your city are chasing grant funds, donations, and volunteer hours for their respective missions— homelessness, cancer awareness and treatment, orphaned children, and many more. Your organization‟s mission is to work with HIV/AIDS patients in your community to provide increased awareness of the condition for those at risk and also to provide treatment options for those who have already been diagnosed. Unfortunately, with such a tough financial situation, the board of directors of the nonprofit organization has determined that a more focused mission is needed. Rather than serving both the prevention and treatment goals, the organization can only do one. The debate at the last board meeting, which was open to all employees and volunteers, was very heated. Many felt that the

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treatment programs offered immediate relief to those in need, and therefore represented the best use of funds. Others felt that the prevention programs needed much more time to be effective and that the funds were spread over a much bigger population who might be at risk. A decision has to be reached. What do you think?

Group responses will vary. If the organization decided to focus on the treatment, then they would provide some relief to those who are suffering. It is extremely expensive to treat these patients; therefore, these patients would be grateful for the options and help provided.

However, if the organization focuses on treatment, then it may send a signal to the community that the organization emphasizes prevention. More people could potentially be saved through prevention methods rather than waiting until they have contracted the disease.

8. Time to raise prices…

Divide into two groups and prepare arguments for and against the following behavior: You are a senior manager at a pharmaceutical company that is facing financial difficulties after failing to receive FDA approval for a new experimental drug for the treatment of Alzheimer‟s disease. After reviewing your test data, the FDA examiners decided that further testing was needed. Your company is now in dire financial straits.

The drug has the potential to revolutionize the treatment of Alzheimer‟s, but the testing delay could put you out of business. The leadership team meets behind closed doors and decides the only way to keep the company afloat long enough to bring the new drug to market is to raise the prices of its existing range of drug products. However, given the financial difficulties your company is facing, some of those price increases will exceed 1,000 percent. When questions are raised about the size of the proposed increases, the chief executive officer defends the move with the following response: “Look, our drugs are still a cheaper option than surgery, even at these higher prices; the insurance companies can afford to pick up the tab; and, worst case scenario, they‟ll raise a few premiums to cover the increase. What choice do we have? We have to bring this new drug to market if we are going to be a player in this industry.”

Group responses will vary. The company needs to look at all possible options before deciding to increase prices. The company should try to minimize the increase in price if this is the only option and then increase the drugs with the smallest profit margin. The ethical issue in this situation is a matter of price gouging, though this company would not be increasing prices only to stay in business, and not just to improve their bottom line. It is not unethical to charge more than other businesses. The idea that this new drug, once further tested, could really help with the treatment of Alzheimer‘s could potentially help a lot of people.

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Thinking Critically 2.1 – Marriott: Wi-Fi As a Service or Revenue Stream??

7.

What is the FCC‘s position on Wi-Fi jamming?

The FCC provides clear instructions on its website that Wi-Fi jamming is illegal.

8.

What is the position of hotels and convention centers?

Students‘ responses will vary. The opportunity for additional revenue from guests is attractive but there are also security and maintenance issues to consider. Personal wi-fi hotspots can present a security risk, and the use of multiple hotspots in one location, such as a large hotel or convention hall, can drain the performance of the network and even overwhelm the capacity of the system.

9.

Is there room for negotiation? Would less exorbitant fees draw less anger?

Students‘ responses will vary. Hotels and convention centers see a potential downside that far exceeds any increased customer satisfaction. The loss of revenue combined with additional capital costs to upgrade their networks to support multiple personal hotspots seems, from their perspective, to be an unattractive proposition. Customers see themselves as a captive market and find no justification for a jammed signal – especially when the FCC has declared the practice to be illegal. Lower fees might draw less anger.

10. How should these companies balance their obligation to shareholders to make money against the obligation to provide good customer service?

Student responses will vary. Since wi-fi access is such a pain-point for customers, hotels and convention centers could raise revenue elsewhere – rooms, food, amenities – to offset the loss of wi-fi revenue.

11. Is the FCC being too extreme in its position? Why or why not?

Student responses will vary. Potential security risks are presented in defense of charging access fees, but without evidence of actual security breaches, the argument is weak and seems designed to support revenue generation more than anything else.

12. Is there potential for an equitable resolution of this issue? Why or why not?

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Students‘ responses will vary. Since the optimum solution appears to be giving up revenue and investing capital in higher grade network systems in the name of increased customer satisfaction, an equitable solution seems unlikely.

2.2 – Unequivocal Dedication to Business Ethics?

7.

Visit the website for BELA at www.ethisphere.com/bela. Define the three areas of performance for the World‘s Most Ethical Companies in detail, and explain which one you think will be the hardest for members to achieve and why.

Students‘ responses will vary. When the website was accessed on November 6, 2016, the scoring had been changed to a corporate Ethics Quotient (EQ) of five categories: Ethics and Compliance Program (35%), Corporate Citizenship and Responsibility (20%), Culture of Ethics (20%), Governance (15%), and Leadership, Innovation and Reputation (10%).

The case material still references the three performance areas: ―promoting ethical business standards and practices internally, enabling managers and employees to make good choices, and shaping future industry standards by introducing tomorrow‘s best practices today.‖

8.

Do you think it was a good idea to welcome founding members with such widely publicized ethical transgressions in their past? Why or why not?

Students‘ responses will vary. Some of the students may find it a good idea because regardless of their past, the council members provide access to important resources to help individuals do their jobs.

9.

BELA is a U.S.-driven initiative at the moment. Do you think it will achieve a wider global acceptance over time? Why or why not?

Students‘ responses will vary. Some of them may say that as time progresses and the role of ethics becomes a wide-spread initiative, it is hopeful that it will achieve a wider global acceptance over a period of time.

10. Are the three key products enough to establish a credible reputation as an ethical company?

What other values would you consider adding and why?

Students‘ responses will vary. Some of them may say that these products (or the EQ) will be enough to enhance the opportunities to develop a credible reputation as an ethical company.

Some of them may say that a commitment to sustainability by following environment friendly ways may also help establish a credible reputation as an ethical company.

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11. Cynics could argue that this is simply a public relations exercise for companies that have performed unethical business practices in the past. Optimists could argue that this is, at the very least, a step in the right direction of restoring the ethical reputation of business as a whole. What do you think?

Students‘ responses will vary. Some of them may say that hopefully it is a step in the right direction of restoring the ethical reputation of the business. It is very difficult to re-establish a positive image and reputation once it has been tarnished.

12. According to the rules of BELA, members will be audited every two years to make sure they are in compliance with BELA standards, and can face removal from the alliance should that audit provide evidence of failure to comply. Do you think the threat of removal from the alliance will keep members in line? Why or why not?

Students‘ responses will vary. Some students may find that the threat of removal from the alliance is an incentive to keep members in line. Although some members of the alliance may partake in unethical practices, it is hopeful that they would learn how to and continue to make strong ethical decisions.

2.3 – Drug Prices: Market Pricing or Price Gouging?

7.

Why doesn‘t the United States have a formal drug policy?

Students‘ responses will vary. The US supports open market pricing in the belief that healthy competition will deliver low prices to consumers. The market reality is very different.

8.

Why would pharmaceutical companies choose to raise prices in direct contradiction to the President‘s request to hold them level?

Students‘ responses will vary. The request from President Trump was in anticipation of a national plan to lower drug prices that, at the time of writing, has yet to materialize. The pharmaceutical companies may have made the strategic decision to raise prices before that plan came into effect, or they may have been sending a more direct message that they would not support such a plan.

9.

Is there a conflict of interest in the relationship between pharmaceutical companies and the PBM‘s? Why or why not?

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Students‘ responses will vary. PBM‘s are assessed on their ability to keep drug costs down for the insurance companies. The lack of alternative vendors (M&A and no competition) gives them very little leverage to work with. That, combined with deliberately convoluted pricing models would appear to make this a very one-sided relationship in favor of the drug companies. It is difficult to see a conflict of interest on that basis.

10. Which of the three key factors supporting high drug prices is the least ethical? Explain your reasoning and propose a practical solution.

For #1 (Mergers and Acquisitions), the choice to buy companies with an established product portfolio can be seen to support maximized shareholder value in the short-term, even though it slows the development of new treatments. For #2, unless there is evidence of a proactive campaign to keep other companies out of a specific drug sector (as has been implied for insulin), it is difficult to hold companies accountable for a lack of competition. For #3, the level of transparency in your pricing model is in the direct control of your company. The fact that drug companies take deliberate action to deliberately obfuscate on this issue would suggest that this is the least ethical factor.

11. Should other states follow the example of Minnesota and start to challenge the drug companies in court? Why or why not?

Students‘ responses will vary. Some may argue that this is a national problem that requires a national solution. However, the presidential promise of a national plan to lower drug prices has yet to produce anything concrete. There is a clear political payoff in taking-on ―bad pharma‖ and high drug costs directly impact state budgets.

6. Do you think consumers will be able to bring about change on this issue? Why or why not?

Students‘ responses will vary. Bad publicity resulting from social media campaigns and calls for boycotts can have an effect, but it is very difficult to boycott something you need for your health (or something you can‘t afford to buy in the first place). Shareholders are happy with the increased revenue from higher drug prices and are unlikely to change their position on that. That leaves the political arena in which consumers demand action on the basis of their vote. However, that vote is often won on the basis of promised action rather than detailed plans.

CHAPTER 3

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Organizational Ethics Table of Contents Chapter Summary Learning Outcomes Frontline Focus: ―Just Sign the Forms‖ Questions Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Learning Outcome 5 Life Skills Progress ✓Questions Ethical Dilemma Frontline Focus: ―Just Sign the Forms–Matt Makes a Decision‖ Questions Key Terms Review Questions Review Exercises Internet Exercises Team Exercises Thinking Critically

3-2 3-2 3-2 3-3 3-4 3-5 3-6 3-7 3-7 3-8 3-11 3-13 3-13 3-14 3-16 3-17 3-18 3-21

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Chapter Summary This chapter examines how each functional department, within an organization, manages the challenge of building and maintaining an ethical culture. The chapter begins by defining organization‘s culture and an organization in terms of its functional areas within a value chain.

Then the chapter begins looking at the ethics involved in research and development, manufacturing, marketing, human resources, and finance. The ethical challenges presented by generally accepted accounting principle (GAAP) are explained and how the accounting industry is dealing with those challenges. The chapter also goes over potential conflicts of interest within various organizational functions.

Learning Outcomes After studying this chapter, the student should be able to: 2 3 4 5 6

Define organizational ethics.

Explain the respective ethical challenges facing the functional departments of an organization.

Discuss the position that a human resource (HR) department should be at the center of any corporate code of ethics.

Explain the potential ethical challenges presented by generally accepted accounting principles (GAAP).

Determine potential conflicts of interest within any organizational function.

Extended Chapter Outline Frontline Focus ―Just Sign the Forms‖ Questions 7.

HR requires that these training videos be viewed for a reason. What risks is Scott taking here? Review the four reasons (found in the ―Ethics in Human Resources‖ section of this chapter) why HR should be directly involved in any code of ethics.

The risk that Steve is taking here includes falsifying information. Telling Matt to simply sign off on something that he hasn‘t actually done is unethical since it is false information.

The text states that the HR department should be at the center of the corporate code of ethics and ensure that the following four critical areas are addressed:  HR professionals must help ensure that ethics is a top organizational priority.  HR must ensure that the leadership selection and development processes include an ethics component.

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 

8.

HR is responsible for ensuring that the right programs and policies are in place.

HR must stay abreast of ethics issues (and in particular the changing legislation and sentencing guidelines for unethical conduct).

Do you think Scott‘s argument for skipping the training videos is justified?

Students‘ responses will vary. Steve knows the routine that new employees must go through and should not justify skipping the videos, regardless of the backlog that‘s waiting. So, most students may not find Scott‘s argument justified.

9.

What should Matt do now?

Students‘ responses will vary. Some of them may feel that Matt should tell Scott that he doesn‘t feel comfortable signing off on documents when Scott hasn‘t completed the task. If Scott is not understanding of Matt‘s request, then Matt should approach the HR department and inform them of his problem.

Learning Outcome 1: Define Organizational Ethics. 



Organizational culture is the values, beliefs, and norms that all the employees of that organization share. o The culture represents the sum of all the policies and procedures—both written and informal—from each of the functional departments in the organization in addition to the policies and procedures that are established for the organization as a whole.

A value chain is the key functional inputs that an organization provides in the transformation of raw materials into a delivered product or service. o Traditionally, these key functions are identified as:  Research and development (R&D)—develops and creates new product designs  Manufacturing—sources the components and builds the product  Marketing (and advertising)  Sales  Customer service o Supporting each of these functional areas are the line functions:  Human resource management—coordinates the recruitment, training, and development of personnel for all aspects of the organization.  Finance—can include internal accounting personnel, external accounting personnel, and external auditors who are called upon to certify the accuracy of a company‘s financial statements.  Information systems (IS or IT)—maintain the technology backbone of the organization (data transfer and security, e-mail communications, internal and

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external websites, as well as the individual hardware and software needs that are specific to the organization and its line of business).  Management—the supervisory role that oversees all operational functions.

Learning Outcome 2: Explain the Respective Ethical Challenges Facing the Functional Departments of an Organization. o

o o

  

Research and development (R&D) professionals carry the responsibility for the future growth of the organization. o However, alongside this responsibility comes an equally critical commitment to the consumer in the provision of a product that is of the highest quality, safety, and reliability.  Defective products not only put consumers at risk but also generate negative press coverage (damaging the organization‘s reputation) and very expensive lawsuits that can put the organization at risk of bankruptcy.

For the R&D team, the real ethical dilemmas come when decisions are made about product quality.

The relationship between R&D and manufacturing is often a challenging one. o The pressures here are very similar to those in the R&D function as manufacturers face the ethical question, ―Do you want it built fast, or do you want it built right?‖ The marketing process (which includes advertising, public relations, and sales) is responsible for ensuring that the product reaches the hands of a satisfied customer.

Marketers see themselves as providing products (or services) to customers who have already expressed a need for and a desire to purchase those products.

Marketers emphasize customer service and argue that since their customers are satisfied, the good outcome justifies the methods used to achieve that outcome no matter how misleading the message or how unnecessary the product sold. o This represents a view of ethics called utilitarianism.  Utilitarianism is the ethical choices that offer the greatest good for the greatest number of people.  Critics argue that the process itself is wrong irrespective of the outcome achieved—that is, how can marketers be proud of an outcome when the customer never needed that product to begin with and was manipulated, or at the very least influenced, by a slick ad campaign into feelings of envy, inadequacy, or inequality if he or she didn‘t rush out and buy it?  On this side of the debate, people are considering universal ethics.  Universal ethics are actions that are taken out of duty and obligation to a purely moral ideal, rather than based on the needs of the situation, since the universal principles are seen to apply to everyone, everywhere, all the time.

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

Marketing professionals abide by a code of ethics adapted by the American Marketing Association (AMA). o The code speaks eloquently about doing no harm, fostering trust, and improving ―customer confidence in the integrity of the marketing exchange system,‖ and establishes clear ethical values of honesty, responsibility, fairness, respect, openness, and citizenship.

Learning Outcome 3: Discuss the Position that a Human Resource (HR) Department Should Be at the Center of Any Corporate Code of Ethics. 

The human resource function within an organization should ideally be directly involved in the relationship between the company and the employee throughout that employee‘s contract with the company: 9.1.1 The creation of the job description for the position.

9.1.2 The recruitment and selection of the right candidate for the position.

9.1.3 The orientation of the newly hired employee.

9.1.4 The efficient management of payroll and benefits for the (hopefully) happy and productive employee.

9.1.5 The documentation of periodic performance reviews.

9.1.6 The documentation of disciplinary behavior and remedial training, if needed.

9.1.7 The creation of a career development program for the employee.

9.2 The HR department should coordinate the final paperwork, including any severance benefits, and should host an exit interview to ensure that anything the organization can learn from the departure of an employee is fed back into the company‘s strategic plan for future growth and development.

9.3 Every step of the life cycle of a company-employee contract has the potential for ethical transgressions.

9.3.1 If the right people are hired in the first place, it is believed, many other problems are avoided down the road.

9.4 Many advocates of ethical business conduct argue that HR should be at the center of any corporate code of ethics—not as the sole creator of the code, since it is a document that should represent the entire organization, but certainly as the voice of reason in ensuring that all the critical areas are addressed.

9.4.1 HR professionals must help ensure that ethics is a top organizational priority.

9.4.2 HR must ensure that the leadership selection and development processes include an ethics component.

9.4.3 HR is responsible for ensuring that the right programs and policies are in place.

9.4.4 HR must stay abreast of ethics issues (and in particular the changing legislation and sentencing guidelines for unethical conduct).

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9.5 The finance function of an organization can be divided into three distinct areas—financial transactions, accounting, and auditing: 9.5.1 The financial transactions—the process by which the flow of money through an organization is handled.

9.5.2 The accounting function—the function that keeps track of all the company‘s financial transactions by documenting the money coming in (credits) and money going out (debits) and balancing the accounts at the end of the period (daily, weekly, monthly, quarterly, annually).

9.5.3 Auditing function—the certification of an organization‘s financial statements, or ―books,‖ as being accurate by an impartial third-party professional. An organization can be large enough to have internal auditors on staff as well as using external professionals—typically certified professional accountants and/or auditing specialists.

9.6 As an organization grows and eventually goes public by selling stock in the organization on a public stock exchange, the need for certified financial documents becomes even greater.

9.6.1 Existing and potential investors will make the decision to invest in the shares of an organization based on the information presented in the certified financial statements—specifically, the profit and loss statement and the balance sheet.

9.7 Internal auditors are well disciplined in their craft and subscribe to a professional code of ethics.

9.7.1 They are diverse and innovative.

9.7.2 They are committed to growing and enhancing their skills.

9.7.3 They are continually on the lookout for emerging risks and trends in the profession.

9.7.4 They are good thinkers.

9.8 To effectively fulfill all their roles, internal auditors must be excellent communicators who listen attentively, speak effectively, and write clearly.

9.9 Modern day internal auditors are consulted on all aspects of the organization and must be prepared for just about anything.

9.9.1 They are coaches, internal and external stakeholder advocates, risk managers, controls experts, efficiency specialists, and problem-solving partners.

Learning Outcome 4: Explain the Potential Ethical Challenges Presented by Generally Accepted Accounting Principles (GAAP). 



GAAP is the generally accepted accounting principles that govern the accounting profession—not a set of laws and established legal precedents but a set of standard operating procedures within the profession.

It is legal to defer receipts from one quarter to the next to manage the tax liability.

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

9.9.2 However, accountants face ethical challenges when requests are made for far more illegal practices, such as falsifying accounts, underreporting income, overvaluing assets, and taking questionable deductions.

A set of accurate financial statements that present an organization as financially stable, operationally efficient, and positioned for strong future growth can do a great deal to enhance the reputation and goodwill of an organization.

9.9.3 The fact that those statements have been certified by an objective third party to be ―clean‖ only adds to that.

9.9.4 However, that certification is meant to be for the public‘s benefit rather than the corporation‘s.

9.9.5 This presents a very clear ethical predicament.

9.9.6 The accounting/auditing firm is paid by the corporation, but it really serves the general public, who are in search of an impartial and objective review.

Learning Outcome 5: Determine Potential Conflicts of Interest Within Any Organizational Function.  

A conflict of interest is a situation in which one relationship or obligation places people in direct conflict with an existing relationship or obligation.

As per the value chain model, the potential for conflicts of interest within an organization can go far beyond the finance department: o At the most basic level, simply meeting the needs of the organization‘s stakeholders can present conflicts of interest when the organization considers the possibility that what is best for the shareholders may not be best for the employees and community. o Selling a product that has the potential to be harmful to the customers represents a conflict of interest. o Selling a product that has the potential to be harmful to the environment also carries a conflict of interest.  These attempts to address conflicts of interest all have one thing in common.  Whether that were prompted by internal strategic policy decisions or aggressive campaigns by customers and special interest groups, the decisions had to come from the top of the organization. o Changing the way an organization does business can sometimes begin with support from the front line of the organization, but eventually the key decisions on corporate policy and capital expenditure have to come from the senior leadership of the organization.

Life Skills Being Ethically Responsible This Life Skills box discusses how each department in an organization holds a specific place and

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function in the value chain. The extent of interaction with other departments on that chain in a professional and ethical manner has a great deal to do with the long-term growth and success of the organization. When faced with ethical dilemmas, employees should remain aware of the bigger picture and consider the results for all the stakeholders involved in the decision.

Progress ✓Questions 1.

Explain the term organizational culture.

Organizational culture can be defined as the values, beliefs, and norms that all the employees of that organization share. The culture represents the sum of all the policies and procedures—both written and informal—from each of the functional departments in the organization in addition to the policies and procedures that are established for the organization as a whole.

2.

Define the term value chain.

A value chain is the key functional inputs that an organization provides in the transformation of raw materials into a delivered product or service.

3.

List the five key functional areas within an organization.

The five key functional areas within an organization are:  Research and development (R&D)  Manufacturing  Marketing (including advertising)  Human resources (HR)  Finance (including accounting and auditing)

4.

List the four primary line functions.

The four primary line functions are:  Human resource management (HRM)  Finance  Information systems (IS or IT)  Management

5.

Identify the three functional components of the marketing process.

The three functional components of the marketing process include advertising, public 1-56 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

relations, and sales.

6.

Explain why marketers feel that their involvement in the production and delivery of goods and services is an ethical one.

Marketers emphasize customer service and argue that since their customers are satisfied, the good outcome justifies the methods used to achieve that outcome, no matter how misleading the message or how unnecessary the product sold. This represents a view of ethics called utilitarianism.

7.

Explain the opposing argument that marketing is an unethical process.

Critics of marketing argue that the marketing process itself is wrong irrespective of the outcome achieved—that is, how can marketers be proud of an outcome when the customer never needed the product to begin with and was manipulated into buying it or was influenced by an ad campaign to feel envy, inadequacy, or inequality if he or she didn‘t rush out and buy the product?

8.

Which argument do you support? Provide an example to explain your answer.

Students‘ responses will vary. Unless you are selling a basic commodity in a developing country that needs your product, at some point you reach a point where customers can survive without your product or service. At this point your marketing must move from informing customers about your product or service to influencing or persuading them that their lives will be better with your company‘s product.

9.

Explain why HR personnel might consider themselves to be the conscience of the organization.

Most HR professionals see their direct involvement in every aspect of an employeeemployer contract and thus they consider themselves to be the conscience of the organization in many ways. If the right people are hired in the first place, it is believed, many other problems are avoided down the road. It‘s when the organization fail to plan ahead for vacancies and promotions that the pressure to hire someone who was needed yesterday can lead to the gradual relaxation of what may be clearly established codes of ethics. In many scenarios, accountability for transgressions would end with the HR department as the corporate function that is legally responsible for ensuring that such things don‘t happen.

10. Select one of the ethical transgressions listed in the HR sections and document how you

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would respond to that situation as the employee.

Student‘s answers will vary. Ethical transgressions are listed in the ―Ethics in Human Resources‖ section.

11. Why is HR‘s involvement in the selection of the leaders of the company so important to ethical business conduct?

HR must be involved in hiring leaders who not only endorse and support but also model the ethical standards needed to keep the company out of danger. The biggest challenge here is convincing the leadership team that it‘s not just the rank-and-file employees who should be put through ethics training.

12. Why have ethics policies and ethics training suddenly become so important?

The absence of appropriate policies and training programs can now increase the fines that are levied for unethical behavior. Response to the recent corporate scandals has been swift and frustratingly bureaucratic. Organizations now face reams of documentation that are designed to regulate ethical behavior in the face of overwhelming evidence that organizations cannot be trusted to do it on their own.

13. List the three primary areas of the finance function in an organization.

The three primary areas of the finance function in an organization are:  Financial transactions  Accounting  Auditing 14. Explain how the accounting profession is governed by GAAP. GAAP is the generally accepted accounting principles that govern the accounting profession—not a set of laws and established legal precedents but a set of standard operating procedures within the profession. These principles are accepted as standard operating procedures within the industry, but, like any operating standard, they are open to interpretation and abuse.

15. Why would audited accounts be regarded as being ―clean‖?

A set of accurate financial statements that present an organization as financially stable, operationally efficient, and positioned for strong future growth can do a great deal to

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enhance the reputation and goodwill of an organization. The fact that those statements have been certified by an objective third party to be ―clean‖ only adds to that. However, that certification is meant to be for the public‘s benefit rather than the corporation‘s.

16. What key decision brought about the demise of Arthur Andersen?

Arthur Andersen‘s consulting business generated millions of dollars in fees from Enron alone. If the auditing side of their business chose to stand up to Enron‘s requests for creative interpretations of accounting practices, those millions of dollars of consulting fees, as well as additional millions of dollars in auditing fees, would be placed in serious jeopardy. The senior partners on the Enron account chose not to stand up to Enron, and their decision eventually sank Andersen entirely.

Ethical Dilemma 3.1 – A Firm Production Date 9.

Tom was obviously overconfident in the final stages of the testing process, but was his behavior unethical? Why or why not?

Students‘ responses will vary. Tom assured Scott that the schedule for production was firm and Tom advised Scott that the tests were routine. Tom was too confident, and he should have been upfront with Scott about any possible delays in the production process.

10. Given Scott‘s concerns over R&D‘s credibility, should he have taken Tom‘s production data as being absolutely firm?

Students‘ responses will vary. Scott was aware of the reputation of the R&D department. He could have got something in writing to confirm the date along with documentation of the issues that could cause delays at that stage of the process.

11. In fact, Scott was so skeptical of Tom‘s production date that he recorded their original conversation without Tom‘s knowledge and then produced the recording when Tom denied giving a firm production date. Tom responded: ―You taped my conversation without telling me! That‘s unethical.‖ Was it?

Students‘ responses will vary. It is better to document business issues in writing. Always consider whether actions are legal and if a taped conversation is legal in a particular state. If this issue went to the HR department, it could create a considerable amount of employment policies or actions that were not parallel with the organization‘s policies and procedures. In

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the event that they wanted to discipline Tom over this incident, it could be considered a conflict of interest because the conversation was tape recorded. Tom could have a privacy violation against the company, or the company might not be able to use the tape-recorded conversation against Tom. 12. Has Scott‘s behavior damaged future relations between marketing and R&D? In what way?

How could this situation have been avoided?

Students‘ responses will vary. Scott was covering himself when he decided to tape record the conversation. The Marketing Department should develop contracts or sign off sheets from the R&D Department that stipulates the project is ready for the next step in the process.

It is important to get all business deals in writing.

3.2 – A Different Perspective 1.

Does an oppressive culture justify the behavior of the Wells Fargo employees who opened fraudulent deposit and credit card accounts? Why or why not?

Students‘ responses will vary. Many employees probably didn‘t have the financial security to walk away from their jobs in the face of such an oppressive culture, but that doesn‘t necessarily excuse their conduct. There were whistle-blowing mechanisms in place (although they were not used), which negates the ―no other choice‖ argument. If termination for failing to meet quotas really was as harsh and immediate as has been claimed, you can certainly understand the pressures they were facing, but that doesn‘t change the fraudulent and unethical nature of their conduct.

2.

Does the two days of ethics training exonerate the leadership of Wells Fargo from responsibility for the scandal? Why or why not?

Students‘ responses will vary. The training is indicative of a proactive response that could be presented to shareholders and regulators as evidence that the company is taking the issue ‗seriously.‘ However, to suggest that this would fix the problem would be a bit of a stretch.

The fact that the problem persisted after the training clearly suggests that it was more of a band-aid than a solution. Walking-the-talk to correct the culture would take much more time and resources than a couple of days of generic ethics training.

3.

Why would an organization create a 37-page brochure on values with so much evidence of conduct that appears to lack a commitment to those values?

Students‘ responses will vary. You could give Wells Fargo the benefit of the doubt and

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accept the document as an aspirational commitment to values in an industry that suffers from an extremely poor reputation. A more cynical response would suggest that this was a ―window dressing‖ exercise designed to promote Wells Fargo as being better than all of their allegedly crooked competitors. The supposedly tough stance taken in firing 5,300 employees could also be seen as a deliberate attempt to divert attention away from the organizational culture that favored oppressive performance metrics over customer satisfaction scores.

4.

Why do you think Wells Fargo wants Sloan‘s successor to come from outside the banking sector?

Students‘ responses will vary. With media reporting of the Wells Fargo story implying that this was yet another example of banks gouging their customers, there is some merit to the idea of bringing someone in from a sector that isn‘t tarnished with the same poor reputation.

Ideas and experience from different industries could also bring a fresh perspective to the problem, rather than trying to change within a very established industry. They might also feel that other banking executives might choose to deliberately avoid the negative press coverage of Wells Fargo and wait until the issue fades into the past.

Frontline Focus ―Just Sign the Forms–Matt Makes a Decision‖ Questions 7.

What should Matt tell the HR director?

Matt should tell the HR director the truth. He should tell him that Scott approached him the first morning and asked him to start working right away because of the backlog. Scott had told him to simply sign off on the training videos because they were routine anyway.

8.

What do you think the HR director‘s reaction will be?

Students‘ answers will vary. The HR director will most likely be disappointed in both Scott and Matt. Routine or not, Scott should not have told Matt to skip watching the training videos, no matter the size of the backlog. And Matt should have been able to see the unethical situation forming and should have approached the HR director about Scott‘s request, knowing that he would be meeting with him at the end of his probationary period anyway.

9.

What are Matt‘s chances of joining the management-training program now?

Students‘ answers will vary. Matt drastically reduced his chances of joining the

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management-training program because ethics and leadership are large part of any training program. If Matt isn‘t capable or willing to do the right thing right from the start, it shows the HR director that he‘s not ready for management.

Key Terms Accounting Function: The function that keeps track of all the company‘s financial transactions by documenting the money coming in (credits) and money going out (debits) and balancing the accounts at the end of the period (daily, weekly, monthly, quarterly, annually).

Auditing Function: The certification of an organization‘s financial statements, or ―books,‖ as being accurate by an impartial third-party professional. An organization can be large enough to have internal auditors on staff as well as using external professionals —typically certified professional accountants and/or auditing specialists.

Conflict of Interest: A situation in which one relationship or obligation places you in direct conflict with an existing relationship or obligation.

GAAP: The generally accepted accounting principles that govern the accounting profession—not a set of laws and established legal precedents but a set of standard operating procedures within the profession.

Organizational Culture: The values, beliefs, and norms that all the employees of that organization share.

Universal Ethics: Actions that are taken out of duty and obligation to a purely moral ideal, rather than based on the needs of the situation, since the universal principles are seen to apply to everyone, everywhere, all the time.

Utilitarianism: Ethical choices that offer the greatest good for the greatest number of people.

Value Chain: The key functional inputs that an organization provides in the transformation of raw materials into a delivered product or service.

Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions.

10. Consider the functional departments we have reviewed in this chapter. Which department do you think faces the greatest number of ethical challenges? Why?

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Students‘ responses will vary. Students should recall at least one of the functional areas of the organization. For example, students can discuss R&D, manufacturing, marketing, human resources, or finance, and discuss which department they believe faces the greatest number of ethical challenges in an organization.

11. Provide three examples of unethical behavior that you have observed at the company you work for (or a company you have worked for in the past). What were the outcomes of this behavior?

Students‘ responses will vary. Some examples of unethical behavior that students may have observed include, but are not limited to bullying or intimidating behavior, employee theft, or any other example that illustrates unethical behavior they observed at the company. They should also discuss the outcome of that behavior.

12. Philip Kotler argues that professional marketers ―should have the same ambivalence as nuclear scientists who help build nuclear bombs.‖ Is that a valid argument? Why or why not?

Students‘ responses will vary. Students should discuss Kotler‘s argument and express their opinion on whether or not they believe it is a valid argument. Some of them may say that nuclear bombs can be used as a source of energy as well as a weapon of mass destruction.

How a person chooses to use it depends upon him or her not the nuclear scientist. Similarly, the professional marketer develops a number of products or services which may be useful for some and useless for others. It is the end-user who should make an informed and intelligent decision on whether he or she really needs the products or services before buying them.

4.

Should the HR department be the ethics champion in the organization? Why or why not?

Students‘ responses will vary. Most of the students may say that the HR department should be the ethics champion in the organization. They may support their argument by saying that the HR department is responsible for the management of human resources in the organization. They need to set positive examples to their employees in the organization.

Ethics is an important factor to consider when they deal with employees, applicants, and vendors on a daily basis.

5.

What are ―creative bookkeeping techniques‖? Provide three examples.

Students‘ responses will vary. Accountants face ethical challenges when requests are made

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for far more illegal practices, such as falsifying accounts, underreporting income, overvaluing assets, and taking questionable deductions. In order to keep up with such requests, accountants may present a doctored set of financial statements that show the organization as financially stable, operationally efficient, and positioned for strong future growth. They use ―creative bookkeeping techniques‖ while doctoring such financial statements. Unrealistic delivery deadlines, reduced fees, and fees that are contingent on providing numbers that are satisfactory to the client are some examples of the ethical challenges modern accounting firms face.

6.

Would you leave your position with a company if you saw evidence of unethical business practices? Why or why not? What factors would you consider in making that decision?

Students‘ responses will vary. It is important that the corporation‘s values should match a person‘s personal values. Any unethical business practices witnessed should be confronted and ―shed light upon.‖ If these practices do not shape up, it would be wise to leave the company, so their irresponsibility does not jeopardize your reputation.

Review Exercises 11. Is this unethical marketing? Explain why or why not.

Students‘ responses will vary. These tactics are still simply promoting a product; they‘re not forcing consumers to purchase these items, but making the product more well-known through a different context. The information being conveyed is a ―scripted opinion‖ and merely aims to make consumers aware of the products. No false claims about the products are made.

12. Critics argue that such campaigns ―blur the lines between consumerism and con artistry.‖ Is that a fair assessment? Why or why not?

Students‘ responses will vary. These campaigns are not borderline con artistry because nothing is being stolen from the consumer. Consumers still have choices regarding their purchases. Others may argue that the misrepresentation of the interaction is questionable.

13. How would you feel if you were involved in such an ambush?

Students‘ responses will vary. The decision is still ultimately the consumers‘. No one can force you to purchase a product; they are purely trying to promote and inform consumers of their product. If the consumer had no or little previous knowledge of the product and decided to buy it and loved it, then the ambush would be viewed positively, and vice versa.

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14. If the majority of consumers are already skeptical about most advertising they are exposed to, how do you think the general public would feel about such marketing campaigns?

Students‘ responses will vary. The general public would most likely not be advocates of such marketing campaigns if the majority of consumers are already skeptical about most advertising.

15. Supporters of these campaigns argue that our economy is built on consumerism and that if you don‘t find more effective ways to reach consumers, the entire economy will suffer. Does that make the practice OK? Should we just accept it as a nuisance and a necessary evil like solicitation calls during dinner?

Students‘ responses will vary. Our economy is based on consumerism, but that doesn‘t justify unethical practices. This practice, however, does not falsify information about the products or claim something that isn‘t true about the product.

16. Would your opinion change if the advertisers were more obvious in their campaigns —such as admitting after each skit that the raving fans were really actors?

Students‘ responses will vary. Students should express their opinion about honest advertising techniques and whether or not the advertisers should disclose that fans or others associated with the advertisement were paid actors.

Internet Exercises 3.

Visit the U.S. government recall website www.recalls.gov, select a product recall event from the past three years and answer the following questions: a.

What information would you consider to be evidence of an ethical transgression in this product recall?

Students‘ responses will vary. Students can choose a product recall of a consumer product, motor vehicle, boat, food, medicine, cosmetics, or environmental products.

They will note the evidence associated with an ethical transgression in the product recall they choose.

b.

Other than recalling the product, what other actions did the company take to address the situation?

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Students‘ responses will vary. Students should note whether the company abided by their code of ethics during the recall process. The company needs to uphold a positive image during the recall process. c.

What steps would you suggest that the company should have taken to restore that reputation?

Students‘ responses will vary. Students should note that a product recall can present an ethical challenge. They may suggest that companies should not steal documents, falsify documents, or undertake in any other dishonest act during the recall process.

2. Locate the websites for the American Marketing Association (AMA) and the American Institute of Certified Public Accountants (AICPA). One has a ―Professional Code of Conduct‖, and the other has a ―Statement of Ethics.‖ Does the terminology make a difference? Why or why not?

The website for the American Marketing Association (AMA) is http://www.marketingpower.com and the website for the American Institute of Certified Public Accountants (AICPA) is http://www.aicpa.org.

Students‘ responses will vary. They should note that the AICPA has a Professional Code of Conduct and the AMA has a Statement of Ethics. They should then explain their perception of the difference between a professional code of conduct and the statement of ethics. a. Compare and contrast the components of each approach.

Students‘ responses will vary. The AICPA and the AMA both contribute to professionalism in the workplace. The AMA has a ―Statement of Ethics‖ that states that the AMA commits itself to promoting the highest standard of professional ethical norms and values for its members (practitioners, academics and students). The AICPA offers the ―Professional Code of Conduct‖, which outlines that the membership in the AICPA is voluntary and by accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of law and regulations. b. Since the AMA offers certification as a ―Professional Certified Marketer,‖ would the organization benefit from promoting a professional code of conduct like the AICPA? Why or why not?

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Students‘ responses will vary. As noted in the text, when an organization involves a third-party professional who is contracted to work for a company, for example a CPA or a Professional Certified Marketer, the potential for ethical challenges and dilemmas increases.

Team Exercises 9.

Is it ethical to ambush?

Divide into two teams. One team must prepare a presentation advocating the use of the ambush marketing tactics described in the Review Exercise. The other team must prepare a presentation explaining the ethical dilemmas those tactics present.

Students‘ responses will vary. The advocates of ambush marketing tactics can argue that the actors are not falsifying information or lying about any product claims, but merely getting the product‘s name out there. Also, these actors are not forcing consumers to purchase their product. Opponents of ambush marketing tactics can argue that consumers are being led into believing these actors are real consumers who are happy with the product, but instead, they are only acting pleased with the products because they are being paid.

10. In search of an ethical department.

Divide into groups of three or four. Each group must select one of the organizational departments featured in this chapter (HR, R&D, marketing, sales, and finance) and document the potential areas for unethical behavior in that department. Prepare a presentation outlining an example of an ethical dilemma in that department and proposing a solution for resolving it.

Students‘ responses will vary. Following are some of the examples of ethical dilemma for different departments.  R&D: o Product quality o Product safety o Product reliability

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







o Defective products Manufacturing: o ―Built fast, or built right?‖ o Cutting corners/product quality Marketing: o Justification of methods used because of customer satisfaction/Utilitarianism o Manipulation and influence/Universal ethics Human Resources: o Hiring issues/illegal immigrants o Waiving waiting periods for friends or boss o Refusing to stay up-to-date on OSHA regulations o Payroll issues Finance: o Falsifying financial transactions or accounting statements o Conflict of interest with internal auditors or external third-party auditors

11. An isolated incident?

Divide into two groups and prepare arguments for and against the following behavior: You are the regional production manager for a tire company that has invested many millions of dollars in a new retreading process that will allow you to purchase used tires, replace the tread, and sell them at a significantly lower cost (with a very healthy profit margin for your company). Initial product testing has gone well and expectations for this very lucrative new project are very high. Promotion prospects for those managers associated with the project are also very good. The company chose to go with a “soft” launch of the new tires, introducing them into the Malaysian market with little marketing or advertising to draw attention to the new product line. Once demand and supply are thoroughly tested, the plan is to launch the new line worldwide with a big media blitz.

Sales so far have been very strong based on the low price. However, this morning, your local contact in Malaysia sent news of a bus accident in which two schoolchildren were killed. The cause of the accident was the front left tire on the bus, which lost its tread at high speed and caused the bus to roll over. You are only three days away from your next progress report meeting and only two weeks from the big worldwide launch. You decide to categorize the accident as an isolated incident and move forward with your plans for the introduction of your discount retread tires to the world market.

Students‘ responses will vary. Advocates for moving forward with the introduction may argue that this was a fluke and the testing showed no signs of safety problems. Even new tires can lose tread and cause problems. Also, these products could be argued as a winwin—lower prices for the consumer and high profit margin for the company. Opponents of

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moving forward with the introduction may argue that it is unethical to introduce these tires because of the safety issues, especially after hearing of the school bus accident. Further indepth testing needs to be conducted and this project may need to be stopped or modified.

12. The sole remaining supplier.

Divide into two groups and prepare arguments for and against the following behavior: Back in the mid-1970s heart pacemakers ran on transistors before advances in technology replaced them with the silicon computer chips we are all familiar with today.

Your company has found itself in a situation where it is the last remaining supplier of a particular transistor for the current models of heart pacemakers on the market. Your competitors have all chosen to get out of the business, claiming that the risks of lawsuits related to malfunctioning pacemakers was simply too great to make the business worthwhile. Your management team has now arrived at the same conclusion. The chief executive officer defends the decision by arguing that as a business-to-business supplier to other manufacturers, you have no say in how the transistors are used, so why should the fact that they are used in life-saving equipment factor into the decision? Your responsibility is to your shareholders, not to the patients who depend on these pacemakers. You are not responsible for all the other manufacturers getting out of the business.

Students‘ responses will vary. Advocates of continuing to sell the transistors can argue that it is the manufacturer‘s responsibility to switch to buying the computer chips. It is also the manufacturer‘s responsibility to make it known that their pacemakers are manufactured using transistors. Opponents of selling the transistors can argue that all competitors are already out of selling these out-of-date products and the risk of lawsuits is too high. Also, it is unethical to sell a product knowing that its quality is lacking in comparison to other technology and could potentially cause harm to people.

Thinking Critically 3.1 – Boosting Your Résumé 13. Does the competitive pressure to get hired justify the decision to boost your résumé? Why? Students‘ responses will vary. Most of the students may say that competitive pressure to get hired does not justify the decision to boost one‘s résumé, because as the examples in the text exhibit, those ―little white lies‖ will come back to haunt the person. Getting hired is a competitive process, but one should be motivated to excel at everything to accurately develop a résumé.

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14. Do you think the board of directors of Bausch & Lomb made the right decision in choosing not to fire Zarrella? Why or why not?

Students‘ responses will vary. Zarrella has now placed a negative image on his and the company‘s reputation. If he could fake some portion of his résumé, it is just possible that he may do further unethical works in the company. However, the board of directors obviously felt that he had proven himself, regardless of not earning his MBA like his resume stated.

The board further claimed that Zarrella had brought too much value to the company and its shareholders and thus it won‘t be right to dismiss him.

15. What steps should companies take during the hiring process to ensure that such bad hires do not happen?

Students‘ responses will vary. Companies need to contact the universities where candidates claim to have received degrees and contact previous employers and references. The hiring process may become slightly long, but in the long run it will save a lot of time and money by avoiding unnecessary training and problems down the road.

16. Can you polish your résumé without resorting to little white lies? Provide some examples of how you might do that.

Students‘ responses will vary. A résumé can be polished by using keywords that describe your responsibilities at previous employment and the skills you possess. The organization and word usage is one of the best methods for polishing a résumé.

17. Your friend has been unemployed for two years. She decides to boost her résumé by claiming to have been a consultant for those two years in order to compete in a very tough job market. She explains that a colleague of hers did the same thing to cover a six-month period of unemployment. Does the longer period of unemployment make the decision any less unethical? Why or why not?

Students‘ responses will vary. Most of the students may feel that this would be rationalization. Being unemployed for two years should prompt this person to improve herself, her skills, polish her résumé, network with other professionals in her industry, but not lie on her résumé.

18. If you discovered that a colleague at work had lied on her résumé, what would you do?

Students‘ responses will vary. If a colleague lied on her résumé, most of the students may

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find that it would need to be addressed to the human resource department because it could affect the company‘s performance and reputation further down the road. Once informed, the HR department could further investigate the issue.

3.2 – Facebook: Showing you ads, selling your data 13. If Facebook users choose to share information about themselves on the social-networking platform, aren‘t they giving-up the right to privacy? Why or why not?

Students‘ responses will vary. The ―they were asking for it,‖ or ―they knew what they were in for,‖ defenses are too simplistic here. There is a difference between agreeing to be tracked as a quid-pro-quo for targeted ads and new stories that are reflective of your expressed interests, and simply selling your data points piecemeal to the highest bidder. Millennials, Gen Xers, and Baby Boomers may have markedly different perspectives on digital privacy, but there is an argument for what is expressed on Facebook staying on Facebook. The fact that the information shared with CA was captured in such an underhanded manner would suggest that this argument is beyond the normal user privacy issue.

14. Should Facebook users have any say in which companies can have access to their information? Why or why not?

Students‘ responses will vary. Research suggests that millennials have a different sense of privacy by virtue of their intensive digital lifestyles. As such, they may be more willing to share personal information if it results in a more personal or tailored digital experience – i.e. targeted ads that are reflective of past purchases or expressed interests. The fact that those ads are targeted based on tracking their online activity does not appear to be much of a concern. Older users would prefer the option to opt-out, just as you can uncheck a box if you don‘t want to receive promotional ads and offers from any provider. The larger variable here is the difference in cultures around the globe. The European Union has a very distinct (and financially punitive) perspective on this issue and seems willing to pursue all legal avenues against Facebook and its competitors to restore user privacy.

15. Zuckerberg took 5 days to respond to the Cambridge Analytica story. How would you have handled that differently?

Students‘ responses will vary. Some may argue that the delay was appropriate in order for him to research the issue and prepare an appropriate response. A more critical perspective would suggest that the company was not prepared for this story to break when it did, and that the five days represented more of a ‗scrambling period‘ for the leadership to fully understand the ramifications of the problem now being public.

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16. Do you think the imposition of fines will force Facebook to modify it operations? Why or why not?

Students‘ responses will vary. The potential for multi-billion-dollar fines certainly makes this a different case than the ―slap on the wrist‖ fines that characterize many regulatory actions. However, that also gives Facebook a very large incentive to invest heavily in an aggressive legal defense that could delay the imposition of such fines for many years, leaving any corrective action in limbo until the cases are settled.

17. What are the arguments in favor of Facebook being regulated by the FTC? Students‘ responses will vary. The Cambridge Analytica case presents a clear argument for the need for consumer protection on the internet. The fact that data can be gathered surreptitiously without fear of consequence and that fake news stories are given the same access as real ones should be setting off alarm bells. Others may argue that regulating Facebook would represent an infringement of free speech, but the issue here is the protection of personal data, not the prohibition of the right to post your thoughts on the platform.

18. What should Facebook do to earn back the trust of its users?

Students‘ responses will vary. Those that see no problem with the issue of user privacy may feel that there isn‘t a trust issue to address. The decline in Facebook‘s core user base would seem to suggest otherwise. Zuckerberg‘s somewhat begrudging mea culpa would seem to imply that there is now some awareness of the sensitivity of this issue, but the fact that the company is clearly willing to fight every step of the way in the upcoming battle with regulators gives very little indication that they are concerned about trust. A proactive response should involve a transparent commitment to data protection and ongoing updates on the progress of that commitment (along with full disclosures of any failures to meet any specific deadlines).

3.3 – Johnson & Johnson and the Tylenol Poisonings 12. Although Johnson & Johnson took a massive short-term loss as a result of its actions, it was cushioned by the relative wealth of the company. Should it have acted the same way if the survival of the firm were at stake?

Students‘ responses will vary. Majority of them may say that Johnson & Johnson acted in a socially responsible manner by destroying all remaining Tylenol. The company proved to care about its customers and have benefited in the long-run. The same would be true even if

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the firm‘s survival were at stake. It may have been a much longer recovery and rough road, but would have been the successful and ethical decision.

13. James E. Burke reportedly said that he felt that there was no other decision he could have made. Do you agree? Could he, for example, have recalled Tylenol only in the Midwest?

Was there a moral imperative to recall all Tylenol?

Students‘ responses will vary. Some of them may say that there are always other decisions that can be made, but there are also risks and consequences that follow. In this case, Burke felt there was no other decision because he was not willing to risk having customers die in the East simply because he only recalled Tylenol in the Midwest. His decision was an ethical choice that led to the resolution of an ethical crisis.

14. What was the moral minimum required of the company in this case? Would it favor some stakeholders more than others? How would you defend balancing the interests of some stakeholders more than others?

Students‘ responses will vary. Some of them may argue that the moral minimum required of the company is to test the Tylenol and still distribute it, or to recall the Tylenol in the specific areas in which cases are reported. Only if no more cases of death or illness come about would stakeholders benefit more. Financially, the company would not have taken as large a hit and therefore, investors may have benefited more, but in the long-run, the stakeholders would still have been successful.

15. Imagine that a third-world country volunteers to take the recalled product. Its representatives make assurances that all the tablets will be visually inspected, and random samples taken before distribution. Would that be appropriate in these circumstances? Would it have been a better solution than destroying all remaining Tylenol capsules?

Students‘ responses will vary. Some of them may point out the fact that random samples would not necessarily find all of the poisoned capsules and citizens of developing nations do not deserve to take the risk of being poisoned. Johnson & Johnson should not have acted on this decision; they did the ethically right thing by destroying all the remaining Tylenol capsules.

16. Apparently no relatives of any of the victims sued Johnson & Johnson. Would they have had a moral case if they had? Should the company have foreseen a risk and done something about it?

Students‘ responses will vary. Some of them may say that the company already possessed

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quality standards and knew that the poisoned Tylenol did not come from their factories and that the poisoning happened after the product was shipped. However, the product still had their name on the bottle and therefore, they should be held responsible to some degree.

17. How well do you think a general credo works in guiding action? Would you prefer a typical mission statement or a clear set of policy outlines, for example? Do you see any way in which the Johnson & Johnson Credo could be improved or modified?

Students‘ responses will vary. Some of them may say that although very short and simple, the Johnson & Johnson Credo served the company well in this situation. However, a properly written mission statement which incorporates the company‘s credo would also be very beneficial and act as a guiding document for all employees and investors.

CHAPTER 4 Corporate Social Responsibility Table of Contents Chapter Summary Learning Outcomes Frontline Focus: ―A Stocking Error‖ Questions Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Learning Outcome 5 Learning Outcome 6 Life Skills Progress ✓Questions Ethical Dilemma Frontline Focus: ―A Stocking Error—Claire Makes a Decision Key Terms Review Questions Review Exercises Internet Exercises Team Exercises

4-2 4-2 4-2 4-3 4-4 4-4 4-5 4-6 4-7 4-8 4-8 4-11 4-13 4-14 4-15 4-16 4-17 4-18

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Thinking Critically

4-20

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Chapter Summary This chapter examines the topic of Corporate Social Responsibility (CSR) where we change the internal perspective of the organization to an external one and look at how an organization should interact with its stakeholders in an ethical manner. This chapter begins with a definition of CSR and discusses the different ethical perspectives. In addition, this chapter covers and explains the five major trends behind the CSR phenomenon. Further, the triple bottom line approach to corporate performance measurement is evaluated and the relative merits of Carbon Offset Credits.

Learning Outcomes After studying this chapter, the student should be able to: 1.

2.

3.

4.

5.

6.

Describe and explain corporate social responsibility (CSR).

Distinguish between instrumental and social contract approaches to CSR. Explain the business argument for ―doing well by doing good.‖ Summarize the five driving forces behind CSR. Explain the triple bottom-line approach to corporate performance measurement.

Discuss the relative merits of carbon-offset trading.

Extended Chapter Outline Frontline Focus ―An Improved Reputation‖ Questions 10. What type of CSR approach is Mr. Jones looking to adopt here? Read the definitions in the following sections for more details.

According to the definitions in the section ―Jumping on the CSR Bandwagon,‖, Mr. Jones is looking to adopt a ‗strategic‘ approach to CSR. He is looking for the most positive publicity or goodwill for the organization without spending any money.

11. Would you say that Mr. Jones‘ statement represents a sincere commitment to CSR practices at the oil company? Why or why not?

Students answers will vary. The mini-case offers no evidence of a sincere commitment beyond looking to fix the company‘s reputation with a few positive media stories.

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for ideas.

Student responses will vary. Claire needs to deliver the ideas that Mr. Jones has requested, but she also has the opportunity to share some positive case studies of oil companies that have benefitted from a more sincere commitment to CSR business practices.

Learning Outcome 1: Describe and Explain Corporate Social Responsibility (CSR). 

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Corporate Social Responsibility (CSR) can be defined as the actions of an organization that are targeted toward achieving a social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations. It is also known as corporate citizenship and corporate conscience. o This definition assumes that the corporation is operating in a competitive environment and that the managers of the corporation are committed to an aggressive growth strategy while complying with all federal, state, and local legal obligations, including:  Payment of all taxes related to the operation of the business  Payment of all employer contributions for its workforce  Compliance with all legal industry standards in operating a safe working environment for its employees  Delivering safe products to its customers While CSR may be growing in prominence, much of that prominence has come at the expense of organizations that found themselves facing boycotts and focused media attention on issues that previously were not considered as part of a traditional strategic plan.

Porter and Kramer pointed out that many companies awoke to [CSR] only after being surprised by public responses to issues they had not previously thought were a part of their business responsibilities. o Nike faced an extensive consumer boycott after The New York Times and other media outlets reported abusive labor practices at some of its Indonesian suppliers in the early 1990s. o Shell Oil‘s decision to sink the Brent Spar, an obsolete oil rig, in the North Sea resulted in Greenpeace protests in 1995.

Learning Outcome 2: Distinguish Between Instrumental and Social Contract Approaches to CSR. 

The instrumental approach is the perspective that the only obligation of a corporation is to maximize profits for its shareholders in providing goods and services that meet the needs of its customers.

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The most famous advocate of this ―classical‖ model is the Nobel Prize-winning economist Milton Friedman. o From an ethical perspective, Friedman argues that it would be unethical for a corporation to do anything other than deliver the profits for which its investors have entrusted it with their funds in the purchase of shares in the corporation. o In addition, Friedman argues that, as an employee of the corporation, the manager has an ethical obligation to fulfill his role in delivering on the expectations of his employers. o This position does not prevent the organization from demonstrating some form of social conscience—donating to local charities or sponsoring a local Little League team, for example—but it restricts such charitable acts to the discretion of the owners, rather than recognizing any formal obligation on the part of the corporation and its management team.

The social contract approach is the perspective that a corporation has an obligation to society over and above the expectations of its shareholders. o Originally, the primary focus of the social contract was an economic one, assuming that continued economic growth would bring an equal advancement in the quality of life. o However, the continued corporate growth was not matched by an improved quality of life. o Growth at the expense of rising costs, wages growing at a lower rate than inflation, and the increasing presence of substantial layoffs to control costs were seen as evidence that the old social contract was no longer working. o The modern social contract approach argues that since the corporation depends on society for its existence and continued growth, there is an obligation for the corporation to meet the demands of that society rather than just the demands of a targeted group of customers. o As such, corporations should be recognized as social institutions as well as economic enterprises. o



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Learning Outcome 3: Explain the Business Argument for ―Doing Well by Doing Good.‖   



 

Corporations do not operate in an isolated environment.

As far back as 1969, Henry Ford II recognized the fact that the terms of contract between industry and society were changing.

Corporations‘ actions impact their: o Customers o Employees o Suppliers o Communities Depending on the actions taken by the corporation, some of these groups will be positively affected and others will be negatively affected. o If a corporation is operating unprofitably in a very competitive market, it is unlikely that it could raise prices to increase profits.  The logical choice would be to lower costs—most commonly by laying off its employees.  The communities in which those employees reside have now lost the spending power of those employees, who, presumably, no longer have as much money to spend in the local market until they find alternative employment. o If the corporation chooses to shut down an entire factory, which negatively impacts the services it can provide to its residents—schools, roads, police force, etc.  In addition, those local suppliers who made deliveries to that factory also have lost business and may have to make their own tough choices as a result. o Presumably, the layoffs will help the corporation remain competitive and continue to offer low prices to its competitors, and the more cost-effective operation will hopefully improve the profitability of the corporation.

Organizations that do demonstrate a ―conscience‖ that goes beyond generating profit inevitably attract a lot of attention.

Jim Roberts, professor of marketing at the Hankamer School of Business, thought of corporate social responsibility as ―doing well by doing good.‖ o Doing what‘s in the best long-term interest of the customer is ultimately doing what‘s best for the company.

Learning Outcome 4: Summarize the Five Driving Forces Behind CSR. 

Joseph F. Keefe of NewCircle Communications asserts that there are five major trends behind the CSR phenomenon: o Transparency

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  

o Knowledge o Sustainability o Globalization o The Failure of the public sector Even with these major trends driving CSR, many organizations have found it difficult to make the transition from CSR as a theoretical concept to CSR as an operational policy.

Many CSR initiatives do not generate immediate financial gains to the organization.

Corporations that choose to experiment with CSR initiatives run the risk of creating adverse results and ending up worse off than when they started: o Employees feel that they are working for an insincere, uncaring organization. o The public sees little more than a token action concerned with publicity rather than community. o The organization does not perceive much benefit from CSR and so sees no need to develop the concept.

Learning Outcome 5: Explain the Triple Bottom-Line Approach to Corporate Performance Measurement. 

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Organizations pursue operational efficiency through detailed monitoring of their bottom line—that is, how much money is left after bills are paid from the revenue generated from sale of product or service.

As a testament of how seriously companies are now taking CSR, many have adapted their annual reports to reflect a triple bottom-line approach, for which they provide social and environmental updates alongside their primary bottom-line financial performance.

The phrase, triple bottom-line approach, has been attributed to John Elkington, cofounder of business consultancy SustainAbility, in his 1998 book Cannibals with Forks: The Triple Bottom Line of 21st Century Business. o As further evidence that this notion has hit the business mainstream, there is a trendy acronym, 3BL, for corporations to use to prove, supposedly, that they are on the ―cutting edge‖ of this new trend.

Organizations have jumped on the CSR bandwagon by adopting three distinct types of CSR—ethical, altruistic, and strategic—for their own purposes.

Ethical CSR represents the purest or most legitimate type of CSR in which organizations pursue a clearly defined sense of social conscience in managing their financial responsibilities to shareholders, their legal responsibilities to their local community and society as a whole, and their ethical responsibilities to do the right thing for all their stakeholders. o Organizations in this category have typically incorporated their beliefs into their core operating philosophies.

Altruistic CSR takes a philanthropic approach to CSR in which organizations underwrite

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

specific initiatives to give back to the company‘s local community or to designated national or international programs. o Critics have argued that, from an ethical perspective, this type of CSR is immoral since it represents a violation of shareholder rights if they are not given the opportunity to vote on the initiatives launched in the name of corporate social responsibility. o The relative legitimacy of altruistic CSR is based on the argument that the philanthropic initiatives are authorized without concern for the corporation‘s overall profitability.

Strategic CSR is a philanthropic approach to CSR in which organizations target programs that will generate the most positive publicity or goodwill for the organization but which runs the greatest risk of being perceived as self-serving behavior on the part of the organization. o By supporting these programs, companies can claim to be doing the right thing and, on the assumption that good publicity brings more sales, they also can meet their fiduciary obligations to their shareholders. o Compared to the alleged immorality of altruistic CSR, critics can argue that strategic CSR is ethically commendable because these initiatives benefit stakeholders while meeting fiduciary obligations to the company‘s shareholders.

Learning Outcome 6: Discuss the Relative Merits of Carbon-Offset Trading. 

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At www.carbonfootprint.com/calculator.aspx, a person can calculate the carbon dioxide emissions from his or her home, his or her car, and any air travel he or she does, and then calculate his or her total emissions on an annual basis. o The result is the person‘s ―footprint.‖ o People can then purchase credits to offset emissions and to render themselves ―carbon neutral.‖ If a person has sufficient funds, he or she can purchase more credits than he or she needs to achieve neutrality and then join the enviable ranks of carbon-positive people who actually take more carbon dioxide out of the cycle than they produce. o This, of course, is a technicality since the person is doing nothing more than buying credits from other projects around the world, such as tree planting in indigenous forests or outfitting African farmers with energy-efficient stoves, and using those positive emissions to counterbalance his or her negative ones.

Companies such as Dell Computer, British Airways, Expedia Travel, and BP have experimented with programs where customers can pay a fee to offset the emissions spent in manufacturing their products or using their services.

The issue of offsetting is serious enough to have been ratified by the Kyoto Protocol—an agreement between 160 countries that became effective in 2005 (and which the United

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





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States has yet to sign). o The protocol requires developed nations to reduce their greenhouse gas emissions not only by modifying their domestic industries, but also by funding projects in developing nations in return for carbon credits. o It didn‘t take long for an entire infrastructure to develop in order to facilitate the trading of these credits so that organizations with high emissions (and consequently a larger demand for offset credits) could purchase credits in greater volumes than most individual projects would provide.

Companies such as JPMorgan Chase and Deutsche Bank, which have multibillion dollar investments in the credit trading arena, are demanding that commonly accepted codes of conduct be established in order to clean up the market and offer greater incentives for customers to trade their credits.

In November 2006, Deutsche Bank teamed up with more than a dozen investment banks and five carbon- trading organizations in Europe to create the European Carbon Investors and Services Association (ECIS) to promote the standardization of carbon trading on a global scale.

In 2003, the Chicago Climate Exchange (CCX) was launched with 13 charter members and today remains the only trading system for all six greenhouse gases (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) in North America.

In 2005, CCX launched the European Climate Exchange (ECX) and the Chicago Climate Futures Exchange (CCFE), which offers options and futures contracts on emissions credits. o Membership of CCX has now reached almost 300 members.

Life Skills Being Socially Responsible This Life Skills box discusses how important one‘s beliefs about corporate social responsibility are in one‘s daily life. It proposes questions pertaining to the damages done by companies who simply provide products at the lowest possible price. It also discusses the importance of finding a job with a company that one is proud to work for rather than taking the first opportunity that comes along only to find oneself at odds with many of the company‘s policies and philosophies.

Progress ✓ Questions 1.

Define corporate social responsibility.

Corporate social responsibility is defined as the actions of an organization that are targeted toward achieving a social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations.

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2.

Name two other terms that may be used for socially aware corporate behavior.

Two other terms that may be used for socially aware corporate behavior are corporate citizenship and corporate conscience.

3.

Give four examples of a corporation‘s legal obligations.

Managers of corporations are committed to an aggressive growth strategy while complying with all federal, state, and local legal obligations. These obligations include payment of all taxes related to the profitable operation of the business, payment of all employer contributions for its workforce, and compliance with all legal industry standards in operating safe working environment for its employees and delivering safe products to its customers.

4.

Do investors always invest money in companies to make a profit?

Investors invest money in companies to provide capital to grow and pursue corporate strategies. It is in the best interest of the investors for the company to be socially responsible and understand that they will not always profit, especially in the short-term, but that they will reap profits over the long-term. Investors rarely invest money to make a loss (unless they are deliberately looking for a tax write-off) but they may support a specific cause with the full knowledge that the venture may not make a profit and only return their original investment at some point in the future.

5.

What is the instrumental model of corporate management?

The instrumental approach to corporate management is the perspective that the only obligation of a corporation is to maximize profits for its shareholders in providing goods and services that meet the needs of its customers.

6.

What is the social contract model of corporate management?

The social contract approach to corporate management is the perspective that a corporation has an obligation to society over and above the expectations of its shareholders.

7.

Research Friedman‘s article—what are the assumptions of his argument?

Student responses will vary based on their perception of the article. However, their answers may contain the following points:  The view has been gaining widespread acceptance that corporate officials have a

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 





8.

social responsibility that goes beyond serving the interests of their stockholders.

This view shows a fundamental misconception of the character and nature of a free economy.

There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.

Few trends could so thoroughly undermine the very foundations of the free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business and has direct responsibility to his employers.

Do you agree or disagree with the social contract model? Why? Students‘ answers will vary. The social contract approach is the perspective that a corporation has an obligation to society over and above the expectations of its shareholders.

13. List the five major trends driving CSR. The five major trends driving CSR are:  Transparency  Knowledge  Sustainability  Globalization  The Failure of the public sector 14. Which one do you think is the most important? Why? Students‘ answers will vary. Some of them may choose one among the five trends— transparency, knowledge, sustainability, globalization, and the failure of the public sector.

They must present an argument as to why they think one is more important than the others.

Others may say that all five trends are important.

15. Explain why organizations are struggling to adopt CSR initiatives.

Organizations are struggling to adopt CSR initiatives not because the ethical action itself causes a problem, but because it is difficult to promote these actions as proof of a new corporate conscience without seeming manipulative or as simply trying to generate press coverage for policies. Such policies could easily be dismissed as feel-good initiatives that

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are just chasing customer favor. Also, many CSR initiatives do not generate immediate financial gains to the organization.

16. Why would customers be cynical of CSR initiatives?

Students‘ answers may vary, but they may include the following points to support their views:  Cynical customers may decide to wait and see if this is real or just a temporary project to win new customers in a tough economic climate.  They see the corporation‘s activity as little more than a token action concerned with publicity rather than community.  Customers may easily dismiss the corporation‘s CSR activities as feel-good initiatives that are simply chasing customer favor.  Customers may also fear that new CSR initiatives will be used as an excuse to raise prices across the board.

21. Explain the term triple bottom line.

Organizations pursue operational efficiency through detailed monitoring of their bottom line—that is, how much money is left over after all the bills have been paid from the revenue generated from the sale of their product or service. As a testament to how seriously companies are now taking CSR, many have adapted their annual reports to reflect a triple bottom-line approach, for which they provide social and environmental updates alongside their primary bottom-line financial performance.

22. Explain the term ethical CSR. Ethical CSR represents the purest or most legitimate type of CSR, in which organizations pursue a clearly defined sense of social conscience in managing their financial responsibilities to shareholders, their legal responsibilities to their local community and society as a whole, and their ethical responsibilities to do the right thing for all their stakeholders.

23. Explain the term altruistic CSR. Altruistic CSR is a philanthropic approach to CSR in which organizations underwrite specific initiatives to give back to the company‘s local community or to designated national or international programs.

24. Explain the term strategic CSR.

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Strategic CSR is a philanthropic approach to CSR in which organizations target programs that will generate the most positive publicity or goodwill for the organization but which runs the greatest risk of being perceived as self-serving behavior on the part of the organization.

Ethical Dilemma Case 4.1 – Global Resources 1.

If Global is paying a fair market price for drilling rights, are there any ethical violations here? Why or why not?

Student responses may vary. Global Resources might be paying a fair market price for drilling rights; however, they are not being honest to the landowners about the implications of the drilling process, such as, fracking. Fracking refers to the procedure of injecting pressurized fluids to break up (or ―fracture‖ the shale rock to release the natural gas. This process can be dangerously toxic and the long term effects of such activity can be disastrous for the land and the landowners. Despite the benefits being promised by Global Resources to the landowners, the entire process brings a lot of negatives too. Global Resources will be violating environmental ethics by justifying their acts by offering improved way of life to the landowners.

2.

Are the Global engineers as committed to ―full disclosure‖ as they claim to be?

Students‘ responses will vary. Some of them may say that Global engineers were not as committed to ―full disclosure‖ as they claimed to be because they didn‘t talk about the dangers of fracking. Global engineers were not following the ethical philosophy of ―doing the right thing.‖ Global engineers were not taking action based on what is best for the people and community. They were only motivated by self-interest and were not putting the people‘s interest first.

3.

Is Global Resources Corporation being socially responsible, or are its local initiatives just ―window dressing‖?

Student responses may vary. Global Resources Corporation might be over promising on the benefits that they would provide the landowners in return of their lands. They might provide many infrastructural benefits but in the long run the negatives may outweigh the positives provided by them. The toxic wastes produced due to fracking being the most dangerous result of all.

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4.

What would you do if you were in Bennett‘s shoes? Why? Student responses may vary. Jon Bennett should contact an environmental organization and ask for its help in analyzing the pros and cons of the situation. He should let the other landowners know about the implication of drilling their lands by fracking, which uses pressurized fluids and produces toxic wastes. They can bring up the matter to Global Resources and see if they can set up a waste disposal and recycling plants as well to keep the water bodies free from toxins. These actions will make sure that the decision of leasing out their lands to Global Resources for such a long term is a wise one and beneficial to everyone, including the landowners and people in the neighborhood.

Case 4.2 – Banning the Real Thing 1.

Which ethical standards are being violated here?

Students‘ responses may vary. Coca-Cola is violating the preferential standards prescribed by the Vendor Code of Conduct. Of the preferential standards, Coca-Cola has been allegedly polluting the environment in India by disposing biosolid waste. It has been drawing down the water table by using deep bore wells. The Coca-Cola products sold in India have been found to contain pesticides that are in excess of local and international standards. It has also violated primary standards in Colombia by not being able to take care of proper health and safety arrangements for the workers at the bottling plants.

2.

Is the university being unreasonable in the high standards demanded in its Vendor Code of Conduct?

Students‘ responses may vary. Some of the students may feel that the University set standards that were necessary for corporations to maintain. The University even gave CocaCola a probationary period and the situation worsened. These standards are not too high; they are what is expected of organizations and must be enforced.

3.

Do you think the university would have developed the Vendor Code of Conduct without the aggressive campaign put forward by SOLE? Students‘ responses may vary. Some of them may say that the aggressive campaign put forward by SOLE certainly put the Code of Conduct initiative into motion. The university probably would not have had as thorough or as high standards as pushed for by SOLE.

4.

How should Coca-Cola respond in order to keep the University of Michigan contracts?

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Students‘ responses may vary. Some of them may say that Coca-Cola needs to address the human rights violations and reporting the progress of their business practices to the University of Michigan. Once Coca-Cola demonstrates they meet the standards set by the university and SOLE, they should pursue another contract with the University of Michigan.

Frontline Focus ―A Stocking Error—Claire Makes a Decision‖ Questions 10. Did Claire do the right thing here?

Claire made a good decision in this situation. Mistakes happen; therefore, customers and employees would be more understanding if they were given a clear explanation by Mr. Jones. Also, Claire‘s plan to implement a more proactive strategy in three months should allow her to build on the goodwill generated by the open and transparent communications from Mr. Jones..

11. Do you think the customers will be convinced? Why or why not?

Student answers will vary. Mr. Jones‘ communications will consist of promises of future actions, so customers may remain skeptical until there is hard evidence of following-through on those commitments.

12. What do you think Mr. Jones‘s reaction will be?

Student answers will vary. Mr. Jones should like the low-cost of the communications in the first step of Claire‘s plan, but he may not be comfortable with the degree of transparency she is proposing. There will need to be a clear sense of goodwill being generated before Mr. Jones will consider spending money on a more proactive CSR approach.

Key Terms Altruistic CSR: Philanthropic approach to CSR in which organizations underwrite specific initiatives to give back to the company‘s local community or to designated national or international programs.

Corporate Social Responsibility (CSR): The actions of an organization that are targeted toward achieving a social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations. Also known as corporate citizenship and corporate conscience.

Ethical CSR: Purest or most legitimate type of CSR in which organizations pursue a clearly

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defined sense of social conscience in managing their financial responsibilities to shareholders, their legal responsibilities to their local community and society as a whole, and their ethical responsibilities to do the right thing for all their stakeholders.

Instrumental Approach: The perspective that the only obligation of a corporation is to maximize profits for its shareholders in providing goods and services that meet the needs of its customers.

Social Contract Approach: The perspective that a corporation has an obligation to society over and above the expectations of its shareholders.

Strategic CSR: Philanthropic approach to CSR in which organizations target programs that will generate the most positive publicity or goodwill for the organization but which runs the greatest risk of being perceived as self-serving behavior on the part of the organization.

Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions.

13. Would organizations really be paying attention to CSR if customers and federal and state agencies weren‘t forcing them to? Why or why not?

Students‘ responses may vary. It is hopeful that organizations would adhere to corporate social responsibility and provide the good service and products that consumers deserve.

Many CSR initiatives do not generate immediate financial gains to the organization. Cynical customers may decide to wait and see if this is real or just a temporary project to win new customers in a tough economic climate. This delayed response tests the commitment of those organizations that are inclined to dispense with experimental initiatives when the going gets tough. To make sure that the corporations hold on to the initiatives and turn them into practice federal and state agencies stipulate some norms on them, so that they continue their CSR activities.

14. Would the CSR policies of an organization influence your decision to use their products or services? Why or why not?

Students‘ responses may vary. Many people are aware of and respond to an organization‘s decision to act in a socially responsible manner by patronizing it. Consumers who are conscious of a corporation‘s charitable donations or environment friendly practices likely have a positive impression of the company and purchase items from it. On the other hand, some consumers simply care about the lowest possible price.

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15. Which is more ethical: altruistic CSR or strategic CSR? Provide examples to explain your answer.

Students‘ responses may vary. Students should recall that altruistic CSR takes a philanthropic approach and centers itself in the charitable giving of a corporation. The organization chooses the charity and could be considered less ethical if the organization violates shareholders‘ rights by denying shareholders the chance to vote on the choice of charity. Strategic CSR also takes a philanthropic approach to CSR by targeting programs that will generate the most positive publicity or goodwill for the organization but it also runs the greatest risk of being perceived as self-serving behavior on the part of the organization.

16. How would you measure your carbon footprint?

At www.carbonfootprint.com/calculator.aspx, students could calculate the carbon dioxide emissions from their home, their car, and any air travel they do, and then calculate their total emissions on an annual basis. The result would be their carbon footprint.

17. If a carbon-offset project is already profitable, is it ethical to provide credits over and above those profits? Why or why not?

Students‘ responses may vary. Individuals can purchase credits to offset the emissions to render themselves ―carbon neutral.‖ Consider the use of the credits over and above profits.

The Kyoto Protocol is an agreement between 160 countries that became effective in 2005 and it requires developed nations to reduce their greenhouse gas emissions. A company that has an abundance of credits can facilitate the trading of those credits so that those organizations with high emissions and a larger demand for offset credits can purchase the credits in larger volumes than most individual projects would provide. However, there are some cases, where credits are sold at inflated market prices, credits are sold from projects that never existed, and the same credits are sold from one project over and over to different buyers who are unable to verify the effectiveness of a project based on their remote geographical area. These practices are however, unethical and should not be accepted, since they are aimed at increasing profits for the organization and not for protecting the environment.

18. Consider the company you currently work for (or one you have worked for in the past).

What initiatives could they start to be more socially responsible? How would you propose such changes?

Students‘ responses may vary. Numerous initiatives could be started by various companies.

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Students would need to look at the current initiatives of the company and find opportunities such as charitable donations, environment protection/sustainability, scholarships, etc.

Changes would need to be analyzed and evaluated to see if they are feasible and realistic. A strategic team can be formed to conduct the necessary research, and implement the changes.

Review Exercises 1.

The PGEP/Payatas project is being promoted as a win-win project for all parties involved. Is that an accurate assessment? Why or why not?

Students‘ responses may vary. Quezon City is doing what it can to enhance the lives of individuals and groups in the community. When Pangea Green Energy Philippines, Inc. drilled the 33 gas wells, their intentions were to harvest the methane gas. As a result, they were able to build a U.S. $4 million 200-kilowatt power plant to be fueled by the harvested methane. It enhances the state of the dump and it creates power for the community.

However, methane gas is 21 times more polluting than the carbon dioxide. PGEP trades the carbon credits in return for U.S. $300,000 donation to the Quezon City community and they will use those funds to develop the community and build schools and hospitals to enhance the lifestyle of the locals. Students will express their opinions and weigh the good versus the bad effects in this scenario.

2.

The Payatas project is estimated to generate 100,000 carbon credits per year. At an average market value of U.S. $30 per credit (prices vary according to the source of the credit), PGEP will receive an estimated U.S. $3 million from the project. On those terms, is the U.S. $300,000 donation to the Payatas community a fair one?

Students‘ responses may vary. Students will discuss whether or not the U.S. $3 million is a fair amount of money for PGEP to receive versus the U.S. $300,000 it is donating to the local community in order to enhance their lifestyle.

3.

How could Quezon City officials ensure that there is a more equitable distribution of wealth?

Students‘ responses may vary. Some of them may say that Quezon City officials could request additional funds and set up a community center to offer additional services. They could also set up a trust fund for the locals or arrange for an equitable distribution of funds.

Internet Exercises 1.

Review the CSR policies of a Fortune 100 company of your choice. Would you classify its

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policies as ethical, altruistic, strategic, or a combination of all three? Provide examples to support your answer.

Students‘ responses will vary. The students should review the CSR policies of a Fortune 100 company and classify their policies as ethical, altruistic, or strategic and provide examples to support their classification. On June 13, 2013, the first five companies in the Fortune 100 were Google, Inc.; SAS; CHG Healthcare Services; The Boston Consulting Group, Inc.; and Wegmans Food Markets, Inc. 2.

Review the annual report of a Fortune 100 company of your choice. What evidence can you find of triple bottom-line reporting in the report? Provide examples to support your answer.

Students‘ responses will vary. The students should review the annual report of a Fortune 100 company and discuss the evidence that the company uses a triple bottom-line reporting in their report and provide examples to support their research. On June 13, 2013, the first five companies in the Fortune 100 were Google, Inc.; SAS; CHG Healthcare Services; The Boston Consulting Group, Inc.; and Wegmans Food Markets, Inc.

Team Exercises 1.

Instrumental or social contract?

Divide into two teams. One team must prepare a presentation advocating for the instrumental approach model of corporate management. The other team must prepare a presentation arguing for the social contract model of corporate management.

The instrumental approach is the perspective that the only obligation of a corporation is to maximize profits for its shareholders in providing goods and services that meet the needs of its customers. This approach focuses on generating profits for the owners who have already invested money in the company through customer satisfaction.

The social contract approach is the perspective that a corporation has an obligation to society over and above the expectations of its shareholders. Advocates of this model may point out that this approach is going above and beyond simply making profits for the owners of the corporation and satisfying customers.

2.

Ethical, altruistic, or strategic?

Divide into three groups. Each group must select one of the following types of CSR: ethical CSR, altruistic CSR, or strategic CSR. Prepare a presentation arguing for the respective

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merits of each approach and offer examples of initiatives that your company could engage in to adopt this strategy.

Ethical CSR represents the purest or most legitimate type of CSR in which organizations pursue a clearly defined sense of social conscience in managing their financial responsibilities to shareholders, their legal responsibilities to their local community and society as a whole, and their ethical responsibilities to do the right thing for all their stakeholders. Organizations in this category have typically incorporated their beliefs into their core operating philosophies.

Altruistic CSR takes a philanthropic approach by underwriting specific initiatives to give back to the company‘s local community or to designated national or international programs.

Critics have argued that, from an ethical perspective, this type of CSR is immoral since it represents a violation of shareholder rights if they are not given the opportunity to vote on the initiatives launched in the name of corporate social responsibility. The relative legitimacy of altruistic CSR is based on the argument that the philanthropic initiatives are authorized without concern for the corporation‘s overall profitability.

Strategic CSR runs the greatest risk of being perceived as self-serving behavior on the part of the organization. This type of philanthropic activity targets programs that will generate the most positive publicity or goodwill for the organization. Companies supporting these programs can achieve the best of both worlds—they can claim to be doing the right thing and, on the assumption that good publicity brings more sales, they also can meet their fiduciary obligations to their shareholders.

3.

Closing down a factory.

Divide into two groups and prepare arguments for and against the following behavior: Your company is managing to maintain a good profit margin on the computer parts you manufacture in a very tough economy. Recently, an opportunity has come along to move your production capacity overseas. The move will reduce manufacturing costs significantly as a result of tax incentives and lower labor costs, resulting in an anticipated 15 percent increase in profits for the company. However, the costs associated with shutting down your U.S.-based operations would mean that you wouldn‟t see those increased profits for a minimum of three years. Your U.S. factory is the largest employer in the surrounding town, and shutting it down will result in the loss of over 800 jobs. The loss of those jobs is expected to devastate the economy of the local community.

Students‘ responses may vary. The benefits for moving the production capacity overseas would strictly be based on reducing manufacturing costs because of tax incentives and lower labor costs. These tax breaks and lower labor costs may also reduce the price of the

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computer parts to consumers. On the other hand, there are numerous arguments for keeping the production capacity in the United States:  First, the firm is already maintaining a good profit margin in a tough economy.  Second, if the production capacity were to be moved, the community in which the current operations are held would drastically be affected by putting over 800 employees out of work.

This firm has an obligation to its stakeholders, including all its employees, and it would be unethical to disrupt and destroy the relationship the firm has developed with all its employees and the community.

4.

A limited campaign.

Divide into two groups and prepare arguments for and against the following behavior: You work in the marketing department of a large dairy products company. The company has launched a “revolutionary” yogurt product with ingredients that promote healthy digestion. As a promotion to launch the new product, the company is offering to donate 10 cents to the American Heart Association (AHA) for every foil top from the yogurt pots that is returned to the manufacturer. To support this campaign, the company has invested millions of dollars in a broad “media spend” on television, radio, web, and print outlets, as well as the product packaging itself. In very small print on the packaging and advertising is a clarification sentence that specifies that the maximum donation for the campaign will be $10,000. Your marketing analyst colleagues have forecast that firstyear sales of this new product will reach 10 million units, with an anticipated participation of 2 million units in the pot-top return campaign (a potential donation of $200,000 without the $10,000 limit). Focus groups that were tested about the new product indicated clearly that participants in the pot-top return campaign attach positive feelings about their purchase to the added bonus of the donation to the AHA. Students‘ responses will vary. Arguments for the pot-top return promotion include that the firm is still donating $10,000 to the AHA, and even though it is printed in small print, the firm still specifies that the maximum donation for the campaign is $10,000. Placing a ceiling or maximum of $10,000 provides an outlet for the firm to potentially donate less to the AHA while still gaining positive publicity. Arguments against this campaign includes the ethical perspective that many consumers will participate without reading or being aware that only a maximum of $10,000 will be donated to AHA when sales in the first year are projected to be much higher. The firm is capitalizing on consumers being aware of the promotion, but not seeing the small print.

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Thinking Critically 4.1 – Sustainable Capitalism 19. Why is ―people, planet, profits‖ a more media-friendly message than a triple bottom-line approach to CSR? Students‘ responses may vary. Organizations pursue operational efficiency through detailed monitoring of their bottom line—that is, how much money is left over after all the bills have been paid from the revenue generated from the sale of their product or service. As a testament to how seriously companies are now taking CSR, many have adapted their annual reports to reflect a triple bottom-line approach, for which they provide social and environmental updates alongside their primary bottom-line financial performance. The message ―people, planet, and profit‖ is more media friendly because it gives a more personal touch to the triple bottom line approach—by attributing people to the social perspective, planet to the environmental perspective, and profits to the financial perspective—thus making it easier for people to relate to it.

20. On what grounds could the CSR initiatives of a corporation be dismissed as ―windowdressing‖?

Students‘ responses may vary. Some corporations provide glossy annual reports and photogenic websites illustrating the wonderful work of corporate-funded nonprofit organizations around the world to reassure their stakeholders who want to see evidence of more conscious capitalism than the pursuit of profit at any cost. However, this project based approach, it is argued, facilitates the development of ―window-dressing‖ strategies where the high visibility of PR-friendly projects may be used to divert attention from the lack of fundamental change in the way most corporations conduct business. In case the projects taken up by the company does not contribute to the resource scarcity awareness, climate change, or any other social or environmental perspective, it can be dismissed as ―windowdressing‖.

21. What is meant by the term sustainable capitalism?

Students‘ responses may vary. Sustainable capitalism fosters the idea that sustainability factors—economic, environmental, social, and governance criteria—will drive a company‘s returns over the long term. By integrating sustainability issues with traditional analysis, the company should seek to provide superior investment returns.

22. Based on the information in this case and a review of GenerationIM‘s manifesto document,

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is there any correlation of its proposal to the commonly accepted tenets of CSR? Students‘ responses may vary. Corporate social responsibility (CSR)—also referred to as corporate citizenship or corporate conscience—may be defined as the actions of an organization that are targeted toward achieving a social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations. This definition assumes that the corporation is operating in a competitive environment and that the managers of the corporation are committed to an aggressive growth strategy while complying with all federal, state, and local legal obligations. These obligations include payment of all taxes related to the profitable operation of the business, payment of all employer contributions for its workforce, and compliance with all legal industry standards in operating a safe working environment for its employees and delivering safe products to its customers.

The proposals made in the GenerationIM‘s manifesto documents are somewhat similar to the commonly accepted principles of CSR and work to achieve the same. They are:  Identify and incorporate risks from stranded assets  Integrated reporting of environmental, social, and governance (ESG) performance alongside mandated financial returns  End the default practice of issuing quarterly earnings guidance  Align compensation structures with long-term sustainable performance  Encourage long-term investing with loyalty-driven securities 23. What challenges do you foresee in the broader acceptance of sustainable capitalism around the world?

Students‘ responses may vary. Critics of sustainable capitalism argue that its action items represent nothing more than an attempt to burden an efficient capitalist model with political correctness. GenerationIM‘s decision to go beyond the more familiar ―green‖ or ―ethical‖ investment fund model, and commit to these specific issues in its investment selection criteria, means that a longer waiting period is required for the promised larger returns of sustainable capitalism.

24. How would you go about introducing sustainable capitalism in your company?

Students‘ responses may vary. In order to introduce sustainable capitalism in a company the five specific action items can be followed. They are:  Identify and incorporate risks from stranded assets  Integrated reporting of environmental, social, and governance (ESG) performance alongside mandated financial returns  End the default practice of issuing quarterly earnings guidance

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 

Align compensation structures with long-term sustainable performance Encourage long-term investing with loyalty-driven securities

4.2 – Corporate Social Irresponsibility 19. Why would companies choose to inflate the image of their corporate citizenship?

Students‘ responses may vary. Companies are inflating the image of their corporate citizenship to provide positive press releases and a positive image among their investors and potential investors. Companies are spending more time promoting and advertising their corporate citizenship because they feel that having a positive corporate image will generate more sales.

20. Is it ethical to direct company donations to ―nonprofit groups closely aligned with the interests of the corporation‘s employees, communities, and business objectives‖? Why or why not?

Students‘ responses may vary. Company donations to nonprofit groups closely aligned with the interests of the corporation‘s employees, communities, and business objectives may create a situation of conflict of interest. However, this can also—if managed correctly—be a powerful business tool.

21. Is it ethical to direct company donations to support ―pet projects of senior managers or board members‖? Why or why not?

Students‘ responses may vary. Company donations to support pet projects of senior managers or board members create a situation of conflict of interest. This is because these stakeholders have ulterior motives other than the good of the cause.

22. Why would budgeting a fixed percentage of pretax profits for corporate philanthropy be seen as a more convincing commitment to CSR than just funding a variety of projects?

Students‘ responses may vary. Budgeting a fixed percentage of pretax profits for corporate philanthropy is a more convincing commitment to CSR because this shows the firm is dedicated to providing a fixed amount for CSR initiatives rather than selecting projects that do not require as much funding or those that provide a conflict of interest.

23. The authors of this article claim that ―an effectively managed contribution program can deliver strong returns to a corporation.‖ What might those returns be?

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Students‘ responses may vary. An effectively managed contribution program can deliver strong returns to a corporation. Rather than a self-imposed tax, a corporation can donate directly to nonprofit groups closely aligned with the interests of the corporation‘s employees, communities, and business objectives. Other returns may be increased investors which will allow the company more capital to expand, grow, or implement new strategies.

24. Does the fact that Target and General Mills donate five times more than the minimum 1 percent make them five times more socially responsible? Why or why not?

Students‘ responses may vary. Some of them may say that the fact that Target and General Mills donate five times more than the minimum 1 percent does not make them five times more socially responsible. What it does say about these corporations is that they are willing to exceed the minimum standards and expectations of corporate social responsibility. This willingness to exceed standards and expectations also carries over into other aspects of business.

4.3 – Monsanto’s Mystery Wheat 1.

Did Monsanto violate any ethical standards in developing genetically modified wheat and planning to sell it as a companion product to Roundup?

Students‘ responses may vary. The lack of communication about the development of MON71800 and the attempt to divert attention towards anti-GMO activists show a clear failure of transparency. In addition, the product was shelved for fears of a negative market reaction, not for any concerns about genetic modification or any obligation to share information with customers.

2.

What should it have done differently?

Students‘ responses may vary. Monsanto could have anticipated the negative market reaction in the planning stages for MON71800 and elected not to develop the product at all.

When it was shelved, the company could have acknowledged the potential for instances of seeds blowing across from test fields and worked with farmers in adjoining farms. Once the story broke, Monsanto should have taken immediate responsibility for the event rather than trying to divert attention away from the company and any implied legal accountability.

3.

Was it ethical for Monsanto to settle the litigation with no admission of responsibility or commitment to change any internal practices? Why or why not?

Students‘ responses may vary. As with any legal case, an admission of responsibility

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establishes a precedent that can prove to be very expensive for the company in any subsequent litigation. Monsanto was pursuing the instrumental approach to business ethics in prioritizing the needs of their shareholders. Had the company followed a social contract approach, it would have committed to changing internal practices to ensure that the situation was not repeated.

4.

Did Japan make the right decision when it banned all imports of U.S. soft wheat?

Students‘ responses may vary. Given the uncertainty of the situation and Monsanto‘s unwillingness to take responsibility for it, Japan made the right call in choosing the most cautious approach until more definitive tests could be performed.

5.

Food scientists argue that Mother nature has been genetically modifying plant species for thousands of years, and that technology now gives them the opportunity to do the same for the welfare of a global population. Explain the ethical position of this argument.

Students‘ responses may vary. The rationalization of needing to feed a global population is an example of utilitarianism, where the greatest good for the greatest number of people justifies the actions being taken.

6.

Anti-GMO protesters warn of the creation of ―frankenfoods‖ that have the potential to harm our bodies in ways that we do not yet understand. Explain the ethical position of this argument.

Students‘ responses may vary. Universal ethics argues that there are certain and universal principles that should apply to all ethical judgments. As such, food scientists have a duty and obligation to the safety of consumers that should take priority over the technical ability to genetically modify food. The problem with this approach is that while scientists are forced to test and retest new processes, many populations across the world continue to starve.

CHAPTER 5 Corporate Governance Table of Contents

Chapter Summary

5-2

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Learning Outcomes Frontline Focus: ―Incriminating Evidence‖ Questions Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Learning Outcome 5 Life Skills Progress ✓Questions Ethical Dilemma Frontline Focus: ―Incriminating Evidence‖—Marco Makes a Decision Questions Key Terms Review Questions Review Exercises Internet Exercises Team Exercises Thinking Critically

5-2 5-2 5-3 5-3 5-4 5-5 5-6 5-7 5-7 5-11 5-14 5-14 5-15 5-16 5-17 5-18 5-21

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Chapter Summary This chapter examines the challenges in maintaining an ethical culture within an organization.

What policies and procedures should be put into place to ensure that the company conducts itself in an ethical manner, and what should be the consequences when evidence of unethical conduct is found? The chapter begins by explaining and defining corporate governance and how it should be organized in a firm. It discusses the roles and responsibilities of different executives, as well as major governance committees and the board of directors. Further, the two methodologies, ―comply or explain‖ and ―comply or else‖ are differentiated.

Learning Outcomes After studying this chapter, the student should be able to: 1.

2.

3.

4.

5.

Explain the term corporate governance.

Understand the responsibilities of the board of directors and the major governance committees.

Explain the significance of the ―King I‖ and ―King II‖ reports.

Explain the differences between the following two governance methodologies: ―comply or explain‖ and ―comply or else.‖ Identify an appropriate corporate governance model for an organization.

Extended Chapter Outline Frontline Focus ―Incriminating Evidence‖ Questions 13. Which committee would have granted stock options to the senior management of Chemco Industries? Review Figure 5.1 for more information on this.

The compensation committee is staffed by members of the board of directors and its primary responsibility is to oversee compensation packages, including stock options, for the senior executives of the corporation.

14. The e-mail suggests that the CEO was well aware of what was going on at Chemco Industries. Do you think the board of directors was aware of the activities of senior management? Which committee would be responsible for monitoring ethical practices at Chemco?

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The board of directors may or may not have been aware of the activities of senior management, depending on the number of senior executives who serve on the board of directors. The committee responsible for monitoring the ethical practices at Chemco would be the corporate governance committee. This committee monitors the ethical performance of the corporation and oversees compliance with the company‘s internal code of ethics as well as any federal and state regulations on corporate conduct.

15. What should Marco do now?

Marco should approach David Collins about the e-mail and state that he found and is aware of this e-mail. It is unethical to delete any evidence, such as e-mails, that could be used to find justice. Marco must ask himself if it is more important to win/lose the case ethically or unethically. If David Collins does not address this issue, then Marco needs to bring up the matter in court.

Learning Outcome 1: Explain the Term Corporate Governance. 

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

The business world has seen an increasing number of scandals in recent years, and numerous organizations have been exposed for poor management practices and fraudulent financial reporting.

Corporate governance is the system by which business corporations are directed and controlled. o It is concerned with how well organizations meet their obligations to their stakeholders—their customers, their vendor partners, state and local entities, and the communities in which they conduct their business operations.

Corporate governance is about the way in which boards oversee the running of a company by its managers, and how board members are, in turn accountable to shareholders and the company.

Good corporate governance plays a vital role in underpinning the integrity and efficiency of financial markets. o Poor corporate governance weakens a company‘s potential and at worst can pave the way for financial difficulties and even fraud.

If companies are well governed, they will usually outperform other companies and attract investors whose support can finance further growth.

Learning Outcome 2: Understand the Responsibilities of the Board of Directors and the Major Governance Committees. 

The owners of the corporation supply equity or risk capital to the company by purchasing shares in the corporation.

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o

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





They are typically a fragmented group, including individual public shareholders, large blocks of private holders, private and public institutional investors, employees, managers, and other companies.

The board of directors is a group of individuals who oversee governance of an organization. o Elected by vote of the shareholders at the annual general meeting (AGM), the true power of the board can vary from institution to institution from a powerful unit that closely monitors the management of the organization, to a body that merely rubberstamps the decisions of the chief executive officer (CEO) and executive team. o The directors are appointed to serve for specific periods of time. o The board is typically made up of inside and outside members—inside members hold management positions in the company, whereas outside members do not.

The audit committee is an operating committee staffed by members of the board of directors plus independent or outside directors. o The committee is responsible for monitoring the financial policies and procedures of the organization, specifically:  Accounting policies  Internal controls  Hiring of external auditors The compensation committee is an operating committee staffed by members of the board of directors plus independent or outside directors. o The committee is responsible for setting the compensation for the CEO and other senior executives.  Typically, this compensation will consist of a base salary, performance bonus, stock options, and other perks.

The corporate governance committee is a committee (staffed by board members and specialists) that monitors the ethical performance of the corporation and oversees compliance with the company‘s internal code of ethics as well as any federal and state regulations on corporate conduct. o It represents a more public demonstration of the organization‘s commitment to ethical business practices.

Learning Outcome 3: Explain the Significance of the ―King I‖ and ―King II‖ Reports. 



While the issue of corporate governance has reached new heights of media attention in the wake of recent corporate scandals, the topic itself has been receiving increasing attention for over a decade.

In 1992, Sir Adrian Cadbury led a committee in Great Britain to address financial aspects of corporate governance in response to public concerns over directors‘ compensation at several high-profile companies in Great Britain.

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

Two years after the release of the Cadbury report, attention shifted to South Africa, where Mervyn King, a corporate lawyer, former High Court judge, and the current governor of Bank of England, led a committee that published the ―King Report on Corporate Governance‖ in 1994 o In contrast to Cadbury‘s focus on internal governance, the King Report ―incorporated a code of corporate practices and conduct that looked beyond the corporation itself, taking into account its impact on the larger community.‖ o ―King I,‖ as the 1994 report became known, went beyond the financial and regulatory accountability upon which the Cadbury report had focused and took a more integrated approach to the topic of corporate governance, recognizing the involvement of all the corporate stakeholders—the shareholders, customers, employees, vendor partners, and the community in which the corporation operates— in the efficient and appropriate operation of the organization.

Even though King I was widely recognized as advocating the highest standards for corporate governance, the committee released a second report eight years later—referred to as ―King II,‖ which formally recognized the need to move the stakeholder model forward and consider a triple bottom line as opposed to the traditional single bottom line of profitability. o The triple bottom line recognizes the economic, environmental, and social aspects of a company‘s activities. o In the words of the King II report, companies must ―comply or explain‖ or ―comply or else.‖

Learning Outcome 4: Explain the Differences between the Following Two Governance Methodologies: ―Comply or Explain‖ and ―Comply or Else.‖ 

―Comply or explain‖ is a set of guidelines that require companies to abide by a set of operating standards or explain why they choose not to. o The Cadbury report argued for a guideline of comply or explain, which gave companies the flexibility to comply with governance standards or explain why they do not in their corporate documents. o The vagueness of what would constitute an acceptable explanation for not complying, combined with the ease with which such explanations could be buried in the footnotes of an annual report (if they were even there at all) raised concerns that comply or explain would not do much to help corporate governance. o The string of financial scandals that followed the report led many critics to argue that comply or explain offered no real deterrent to corporations. o The answer, they argued, was to move to a more aggressive approach of comply or else.

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

―Comply or else‖ is a set of guidelines that require companies to abide by a set of operating standards or face stiff financial penalties. o The Sarbanes-Oxley Act of 2002 incorporates this approach.

Learning Outcome 5: Identify an Appropriate Corporate Governance Model for an Organization. 





 



When corporations reach out to consultants, or are approached by consultants with new solutions to maximize the effectiveness of their corporate governance, the issues of finding an accepted benchmark and a comparative measure of one company‘s corporate governance versus another‘s inevitably arise. o Acronyms typically feature prominently in these measurement frameworks.  For example, INSEAD, the European business school, offers the ―CRAFTED‖ principles of governance—―good corporate governance is a culture and a climate of Consistency, Responsibility, Accountability, Fairness, Transparency, and Effectiveness that is Deployed throughout the organization.‖  The application of a commonly accepted numerical scoring template remains frustratingly elusive.  The CRAFTED principles appear to be fairly self-explanatory, and, when questioned, most boards of directors would no doubt offer their wholehearted support for them.

If the board is to serve its purpose in setting the operational tone for the organization, it should be comprised of members who represent professional conduct in their own organizations. o Proper authority should be granted, so that the board members can fulfill their responsibilities of oversight, guidance, and approval to the best of their abilities.

Unfortunately, the CRAFTED principle of transparency is often foregone in favor of tightly managed information flow by the executive leadership of the organization; and the appointments to the board more often reflect the trading of professional favors and quid pro quo agreements than the utilization of the best available skills and experience.

The board must be willing to work with the executive leadership to provide feedback and guidance in a detailed and timely manner.

Running a company of any size requires constant evaluation of risk-versus-reward scenarios. o The corporate governance model assumes that the board of directors and executive leadership work together in making those evaluations.

Walter Salmon, a longtime director with over 30 years of boardroom experience, in a 1993 Harvard Business Review article, recommended a checklist of 22 questions to assess the

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

quality of a board of directors. o If the board answers yes to all 22 questions, it is an exemplary board. o Even with a board that passes all the tests and meets all the established criteria, ethical misconduct can still come down to the individual personalities involved.

There is more to effective corporate governance than simply maintaining a checklist of items to be monitored on a regular basis. o Simply having the mechanism in place will not, in itself, guarantee good governance.

While media coverage of corporate scandals has tended to concentrate on the personalities involved, we cannot lose sight of the fact that corporate governance is about managers fulfilling a fiduciary responsibility to the owners of their companies. o A fiduciary responsibility is ultimately based on trust, which is a difficult trait to test when a company is hiring a manager or to enforce once that manager is in place. o A commitment to good corporate governance makes a company both more attractive to investors and lenders, and more profitable.

Life Skills Governing your Career This Life Skills box discusses how an organization‘s board of directors is designed to be both an advisory group and a governing body. The board is a team of people that businesspeople can count on for advice and guidance. Many successful businesspeople acknowledge that developing a dream team of advisers has been critical to their business and personal success in life. Being willing to reach out to others and seek their advice and guidance on a regular basis, they believe, has helped them prepare for important decisions and plan for long-term career choices.

Progress ✓Questions 1.

Define corporate governance.

Corporate governance is the system by which business corporations are directed and controlled.

2.

Explain the roles of a corporate governance committee.

The corporate governance committee is staffed by board members and specialists. It monitors the ethical performance of the corporation and oversees compliance with the company‘s internal code of ethics as well as any federal and state regulations on corporate conduct.

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3.

Explain the role of the board of directors.

The board of directors is a group of individuals who oversee governance of an organization.

Elected by vote of the shareholders at the annual general meeting (AGM), the true power of the board can vary from institution to institution from a powerful unit that closely monitors the management of the organization to a body that merely rubber-stamps the decisions of the chief executive officer (CEO) and executive team.

4.

What is an outside director?

The board of directors is typically made up of inside and outside members—inside members hold management positions in the company, whereas outside members do not. The term outside director can be misleading because some outside members may have direct connections to the company as creditors, suppliers, customers, or professional consultants.

5.

Which two scandals greatly increased the attention paid to the 1992 Cadbury Report?

In 1992, Sir Adrian Cadbury led a committee in Great Britain to address financial aspects of corporate governance in response to public concerns over directors‘ compensation at several high-profile companies in Great Britain. The subsequent financial scandals surrounding the Bank of Credit and Commerce International (BCCI) and the activities of publishing magnate Sir Robert Maxwell generated more attention for the committee‘s report than was originally anticipated.

6.

Explain the ―right balance‖ that Cadbury encourages companies to pursue.

At the heart of the Cadbury Committee‘s recommendations is a Code of Best Practice designed to achieve the necessary high standards of corporate behavior. By adhering to the Code, listed companies will strengthen both control over their businesses and their public accountability. In so doing, they will be striking the right balance between meeting the standards of corporate governance now expected of them and retaining the essential spirit of enterprise.

7.

Explain the difference between the King I and King II reports.

The King I report went beyond the financial and regulatory accountability upon which the Cadbury report had focused and took a more integrated approach to the topic of corporate governance, recognizing the involvement of all of the corporation‘s stakeholders—the shareholders, customers, employees, vendor partners, and the community in which the

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corporation operates—in the efficient and appropriate operation of the organization.

The King II report formally recognized the need to move the stakeholder model forward and consider a triple bottom line as opposed to the traditional single bottom line of profitability.

The triple bottom line recognizes the economic, environmental, and social aspects of a company‘s activities.

8.

Explain the difference between ―comply or explain‖ and ―comply or else.‖ The ―comply or explain‖ is a set of guidelines that require companies to abide by a set of operating standards or explain why they choose not to.

The ―comply or else‖ is a set of guidelines that require companies to abide by a set of operating standards or face stiff financial penalties.

9.

What is the argument in favor of merging the roles of chairman and CEO? The argument in favor of merging the roles of chairman and CEO is one of efficiency—by putting the leadership of the board of directors and the senior management team in the hands of the same person, the potential for conflict is minimized and, it is argued, the board is given the benefit of leadership from someone who is in touch with the inner workings of the organization rather than an outsider who needs time to get up to speed.

10. What is the argument against merging the roles of chairman and CEO? The argument against merging the roles of chairman and CEO is an ethical one. Governance of the corporation is now in the hands of one person, which eliminates the checks and balances process that the board was created for in the first place. As time passes, the CEO slowly populates the board with friends who are less critical of the CEO‘s policies and more willing to vote larger and larger salary and benefits packages. With a rubber-stamp board in place to authorize every wish, the CEO now becomes a law unto himself or herself. The independence of the board is compromised, and the power of the stockholders is minimized.

The CEO can pursue policies that are focused on maintaining a high share price in the short term without any concern for the long-term stability of the organization.

11. Explain the difference between a short-term and long-term view in the governance of a corporation.

In the short-term view in the governance of a corporation, the CEO focuses on the numbers for the next quarter.

In the long-term view in the governance of a corporation, the CEO focuses on the numbers for the next five or more years.

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12. Is it unethical to populate your board of directors with friends and business acquaintances?

Why or why not?

Students‘ answers will vary but majority of the students may say that populating the board of directors with friends and business acquaintances is unethical. It will create a conflict of interest. Friends and business acquaintances will be less critical of the CEO‘s policies and more willing to vote larger and larger salary and benefits packages. It is much harder for a friend or business acquaintance to say no to the CEO than an outsider who has no stake in the organization.

13. What are INSEAD‘s ―CRAFTED‖ principles of governance?

Good corporate governance is a culture and a climate of Consistency, Responsibility, Accountability, Fairness, Transparency, and Effectiveness (CRAFTED) that is deployed throughout the organization. The CRAFTED principles appear to be fairly self-explanatory, and, when questioned, most boards of directors would no doubt offer their wholehearted support for them. Unfortunately, the CRAFTED principle of transparency is often foregone in favor of tightly managed information flow by the executive leadership of the organization.

14. Select your top six from Walter Salmon‘s ―22 Questions for Diagnosing Your Board‖ and defend your selection.

Students‘ answers will vary. Numerous responses can be expected as long as supported with justification. For example:  Are there three or more outside directors for every insider?

This is important because outsiders create a more diverse board and provide the checks and balances that a board is supposed to have.  Does your audit committee, not management, have the authority to approve the partner in charge of auditing the company?

This is important because this eliminates management from choosing and therefore eliminates the situation of conflict of interest.  Do outside directors annually review succession plans for senior management?

This is important because outside directors are chosen by the owners of the corporation and should be held responsible for reviewing succession plans of senior management.  Is there a way for outside directors to alter the meeting agenda set by your CEO? A corporation‘s CEO already has a great deal of power. When combining this power with being chair of the board, there needs to be a method in place through which outsiders can intervene.

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

Do the outside directors meet without management on a regular basis?

Meeting on a regular basis without management provides an atmosphere in which persuasion by management‘s interests are not present.

Is the performance of each of your directors periodically reviewed?

Evaluation is an important task of any committee or organization.

15. Research a recent case of poor corporate governance and document how the company in question ―had all its governance boxes checked.

Students‘ answers will vary. Some of them may give the example of Enron.

Enron separated the roles of Chairman (Kenneth Lay) and Chief Executive Officer (Jeffrey Skilling)—at least until Skilling‘s surprise resignation. The company maintained a roster of independent directors with flawless résumés. It maintained an audit committee consisting exclusively of nonexecutives.

However, the true picture was a lot less appealing. Many of the so-called independent directors were affiliated with organizations that benefited directly from Enron‘s operations.

The directors enjoyed substantial ―benefits‖ that continued to grow as Enron‘s fortunes grew. Their role as directors of Enron, a Wall Street darling, guaranteed them positions as directors for other companies—a career package that would jeopardize if they chose to ask too many awkward questions and gain reputations as troublemakers.

16. Provide three examples of evidence that good corporate governance can pay off for organizations.

Student answers may vary. Possible answers may include:  A Deutsche Bank study of Standard & Poor‘s 500 firms showed that companies with strong or improving corporate governance outperformed those with poor or deteriorating governance practices by about 19 percent over a two-year period.  A Harvard-Wharton study showed that if an investor purchased shares in U.S. firms with the strongest shareholder rights and sold shares in the ones with the weakest shareholder rights, the investor would have earned abnormal returns of 8.5 percent per year. o The same study also found that U.S.-based firms with better governance have faster sales growth and was more profitable than their peers.  In a 2002 McKinsey survey, institutional investors said they would pay premiums to own well- governed companies. Premiums averaged 30 percent in Eastern Europe and Africa and 22 percent in Asia and Latin America.

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Ethical Dilemma 5.1 – 20/20 Hindsight 1.

How did SIB‘s status as an ―offshore bank‖ facilitate Stanford‘s alleged fraud?

Students‘ responses will vary. As an ―offshore bank‖, Stanford International Bank (SIB) SIB operated outside of U.S. banking regulations. This facilitated Stanford‘s alleged fraud. With a reputed $8.5 billion in assets, the bank took money from depositors by an unusual route.

No loans were ever made by the bank, although it did claim to have a traditional stock and bond trading department. Clients deposited funds by purchasing certificates of deposits (CDs) that offered above average interest rates in return for reduced liquidity. Once deposited with SIB, customer funds took 60 days to be returned. The above average interest rates proved irresistible to investors in the United States and Latin America—over $8 billion was invested in SIB CDs by over 20,000 investors.

2.

Why would investors be willing to sacrifice immediate access to the funds they deposited with SIB? The investors were willing to sacrifice immediate access to the funds they deposited with Stanford International Bank (SIB) because the certificates of deposit (CDs) offered above average interest rates in return for reduced liquidity. Once deposited with SIB, customer funds took 60 days to be returned. The above average interest rates proved irresistible to investors in the United States and Latin America.

3.

What elements were missing from the governance structure of Stanford Financial Group?

The case doesn‘t talk about the following elements of the governance structure:  The board of directors  The audit committee  The compensation committee  The corporate governance committee The chief financial officer (CFO) of Stanford International Bank (SIB), James Davis, was Stanford‘s college roommate. The chief investment officer of Stanford Financial Group (SFG), Laura Pendergest-Holt, had no financial services or securities experience, and claimed to have limited knowledge of ―the whereabouts of the vast majority of the bank‘s multi-billion investment portfolio‖ according to the Securities Exchange Commission (SEC). Other senior corporate officers included Stanford family members, friends, and business associates with cattle ranching and car sales companies in Texas. Such people are 1-111 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

less critical of the chief executive officer‘s (CEO‘s) policies and more willing to vote larger and larger salary and benefits packages. The independence of the board of directors is compromised, and the power of the stockholders is minimized.

4.

What was the basis of Stanford‘s defense?

Stanford continued to profess his innocence by claiming that he was wrong to trust the integrity of his chief financial officer (CFO), James Davis. Therefore, he did not have knowledge of the missing funds. As for the collapse of his financial empire and his inability to repay investors, Stanford blamed the SEC for using him as a ―scapegoat‖ after failing to catch Bernard Madoff, and for the ―ripple effect‖ of its indictment that prompted regulatory agencies around the world to freeze the assets of his multiple investment companies. He said there was no money missing, there never was a Ponzi scheme, and there never was an attempt to defraud anybody.

5.2 – A Spectacular Downfall 1.

Which stakeholders were impacted by Blatter‘s leadership at FIFA? The stakeholders who were impacted by Blatter‘s leadership at FIFA included but were not limited to employees, sponsors, professional football associations and their members, and supporters of the sport of soccer/football around the world.

2.

Where were the failures in corporate governance in this case?

Students‘ responses will vary. The failures in corporate governance included but were not limited to a lack of internal oversight by the board of directors, and a lack of policies to balance the dominant authority of Sepp Blatter. The frequent implications of bribery payments also suggest that clear rules of ethical conduct were either circumvented or completely ignored.

3.

Is there any evidence of good corporate governance in this case?

Students‘ responses will vary. The ethics committee was finally forced to suspend Blatter in response to an outcry from sponsors who provide the majority of FIFA‘s revenue. Attempts to address the scandal by barring Blatter and Michel Platini (the president of UEFA, European football‘s governing body) for eight years were undermined when the Court of Arbitration for Sport reduced the term to six years.

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4.

What steps should the new president of FIFA take to restore corporate governance?

Students‘ responses will vary. With such a tarnished reputation and loss of confidence among sponsors, football associations, players and fans, the new President of FIFA will need to enforce stricter control measures to ensure that such bribery is never allowed to happen again.

Frontline Focus ―Incriminating Evidence‖—Marco Makes a Decision Questions 13. What could Marco have done differently here?

Student answers will vary. Marco could have gone public with this news and been recognized as a whistleblower. As a whistleblower, he would have gotten the chief executive officer (CEO) of Chemco, the senior managers, David Collins, and probably anyone assigned to the Chemso case fired. Although this seems like a drastic strategy to take, this would send a message to all those acting unethically and it would prevent these people from destroying Chemco permanently.

14. What do you think will happen now?

Student answers will vary. Because Marco shredded the evidence, Chemco will most likely win the lawsuit and continue to act in an unethical manner and ―massage the numbers‖ when needed. Having gotten away with this, Chemco may also begin making more unethical choices.

15. What will be the consequences for Adam, David Collins, and Chemco Industries?

Student answers will vary. If other evidence is found, then David Collins, the chief executive officer (CEO) of Chemco, and Marco will be fired and struggle to be hired in any other firm, if at all. Marco could have saved himself by ―doing the right thing,‖ but is now at risk of being associated with the unethical practices of the firm and David Collins.

Key Terms Audit Committee: An operating committee staffed by members of the board of directors plus independent or outside directors. The committee is responsible for monitoring the financial policies and procedures of the organization—specifically the accounting policies, internal controls, and the hiring of external auditors.

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Board of Directors: A group of individuals who oversee governance of an organization. Elected by vote of shareholders at the annual general meeting (AGM), the true power of the board can vary from institution to institution from a powerful unit that closely monitors the management of the organization, to a body that merely rubber-stamps the decisions of the chief executive officer (CEO) and executive team.

Compensation Committee: An operating committee staffed by members of the board of directors plus independent or outside directors. The committee is responsible for setting the compensation for the CEO and other senior executives. Typically, this compensation will consist of a base salary, performance bonus, stock options, and other perks. ―Comply or Else‖: A set of guidelines that require companies to abide by a set of operating standards or face stiff financial penalties. ―Comply or Explain‖: A set of guidelines that require companies to abide by a set of operating standards or explain why they choose not to.

Corporate Governance: The system by which business corporations are directed and controlled.

Corporate Governance Committee: Committee (staffed by board members and specialists) that monitors the ethical performance of the corporation and oversees compliance with the company‘s internal code of ethics as well as any federal and state regulations on corporate conduct.

Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions.

1.

Why do corporations need a board of directors?

Student responses will vary. Corporations need board of directors to oversee the governance in an organization. Typically, the stockholders of the organization elect the board of directors. The corporation needs the board of directors because an organization‘s board of directors is also designed to be both an advisory group and a governing body.

2.

What is the value of adding ―outside directors‖ to your board?

Student responses will vary. Outside directors are beneficial because they can bring their

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outside skills or knowledge to the organization. Outside directors can also eliminate bias in an organization.

3.

Which is more important to effective corporate governance: an audit committee or a compensation committee? Why? Student responses will vary. Some of them may say that both the committees are effective for corporate governance. The audit committee is responsible for monitoring the financial policies and procedures at the organization. They monitor the accounting policies, internal controls, and they hire the external auditors. The compensation committee is responsible for setting the compensation for the chief executive officer (CEO) and other senior executives.

The audit committee is one of the key safeguards of the organization because this system of corporate governance helps to defend the organization against fraud and incompetence.

4.

Many experienced senior business executives serve on multiple corporate boards. Is this a good thing? Explain your answer.

Student responses will vary. A senior business executive that serves on multiple corporate boards can bring experience and knowledge to a corporation. For example, if the organization has a unique situation, the business executive will have the knowledge and experience to offer guidance or assistance to rectify the issue. However, a senior business executive that serves on multiple corporate boards could become very busy. As a result, the board member may not have the time it takes to be effective in the organization. In certain cases it could be considered a conflict of interest.

5.

Many of Enron‘s ―independent‖ directors were affiliated with organizations that benefited directly from Enron‘s operations. How would you address this clear conflict of interest?

Student responses will vary. Students should address the ethical issues that relate to Enron‘s ―independent‖ directors. They were guaranteed other positions at organizations and the organizations they were affiliated with benefited directly from Enron‘s operations. It is important for directors to have a strong and ethical fiduciary responsibility to the organization. The ―independent‖ directors at Enron crossed that line and entered into an unethical situation.

6.

Outline the corporate governance structure of the company you work for (or one you have worked for in the past).

Student responses will vary.

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Review Exercises 17. Who would most likely have intervened to terminate the senior team over issues of conduct?

Student responses will vary. The board of directors would be the governing group of the organization and would have the authority to fire these executives.

18. Give some examples of the kind of ethical misconduct that could have led to the termination of the entire senior leadership of GlobalMutual.

Student responses will vary. Some examples of ethical misconduct would be the collaboration of these executives in practices such as falsifying financials or reports, or selling of stock when company is performing poorly while still portraying great health to the public.

19. Was it a good idea to fire them all at the same time with no detailed explanation?

Student responses will vary. If each of these executives were involved in the same unethical conduct then firing them all at the same time would be justified. However, the public, especially shareholders, has a right to know about the misconduct that was committed.

20. How are the stakeholders of GlobalMutual likely to react to this news? Explain your answer.

Student responses will vary. The stakeholders are most likely to be concerned and confused as to what misconduct was committed by the three executives. The firing of these three important executives will create another struggle for the organization because they must replace these people and get the new people up to date regarding the operations and issues.

This will most likely be difficult for the company and cause a trickle-down effect for the stakeholders. However, if the executives were guilty of unethical practices, stakeholders should feel that this was the best thing to do to prevent further disruption in the organization.

Internet Exercises 1.

Review the website of the International Corporate Governance Network (ICGN) at www.icgn.org. a.

What is the ICGN‘s stated mission?

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According to the website, the ICGN is a global membership organization of around 600 leaders in corporate governance based in 50 countries with a mission to raise standards of corporate governance worldwide. b.

How can this organization affect corporate governance in the business world?

The ICGN‘s mission is to raise standards of corporate governance worldwide. In doing so, the ICGN encourages cross-border dialogue at conferences and influences corporate governance public policy through ICGN Committees. It promotes best practice guidance, encourages leadership development and keeps its members informed on emerging issues in corporate governance through publications and the ICGN website. This will ultimately have some effect on corporate governance in the business world.

c.

The ICGN offers ―policy‖ guidance in several areas. Select one, and summarize how that guide contributes to the general discussion on corporate governance.

Students‘ responses are expected to vary. Some of the ideas areas are corporate objective (sustainable value creation), corporate boards (directors as fiduciaries, effective board behavior, responsibilities of the board, composition and structure of the board, skills and experience, etc.), corporate culture (culture and ethical behavior, integrity, codes of ethics and conduct, bribery and corruption, employees share dealing, etc.), risk management (effective and appropriate risk management, dynamic management process, board oversight, comprehensive approach, disclosure), remuneration (alignment with long term, link to value-creation, pay for non-executive directors, transparency, share ownership, etc.), etc.

2.

Review the annual report of a Fortune 100 company of your choice. Who serves on the board of directors for the company? Are there any designated ―outside‖ directors? On how many other boards do those ―outside‖ directors serve? What does the company gain from having these ―outside‖ directors on the board?

Students‘ responses will vary.

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Team Exercises 13. Chairperson and/or CEO. Divide into two teams. One team must prepare a presentation advocating for the separation of the roles of chairperson and CEO. The other team must prepare a presentation arguing for the continued practice of allowing one corporation executive to be both chairperson and CEO. Student responses will vary. Advocating the separation of the roles of chairperson and CEO, students will need to emphasize that this allows the CEO to focus on his/her duties to the company and its shareholders, while allowing the chairperson and board to monitor his/her actions. The separation allows for checks and balances and eliminates one person having too much power and a possible conflict of interest.

The argument against separation is one of efficiency. Allowing the CEO to also be the chairperson creates a more efficient board because the leader of the organization (CEO) is already aware of the organization‘s operations and functions. If the chairperson is someone different, then he or she must be brought up to speed before accurately conducting his or her duties.

14. Compensation.

You serve on your organization‟s compensation committee, and you are meeting to negotiate the retirement package for your CEO who is retiring after a very successful 40-year career with your organization—the last 20 as CEO, during which time the company‟s revenues grew more than fourfold and gross profits increased by over 300 percent. Divide into two teams, arguing for and against the following compensation package being proposed by the CEO‟s representative:  Unlimited access to the company‟s New York apartment.  Unlimited use of the corporate jet and company limousine service.  Courtside tickets to New York Knicks games.  Box seats at Yankee Stadium.  VIP seats at the French Open, U.S. Open, and Wimbledon tennis tournaments.  A lucrative annual consulting contract of $80,000 for the first five days and an additional $17,500 per day thereafter.  Reimbursement for all professional services—legal, financial, secretarial, and IT support.  Stock options amounting to $200 million.

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Student responses will vary. Arguments for the recommended compensation package may include the point that the successful career and dedication that this CEO has had with the organization deserves to be rewarded. He or she has grown the company‘s revenues more than fourfold and increased gross profits by over 300 percent. This is also someone who will still represent the company in consulting and through his or her connections when networking; therefore, keeping him or her satisfied and happy with the organization will, ultimately benefit the organization.

Arguments against this recommended package is the cost of all the benefits—tickets to sporting events, reimbursements, etc. Also, one must consider the opportunity cost and how these items will indirectly affect the company. For example, the stock options amounting to $200 million dollars is going to result in less capital from investors buying the shares. Also, the new CEO and other executives may need or have access to the New York apartment and corporate jet, so this will create a conflict of interest or possibly a problem between these people.

15. An appropriate response.

You sit on the board of directors of a major airline that just experienced a horrendous customer service event. A severe snowstorm stranded several of your planes and caused a ripple effect throughout your flight schedule, stranding thousands of passengers at airports across the country and keeping dozens of passengers as virtual hostages on planes for several hours as they waited for departure slots at their airport. The press has covered this fiasco at length and is already calling for a passenger bill of rights that will be based primarily on all the things your airline didn‟t do to take care of its‟ passengers in this situation. Your CEO is the founder of the airline, and he has been featured in many of your commercials raving about the high level of customer service you deliver. The board is meeting to review his continued employment with the company. Divide into two teams and argue the case for and against terminating his employment as a first step in restoring the reputation of your airline.

Student responses will vary. Arguments for the CEO‘s termination may include the points that the unhappy and unsatisfied customers have tarnished the reputation of the organization, as well as the trust of the public. Also, due to the incident and the coverage of the situation, the public will expect some kind of punishment or expression of fault to show that the organization is committed to satisfying its customers.

Arguments against termination of the CEO may include the point that everyone makes mistakes and the response to the situation needs to be taken into consideration. The CEO is also the founder of the airline and has provided quality customer service throughout his

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career.

16. Ideal corporate governance.

Divide into groups of three or four. Each group must map out its ideal model for corporate governance of an organization—for example, the number of people on the board of directors; separate roles of chairman and CEO, inside and outside directors, and employee representation on the board. Prepare a presentation arguing for the respective merits of each model and offer evidence of how each model represents the best interests of all the organization‟s stakeholders.

Student responses will vary. Students will need to justify the number of people on the board of directors. A smaller board may not be as efficient as a larger board. The number of inside and outside directors will vary and must also be justified. Outside directors are important to prevent situations of conflict of interest. Separation of the chairman and CEO can be argued as an ethical issue or an efficiency issue.

Thinking Critically 5.1 – Tesco’s Vanishing Profits 25. In what way does this scandal demonstrate a lack of corporate governance on Tesco‘s part?

Students‘ responses will vary. Effective corporate governance depends on a proactive framework of checks and balances that clearly were not in place at Tesco. Costs were deferred and income accelerated and PwC, Tesco‘s auditor either overlooked the actions entirely or failed to flag the transactions as questionable and worthy of further analysis.

The executives involved might attempt to rationalize their unethical conduct by blaming increasing pressure to perform in a competitive market, but, as the saying goes, the buck ultimately stops here.

26. Were the actions taken by newly appointed chief executive Dave Lewis sufficient to address that lack of governance? Explain.

Students‘ responses will vary. The actions taken by Lewis do seem to be appropriate given the severity of the situation. He fired the executives involved, ordered an independent review of the accounts by Deloitte, brought in legal advisers to scrutinize the division in which the mismanagement took place, and contacted the appropriate regulatory agency about the overstatement. In general, those actions were proactive and transparent.

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However, the true test will come in responding to the findings of the multiple investigations to ensure that the same mismanagement will not be repeated.

27. Does the fact that the actions that led to the overstatement of profits had been going on for over a year make the lack of governance any worse? Why or why not?

Students‘ responses will vary. Many of them will say that mismanagement is mismanagement. Others may make the distinction between one-off errors and systematic attempts to circumvent financial controls over an extended period of time. The fact that those controls were unable to catch these repeated actions would suggest that the governance was much weaker than simply missing one incident.

28. Does PwC bear some responsibility here? Why or why not?

Students‘ responses will vary. PwC‘s responsibility as auditor was to scrutinize Tesco‘s financial reports and to formally authorize them as being truly representative of the company‘s financial condition. The fact that profits were overstated is a clear indication that PwC failed in that task.

29. Lewis identified three immediate priorities in turning the Tesco situation around. What are they and will they be enough? Explain.

Students‘ responses will vary. Lewis stated: ―Three immediate priorities are clear: to recover our competitiveness in the UK, to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand.‖ While the financial mismanagement may concern regulators and investors, retail customers will continue to be concerned about merchandise quality and price, so Tesco cannot afford to allow those priorities to take attention away from the company‘s core business.

6. What else should Tesco do to restore investor confidence in their business ethics?

Student responses will vary. With such clear financial mismanagement, the company should implement stricter controls and fully comply with all regulatory requirements. In addition, its‘ communications on the issue with investors should be frequent and transparent.

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5.2 – Carlos Ghosn 25. Why is Ghosn‘s arrest drawing global attention?

Students‘ responses will vary. Ghosn‘s ability to pull together and manage a conglomerate of highly competitive automobile manufacturers has brought him global fame as a tough but insightful corporate leader. The Renault-Nissan alliance is unique in the automotive sector, and the fact that Ghosn lead that alliance for two decades makes him worthy of those accolades, although his reputation is now permanently tarnished if you‘re a subscriber to the ―no smoke without fire‖ perspective.

26. Why is this being labelled ―a palace coup‖?

Students‘ responses will vary. The fact that Ghosn was ousted by Nissan‘s board by unanimous vote within three days of his arrest suggests that they were looking for the right opportunity to remove him. While the negative media coverage certainly warranted a proactive response, the fact that the vote was unanimous in the face of nothing but allegations suggests that Ghosn was not a popular leader within the conglomerate. The fact that Renault admitted that they had found no evidence of wrongdoing (but still suspended him) also suggests that Nissan was driving the bus on this one.

27. Using internet research, summarize the events that have taken place in this case since April 2019.

Students‘ responses will vary. At time of writing, the case continues to be extremely adversarial. Ghosn was re-arrested on new charges in April 2019, accusing him of funneling Nissan‘s money to a car dealership he controlled. Ongoing investigations have revealed a pattern of poor financial decisions on his part. Nissan was forced to issue a formal warning of falling profits, and a proposed $35 billion merger between Fiat Chrysler, Renault and Nissan to replace the former strategic alliance never made it off the drawing board after Nissan rejected the terms of the merger. The French government, which holds a 15% stake in Renault was also blamed after demanding what were deemed to be unrealistic guarantees and concessions from FCA. 28. Why should Ghosn‘s status and influence in Asia be a concern for prosecutors in this case?

Students‘ responses will vary. The fact that Ghosn came seventh in a Japanese poll that asked who should run the country is indicative of his wide popularity as a ‗savior‘ of the Japanese auto industry (for both Mitsubishi and Nissan). This puts the Japanese legal system under a great deal of scrutiny from the general population over and above Japanese and

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global business media. If he is perceived to have received anything less than fair treatment, the consequence for investor confidence could be significant.

29. What evidence is being presented to suggest that Ghosn abused his power as chief executive of a conglomerate of three major car manufacturers?

Students‘ responses will vary. The alleged abuses of power include a series of decisions that implied that Ghosn ran the conglomerate more as his personal fiefdom than as an alliance of publicly-traded corporations. Large transfers of funds from one balance sheet to another, including funds diverted for ―personal expenditure‖, paint a picture of an executive who became comfortable living a lifestyle worthy of his global status. Subsequent investigations have revealed other examples of excessive spending, but whether they amount to explicit abuses of power is a question for the Japanese legal process to answer.

30. What should Renault-Nissan do now? Explain and justify your recommendations.

Students‘ responses will vary. The loss of such a prominent leadership figure who is regarded as being the critical lynchpin that holds the strategic alliance together is potentially catastrophic. The risk that the individual company leadership teams will devolve into internal conflicts and turf battles has unnerved investors, and share prices have suffered as a result. Formal profit warnings haven‘t helped. Restoration of some form of stability would seem to be the highest priority. The fact that the FCA-Renault-Nissan merger proposal fell apart would suggest that Ghosn‘s departure has allowed long-held dissatisfactions to surface, which does not bode well for the long-term survival of the alliance.

5.3 – Valeant: The Pharmaceutical Enron 18. Identify three examples of poor corporate governance in this case.

Students‘ responses will vary. Many of them will say that such aggressive predatory pricing outside of market norms threatened the financial stability of the company. Others will point to the evidence that the company was booking revenue before sales had actually been completed. The highly questionable relationship between Valeant and Philidor is also indicative of a lack of oversight by senior executives.

19. Why do you think Bill Ackman remained so supportive of Valeant?

Students‘ responses will vary. Ackman had a responsibility to his own investors. Having sunk so much of the hedge fund‘s money into Valeant he had apparently decided to stick with it until the end, rather than making the choice that Robert Goldfarb at Sequoia Fund

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made, which was to step down from his fund after a 10.6 percent loss in the $5.6 billion fund in the first quarter of 2016.

20. Critics have described the Valeant board of directors as weak. Is that a fair assessment? Why or why not?

Students‘ responses will vary. Many of them will say that the boards of directors should be the ones who take it upon themselves to be involved in every aspect of company activities.

Others may argue that the company is simply too big to manage with that level of detail, and that the board of directors is dependent on accurate reporting from junior executives. The fact that such extensive financial mismanagement was allowed to occur over such a long period of time does portray the Valeant board of directors as being especially weak.

21. Is the release of negative research information by a company that is actively shorting the shares of that company an unethical business practice? Why or why not?

Students‘ responses will vary. Shorting stocks is an accepted investment practice, even if it is often dismissed as being distasteful and unethical by critics. However, the practice is assumed to operate on research that is accessed in an honest and ethical manner. Using insider information that has been accessed dishonestly or, even worse, creating false information to support your short position would be both unethical and illegal.

22. Does the fact that Citron Research was proven right in its accusations about Valeant validate its short-selling tactics?

Students‘ responses will vary. It is important to distinguish between short selling as an accepted practice and Citron‘s decision to short Valeant shares specifically based on their research. Being proven right is a positive outcome for Citron, but those opposed to the practice of short selling as being predatory and unnecessarily disruptive would not change their opinion. Supporters would argue that Citron did investors and financial markets a favor in drawing attention to the malfeasance taking place at Valeant. Investors who lost money with Valeant might not share that sentiment.

23. How can the newly staffed board of directors begin to restore investor confidence in Valeant (now Bausch Health)?

Students‘ responses will vary. Many of them may say that there is a clear need for stricter financial controls in the face of such extreme mismanagement. Others may focus on the loss of reputation as a result of such aggressive predatory pricing and propose that Valeant find ways to help financially challenged patients gain access to their highly-priced drugs.

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Frequent and transparent communications would be critical to any plan to restore the company‘s heavily tarnished brand. It remains to be seen whether the name change will allow the company to put its tarnished past behind it.

CHAPTER 6 The Role of Government Table of Contents Chapter Summary Learning Outcomes Frontline Focus: ―Too Much Trouble‖ Questions Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Learning Outcome 5 Life Skills Progress ✓Questions Ethical Dilemma Frontline Focus: ―Too Much Trouble—Susan Makes a Decision‖ Questions Key Terms Review Questions Review Exercises Internet Exercises Team Exercises Thinking Critically

6-2 6-2 6-2 6-3 6-3 6-5 6-7 6-7 6-8 6-8 6-12 6-14 6-14 6-16 6-17 6-18 6-20 6-22

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Chapter Summary This chapter steps outside of the organizational framework and examines what legislation the government has put into place to enforce ethical conduct. The Foreign Corrupt Practices Act attempts to send a clear message that U.S. overseas corporations are based on price and product quality. The U.S. Federal Sentencing Guidelines were put into place in 1984 to hold businesses liable for the criminal acts of their employees and agents. The Sarbanes-Oxley Act has 11 titles that cover the financial management of business containing examples of corporate wrongdoing that preceded the establishment of the legislation. The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted to combat perceived corporate mistreatment of consumers after the 2008 crash in the financial sector.

Learning Outcomes After studying this chapter, the student should be able to: 1.

2.

3.

4.

5.

Identify the five key pieces of U.S. legislation designed to discourage, if not prevent, illegal conduct within organizations.

Understand the purpose and significance of the Foreign Corrupt Practices Act (FCPA).

Calculate monetary fines under the three-step process of the U.S. Federal Sentencing Guidelines for Organizations (FSGO).

Compare and contrast the relative advantages and disadvantages of the Sarbanes-Oxley Act (SOX).

Explain the key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Extended Chapter Outline Frontline Focus ―Too Much Trouble‖ Questions 1.

The Sarbanes-Oxley Act created an oversight board for all auditing firms. Look at the outline of the act on pages 122–123 for more information on the Public Company Accounting Oversight Board (PCAOB). Would the PCAOB endorse trying to dump a prospective client in this manner?

Students‘ answers may vary. The PCAOB was created as an independent oversight body as an attempt to reestablish the perceived independence of auditing companies that the conflict of interest in Arthur Andersen‘s auditing and consulting relationship with Enron had called into question. Also, the PCAOB was charged with maintaining compliance with established 1-126 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

standards and enforcing rules and disciplinary procedures for those organizations that found themselves out of compliance. In this scenario, the PCAOB would not encourage the firm to take on a client that they could not accurately and adequately spend time auditing; however, it is not ethical to create such a high quote to drive away the client.

16. Is being too busy with other clients a justification for deliberately driving this customer away?

Students‘ answers may vary. Being too busy with other clients is not a justification for deliberately driving this customer away. If Steven is concerned about finding the future big fish and keeping up with a growing client base, then the firm needs to address the issue of hiring more auditors to take on more clients.

17. What should Susan do now?

Students‘ answers may vary. Susan should have a discussion with Steven about her comfort level regarding following through with his request as well as what will happen in the future when this happens again.

Learning Outcome 1: Identify the Five Key Pieces of U.S. Legislation Designed to Discourage, if not Prevent, Illegal Conduct within Organizations. 



For those organizations that have demonstrated that they are unable to keep their own house in order by maintaining a strong ethical culture, the last line of defense has been a legal and regulatory framework that offers financial incentives to promote ethical behavior and imposes penalties for those that choose not to adopt such behavior.

Since the 1970s, there have been several attempts at behavior modification to discourage, if not prevent, illegal conduct within organizations: o The Foreign Corrupt Practices Act (1977) o The U.S. Federal Sentencing Guidelines for Organizations (1991) o The Sarbanes-Oxley Act (2002) o The Revised Federal Sentencing Guidelines for Organizations (2004) o The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

Learning Outcome 2: Understand the Purpose and Significance of the Foreign Corrupt Practices Act (FCPA). 

The Foreign Corrupt Practices Act (FCPA) was a legislation introduced to control bribery and other less obvious forms of payment to foreign officials and politicians by American publicly traded companies.

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











By passing the FCPA, Congress was attempting to send a clear message that the competitiveness of U.S. corporations in overseas markets should be based on price and product quality rather than the extent to which companies had paid off foreign officials and political leaders.

The FCPA focuses on two distinct areas: o Disclosure—the FCPA requirement that corporations fully disclose any and all transactions conducted with foreign officials and politicians, in line with the SEC provisions. o Prohibition—the FCPA inclusion of wording from the Bank Secrecy Act and the Mail Fraud Act to prevent the movement of funds overseas for the express purpose of conducting a fraudulent scheme.

The FCPA was criticized for lacking any real teeth because of its formal recognition of facilitation payments. o Facilitation payments are payments that are acceptable (legal) provided they expedite or secure the performance of a routine government action.

The FCPA finds these payments acceptable provided they expedite or secure the performance of a routine governmental action. o Routine governmental action is any regular administrative process or procedure, excluding any action taken by a foreign official in the decision to award a new or continuing business. Examples include:  Providing permits, licenses, or other official documents to qualify a person to do business in a foreign country  Processing governmental papers, such as visas and work orders  Providing police protection, mail pickup and delivery, or scheduling inspections related to transit of goods across a country  Providing phone service, power, and water supply, loading and unloading cargo, or protecting perishable products or commodities from deterioration  Performing acts of a similar nature The key distinction in identifying bribes was exclusion of any action taken by a foreign official in the decision to award new or continuing business. o Such decisions, being the primary target of most questionable payments, were not deemed to be routine governmental action.

Figure 6.1 summarizes the fine lines between legality and illegality in some of the prohibited behaviors and approved exceptions in the FCPA provisions. o The Department of Justice can enforce criminal penalties of up to $2 million per violation for corporations and other business entities. o Officers, directors, stockholders, employees, and agents are subject to a fine of up to $250,000 per violation and imprisonment for up to five years. o The SEC may bring a civil fine of up to $10,000 per violation. o Penalties under the books and record-keeping provisions can reach up to $5 million

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and 20 years‘ imprisonment for individuals and up to $25 million for organizations.

Learning Outcome 3: Calculate Monetary Fines under the Three-Step Process of the U.S. Federal Sentencing Guidelines for Organizations (FSGO). 







The U.S. Federal Sentencing Commission was established in 1984 by the Comprehensive Crime Control Act and was charged with developing uniform sentencing guidelines for offenders convicted of federal crimes.  In 1991, Chapter 8 was added to the guidelines.  Chapter 8 is more commonly known as Federal Sentencing Guidelines for Organizations.

Federal Sentencing Guidelines for Organizations (FSGO) hold businesses liable for the criminal acts of their employees and agents.  In its mission to promote ethical organizational behavior and increase the costs of unethical behavior, the FSGO establishes a definition of an organization that is so broad as to prompt the assessment that ―no business enterprise is exempt.‖  In addition, the FSGO includes such an exhaustive list of covered business crimes that it appears frighteningly easy for an organization to run afoul of federal crime laws and become subject to FSGO penalties.

Penalties under FSGO include monetary fines, organizational probation, and the implementation of an operational program to bring the organization into compliance with FSGO standards If an organization is sentenced under the FSGO, a fine is calculated through a three-step process:  Step 1: Determination of the “Base Fine”—the base fine will normally be the greatest of:  The monetary gain to the organization from the offense.  The monetary loss from the offense caused by the organization, to the extent the loss was caused knowingly, intentionally, or recklessly.  The amount determined by a judge based on an FSGO table.  Step 2: The Culpability Score—the culpability score is the calculation of a degree of blame or guilt that is used as a multiplier of up to four times the base fine. The culpability score can be adjusted according to the aggravating or mitigating factors.  Aggravating factors  High-level personnel were involved in or tolerated the criminal activity.  The organization willfully obstructed justice.  The organization had a prior history of similar misconduct.  The current offense violated a judicial order, an injunction, or a condition of probation.  Mitigating factors 1-129

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







 The organization had an effective program to prevent and detect violations of law.  The organization self-reported the offense to appropriate governmental authorities, fully cooperated in the investigation, and accepted responsibility for the criminal conduct. o Step 3: Determining the Total Fine Amount—the base fine multiplied by the culpability score gives the total fine amount.  In certain cases the judge has the discretion to impose a so-called death penalty.  The death penalty is a fine that is set high enough to match all the organization‘s assets and basically put the organization out of business. This is warranted where the organization was operating primarily for a criminal purpose.

In addition to monetary fines, organizations also can be sentenced to probation for up to five years. The status of probation can include the following requirements: o Reporting the business‘s financial condition to the court on a periodic basis o Remaining subject to unannounced examinations of all financial records by a designated probation officer and/or court-appointed experts o Reporting progress in the implementation of a compliance program o Being subject to unannounced examinations to confirm that the compliance program is in place and is working The best way to minimize an organization‘s culpability score is to make sure that you have some form of program in place that can effectively detect and prevent violations of law—a compliance program.

The FSGO prescribes seven steps for an effective compliance program: o Management oversight o Corporate policies o Communication of standards and procedures o Compliance with standards and procedures o Delegation of substantial discretionary authority o Consistent discipline o Response and corrective action In May 2004, the U.S. Sentencing Commission proposed to Congress that there should be modifications to the 1991 guidelines. The revised guidelines, which Congress formally adopted in November 2004, made three key changes: o They required companies to periodically evaluate the effectiveness of their compliance programs on the assumption of a substantial risk that any program is capable of failing. o The revised guidelines required evidence of actively promoting ethical conduct rather than just complying with legal obligations.

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o

The guidelines defined accountability more clearly. Corporate officers are:  Expected to be knowledgeable about all aspects of the compliance program  Required to receive formal training as it relates to their roles and responsibilities within the organization

Learning Outcome 4: Compare and Contrast the Relative Advantages and Disadvantages of the Sarbanes-Oxley Act (SOX) 

The Sarbanes- Oxley Act (SOX) is a legislative response to the corporate accounting scandals of the early 2000s that covers the financial management of businesses. o It became law on July 30, 2003. The act contains 11 sections, or titles, and almost 70 subsections covering every aspect of the financial management of businesses.  Title I: Public Company Accounting Oversight Board—the Public Company Accounting Oversight Board (PCAOB) is an independent oversight body for auditing companies.  Title II: Auditor Independence  Title III: Corporate responsibility  Title IV: Enhanced Financial Disclosures  Title V: Analyst Conflicts of Interest  Title VI: Commission Resources and Authority  Title VII: Studies and Reports  Title VIII: Corporate and Criminal Fraud Accountability  Title IX: White-Collar Crime Penalty Enhancements  Title X: Corporate Tax Returns  Title XI: Corporate Fraud and Accountability

Learning Outcome 5: Explain the Key Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 



The Dodd-Frank Wall Street Reform and Consumer Protection Act is a legislation that was promoted as the ―fix‖ for the extreme mismanagement of risk in the financial sector that led to a global financial crisis in 2008-2010. o It was implemented on July 21, 2010.

The primary achievements of Dodd-Frank can be summarized as follows: o The Act created the Consumer Financial Protection Bureau (CFPB)—a government agency within the Federal Reserve that oversees financial products and services. o The Act established the Financial Stability Oversight Council (FSOC)—a government agency established that prevents banks from failing and otherwise threatening the stability of the U.S. economy.

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o

 It is empowered to act if a bank with more than $50 billion in assets ―poses a great threat to the financial stability of the United States.‖ American economist and past Federal Reserve Chairman Paul Volcker proposed that there should be a key restriction in the legislation to limit the ability of banks to trade on their own accounts (termed proprietary trading).  The original Volcker rule sought to stop the trading of derivatives (which are financial instruments based on the performance of other financial instruments) completely, but was scaled back to a compromise that, it is hoped, will limit the ethically questionable practices of banks taking opposing positions to trades that they are simultaneously promoting to their clients.

Life Skills Governing your Own Ethical Behavior This Life Skills box discusses how our own personal value system represents the cumulative effect of a series of influences in our life. As such our ethical standards already represent a framework of the influences that makes us the person we are today. Developing a clear sense of personal values is as much about knowing what one isn‘t willing to do as it is about knowing what one is willing to do. Understanding the difference allows us to remain grounded and focused while those around us wonder in search of someone to help them make a decision.

Progress ✓ Questions 17. What was the primary purpose of the FCPA? The FPCA was introduced to control bribery and other less obvious forms of payment to foreign officials and politicians by American publicly traded companies. By passing the FCPA, Congress was attempting to send a clear message that the competitiveness of U.S. corporations in overseas markets should be based on price and product quality rather than the extent to which companies had paid off foreign officials and political leaders.

18. What was the maximum fine for a U.S. corporation under the FCPA? The Department of Justice can enforce criminal penalties up to $2 million per violation for corporations and other business entities. Officers, directors, stockholders, employees, and agents are subjected to $250,000 per violation and imprisonment for up to 5 years. The SEC may bring a civil fine of up to $10,000 per violation. Penalties under the books and recordkeeping provisions can reach up to $5 million and 20 years‘ imprisonment for individuals and up to $25 million for organizations.

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19. Which two distinct areas did the FCPA focus on?

The FCPA encompasses all the secondary measures that were currently in use to prohibit such behavior by focusing on two distinct areas: 1. Disclosure—the act requires corporations to fully disclosure any and all transactions conducted with foreign officials and politicians, in line with the SEC provisions.

2. Prohibition—the act incorporates the wording from the Bank Secrecy Act and the Mail Fraud Act to prohibit the movement of funds overseas for the express purpose of conducting a fraudulent scheme.

20. List four examples of routine governmental action.

Examples of routine governmental actions include:  Providing permits, licenses, or other official documents to qualify a person to do business in a foreign company  Processing governmental papers, such as visas and work orders  Providing police protection, mail pickup and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across a country  Providing phone service, power, and water supply; loading and unloading cargo; or protecting perishable products or commodities of deterioration  Performing actions of a similar nature 21. What are the three steps in calculating financial penalties under FSGO? If an organization is sentenced under FSGO, a fine is calculated through a three-step process:  Determination of the ―Base Fine‖  The Culpability Score  Determining the Total Fine Amount 22. What is the maximum fine that can be levied?

The worst case scenario would be a fine of four times the maximum base fine of $72.5 million, for a grand total of $290 million.

23. What is the maximum term of organizational probation?

The maximum term for probation is up to five years.

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24. What is the ―death penalty‖ under FSGO? The death penalty is a fine that is set high enough to match all the organization‘s assets and basically put the organization out of business. This is warranted where the organization was operating primarily for a criminal purpose.

25. Explain the seven steps of an effective compliance program.

The FSGO prescribes the following seven steps for an effective compliance program:  Management oversight—a high-level official must be in charge of and accountable for the compliance program.  Corporate policies—policies and procedures designed to reduce the likelihood of criminal conduct in the organization must be in place.  Communication of standards and procedures—these ethics policies must be effectively communicated to every stakeholder of the organization.  Compliance with standards and procedures—evidence of active implementation of these policies must be provided through appropriate monitoring and reporting.  Delegation of substantial discretionary authority—no individuals should be granted excessive discretionary authority that would increase the risk of criminal conduct.  Consistent discipline—the organization must implement penalties for criminal conduct and for failing to address criminal misconduct in a consistent manner.  Response and corrective action—criminal offenses, whether actual or suspected, must generate an appropriate response, analysis, and corrective action.

26. What are aggravating and mitigating factors?

Aggravating factors:  High-level personnel were involved in or tolerated criminal activity.  The organization willfully obstructed justice.  The organization had a prior history of similar misconduct.  The current offense violated a judicial order, injunction, or condition of probation.

Mitigating factors:  The organization had an effective program to prevent and detect violations of the law.  The organization self-reported the offense to appropriate governmental authorities, fully cooperated in the investigation, and accepted responsibility for the criminal conduct.

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27. Explain the risk assessments required in the 2004 Revised FSGO. Risks involved can be negative publicity for the organization, which could result in significant loss of sales, additional scrutiny from vendors, and even a drop in the organization‘s stock price.

28. What were the three key components of the 2004 Revised FSGO? The revised guidelines, which Congress formally adopted in November 2004, made the following three key changes:  They required companies to periodically evaluate the effectiveness of their compliance programs on the assumption of a substantial risk that any program is capable of failing.

They also expected the results of these risk assessments to be incorporated back into the next version of the compliance program.  The revised guidelines required evidence of actively promoting ethical conduct rather than just complying with legal obligations. For the first time, the concept of an ethical culture was recognized as a foundational component of an effective compliance program.  The guidelines defined accountability more clearly. Corporate officers are expected to be knowledgeable about all aspects of the compliance program, and they are required to receive formal training as it relates to their roles and responsibilities within the organization.

29. Explain the role of the PCAOB. The PCAOB is an independent oversight body for auditing companies. In addition, as an oversight board, it is in charge of maintaining compliance with established standards and enforcing rules and disciplinary procedures for those organizations that found themselves out of compliance.

30. Which title requires CEOs and CFOs to certify quarterly and annual reports to the SEC? Title III: Corporate Responsibility requires CEOs and CFOs to certify quarterly and annual reports to the SEC, including making representations about the effectiveness of their control systems.

31. Which title protects employees of companies who provide evidence of fraud?

Title VIII: Corporate and Criminal Fraud Accountability protects employees of companies

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who provide evidence of fraud.

32. What are the five key requirements for auditor independence?

The Sarbanes-Oxley Act introduced the following five key directives to enforce the independence of auditors and hopefully restore public confidence in independent audit reports:  Prohibits specific ―nonaudit‖ services of public accounting firms as violations of auditor independence  Prohibits public accounting firms from providing audit services to any company whose senior officers (chief executive officer, financial officer, etc.) were employed by that accounting firm within the previous 12 months  Requires senior auditors to rotate off an account every five years and junior auditors every seven years  Requires the external auditor to report to the client‘s audit committee on specific topics  Requires the auditors to disclose all other written communications between management and themselves

Ethical Dilemma 6.1 – The Bribery Gap 13. Is it ethical for U.S. regulations to put U.S. companies at an apparent disadvantage to their foreign competitors? Explain why or why not.

Students‘ responses will vary. U.S. companies have regulations that are specific to the U.S. because of the values, morals, and ideals in U.S. culture. While it may seem that foreign competitors have an advantage, those firms most likely have a different set of regulations from their government.

14. If foreign companies pay bribes, does that make it OK for U.S. companies to do the same?

Explain why or why not.

Students‘ responses will vary. Foreign companies may pay bribes, but this does not justify the U.S. companies doing the same because it is still illegal. Even if the U.S. companies are based in foreign countries and conducting business internationally, the firm is still subject to U.S. legislation.

15. If you could prove that new jobs, new construction, and valuable tax revenue would come to 1-136 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

the United States if the bribe were paid, would that change your position? Explain your answer.

Students‘ responses will vary. The benefits and opportunities such as new jobs, new construction, and valuable tax revenue are what make unethical behavior seem attractive and justifiable.

16. It would seem that the playing field will never be level—someone will always be looking for a bribe, and someone will always be willing to pay it if she or he wants the business badly enough. If that‘s true, why bother to put legislation in place at all?

Students‘ responses will vary. This is the argument of those who are against creating new legislation. There will always be those willing to break the laws to get what they want.

However, the legislation attempts to prevent and make it much harder to do, and as a result, reduces the number of people who would have acted unethically without legislation in place.

6.2 – An Unethical Way to Fix Corporate Ethics?

1.

SOX has introduced sweeping changes in the name of enforcing corporate ethics. Is it really a ―fair‖ piece of legislation? Explain your answer.

Students‘ responses will vary. When comparing large versus small companies, the SarbanesOxley (SOX) Act is not fair. Smaller companies without access to the internal resources to comply with SOX are being particularly hard hit by the legislation. Plus the transgressions that prompted the statute in the first place came from large, publicly traded organizations.

Smaller firms still face their own ethical problems, but it seems that they are expected to carry an administrative burden that is equal to that of their much larger counterparts.

2.

Do U.S. ethical problems give us the right to demand ethical controls from international companies based outside the United States?

Students‘ responses will vary. Ethical problems in the United States do not give the U.S. the right to dictate controls from international companies based outside the United States. These firms should be governed by international organizations such as the European Union, NAFTA, etc.

3.

Does the decision to increase auditing requirements seem to be an ethical solution to the problem of questionable audits? Explain your requirements.

Students‘ responses will vary. The decision to increase the auditing requirements does not

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seem to be an ethical solution, but one that provides a limitation or reduction of corporate scandals. There will always be those firms or executives that will find a way to manipulate the legislation and continuously act in unethical ways.

4.

If there were more than four large accounting firms in the marketplace, would that make the decision more ethical? Explain your answer.

Students‘ responses will vary. The number of accounting firms in the marketplace is irrelevant because each of these is required to follow the same auditing requirements. The fact that there are only four large accounting firms in the marketplace suggests it should be easier to monitor and regulate these firms.

Frontline Focus ―Too Much Trouble—Susan Makes a Decision‖ Questions 16. What could Susan have done differently here?

Students‘ responses will vary. Susan could have asked Thompson, if he would have liked her to put a small team together and wrap up the project quickly, rather than quoting a high price to the client altogether, thereby forcing them to leave. She should not have quoted such an abnormally high price that would just make it obvious to the client that something has gone wrong.

17. What do you think will happen now?

Students‘ responses will vary. The PCAOB will run an investigation on the matter and would like an explanation as to how the auditing firm arrived at the quotation figure. And this will bring negative publicity for the firm.

18. What will be the consequences for Susan, Steven Thompson, and their auditing firm?

Students‘ responses will vary. If Susan, Steven Thompson, and their auditing firm are found guilty of misrepresenting the quotation figure they might have to face disciplinary actions posed by the PCAOB.

Key Terms Consumer Financial Protection Bureau (CFPB): A government agency within the Federal Reserve that oversees financial products and services.

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Culpability Score (FSGO): The calculation of a degree of blame or guilt that is used as a multiplier of up to four times the base fine. The culpability score can be adjusted according to aggravating or mitigating factors.

Death Penalty (FSGO): A fine that is set high enough to match all the organization‘s assets— and basically put the organization out of business. This is warranted where the organization was operating primarily for a criminal purpose.

Disclosure (FCPA): The FCPA requirement that corporations fully disclose any and all transactions, conducted with foreign officials and politicians.

Dodd-Frank Wall Street Reform and Consumer Protection Act: Legislation that was promoted as a ―fix‖ for the extreme mismanagement of risk in the financial sector that led to a global financial crisis in 2008-2010.

Facilitation Payments (FCPA): Payments that are acceptable (legal) provided they expedite or secure the performance of a routine governmental action.

Federal Sentencing Guidelines for Organizations (FSGO): Chapter 8 of the guidelines that hold businesses liable for the criminal acts of the employees and agents.

Financial Stability Oversight Council (FSOC): A government agency established to prevent banks from failing and otherwise threatening the stability of the U.S. economy.

Foreign Corrupt Practices Act (FCPA): Legislation introduced to control bribery and other less obvious forms of payment to foreign officials and politicians by American publicly traded companies.

Prohibition (FCPA): The FCPA inclusion of wording from the Bank Secrecy Act and the Mail Fraud Act to prevent the movement of funds overseas for the express purpose of conducting a fraudulent scheme.

Public Company Accounting Oversight Board (PCAOB): An independent oversight body for auditing companies.

Routine Governmental Action (FCPA): Any regular administrative process or procedure, excluding any action taken by a foreign official in the decision to award new or continuing business.

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Sarbanes-Oxley Act (SOX): A legislative response to the corporate accounting scandals of the early 2000s that covers the financial management of businesses.

Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions.

19. Which is the most effective piece of legislation for enforcing ethical business practices: FCPA, FSGO, SOX, or Dodd-Frank? Explain your answer.

Students‘ responses will vary. The FCPA is a legislation introduced to control bribery and other less obvious forms of payment to foreign officials and politicians by American publicly traded companies. SOX is a legislative response to the corporate accounting scandals of the early 2000s that covers the financial management of businesses. It delivers the tools and penalties to punish offenders with enough severity. FSGO refers to Chapter 8 of the guidelines that holds businesses liable for criminal acts of the employees and agents.

Dodd-Frank is the legislation that was promoted as a ―fix‖ for the extreme mismanagement of risk in the financial sector that led to a global financial crisis in 2008-2010.

20. ―The FCPA has too many exceptions to be an effective deterrent to unethical business practices.‖ Do you agree or disagree with this statement? Explain your answer.

Students‘ responses will vary. Some of the students may not agree with this statement. They may say that this act encompasses all the secondary measures that were currently in use to prohibit such behavior by focusing on two distinct areas—disclosure and prohibition.

However, others may agree with this statement under the argument that the FCPA lacks any real teeth because of its formal recognition of facilitation payments, which would otherwise be acknowledged as bribes. The FCPA finds these payments acceptable provided they expedite or secure the performance of a routine governmental action.

5.

What issues prompted the revision of the Federal Sentencing Guidelines for Organizations in 2004?

The Federal Sentencing Guidelines for Organizations (FSGO) was implemented after major fraud and scandals that occurred in the U.S. and abroad. The revisions were to the 1991 guidelines and it needed to provide key changes in corporate compliance programs. The changes require companies to periodically evaluate the effectiveness of their compliance programs on the assumption of a substantial risk that any program is capable of failing; require evidence of promoting ethical conduct rather than just complying with legal obligations; and require that guidelines define accountability more clearly.

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6.

Do you think the requirement that CEOs and CFOs sign off on their company accounts will increase investor confidence in those accounts? Why or why not?

Students‘ responses will vary. It seems as though many of the recent corporate scandals started with the CEO, CFO, or COO. Therefore, requiring the CEOs and CFOs sign off on company accounts will not necessarily reduce corporate scandals and investor confidence will remain volatile.

7.

Why may the Sarbanes-Oxley Act of 2002 be regarded as one of the most controversial pieces of corporate legislation in recent history?

Students‘ responses will vary. Some of the students may argue that with all the financial scandals and accounting fraud that was happening, the Sarbanes-Oxley was an appropriate response. However, others may argue that those who are going to commit fraud will find a way to commit it even with regulations in place. Some of them may also feel that regulations simply make more work for those who are already acting in an ethical manner.

8.

Based on the information in this chapter, can the Dodd-Frank Act of 2010 prevent ―too big to fail‖? Explain your answer.

Students‘ responses will vary based on their perception of the Act. Students should note that the Dodd-Frank Act of 2010 should prevent or counteract the corporate fraud and scandals at a Wall Street company with the achievements of the Consumer Financial Protection Bureau (CFPB), the Financial Stability Oversight Council (FSOC), and the Volcker Rule. It will take time to determine if the new act can actually prevent ―too big to fail‖ but it should hopefully put a dent into the extreme mismanagement of risk in the financial sector.

Review Exercises 1.

Identify the ethical transgressions in this case.

Students‘ responses will vary. Universal Industries wants to further its international exposure and the COO made a connection with a former high school classmate to help do so. Universal Industries were willing to follow a ―means justify the ends‖ philosophy.

Several Universal operatives made unpublicized visits to the towns surrounding the base, and made it almost impossible for other contenders to meet the requirements of the RFPs through bribes. Apart from bribing, the senior management team also decided to adjust its fourth-quarter expenses, which included having the CEO and CFO sign the financial reports confirming their authenticity.

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2.

Which piece of legislation would apply to each transgression?

The Foreign Corrupt Practices Act would apply to the bribery conducted by Universal. The Sarbanes-Oxley Act would apply to financial fraud and authorization of the financial reports.

3.

What would be the penalties for each transgression?

Students‘ responses will vary. Under each of the legislations, the FCPA and SOX, violators will be held liable for their criminal acts as per the Federal Sentencing Guidelines for Organizations. Penalties under FSGO include monetary fines, organizational probation, and the implementation of an operational program to bring the organization into compliance with FSGO standards.

4.

If Universal could prove that it had a compliance program in place, how would that affect the penalties?

Students‘ responses will vary. Universal would be subject to lower monetary fines if the firm could prove it had a compliance program in place. For example, a level 18 offense has a base penalty of a $350,000 fine. Based on numerous factors this can be greatly increased, but the minimum fine with mitigating circumstances such as having a compliance program, would place this fine in the $17,500 to $70,000 range.

Internet Exercises 1. Locate the website for Berlin-based Transparency International (TI). a.

What is the stated mission of TI? TI‘s mission is to stop corruption and promote transparency, accountability and integrity at all levels and across all sectors of society. Its core values are:  Transparency  Accountability  Integrity  Solidarity  Courage  Justice  Democracy

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b.

Explain the Corruption Perception Index.

The annual Corruption Perceptions Index (CPI), first released in 1995, is the best known of TI‘s tools. It ranks countries and territories based on how corrupt their public sector is perceived to be. The 2012 CPI measures the perceived levels of public sector corruption in 176 countries and territories around the world.

c.

Which are the least and most corrupt countries on the index?

Denmark, Finland, and New Zealand are tied for being ranked as the least corrupt countries on the index and Somalia is listed as the most corrupt country.

d.

Summarize how the ―Together Against Corruption: Transparency International Strategy 2020‖ report was compiled.

On June 7th, 2019, the following was available on the www.transparency.org website: ―Together Against Corruption draws on a wide and inclusive consultation process across the Transparency International movement and key stakeholders in 2014 and 2015. Using surveys, meetings, interviews and written inputs, we evaluated our context, our organisation and our achievements. All told, we had more than 1000 contributions from within Transparency International and 500 from outside our movement, drawing on the worlds of government, international organisations, business and civil society.‖

2.

Using Internet research, review the involvement of Harvard law professor Elizabeth Warren in the Consumer Financial Protection Bureau (CFPB). a.

What was Warren‘s involvement in the government response to the collapse of the financial markets?

Students‘ responses will vary. Elizabeth Warren appeared in a variety of articles and news briefs about her involvement in the Consumer Financial Protection Bureau (CFPB). Ms. Warren proposed an idea about the need to implement a consumer financial regulation in 2007. This is the result of Americans‘ need or want for an agency in Washington to promote the financial protection of individuals and groups.

b.

How is she connected to the CFPB? Warren was an early advocate for the creation of a new Consumer Financial Protection

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Bureau (CFPB). In anticipation of the agency‘s formal opening, for the first year after the bill‘s signing, Warren worked on implementation of the bureau as a special assistant to the president. c.

What were the objections to her involvement with the CFPB? The CFPB was established by the Dodd–Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama in July 2010. In anticipation of the agency‘s formal opening, for the first year after the bill‘s signing, Warren worked on implementation of the bureau as a special assistant to the president. While liberal groups and consumer advocacy groups pushed for Obama to nominate Warren as the agency‘s permanent director, Warren was strongly opposed by financial institutions and by Republican members of Congress who believed Warren would be an overly zealous regulator.

d.

What has happened to the CFPB under the Trump Administration?

Internet research will reveal that Mick Mulvaney was appointed as acting director of the CFPB in November 2017, prompting an exodus of over one hundred officials from the agency. Enforcement actions subsequently dropped by 75 percent as Mulvaney introduced a more ―pro-business‖ approach to running the agency. Mulvaney‘s successor, Kathy Kraninger, has followed the same path, including the quashing of an Obama-era rule protecting consumers against predatory lending practices from payday lenders. Critics argue that the CFPB has been effectively neutered under the Trump Administration.

Team Exercises 1.

Protecting your people at all costs.

Your company is a major fruit processor that maintains long-term contracts with plantation owners in Central America to guarantee supplies of high quality produce. Many of those plantations are in politically unstable areas and your U.S.-based teams travel to those regions at high personal risk. You have been contacted by a representative from one of the local groups of Freedom Fighters demanding that you make a “donation” to their cause in return for the guaranteed protection of the plantations with which you do business. The representative makes it very clear that failure to pay the donation could put your team on the ground at risk of being kidnapped and held for ransom. Your company is proud of its compliance with all aspects of the FCPA and the revised FSGO legislation. Divide into two

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groups and argue your case for and against paying this donation.

Students‘ responses will vary. By paying this donation, the company would be safeguarding its plantations which supplies high quality produce. If the donation is not paid, then the company will remain in compliance with the FCPA and the FSGO legislation.

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2.

Budgeting for Bribes.

You are a midlevel manager for the government of a small African nation that relies heavily on oil revenues to run the country‟s budget. The recent increase in the price of oil has improved your country‟s budget significantly and, as a result, many new infrastructure projects are being funded with those oil dollars—roads, bridges, schools, and hospitals— which are generating lots of construction projects and very lucrative orders for materials and equipment. However, very little of this new wealth has made its way down to the lower levels of your administration. Historically, your government has always budgeted for very low salaries for government workers in recognition of the fact that their paychecks are often supplemented by payments to expedite the processing of applications and licensing paperwork. Your boss feels strongly that there is no need to raise the salaries of the lowerlevel government workers since the increase in infrastructure contracts will bring a corresponding increase in payments to those workers, and, as he pointed out, “companies that want our business will be happy to make those payments.” Divide into two groups and argue for and against the continuation of this arrangement.

Students‘ responses will vary. The lower levels of administration deserve to have an increase in their salaries the same as other government workers, especially since they are already budgeted for very low salaries. Employees need to be valued in order to remain profitable and successful. Even these lower-level government workers made a difference in the success of this new wealth. On the other hand, if these workers will be paid from the infrastructure contract, then those companies can pay them an extra portion of their salary and save the money that would have been budgeted to their increase.

3.

The pros and cons of SOX. Divide into two teams. One team must defend the introduction of Sarbanes-Oxley as a federal deterrent to corporate malfeasance. The other team must criticize the legislation as being ineffective and an administrative burden.

Students‘ responses will vary. Advocates of SOX hailed this act as ―one of the most important pieces of legislation governing the behavior of accounting firms and financial markets since legislation in the 1930s.‖ Critics claimed this to be one of the most controversial pieces of corporate legislation and created an unnecessary administrative burden for ethical corporations.

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4.

The key components of SOX. Divide into groups of three or four. Distribute the 11 sections of SOX reviewed in this chapter. Each group must prepare a brief presentation outlining the relative importance of its section to the overall impact of SOX and the prohibition of unethical business practices.

Students‘ responses will vary.

Title I: Public Company Accounting Oversight Board (PCAOB)—the PCAOB as an independent oversight body which was an attempt to reestablish the perceived independence of auditing companies that the conflict of interest in Arthur Andersen‘s auditing and consulting relationship with Enron had called into question.

Title II: Auditor Independence—introduced several key directives to further enforce the independence of auditors and hopefully restore public confidence in independent audit reports.

Title III: Corporate Responsibility Title IV: Enhanced Financial Disclosure Title V: Analyst Conflicts of Interest Title VI: Commission Resources and Authority Title VII: Studies and Reports Title VIII: Corporate and Criminal Fraud Accountability Title IX: White-Collar Crime Penalty Enhancements Title X: Corporate Tax Returns Title XI: Corporate Fraud and Accountability

Thinking Critically 6.1 – Ponzi Schemes 1.

Charles Ponzi was a working-class Italian immigrant who was eager to find success in America. Bernard Madoff was already a multimillionaire before he started his scheme. Does that make one more unethical than the other? Why or why not?

Students‘ responses will vary. Some of them may say that this does not make one more unethical than the other. Different motives cause people to act in unethical manners, but struggling to make ends meet or to find success is not a justified reason for being unethical and neither is greed.

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2.

Explain how a Ponzi scheme works.

The Ponzi scheme is the same as ―robbing Peter to pay Paul.‖ This scheme is the practice of providing old investors above-average returns on their investment with funds raised from new investors, in absence of any real business operation to generate profits.

3.

Does the SEC bear any responsibility in the event of the Madoff Scheme? In what way?

Students‘ responses will vary based on their individual perception of the case. Although the SEC responded on various occasions to complaints or irregularities, it only uncovered minor inconsistencies in his transactions. The students should note that the SEC should have been suspicious or implemented harsher punishments when they found irregularities. Students might also note the need for deeper scrutiny of audits and the need for improved legislation to prevent fraud and corruption.

4.

Does the fact that Madoff offered less outrageous returns (10-18 percent per year) on investments compared to Ponzi‘s promise of a 50 percent return in only 90 days make Madoff any less unethical? Why or why not?

Students‘ responses will vary. Some of them may say that the fact that Madoff offered less outrageous returns than Ponzi, does not make him less unethical because no matter what the offer or guarantee, they were still false, misleading, and ultimately lies.

5.

Can the investors who put their money in Madoff‘s funds without any due diligence, often on the basis of a tip from a friend or a ―friend of a friend,‖ really be considered victims in this case? Why or why not?

Students‘ responses will vary. Some of them may say that anyone investing their money in Madoff‘s funds can be considered victims. Madoff had strong, reputable credentials as the former chairman of the NASDAQ stock exchange, and an occasional consultant to the SEC on matters of investment regulation.

6.

What should investors with Bernard Madoff have done differently here?

Students‘ responses will vary. Some of them may say that the investors should have made sure Madoff was insured with FDIC or other federal insurance organization and traded through a legitimate broker. The investors should have also requested the trade tickets for filing purposes to ensure the trades were actually being made.

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6.2 – Astroturfing 31. Why would a political or business organization choose to pursue astroturfing?

Students‘ responses will vary but the answer is there in the first paragraph: “to give the impression that there is strong public or „grassroots‟ support for a specific position or policy.”

32. If these astroturf organizations are funded by such large companies, why don‘t those companies just spend their money on large advertising campaigns?

Students‘ responses will vary. The logic is very straightforward. A front organization provides anonymity, plausible deniability, and the opportunity to create the perception that there is greater support for a position or policy than actually exists.

33. Why would an organization need to use a public relations firm to get involved with astroturfing?

Students‘ responses will vary. Using a third-party agency keeps the relationship at armslength (anonymity and plausible deniability), but there is also a pragmatic aspect to the relationship – the PR firm will have the social media and marketing expertise to achieve the level of viral sharing that the messages from this new entity will need to achieve.

34. Using internet research, track down an example of an astroturf group not mentioned in this case. What are they supporting and who are they funded by?

Students‘ responses will vary. A simple Google search for ―Astroturf Organizations‖ will provide plenty of options – especially in the fossil fuel sector.

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35. Should the government get involved with some form of regulation or permit program to establish the legitimacy of these organizations? Why or why not?

Students‘ responses will vary. Some may see a clear free speech component to this issue, but the fact that these organizations are actively seeking to disguise their involvement in these initiatives negates that. The Citizens United decision of campaign funding would suggest that the federal position on this is fairly weak, but from an ethics perspective, there is a need for greater transparency. Permits or regulations will take years to finalize and will simply invite more creative workarounds to achieve the same outcome. Addressing the disclosure issue head-on might be more effective in the short-term – such as forcing these organizations to disclose their funders on their websites, for example. Of course, that may just prompt the creation of private foundations to be the funding source…

36. If you were involved with a real grassroots organization, how would you convince people interested in supporting you that you were the real deal? Explain.

Students‘ responses will vary. Establishing a level of transparency that your opposition would be unwilling to match seems like a good start. Complete disclosure of funds received and where those funds were spent would put the opposing organization on the defensive to follow suit.

6.3 – ―Off-Label Marketing‖ 24. Why would illegal marketing activities feature so frequently in the pharmaceutical industry?

At what point would they be considered endemic?

Students‘ responses will vary. Many of them will say that, it is difficult to keep track of all the drugs that are being developed. This makes it difficult for the authorities to test them properly before granting the launch. Moreover, most pharmaceutical companies are eager to cash in on the first mover advantage. This prompts them to adopt a short-cut method rather than checking and rechecking whether the drug actually works. All these make illegal marketing activities frequent in the pharmaceutical industry.

25. Why would pharmaceutical companies choose to continue such practices even when it is made clear that they are illegal?

Students‘ responses will vary. Many of them will say that most pharmaceutical companies are eager to cash in on the first mover advantage. This prompts them to adopt a short-cut

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method rather than checking and rechecking whether the drug actually works.

26. What should the respective boards of directors be doing here? How should they be held accountable?

Students‘ responses will vary. Many of them will say that the boards of directors should be the ones who take it upon themselves to be involved in each step of the drug development and testing process. This will keep them in the loop. Moreover, they will not be able to cite ignorance as an excuse. As they represent the company, it makes sense that they should be fined, penalized, or held accountable if the drugs not perform well or produce unwarranted side-effects.

27. Critics argue that fines are too affordable. In other words, a $1 billion fine for activities that generate several billion dollars in illegal sales simply becomes a cost of doing business.

Should fines be more punitive? How much would be enough?

Students‘ responses will vary. Many of them may say that the fines should be increased. The fine should vary from a case-to-case basis. The monetary fine may be set at half of the expected returns. Along with that some prison time should also be included. Specifically, repeat offenders must serve a prison sentence. This will work as a deterrent for other companies in the business.

28. Is the payment of a monetary fine sufficient restitution for these offences? Why or why not?

Students‘ responses will vary. Many of them may say that monetary fine does not seem to be sufficient resolution for these offences because a $1 billion fine for activities that generate several billion dollars in illegal sales simply becomes a cost of doing business. Adding a prison sentence to the monetary fine levied may work as a stronger deterrent for likely offenders.

29. How could this apparently endemic problem be approached differently?

Students‘ responses will vary. Many of them may say that a central laboratory may be set up where all pharmaceutical companies developing a new drug are bound to carry out the drug development process. This way they can be closely monitored. Some may say that the monetary fine should be set at half of the expected returns so that drug companies would consider and reconsider before adopting a short-cut.

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CHAPTER 7 Blowing the Whistle Table of Contents Chapter Summary Learning Outcomes Frontline Focus: ―Good Money‖ Questions Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Learning Outcome 5 Life Skills Progress ✓Questions Ethical Dilemma Frontline Focus: ―Good Money—Ben Makes a Decision‖ Questions Key Terms Review Questions Review Exercises Internet Exercises Team Exercises Thinking Critically

7-2 7-2 7-2 7-3 7-3 7-5 7-6 7-6 7-7 7-7 7-10 7-13 7-13 7-13 7-14 7-15 7-17 7-19

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Chapter Summary This chapter examines how employees who find evidence of unethical conduct in their companies go about bringing that information to the attention of the companies‘ senior management or the appropriate regulatory authorities. This chapter explores ethical and unethical means of whistle-blowing. Whistle blowing came to its height in 2002 with the Sarbanes-Oxley Act and there are internal policies to address the needs of whistle-blowers. Further, it explores an individual‘s duty to respond as well as the risks they face by making the choice to act.

Learning Outcomes After studying this chapter, the student should be able to: 1.

2.

3.

4.

5.

Explain the term whistle-blower, and distinguish between internal and external whistleblowing.

Understand the different motivations of a whistle-blower.

Evaluate the possible consequences of ignoring the concerns of a whistle-blower.

Recommend how to build internal policies to address the needs of whistle-blowers.

Analyze the possible risks involved in becoming a whistle-blower.

Extended Chapter Outline Frontline Focus ―Good Money‖ Questions 18. If Ben decides to raise concerns about the product quality of the Benfield Voyagers, he will become a whistle-blower. The difference between internal and external whistle-blowing is discussed later in the chapter. Which approach should Ben follow if he does decide to raise his concerns?

Students‘ answers may vary. The right thing for Ben to do if he decides to raise his concerns is to take the issue to his immediate supervisors. After speaking through the chain of command within his organization if Ben feels his concerns are not being addressed and that they are true concerns for himself and for the community, Ben should consider switching to a form of external whistle-blowing. By involving the media the issue of the quality of tires will be made public and thus the community will have all of the information they need to make an informed decision about what type of tire they wish to purchase.

19. The five conditions that must exist for whistle-blowing to be ethical are outlined later in the chapter. Has Rick given Ben enough information to be concerned about the Benfield 1-153 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Voyagers?

Students‘ answers may vary. Rick, a knowledgeable experienced professional in the field, has given Ben information to suggest an extreme cut in the quality of the tires which could lead to harming a member of the public if the tires do not perform as they should, thus meeting the first condition of ethical whistle-blowing. Ben needs to make sure when he decides to address the issue that he clearly expresses why he feels this brand of tires could in fact be a dangerous choice for consumers. If Ben‘s boss John does not take immediate action, Ben should not run right to the press. Ben should make sure he exhausts all efforts to solve the issue internally. Ben may want to get documented statements from other tire professionals who agree with Rick to ensure that when he addresses the situation he has substantial evidence that the tires may not be of decent quality. Finally, Ben must weigh the chances of succeeding and failing. He must determine if exposing these tires as dangerous will benefit both the public and the company or if he is misunderstanding the severity of the issue.

20. What should Ben do now?

Students‘ answers may vary. Ben needs to do some research to see if the Voyager tire is of low enough quality to cause concern. If Ben does find that the tire could cause harm, he should address his concerns with his immediate supervisor. Based on evidence, we can assume his supervisor will not agree, in which case Ben should continue up the corporate ladder to address his concerns. If evidence shows that these tires are of a quality that could become dangerous and the company refuses to act, Ben should then consider taking the next step and alert the media.

Learning Outcome 1: Explain the Term Whistle-Blower, and Distinguish Between Internal and External Whistle-Blowing.  



A whistle-blower is an employee who discovers corporate misconduct and chooses to bring it to the attention of others.

Internal whistle-blowing happens when an employee discovering corporate misconduct, brings it to the attention of his or her supervisor, who then follows established procedures to address the misconduct within the organization.

External whistle-blowing happens when an employee discovering corporate misconduct, chooses to bring it to the attention of law enforcement agencies and/or the media.

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Learning Outcome 2: Understand the Different Motivations of a Whistle-Blower.  









Whistle-blowers are said to provide an invaluable service to their organizations and the general public.

The discovery of illegal activities before the situation is revealed in the media could potentially save organizations millions of dollars in fines and lost revenue from the inevitable damage to their corporate reputations.

The discovery of potential harm to consumers offers immeasurable benefit to the general public. o From this perspective, it is easy to see why the media often applaud whistle-blowers as models of honor and integrity at a time when integrity in the business world seems to be in very short supply. o However, in contrast to the general perception that whistle-blowers are brave men and women putting their careers and personal lives at risk to do the right thing, some people often criticize whistle-blowers as informers, ―sneaks,‖ spies, or ―squealers‖ who have in some way breached the trust and loyalty they owe to their employers.

Whistle-blowing is appropriate—ethical—under five conditions: o When the company, through a product or decision, will cause serious and considerable harm to the public or break existing laws, the employee should report the organization. o When the employee identifies a serious threat of harm, he or she should report it and state his or her moral concern. o When the employee‘s immediate supervisor does not act, the employee should exhaust the internal procedures and chain of command to the board of directors. o The employee must have documented evidence that is convincing, to a reasonable, impartial observer that his or her view of the situation is accurate, and evidence that the firm‘s practice, product, or policy seriously threatens and puts in danger the public or product user. o The employee must have valid reasons to believe that revealing the wrongdoing to the public will result in the changes necessary to remedy the situation.

If there is evidence that the employee is motivated by the opportunity for financial gain or media attention or that the employee is carrying out an individual vendetta against the company, then the legitimacy of the act of whistle-blowing must be questioned.

A qui tam lawsuit is a lawsuit brought on behalf of the federal government by a whistleblower under the False Claims Act of 1863, also known as ―Lincoln‘s Law.‖ o Qui tam is an abbreviation for a longer Latin phrase that establishes the whistleblower as a deputized petitioner for the government in the case. o Originally enacted during the Civil War in 1863 to protect the government against fraudulent defense contractors, the act was strengthened as recently as 1986 to make

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



it easier and safer for whistle-blowers to come forward.

Whether the motivation to speak out and reveal the questionable behavior comes from a personal ethical decision or the potential for a substantial financial windfall, the key point is that one had better be very sure of one‘s facts and one‘s evidence had better be irrefutable before crossing that line.

Since examples of internal whistle-blowing rarely receive media attention, it is impossible to track the history of such actions. o However, external whistleblowing is a 20th-century phenomenon. o One of the first instances of the use of the term whistle-blower occurred in 1963. o Public awareness of whistle-blowers reached a peak in 2002.

Learning Outcome 3: Evaluate the Possible Consequences of Ignoring the Concerns of a Whistle-Blower. 

Employees are becoming increasingly willing to respond to any questionable behavior they observe in the workplace. o The choice for an employer is to ignore them and face public embarrassment and potentially ruinous financial penalties, or to create an internal system that allows whistle-blowers to be heard and responded to before the issue escalates to an external whistle-blowing case.  Responding to whistle-blowers in this context means addressing their concerns, and not, firing them.  Prior to 2002, legal protection for whistle-blowers existed only through legislation that encouraged the moral behavior of employees who felt themselves compelled to speak out, without offering any safeguards against retaliation aimed at them.  As far back as the False Claims Act of 1863, designed to prevent profiteering from the Civil War, the government has been willing to split up to 50 percent of the recovered amount with the person filing the petition—a potentially lucrative bargain—but it offered no specific prohibitions against retaliatory behavior. o The Whistleblower Protection Act of 1989 addressed the issue of retaliation against federal employees who bring accusations of unethical behavior.  The act imposed specific performance deadlines in processing whistle-blower complaints and guaranteed the anonymity of the whistle-blower unless revealing the name would prevent criminal activity or protect public safety.  The act also required payment of any portion of the settlement to which the whistle-blower would be entitled, even if the case were still working its way through the appeals process.  The Whistleblower Protection Act of 1989 applied only to federal employees.  Not until the Sarbanes- Oxley Act of 2002 (also known as the Corporate and Criminal Fraud Accountability Act, and most commonly abbreviated to SOX) did Congress take an

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integrated approach to the matter of whistle-blowing by both prohibiting retaliation against whistle- blowers and encouraging the act of whistle-blowing itself.  The Dodd-Frank Wall Street Reform and Protection Act of 2010 introduced a new reward program for whistle-blowers who report securities law violations to the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). o The legislation stipulates that if more than $1 million is collected, the whistle-blower is entitled to between 10 and 30 percent of the monies collected, in addition to a clear entitlement to job and confidentiality protection. o The SEC‘s new ―Office of the Whistleblower‖ was created in August 2011 and received 2,700 tips in its first year.

Learning Outcome 4: Recommend How to Build Internal Policies to Address the Needs of Whistle-Blowers.  Given the new legal environment surrounding whistle-blowers, all employers would be wise to put the following mechanisms in place: o A well-defined process to document how such complaints are handled—a nominated contact person, clearly identified authority to respond to the complaints, firm assurances of confidentiality, and nonretaliation against the employee. o An employee hotline to file such complaints, again with firm assurances of confidentiality and nonretaliation to the employee. o A prompt and thorough investigation of all complaints. o A detailed report of all investigations, documenting all corporate officers involved and all action taken.  A whistle-blower hotline is a telephone line by which employees can leave messages to alert a company of suspected misconduct without revealing their identity.

Learning Outcome 5: Analyze the Possible Risks Involved in Becoming a Whistle-Blower. 



The perceived bravery and honor in doing the right thing by speaking out against corporate wrongdoing at personal risk to one‘s career and financial stability adds a gloss to the act of whistle-blowing that is undeserved.

The fact that an employee is left with no option but to go public with information should be seen as evidence that the organization has failed to address the situation internally for the long-term improvement of the corporation and all of its stakeholders. o Becoming a whistle-blower and taking the story public should be seen as the last resort rather than the first. o The fallout of unceasing media attention and the often terminal damage to the reputation and long-term economic viability of the company should be enough of a threat to force even the most stubborn executive team to the table with a commitment

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

to fix whatever has been broken. o Regrettably, the majority of executives choose to either bury the information and hire the biggest legal gunslinger they can find to discredit the evidence or, tie their employees in such restrictive confidentiality agreements that speaking out exposes the employee to extreme financial risk, which managers hope will prompt the employee to ―keep his or her mouth shut.‖ A study of 233 whistle-blowers by Donald Soeken of St. Elizabeth‘s Hospital in Washington, DC, found that the average whistle-blower was a man in his forties with a strong conscience and high moral values. o After blowing the whistle on fraud:  90 percent of the whistle-blowers were fired or demoted  27 percent faced lawsuits  26 percent had to seek psychiatric or physical care  25 percent suffered alcohol abuse  17 percent lost their homes  15 percent got divorced  10 percent attempted suicide  8 percent were bankrupted o But in spite of all this, only 16 percent said they wouldn‘t blow the whistle again.

Life Skills Making Difficult Decisions Many individuals, such as Jeffrey Wigand, Sherron Watkins, Christine Casey, and David Welch, have come across situations in their business lives where the behavior they observe is in direct conflict to their ethical standards, and they find themselves unable to simply look the other way.

What would you do in this situation? Would you ignore it? Could you live with that decision?

What if there was a negative impact on the company as a result of your actions? The consequences for you, your immediate family, your co-workers, and all the other stakeholders in the organization represent an equally important part of that decision. Now you can see why whistle-blowers face such emotional turmoil before, during, and after what is probably one of the toughest decisions of their lives. If you find yourself in such a situation, don‘t make the decision alone. Talk to people you can trust, and let them help you review all the issues and all the potential consequences of the decision you are about to make.

Progress ✓ Questions 1.

What is a whistle-blower?

A whistle-blower is an employee who discovers corporate misconduct and chooses to bring 1-158 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

it to the attention of others.

2.

What is internal whistle-blowing?

Internal whistle-blowing occurs when an employee on discovering corporate misconduct, brings it to the attention of his or her supervisor, who then follows established procedures to address the misconduct within the organization.

3.

What is external whistle-blowing?

External whistle-blowing occurs when an employee discovers corporate misconduct and chooses to bring it to the attention of law-enforcement agencies and/or the media.

4.

Is whistle-blowing a good thing?

Students‘ answers will vary. Some students may argue that many individuals, especially the media believe that whistle-blowing is a good thing, not only because it can save an organization millions of dollars, but because it can often prevent substantial harm to consumers. However, others may argue that whistle-blowers are motivated by money or have egos and a ―troublemaker‖ personality. Also, some feel that whistle-blowers are ―sneaks‖ or ―squealers‖ who have broken the trust and loyalty of their employer.

5.

List five conditions for whistle-blowing to be considered ethical.

The five conditions for whistle-blowing to be considered ethical are:  When the company, through a product or decision, will cause serious harm to the public or break existing laws, the employee should report to the organization.  When the employee identifies a serious threat of harm, he or she should report it and state his or her moral concern.  When the employee‘s immediate supervisor does not act, the employee should exhaust the internal procedures and chain of command to the board of directors.  The employee must have documented evidence that is convincing to a reasonable, impartial observer, that the firm‘s practice, product or policy seriously puts the public in danger.  The employee must have valid reasons to believe that revealing the wrongdoing to the public will result in the changes necessary to remedy the situation.

6.

Under what condition could whistle-blowing be considered unethical?

Students‘ answers will vary. Whistle-blowing can be considered unethical if the employee is

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motivated by financial gain or media attention, or if he or she carries a vendetta against the company. In this case the legitimacy of their whistle-blowing must be questioned.

7.

If you blow the whistle on a company for a personal vendetta against another employee but receive no financial reward, is that more or less ethical than doing it just for the money?

Students‘ answers may vary. Personal vendettas and/or financial rewards are unethical reasons for blowing the whistle on corporations. Whistle-blowing should be about wanting to prevent unethical behavior that will affect numerous stakeholders by ―shedding light‖ on behavior unknown to others.

8.

Would the lack of any financial reward make you more or less willing to consider being a whistle-blower? Why? Students‘ answers may vary. Blowing the whistle on someone or on an organization should not be about the reward. It is important for the health of the company and its stakeholders to report unethical behavior.

9.

If an employee blows the whistle on an organization on the basis of a rumor, is that ethical?

Students‘ answers may vary. Some of them may say that this act cannot be considered ethical. One of the conditions for ethical whistle-blowing states that there must be documented evidence that is convincing to a reasonable, impartial observer.

10. If that information turns out to be false, should the employee be liable for damages? Explain your answer.

Students‘ answers may vary. If an employee blows the whistle on an organization based on a rumor and the information is false, then the employee should be held liable for damages.

The employee will have cost the organization its reputation—which it has to spend time mending and rebuilding—and trust. Whistle-blowing should only take place if there is documented evidence that is convincing to a reasonable, impartial observer.

11. Compensation under Dodd-Frank isn‘t as clear as a percentage of the funds recovered for a government whistle-blower. Does that make it less likely that we‘ll see more whistleblowing under Dodd-Frank?

Students‘ answers will vary. It may or may not promote more whistle-blowing, but the financial reward aspect should not be the primary motivation. The primary motivation should be to do the right thing and prevent an organization from going through a corporate

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scandal when it can be prevented.

12. Under SOX, complaining to the media isn‘t recognized as whistle-blowing. Is that ethical?

Students‘ answers will vary. Complaining to the media is different from whistle-blowing.

Complaints should be addressed and taken care of by the organization, whereas, the information displayed by the whistle-blower will be taken into consideration and dealt with by legislation.

13. How should managers or supervisors respond to an employee who brings evidence of questionable behavior to their attention?

Students‘ answers will vary. Managers should tell the employee about the company‘s defined process and ensure the employee‘s confidentiality. They should then take the employee through the next steps of the company‘s outlined process for reporting questionable behavior.

14. Should that employee be given any reassurances of protection for making the tough decision to come forward?

Students‘ answers will vary. Yes, as it is stated in SOX, retaliation against whistle-blowers is prohibited and the company‘s policies should stress this along with extreme confidentiality.

15. Do you think a hotline that guarantees the anonymity of the caller will encourage more employees to come forward?

Students‘ answers may vary. An anonymous hotline would allow for those who are uncomfortable coming forward to do so. However, this may also encourage those who have personal vendettas to cause unnecessary investigations as well.

16. Does your company have a whistle-blower hotline? How did you find out that there is (or isn‘t) one?

Students‘ answers may vary. Most likely, students will not be working in a company that has a whistle-blower hotline, but many will upon graduation. If a hotline exists, the company will want to share it with their employees.

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Ethical Dilemma 7.1 – The Insider 17. Wigand was initially unwilling to go public with his information. What caused him to change his mind?

Students‘ responses will vary. After being fired due to ―poor communication skills,‖ the company modified their confidentiality agreement. While still employed, Wigand did not want to break his integrity of honoring the contract. Once he realized they did not believe he would honor their agreement he chose to go public.

18. Did CBS pursue Wigand‘s story because it was the right thing to do or because it was a good story?

Students‘ responses will vary. Arguments for CBS covering the story could be considered for both the right thing to do and because it was a good story. Both of these were probably motivators for CBS. They were able to turn a true story into a movie with a Hollywood cast.

19. Since CBS played such a large part in bringing Dr. Wigand‘s story to the public, do you think the network also had an obligation to support him once the story broke? Explain why or why not.

Students‘ responses will vary. CBS was not obligated to support Wigand, but should have run the interview as an unbiased display of coverage. CBS does have an obligation to display the facts of the stories they are covering.

20. Was CBS‘s decision not to run the interview driven by any ethical concerns?

Students‘ responses will vary. The main decision not to run the interview, however, came from fears of lawsuits from Brown & Williamson. Students‘ answer may vary as to whether this was because of financial reasons or the ethical issue of interfering in to other parties‘ contractual relationship.

7.2 – The Cold, Hard Reality 5.

Who took the greater risk here: Khaled Assadi or Kyle Lagow? Why? Students‘ responses will vary. Khaled Assadi disclosed to his supervisors and the GE ombudsperson about an alleged case of bribery. He was the only one to point out the matter.

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He then faced retaliation from the company and was ultimately fired from his job. Even though he was an American employee he was working for the company‘s Aman Jordan operations, where the rules and regulations regarding whistle-blowing might be entirely different. On the other hand, Kyle Lagow—who accused subprime lender Countrywide Financial of inflating appraisal values on government-insured loans—was fired soon after raising concerns about the appraisal practices at his company. His complaint was brought under the qui tam provision, and his lawsuit was one of five whistle-blower complaints that were folded into a larger $25 billion national mortgage settlement that five banks.

6.

Was the alleged behavior at GE Energy more or less unethical than the behavior at the Countrywide Financial? Explain your answer.

Students‘ responses will vary. Both companies performed unethical practices. GE Energy way bribed the government, and Countrywide Financial falsified documents and appraisal reports.

7.

Do you think Assadi and Lagow regret their decisions to go public with their information?

Why or why not?

Students‘ responses will vary. In light of the following information given in the case, many students may say that Assadi may be regretting his decision, whereas Lagow may be comfortable with his decision:  Although Assadi sought protection under the Dodd-Frank whistle-blower provisions, the U.S. Court for the Southern District of Texas dismissed the lawsuit on the grounds that the antiretaliation provision did not apply in cases of ―extraterritoriality‖. Assadi lost his job and did not receive any kind of protection from the government.  Lagow‘s complaint however was brought under qui tam provision, and his lawsuit was one of five whistle-blower complaints that were folded into a larger $25 billion national mortgage settlement. He later received his share of $14.5 million from the lawsuit settlement.

8.

Do you think their behavior changed anything at either company?

Students‘ responses will vary. In the light of the following information given in the case, many students may say that nothing will have changed in Assadi‘s company but there must have been a few changes in Lagow‘s company:  In the case of Assadi the outcome of the entire process was a negative one, where Assadi lost his job and was also not provided any protection under the Dodd-Frank whistle-blower provisions. The company did not take any actions based on Assadi‘s allegations and successfully put the matter behind by firing Assadi.

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

In Lagow‘s situation, his complaint was brought under the qui tam provision and he did receive a $14.5 million dollar worth settlement from the lawsuit that he had filed against Countrywide Financial.

Frontline Focus ―Good Money—Ben Makes a Decision‖ Questions 19. What do you think will happen now?

Students‘ answers will vary. The family will probably sue the tire company for damages.

The more direct effect will be on Ben and how he handles the pressure of knowing he could have stopped this.

20. What will the consequences for Ben, Rick, their tire store, and Benfield?

Students‘ answers will vary. Benfield and potentially the store that sold the tires could have lawsuits on their hands. Ben and Rick will have to live with the fact that even after knowing the truth about the quality of the tires they chose to keep quiet and not talk about it.

21. Should Ben have spoken out against the Voyager tires?

Students‘ answers will vary. Ben should have called the company hotline so that the company could follow a procedure and investigate the situation and handle it accordingly.

Key Terms External Whistle-Blowing: An employee discovering corporate misconduct and choosing to bring it to the attention of law-enforcement agencies and/or the media.

Internal Whistle-Blowing: An employee discovering corporate misconduct and bringing it to the attention of his or her supervisor, who then follows established procedures to address the misconduct within the organization.

Qui Tam Lawsuit: A lawsuit brought on behalf of the federal government by a whistleblower under the Federal Civil False Claims Act of 1863.

Whistle-Blower: An employee who discovers corporate misconduct and chooses to bring it to the attention of others.

Whistle-Blower Hotline: A telephone line by which employees can leave messages to alert a 1-164 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

company of suspected misconduct without revealing their identity.

Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions.

1.

Why are whistle-blowers regarded as models of honor and integrity?

Students‘ responses will vary. Whistle-blowers can be regarded as models of honor and integrity because they put their careers and personal lives at risk to do the right thing.

2.

Which whistle-blowing option is better for an organization: internal or external? Why? Students‘ responses will vary. Internal whistle-blowers do not receive a tremendous amount of attention and it is harder to track. They avoid public embarrassment. External whistleblowing exploits the company and it typically creates more public awareness of an issue or incident at a particular organization.

3.

Why would an organization decide to ignore evidence presented by a whistle-blower?

Students‘ responses will vary. An organization could decide to ignore evidence if it thought the individual was reacting in the interest of his or her own ethical perception.

4.

Is it reasonable for a whistle-blower to expect a guarantee of anonymity?

Students‘ responses will vary. Some organizations have whistle-blower hotlines that individuals use to protect their identity, while disclosing information regarding the misconduct. A well-defined process is needed to determine how complaints are handled. It can assure confidentiality and ensure that there is no retaliation against the employee.

5.

Why would a whistle-blower be concerned about retaliation?

Students‘ responses will vary. A whistle-blower should be concerned about retaliation because he or she could lose his or her job or create an environment that could be dangerous or uncomfortable in which to work.

6.

Why is trust such an important issue in whistle-blowing?

Students‘ responses will vary. Whistle-blowing has become popular over the years and it is important that the employee is assured that his/her information can be given anonymously

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and without fear of retaliation.

Review Exercises 21. You work for a meatpacking company. You have discovered credible evidence that your company‘s delivery drivers have been stealing cuts of meat and replacing them with ice to ensure that the delivery meets the stated weight on the delivery invoice. The company has 12 drivers and, as far as you can tell, they are all in on this scheme. Your company has a welladvertised whistle-blower hotline. What do you do?

Students‘ responses will vary. If you do not have substantial evidence you should report the situation to the hotline so that they may do an investigation. If you do have evidence and feel comfortable doing so you may want to take the evidence to your direct manager.

22. What would you do if your company did not have a whistle-blowing policy?

Students‘ responses will vary. The right thing to do would be to take the information to your direct supervisor. You must make sure you have evidence and are not just going on rumors or suspicions.

23. You later discover that one of the drivers was not a part of the scheme but was fired anyway when the information was made public. What do you do?

Students‘ responses will vary. You may want to report what you know to a supervisor to try and help the driver get his job back. This is why it is important to know all of the facts before placing the complaint.

24. Should the driver get his job back? Why or why not?

Students‘ responses will vary. It will be hard to prove the driver was not involved. It will also be hard to prove if he was aware of the scheme and turned a blind eye or if he was unaware of the situation.

Internet Exercises 1.

Visit the Government Accountability Project (GAP) at www.whistleblower.org.

4.

What is the mission of GAP?

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The Government Accountability Project‘s mission is to promote government and corporate accountability by protecting whistleblowers, advancing occupational free speech, and empowering citizen activists.

5.

How is GAP funded?

Founded in 1977, GAP is a non-profit, public interest organization that receives funding from over 10,000 individual donors and foundations such as the CS Fund, the Open Society Foundations and Rockefeller Family Fund. Additional support comes from legal fees, settlement awards, and services provided.

6.

What kind of assistance is available through GAP for someone thinking about becoming a whistle-blower?

Students‘ responses will vary. A few examples include:  12 Survival Strategies  A GAP Intake Application for GAP to review your case  Conferences

2.

Visit the National Whistleblowers Center at www.whistleblowers.org. a.

Select the biography of one whistle-blower (not already mentioned in this book) and briefly summarize the details of the case.

Students‘ responses will vary based on the biography they select.

b.

Which publication is recommended for information pertaining to your rights as a whistle-blower?.

Students‘ should respond with ‗The Whistleblower‘s Handbook‘.

3.

There are now two whistle-blowing websites separated by only one letter. Summarize their differences and propose which one offers the greatest assistance to a potential whistleblower.

Students‘ responses will vary. Students are required to summarize the differences between www.whistleblower.org and www.whistleblowers.org.

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Team Exercises 1.

Guilt by Omission.

Divide into two groups and prepare arguments for and against the following behavior: You work for a large retail clothing company that spends a large amount of its advertising budget emphasizing that its clothes are “Made in America.” You discover that only 15 percent of its garments are actually “made” in America. The other 85 percent are actually either cut from patterns overseas and assembled here in the United States or cut and assembled overseas and imported as completed garments. Your hometown depends on this clothing company as the largest local employer. Several of your friends and family work at the local garment assembly factory. Should you go public with this information?

Students‘ responses will vary. It is not okay to use false advertisement. This goes deeper into deciding whether the statement ―made in America‖ insinuates that 100% of their products are made in America. However, this also addresses the question of who is affected by this decision. If the employment opportunities at this hometown depend on this company and several friends and family members work there, these people may be out of a job if the whistle is blown.

2.

“Tortious Interference.‖

Divide into two groups and prepare arguments for and against the following behavior: In the case of Dr. Jeffrey Wigand and the Brown & Williamson Tobacco Company, the CBS Broadcasting Company chose not to air Dr. Wigand‟s 60 Minutes interview with Mike Wallace under threat of legal action for “tortious interference” between B&W and Dr. Wigand. There were suspicions that CBS was more concerned about avoiding any potential legal action that could derail its pending sale to the Westinghouse Corporation.

Was CBS behaving ethically in putting the welfare of its stakeholders in the Westinghouse deal ahead of its obligation to support Dr. Wigand?

Students‘ responses will vary. A corporation should never act in a way that would negatively affect their shareholders. However, some may feel that CBS should not have agreed to support Dr. Wigand and then backed off the case.

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3.

A New Approach to Freshness.

Divide into two groups and prepare arguments for and against the following behavior: You work in the meat department of store 2795 of a large retail grocery chain. The company recently announced a change in the meat-handling protocols from the primary supplier. Starting in January 2013, the meat will be gassed with carbon monoxide before packaging. This retains a brighter color for the meat and delays the discoloration that usually occurs as the meat begins to spoil. You understand from the memo that there will be no information on the product label to indicate this protocol change and that the company has no plans to notify customers of this new process. Should you speak out about the procedure?

Students‘ responses will vary. This would depend on the health effects that the meat gassed with carbon monoxide will have. If the protocol change might cause people to buy meat that will go bad earlier, or if the gas itself might harm consumers, you should speak out about the procedure.

4.

California Organic.

Divide into two groups and prepare arguments for and against the following behavior: You work in the accounting department of a family-owned mushroom grower based in California that sells premium organic mushrooms to local restaurants and high-end retail grocery stores. The company‟s product range includes both fresh and dried mushrooms. Your organic certification allows you to charge top dollar for your product, but you notice from invoices that operating costs are increasing significantly without any increase in revenues. The market won‟t absorb a price increase, so the company has to absorb the higher costs and accept lower profits. One day you notice invoices for the purchase of dried mushrooms from a Japanese supplier. The dried mushrooms are not listed as being organic, but they are apparently being added to your company‟s dried mushrooms, which are labeled organic and California-grown. Should you speak out about this?

Students‘ responses will vary. This is a prime case of false advertising. The company cannot claim their mushrooms are organic and California-raised if they are imported from Japan.

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Thinking Critically 7.1 – Questionable Motives 30. Birkenfeld was adamant that his prison sentence is unfair when compared to the fact that no one else (e.g., Olenicoff or UBS bankers) went to jail. Did he have a point?

Students‘ responses will vary. Some of them may say that Birkenfeld didn‘t have a point because he withheld pertinent data related to Olenicoff‘s business dealings. He did not disclose the nature of his relationship with Olenicoff to the United States Justice Department.

31. Why did UBS elect to settle with the U.S. government?

Students‘ responses will vary. Some of them may say that UBS elected to settle with the U.S. government because it did not want to lose its access to a large market and it wanted to remain a global banking entity. UBS also sought the intervention of the Swiss Government to help its case.

32. Given that there was an immunity agreement in place, what did the Department of Justice gain from prosecuting Birkenfeld?

Students‘ responses will vary. Students should recall that Birkenfeld was charged with helping Olenicoff by referring him to a UBS specialist in the creation of offshore ‗shell‘ corporations designed to hide the true ownership of UBS accounts. The Justice Department charged Birkenfeld with conspiracy to commit tax fraud.

33. Critics are concerned that even with the large qui tam award, Birkenfeld‘s prison sentence will discourage other tax whistle-blowers from coming forward. Is that a valid concern?

Why or why not?

Students‘ responses will vary. Some of them may say that it is a valid concern. However, Birkenfeld was not honest with the Justice Department because he withheld pertinent information about the case.

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7.2 – Olympus: Paying a Price for Doing What’s Right?

37. What accounting irregularities did Michael Woodford uncover at Olympus?

As part of a regular review of Tokyo operations, Woodford had begun analyzing four separate acquisitions that Olympus had made between 2006 and 2009. Three of the four had cost Olympus $1 billion, but their assets had already been written down to just a fraction of that on the balance sheet, indicating that they were considered to be of no real value to the corporation. The fourth company—a UK-based medical instruments company called Gyrus—was acquired for $2.2 billion in 2008. The purchase included a $687 million ―transaction fee‖ to two investment bankers, with the funds going into a Cayman Islands account that was also closed shortly after the deal was concluded. Given that investment banking fees typically amount to only 1 percent of the transaction, a fee of almost 33 percent was suspicious enough to warrant an independent audit, which the Olympus board had authorized in October 2009.

38. How did the executive leadership respond to Woodford‘s revelations?

Three days after Woodward sent the memo to Kikukawa mentioning the accounting discrepancies that he had noticed in the financial statements, Kikukawa and his board of directors fired Woodford from his position as CEO. 39. Critics argue that Woodford could have been more effective if he had taken a longer-term approach to addressing the accounting scandal, rather than the ―showdown‖ approach he took with Kikukawa. Is that a fair assessment? Why or why not?

Students‘ responses will vary based on their perception of the case. Woodford had enough evidence to hold Kikukawa responsible for the accounting discrepancy. Knowing that the board of directors readily fired him once Kikukawa received the memo shows that even the board may have been a party to this scandal. Woodford could have taken the assistance of an external agency or organization that supports whistle-blowers.

40. After the 2012 accounting scandal, Olympus Corp. committed to a major overhaul of its accounting practices. What do the 2016 settlements convey about that overhaul??

Students‘ responses will vary. Many will feel that the sentencing of former executives and the payment of the $7 million fines should have sent a clear message about a stronger commitment to ethical conduct. However, the subsequent 2016 settlements would suggest that the message wasn‘t received.

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7.3 – Theranos: Chasing a Unicorn 30. What do you think Elizabeth Holmes hoped to achieve with her affectations and Steve Jobs comparison?

Students‘ responses will vary. Some may make it a misogyny issue and argue that she was just trying to be taken as seriously as a man would be in the same position. Others may see a more deliberate agenda to create a Jobs-ian mystique around herself and her perceived ‗genius‘ in order to elevate media coverage of her company.

31. Do some additional web research on this case. Is there evidence that Holmes knew the technology was flawed from the beginning? Explain your argument.

Students‘ responses will vary. Thorough research will reveal that additional discovery as part of the ongoing litigation has uncovered explicit attempts on the part of the Theranos leadership team to address concerns about the efficacy of the black box. Holmes deliberately undermined and/or evaded such attempts.

32. Does the fact that Holmes persisted in the face of flawed technology make her naïve or just a more determined crook? Explain your answer.

Students‘ responses will vary. The notion of a ―naïve genius‖ will probably feature prominently in Holmes‘ defense when the case finally comes to trial. Rather than deliberately misleading investors, it will be argued, she was simply too blindly passionate in her belief that the model worked to see the reality. Critics argue that there is sufficient evidence to confirm that she was well aware of the shortcomings of the model while still pursuing additional rounds on venture capital funding.

33. Does the lack of due diligence on the part of investors dilute their argument that they were deceived by Holmes? Why or why not??

Students‘ responses will vary. Claiming deception is a great way to distract from your own greed and failure to do due diligence, but the phrase caveat emptor persists for a reason.

There may be a case against Holmes for failure to disclose accurate information, but the fact that investors were so eager to believe does introduce the issue of gullibility.

34. Why would whistle-blowers be willing to damage their reputations to bring this story to light?

Students‘ responses will vary. The extent of the ―damage‖ to their reputations is unknown at

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this point. You could present an argument that they would be respected and praised for putting patient safety first, but there will be others who will question why they stayed for so long in spite of all the warning signs, and why they took so long to make the call.

35. What lessons should financial markets and investors learn from the Theranos case??

Students‘ responses will vary. Some may be cynical and say that greed will ultimately overpower any lesson to be learned and that history will inevitably repeat itself. Theranos is not the first and will most definitely not be the last. Others may have more faith that, given the wide exposure of the fraud – books and documentaries – investors may follow the mantra of once bitten, twice shy.

CHAPTER 8 Ethics and Technology Table of Contents Chapter Summary Learning Outcomes Frontline Focus: ―Problems at ComputerWorld‖ Questions Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Learning Outcome 5 Life Skills Progress ✓Questions Ethical Dilemma Frontline Focus: ―Problems at ComputerWorld—Steve Makes a Decision‖ Questions Key Terms Review Questions Review Exercises Internet Exercises Team Exercises Thinking Critically

8-2 8-2 8-2 8-3 8-4 8-4 8-5 8-5 8-6 8-6 8-8 8-11 8-11 8-12 8-13 8-14 8-16 8-18

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Chapter Summary This chapter examines the ethical debate over employee surveillance and the extent to which technology not only facilitates the prevention of unethical behavior but also jeopardizes the rights of individual employees. The chapter begins by displaying the types of new technology and the ethical implications of using it. Further, the chapter discusses the different points of view on privacy at work from an employer and an employee perspective. Finally, the chapter discusses the privacy and surveillance capabilities and the future of surveillance used in corporations.

Learning Outcomes After studying this chapter, the student should be able to: 6. Evaluate the ethical ramifications of recent technological advances.

7. Explain the opposing employer and employee views of privacy at work.

8. Distinguish between thin and thick consent.

9. Evaluate the concept of vicarious liability.

10. Analyze an organization‘s employee-surveillance capabilities.

Extended Chapter Outline Frontline Focus ―Problems at ComputerWorld‖ Questions 1.

The Computer Ethics Institute developed ―Ten Commandments of Computer Ethics,‖ listed in Figure 8.1. How many of those commandments are being broken here?

Larry is breaking several of the ―Ten Commandments of Computer Ethics‖ in this situation.

In particular, the following commandments are broken:  Commandment 2—Thou Shalt Not Interfere with Other People‘s Computer Work.

Larry is interfering with other people‘s work by keeping Mr. Johnson‘s old hard drive.  Commandment 3—Thou Shalt Not Snoop Around in Other People‘s Computer Files.

Larry is also possibly snooping around on Mr. Johnson‘s computer files when he states that he will erase the hard drive if he has time.  Commandment 7—Thou Shalt Not Use Other People‘s Computer Resources without Authorization or Proper Compensation. By reselling those slightly used hard drives at the flea market Larry is using other people‘s computer resources without authorization or proper compensation.  Commandment 8—Thou Shalt Not Appropriate Other People‘s Intellectual Output.

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Larry is using his knowledge of computers to deceive Mr. Johnson, who is not computer savvy.

2.

Larry seems pretty happy with the prospect of selling those slightly used hard drives at the flea market, but what happens if the information on them doesn‘t get erased? Would ComputerWorld be liable here? Read the section ―Vicarious Liability‖ later in the chapter to find out more.

Vicarious liability is a legal concept that means a party may be held responsible for injury or damage even when he or she was not actively involved in an incident. Therefore, since Larry is directly involved with selling the hard drives at the flea market and because of his position at ComputerWorld, the organization could be held liable as well, especially if the information on drives is not erased.

3.

What should Steve do now?

Students‘ answers will vary. Steve needs to approach his manager about Larry and the reselling of customers‘ hard drives at flea markets. This could potentially come back and destroy the reputation of the firm and cause numerous costly lawsuits.

Learning Outcome 1: Evaluate the Ethical Ramifications of Recent Technological Advances. 



Technological advances often deliver new and improved functional capabilities before we have had the chance to fully consider the implications of those improvements. o There have been dramatic changes in workplace technology over the last two decades—specifically desktop computing, the Internet, and the growth of e-mail and instant messaging (IM).  The intranet is a company‘s internal website, containing information for employee access only.  An extranet is a private piece of a company‘s Internet network that is made available to customers and/or vendor partners on the basis of secured access by unique password.

Disadvantages of technology in the workplace include the loss of privacy in two key areas: o Customers must be aware that companies now have the technical capability to send their personal data to any part of the world to take advantage of lower labor costs. o Employees must be aware that employers now have the capability of monitoring every e-mail you send and website you visit in order to make sure that you really are delivering on the promise of increased worker productivity.

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Learning Outcome 2: Explain the Opposing Employer and Employee Views of Privacy at Work. 

Computers, e-mail, instant messaging, and the World Wide Web have changed our work environments beyond recognition over the last two decades, but with those changes have come a new world of ethical dilemmas. o There are two distinct viewpoints on this issue:  The employer view—employers mandate that productivity in the workplace is what the employees have to meet for the pay-for-performance contract they agreed to when they were hired.  Employee actions during work time are at the discretion of the company.  All employee activity should be work-related, and any monitoring of that activity should not be regarded as an infringement of your privacy.  The organization has an obligation to its stakeholders to operate as efficiently as possible and ensure company resources are not being misused and that company data and proprietary information are being closely guarded.  The employee view—employee time at work represents the productivity for which the employee receives an agreed amount of compensation in return.  The compensation agreement should not, however, allow the employer to intrude the employees‘ civil rights as an individual.  An employee is not a servant.  Electric monitoring can imply that employees can‘t be trusted to do their job; and, thus, the employer‘s decision to employ them in the first place as questionable. o Arriving at a satisfactory resolution of opposing arguments between employees and employers are difficult for the following two reasons:  The availability of ongoing technological advancements has made it increasingly difficult to determine precisely where work ends, and personal life begins.  The willingness to negotiate or compromise has risen and fallen in direct relation to the prevailing job market.

Learning Outcome 3: Distinguish Between Thin and Thick Consent. 

Telecommuting is the ability to work outside of your office (from your home or anywhere else) and log in to your company network (usually via a secure gateway such as a virtual private network, or VPN). o The concept of ―at work‖ has become blurred. o The concept of being at work has become far more flexible.

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o o



Availability has now become defined by accessibility.

Employees, in return, have begun to expect the same flexibility in taking care of personal needs during working hours.

Adam Moore points out that the state of the job market will inevitably create a distinction between two types of consent: thin and thick. o Thin consent is the consent in which the employee has little choice.  For example, when an employee receives formal notification that the company will be monitoring all e-mail and web activity—either at the time of hire or during employment—and it is made clear in that notification that his or her continued employment with the company will be dependent on the employee‘s agreement to abide by that monitoring.  In other words, there are two options—agree to the monitoring or pursue other employment opportunities. o Thick consent is the consent in which the employee has an alternative to unacceptable monitoring.  For example, if jobs are plentiful and the employee would have no difficulty in finding another position, then the employee has a realistic alternative for avoiding an unacceptable policy.

Learning Outcome 4: Evaluate the Concept of Vicarious Liability. 



Vicarious Liability is a legal concept that means a party may be held responsible for injury or damage even when he or she was not actively involved in an incident. o The implications of vicarious liability are that the party charged is responsible for the actions of his or her subordinates.

Cyberliability is a legal concept that employers can be held liable for the actions of their employees in their Internet communications to the same degree as if those employers had written those communications on company letterhead. o The extent of this new liability can be seen in the top categories of litigation recorded

by Elron Software:  Discrimination  Harassment  Obscenity and pornography  Defamation and libel  Information leaks  Spam

Learning Outcome 5: Analyze an Organization’s Employee-Surveillance Capabilities. 

Many supporters of employee privacy rights argue that we have reached that state now that

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employers have the technology to monitor every keystroke on your computer, track every website you visit, and record every call you make. o Creating a ―locked-down‖ place to work may protect your liability, but it may also drive those employees away who are not comfortable being treated like lab rats. o The Ten Commandments of Computer Ethics (Figure 8.1) are as follows:  Thou Shalt Not Use a Computer to Harm Other People.  Thou Shalt Not Interfere with Other People‘s Computer Work.  Thou Shalt Not Snoop Around in Other People‘s Computer Files.  Thou Shalt Not Use a Computer to Steal.  Thou Shalt Not Use a Computer to Bear False Witness.  Thou Shalt Not Copy or Use Proprietary Software for Which You Have Not Paid.  Thou Shalt Not Use Other People‘s Computer Resources without Authorization or Proper Compensation.  Thou Shalt Not Appropriate Other People‘s Intellectual Output.  Thou Shalt Think about the Social Consequences of the Program You Are Writing or the System You Are Designing.  Thou Shalt Always Use a Computer in Ways That Ensure Consideration and Respect for Your Fellow Humans.

Life Skills The mixed blessing of technology The Life Skills box discusses the benefits of all the recent technology, such as the Internet, email, text messaging, etc., and how it has greatly enhanced the efficiency. It also puts a different perspective on technology and points out the reality that this technology and easy communication has created a blur between work and home. It states that you are no good to your company if you are burned out and never find the time to rest.

Progress Questions 1.

How would you feel if you found out that someone halfway around the world from your doctor‘s office was reading your CAT scan?

Students‘ answers may vary. Some may be upset with their doctor because they thought there was an understanding of doctor-patient confidentiality. On the other hand, some may say that if their doctor needed extra assistance to determine the problem with a CAT scan then they wouldn‘t mind if their doctor used a patient ID number to release some personal information on the network.

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2.

Would your opinion change if you knew the cost savings from outsourcing were putting American radiologists out of a job? What if they were being read this way because there was a shortage of qualified medical personnel here? Would that change your opinion?

Students‘ answers may vary.

3.

Should your doctor be obligated to tell you where your tests are being read? Why or why not?

Students‘ answers may vary. Most of the students may have the opinion that they should be told where their tests are being read, as it is an individual‘s personal information and they may not want any person other than their doctor to look at it.

4.

Storing private information in digital format simplifies the storage and transfer of that information and offers cost savings to companies that are (hopefully) passed on to their customers. Does using ID number instead of names meet their obligation to maintain your privacy in this new digital world?

Students‘ answers may vary. Most of them would say that ID numbers would work only if they could guarantee patient confidentiality.

5.

Define the term telecommuting.

Telecommuting is the ability to work outside the office (from home or anywhere else) and log in to the company network (usually via a secure gateway such as a virtual private network, or VPN).

6.

Summarize the employer position on privacy at work.

The organization has an obligation toward its stakeholders to operate as efficiently as possible, and to do so, it must ensure that company resources are not being misused or stolen and that company data and proprietary information are being closely guarded.

7.

Summarize the employee position on privacy at work.

As employees, they would argue that their civil rights as an individual are being intruded upon. If the employees are being monitored, it implies that they are not trusted to do their jobs.

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8.

Explain the difference between thin and thick consent.

Thick consent is the consent in which the employee has an alternative to unacceptable monitoring. For example, if jobs are plentiful and the employee would have no difficulty in finding another position, then the employee has a realistic alternative for avoiding an unacceptable policy.

Thin consent is the consent in which the employee has little choice. For example, when an employee receives formal notification that the company will be monitoring all e-mail and web activity—either at the time of hire or during employment—and it is made clear in that notification that his or her continued employment with the company will be dependent on the employee‘s agreement to abide by that monitoring.

9.

How would you describe the atmosphere in this call center?

Students‘ answers may vary. Many of them may say that the call center has a stressful atmosphere with the agents getting as stressed or more stressed than the customers.

10. Jamie‘s calls were monitored at all times by a call center supervisor. Is that ethical? Why or why not?

Students‘ answers may vary. Many of them may say that it is ethical in this case because the employer can supervise the employees‘ calls and determine if the employee has a problem with how he or she deals with customers. In this case the employer can work on the employee‘s customer relations skills, so the employee is better able to sell the company‘s products.

11. What would you say is the worst part of working in this call center?

Students‘ answers may vary. Many of them may say that the worst part about working in this call center may be the inbound sales channel. The inbound sales channel would have to first deal with the customers‘ complaint and then have to try and sell more products.

12. When Jamie resigned, she was escorted from the building by security. Is that ethical? Why or why not?

Students‘ answers may vary. It depends on how Jamie resigned; if she acted respectfully and professionally while resigning then there should be no need to escort him out of the building.

On the other hand, if Jamie acted obnoxiously and going berserk it would be ethical to escort Jamie out of the building.

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13. Which of the ―Ten Commandments of Computer Ethics,‖ in Figure 8.1, carry the strongest ethical message? Why? Students‘ answers may vary. All of these commandments carry a strong ethical message.

14. Define the term vicarious liability.

Vicarious liability is a legal concept that means a party may be held responsible for injury or damage even when he or she was not actively involved in an incident.

15. List four of the top categories of litigation related to Internet communications.

Four of the top categories of litigation related to Internet communications are:  Obscenity and pornography  Defamation and libel  Information leaks  Spam 16. Define the term cyberliability.

Cyberliability is a legal concept that employers can be held liable for the actions of their employees in their internet communications to the same degree as if those employers had written those communications on company letterhead.

Ethical Dilemma 8.1 – A Failure to Disclose 1.

Is Sally right to be concerned about Chuck‘s plan? Explain why or why not.

Students‘ answers will vary. Sally has a right to be concerned with Chuck‘s plan because of the failure to disclose the information of sending the tax returns to India. The plan of providing cheaper, while still accurate, returns is an admirable strategy, but implementing this strategy without informing the customers while they are under the impression that the returns are being completed in the U.S. is not ethical.

2.

Chuck Junior is obviously focusing on the money to be saved (and made) with this plan.

What are the issues he is not considering?

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Students‘ answers will vary. Chuck Junior is not considering issues such as the privacy of information being sent overseas. Some customers may not be comfortable sending their information to foreign countries. The other issue becomes the legality of disclosing and informing the customers.

3.

Do you think Chuck Senior has signed off on this plan? If not, should Sally tell him?

Explain why or why not.

Students‘ answers will vary. Chuck Junior, because of his attitude of being on the cutting edge, probably has not shared his plan with Chuck Senior (who has likely not signed off on this plan). Chuck Junior seems to be simply waiting for the actual day he takes control of the business. Even if Chuck Senior has been informed of the plan, Sally should still approach him and discuss the implications of the plan.

4.

Would the plan still succeed if Chuck Junior disclosed all the details?

Students‘ answers will vary. Chuck Junior‘s plan would probably be a success if the details were disclosed to the customers. There will be some customers who will be comfortable with the new plan and want the benefits of a cheaper, faster return. Others will still request to have their tax returns completed in the United States by local CPAs.

8.2 – Top 20 Blonde Jokes 1.

Was Steve Collins wrong to send the e-mail? Why? Students‘ answers will vary. Many of them may say that Steve Collins was wrong in sending the e-mail because it is in a professional setting where females and blondes are present.

While some employees may find these things funny, others may find it offensive, as Jane did. Even though Steve did not direct it towards Jane, the e-mail still created a negative emotional response from Jane and may affect her work performance.

2.

Is Jane Williams overreacting in filing her formal complaint? Explain why or why not.

Students‘ answers will vary. Some of them may say that if Jane truly felt uncomfortable by the e-mail, then it is her right to file a formal complaint. However, others may state that Jane is overreacting because the e-mail was not directed towards her and the intent of the e-mail was to make people laugh, not ―create a hostile work environment.‖

3.

What impact do you think any change in the employee privacy policies would have at Midland?

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Students‘ answers will vary. It seems as though the employee privacy policies are very informal and relaxed at Midland. Jokes are a routine and common thing in this organization.

If employee privacy policies are changed, the morale of some employees may seem to decrease because of being too strict compared to the previous setting. However, a change in these policies will decrease the number of formal grievances and situations similar to Collins‘ and Williams‘.

4.

What are Bill Davis‘s options here?

Students‘ answers will vary. Some of them may say that Bill Davis should speak with Steve Collins about the unprofessional e-mail and how it created an uncomfortable situation for other employees. Bill needs to reprimand or warn Steve and keep the warning on file to keep track of the number of offenses he has committed.

Frontline Focus ―Problems at ComputerWorld—Steve Makes a Decision‖ Questions 1.

What could Steve have done differently here?

Students‘ answers will vary. Many of them may say that Steve should have taken the initiative to tell his boss of Larry‘s ―side business.‖ This is ultimately going to affect him, Larry, and ComputerWorld. If Steve approached his boss he could save himself and ComputerWorld from any legal suits in the future.

2.

What do you think will happen now?

Students‘ answers will vary. Many of them may say that now that Mr. Johnson has received a phone call stating his old hard drive was sold with all of his personal information, Larry, Steve, and ComputerWorld will be facing a lawsuit. Both Larry and Steve will probably be fired and will struggle to find another job in the IT industry. ComputerWorld will probably be sued and have to pay Mr. Johnson and court fees.

3.

What will be the consequences for Steve, Larry, Mr. Johnson, and ComputerWorld?

Students‘ answers will vary. Many of them may say that Larry, Steve, and ComputerWorld will be facing a lawsuit. Both Larry and Steve will probably be fired and will struggle to find another job in the IT industry. ComputerWorld will probably be sued and have to pay Mr. Johnson and court fees.

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Key Terms Cyberliability: A legal concept that employers can be held liable for the actions of their employees in their internet communications to the same degree as if those employers had written those communications on company letterhead.

Extranet: A private piece of a company‘s Internet network that is made available to customers and/or vendor partners on the basis of secured access by unique password.

Intranet: A company‘s internal website, containing information for employee access only.

Telecommuting: The ability to work outside of your office (from your home or anywhere else) and log in to your company network (usually via a secure gateway such as a virtual private network, or VPN).

Thick Consent: Consent in which the employee has an alternative to unacceptable monitoring.

For example, if jobs are plentiful and the employee would have no difficulty in finding another position, then the employee has a realistic alternative for avoiding an unacceptable policy.

Thin Consent: Consent in which the employee has little choice. For example, when an employee receives formal notification that the company will be monitoring all e-mail and web activity— either at the time of hire or during employment—and it is made clear in that notification that his or her continued employment with the company will be dependent on the employee‘s agreement to abide by that monitoring.

Vicarious Liability: A legal concept that means a party may be held responsible for injury or damage even when he or she was not actively involved in an incident.

Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions.

1.

Should you be allowed to surf the web at work? Why or why not?

Students‘ answers will vary. Surfing the web at work is a controversial issue. Surfing the web at work can be viewed as wasting company time and money and should be limited. On the other hand, employees need to be able to redirect their minds to something other than their work and come back to it with a fresh thought process. The biggest issue in such cases is which websites are the employees viewing.

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2.

Are your telephone calls monitored where you work? If they are, how does that make you feel? If they aren‘t monitored, how would you feel if that policy were introduced?

Students‘ answers will vary. Many employees would probably feel their privacy is being violated, especially if the policy were just being introduced. These policies may also encourage employees to use their cellular phones.

3.

What would you do if someone sent you an e-mail at work that you found offensive? Would you just delete it or say something to that person?

Students‘ answers will vary. These responses will completely depend upon the person and their personality. Some may simply delete it, while others will approach the person or even file a formal grievance.

4.

If you had the chance to work from home and telecommute, would you take it? If the opportunity meant that you had to allow your company to monitor every call on your phone and every keystroke on your computer, would you still take it? Explain why or why not.

Students‘ answers will vary. One opinion on this offer would be that people may not want to ―confuse‖ work and home, especially if their company is monitoring everything at their house. Many people feel like they are more productive when in an actual work setting because too many distractions exist at home.

5.

You have just been issued a new company Blackberry (to make sure you never miss an important e-mail or phone call!). Are you now obligated to answer those calls and e-mails at any time, day or night? Why or why not?

Students‘ answers will vary. The company would probably find out if the employee did not answer a call or email in a timely manner and they could use that against the employee as insubordination or grounds for dismissal if they wanted to.

6.

Would you use that new Blackberry for personal calls and e-mails? Why or why not?

Students‘ answers will vary. If you use the new Blackberry for personal calls and e-mails, the company can monitor your calls and e-mails. It is in the best interest not to use it for personal business unless you want that business made public.

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Review Exercises 1.

How well did Matrix‘s client handle this situation?

Matrix Technologies has upgraded its customer service extranet service for its clients to download software updates. The majority of clients had very positive feedback for this new update. The only client of Matrix who reported that this upgrade did not help was the large local government client. This client had to take away all Internet privileges from its employees and therefore, is requiring Matrix to mail upgrade CDs to 24 regional offices.

2.

What kind of message does this send to the employees of Matrix‘s client?

When Matrix created upgrades through its extranet and had to mail upgrade CDs to its local government client, the message sent to the government employees was a reminder that they could not use the Internet while numerous other firms were still allowing employees to access the Internet during work. It also sends a message to the employees that Matrix Technologies is willing to accommodate the needs of the firm based on its policies.

3.

What other options were available here?

Students‘ responses will vary. Matrix Technologies could have not accommodated its government client by refusing to change its upgraded system specifically for it. Of all the clients, the local government was the only client that this new system did not work for because it did not allow access to the Internet.

4.

On the assumption that the downloadable software patches can greatly improve updates for its client, does Matrix have an ethical obligation to get involved here? Explain your answer.

Students‘ answers will vary. Matrix Technologies has an obligation to satisfy its clients and must respect the ethical issue the government faced with regards to Internet surfing. Matrix cannot lose a large client because it is not willing to utilize the Internet.

Internet Exercises 1.

Visit the website for the RAND Center for Corporate Ethics and Governance (CCEG) at www.rand.org/jie/centers/corporate-ethics.html. e.

What does RAND aim to do with this research?

As of June 7th, 2019:

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“RAND research on corporate ethics and governance aims to improve public understanding of corporate ethics, law, and governance. Our work also addresses related problems in public policy and risk management, particularly concerning the relationship between regulators and the private sector. Research projects have been supported by government, foundation, and private-sector sponsors.”

What has RAND‘s research focused on over the last decade?

f.

As of June 7th, 2019: “Over the past decade, some of our major research efforts have included empirical studies on board governance and the impact of Sarbanes-Oxley; on the landscape of investment-advisers and broker-dealers and the impact of federal regulation upon them; and on the relationship between fair value accounting and systemic risk in the lead-up to the 2008 crisis. To all of this work, we bring RAND's full set of research capabilities, including a world class, multi-disciplinary staff; scientific rigor and objectivity in approach; and a commitment to advancing the public good through our work.”

g.

Select and summarize a current CCEG research project.

Students can visit this page and choose any current CCEG research project: http://www.rand.org/jie/centers/corporate-ethics/projects.html One of the current projects is Operations, Compliance, and Accountability in Corporate Political Spending. The site explains that this project involves an investigation of the lack of compliance mechanisms and programs in support of corporate political spending.

Students can read the details of the project and summarize it based on their understanding.

2.

Visit the website for the Electronic Frontier Foundation (EFF) at www.eff.org. a.

What does the EFF do?

The EFF is a donor-funded nonprofit organization that defends the digital rights of individuals and groups. They defend those cutting-edge issues associated with free speech, privacy, innovations, and consumer rights today.

b.

What is the EFF ―Bloggers‘ Rights‖ Project?

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The EFF ―Blogger‘s Right‘s‖ Project is a legal guide provided for bloggers to help them understand that they have rights and their legitimate speech is protected. This legal guide is actually a collection of blogger-specific FAQs that addresses a variety of issues ranging from fair use to defamation law to workplace whistle-blowing. c.

What is the ―Open Wireless Movement‖?

The ―Open Wireless Movement‖ is a movement that aims to achieve an omnipresent open Internet. It aims to have several open networks at users‘ fingertips. It aspires to allow tablets, watches, and other new devices to automatically join these networks.

This movement believes that wireless Internet is effective for sharing which is one of the societal expectations.

Team Exercises 1.

When are you ―at work‖?

Divide into two teams. One team must defend the employer position on employee monitoring. The other team must defend the employee position. Draw on the policies and experiences you have gathered from your own jobs.

Students‘ answers will vary. Employers view the issue of employee monitoring as verifying and utilizing the time of the employees effectively. When employees are allowed to surf the Internet or be on the phone without being monitored, the company is not aware of how much time and money is being wasted on lack of productivity. Monitoring phone calls also helps address improvements in customer service.

From an employee position, monitoring every keystroke and every phone call can be considered an invasion of privacy. Another issue that employees may argue is the point that strict monitoring will reduce morale and result in lower productivity.

2.

A new billing system.

A new system that bills corporate clients is under development, and there is a discussion over how much to invest in error checking and control. One option has been put forward so far, and initial estimates suggest it would add about 40 percent to the overall cost of the project but would vastly improve the quality of the data in the database and the accuracy of client billing. Not spending the money would increase the risk of overcharging some midsize clients. Divide into two groups and prepare arguments for and against spending the extra money on error checking and control. Remember to include in your argument how

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stakeholders would be affected and how you would deal with any unhappy customers.

Students‘ answers will vary. Arguments for spending the extra money on error checking control include the satisfaction of customers and the savings the time and money would cost the company for inaccurate billings. When customers receive inaccurate bills the company‘s credibility and reputation decreases. Arguments against spending the extra money include the 40 percent to the overall cost of the project.

3.

E-mail privacy.

Divide into two groups and prepare arguments for and against the following behavior: Your company has a clearly stated employee surveillance policy that stipulates that anything an employee does on a company-owned computer is subject to monitoring. You manage a regional office of 24 brokers for a company that offers lump-sum payments to people receiving installment payments—from lottery winnings or personal injury settlements who would rather have a large amount of money now than small monthly checks for the next 5, 10, or 20 years.

You have just terminated one of your brokers for failing to meet his monthly targets for three consecutive months. He was extremely angry about the news and when he went back to his cube, he was observed typing feverishly on his computer in the 10 minutes before building security arrived to escort him from the premises.

When your IT specialist arrives to shut down the broker‟s computer, he notices that it is still open and logged in to his Gmail account and that there is evidence that several emails with large attachments had been sent from his company e-mail address to his Gmail address shortly after the time he was notified that he was being fired. The e-mails had been deleted from the folder of sent items in his company account. The IT specialist suggests that you take a look at the e-mails and specifically the information attached to those e-mails. Should you?

Students‘ answers will vary. Arguments for looking at the broker‘s Gmail account would be on the basis of security. According to the scenario, it seems the broker sent company information to his personal e-mail which could jeopardize the company. Also, the company has a clearly stated policy that stipulates anything an employee does on company-owned computers is subject to monitoring. If the e-mail was left open and there is reason to believe the broker had sent private company information to his personal account, then the company has a right to check it.

Arguments against checking the brokers Gmail account would be on the basis of privacy.

There were no signs of sent mail to the brokers Gmail account from his company e-mail, and the broker could claim an invasion of privacy if the company were to go through his private

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(Gmail) account.

4.

Software piracy.

Divide into two groups and prepare arguments for and against the following behavior: You run your own graphic design company as a one-person show, doing primarily small business projects and subcontracting work for larger graphic design agencies. You have just been hired as an adjunct instructor at the local community college to teach a graphic design course. You decide that it‟s easier to use your own laptop rather than worry about having the right software loaded on the classroom machines, and so the college IT department loads the most current version of your graphic design software on your machine. Business has been a little slow for you, and you haven‟t spent the money to update your own software. The version that the IT department loads is three editions ahead of your version with lots of new functionality.

You enjoy teaching the class, although the position doesn‟t pay very well. One added bonus, however, is that you can be far more productive on your company projects using the most current version of the software on your laptop, and since you use some of that work as examples in your class, you‟re not really doing anything unethical, right?

Students‘ answers will vary. An argument for using the software for personal use is that it is providing examples and content for your class. It was easier to load this upgraded software on the personal laptop than the classroom computers and therefore, should be able to be used as long as still employed by the community college.

An argument against using the software for personal use is that the college loaded the software on the laptop for the purpose of teaching the class. Because the person did not pay for the software, it should not be used to make money on the side.

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Thinking Critically 8.1 – Alexa: Are you listening to me?

1.

Why did the Bloomberg piece gain so much attention?

Students‘ answers will vary. The article brought attention to how quickly people had allowed these machines into their homes without fully understanding the ramifications of having a personal digital assistant. Most users assumed (without giving it much thought) that the conversations would end after the questions had been answered. From their perspective, recording the conversation had no value, but from Google‘s perspective, the information in those conversations was solid gold in terms of value to update their algorithm and send you more targeted ads. The fact that employees could review those recordings just added a creepiness factor to it.

2.

Were you assured by Amazon‘s response? Why or why not?

Students‘ answers will vary.

3.

Why should we make a distinction between hearing and listening?

Students‘ answers will vary. The machines need the capability to hear your enquiry.

Whether they need to be able to listen beyond that enquiry is a separate matter. Whether consumers are willing to be passively-monitored in return for more targeted information remains to be seen.

4.

What steps should Amazon, Apple, and Google take to reassure their customers that these digital personal assistants will protect their privacy? Explain your answer.

Students‘ answers will vary. The fact that manufacturers are responding with new software upgrades and design changes to reassure users that the machines won‘t be listening would suggest that they are at least aware that this is a very sensitive issue.

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8.2 – Volkswagen: ―Defeat Devices‖ 1.

Why did VW develop the software in the ―defeat devices‖?

Students‘ answers will vary. Many will note that the Type EA189 diesel engines did not meet EPA emission standards and since the company had committed millions of marketing dollars to promote the engines as more fuel-efficient and cleaner-burning, the easiest solution was to massage the data.

2.

Has Müller‘s commitment to ―maximum transparency‖ helped or hindered the situation?

Explain your answer Students‘ answers will vary. Transparency may be the right thing to do, but it is coming at a very high cost to VW. The real emission levels proved to be greater than 40 times the required standards, and the number of vehicles impacted quickly escalated from 500,000 to 11 million.

3.

Would you buy a VW car based on the information in this case? Why or why not?

Students‘ responses will vary.

4.

What should VW be doing to recover from this scandal?

Students‘ answers will vary. Many will believe that the commitment to ―maximum transparency‖ is a good start, but lengthy legal disputes will leave customers with cars that are unsellable and technically undriveable since they violate EPA emission standards. The right thing to do would be to expedite refund payments so that disgruntled customers can get on with their lives.

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8.3 – The HIPAA Privacy Rule 1.

Is the term privacy rule accurate in describing the HIPAA legislation? Why or why not?

Students‘ answers will vary. While the purpose of HIPAA is clearly stated, the interpretation of the legislation lacks clarity. This piece of legislation attempts to be a privacy rule, but has had numerous incidents in which violations and unethical situations occur.

2.

Is it ethical for covered entities to be excused from getting patient permission to use their private information for routine purposes? Why or why not?

Students‘ answers will vary. Private entities should not be excused from obtaining patient permission to use their private information for routine purposes because this creates a situation that exposes patient information to more people and creates opportunity for more unethical and privacy situations. In order to reduce and enhance this piece of legislation, permission should always be required from the patient, no matter who needs it.

3.

Based on the limited information in this article, do you think the HIPAA legislation achieves its objective of securing patient privacy?

Students‘ answers will vary. With the examples provided in the article, it is hard to believe that the HIPAA legislation is achieving its objective of securing patient privacy. These examples demonstrate the incidents when HIPAA has not upheld its privacy guarantees.

4.

How could this issue of patient privacy have been handled in a more ethical manner?

Students‘ answers will vary. The HIPAA legislation needs to be modified and should state that permission must always be given before using or accessing their private information.

The consequences for HIPAA violations should also be addressed and enforced to prevent people from making careless mistakes or bad decisions.

CHAPTER 9 Ethics and Globalization Table of Contents 1-193 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter Summary Learning Outcomes Frontline Focus: ―A Matter of Definition‖ Questions Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Learning Outcome 5 Life Skills Progress ✓Questions Ethical Dilemma Frontline Focus: ―A Matter of Definition–Tom Makes a Decision‖ Questions Key Terms Review Questions Review Exercises Internet Exercises Team Exercises Thinking Critically

9-2 9-2 9-2 9-3 9-4 9-4 9-5 9-6 9-7 9-7 9-11 9-13 9-13 9-14 9-15 9-16 9-18 9-20

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Chapter Summary Ethical issues have been raising problems in the global business. This caused the United Nations to take action in 2000 by presenting the UN Global Impact. The chapter presents the issue of ethical relativism in a global environment. Next, the ethical challenges in doing business in developing and developed economies are compared. The author argues that even though it is hard for organizations to make a global code of conduct these are the best solutions. The final part of the chapter explains the OECD Guidelines for Multinational Enterprises.

Learning Outcomes After studying this chapter, you should be able to: 11. Understand the ethical issues arising in global business.

12. Explain the issue of ethical relativism in a global environment.

13. Explain the challenges in developing a global code of ethics.

14. Analyze the ramifications of the UN Global Compact.

15. Explain the OECD Guidelines for Multinational Enterprises.

Extended Chapter Outline Frontline Focus ―A Matter of Definition‖ Questions 21. Ten guidelines for organizations doing business with developing nations are listed in ―The Pursuit of Global Ethics‖ section. Do you think Smith‘s is following any of these?

Students‘ answers will vary. Considering the information in the case, it does not seem as though Smith‘s is following any of these guidelines, especially the guideline to respect the human rights of its employees.

22. Review the UN Global Compact in the ―Enforcing Global Ethics‖ section. How many violations has Smith‘s incurred by doing business with Jakarta Enterprises?

Students‘ answers will vary. Smith‘s is violating both of the human rights of the UN Global Compact principles. Smith‘s is also violating numerous labor standards of the UN Global Compact, such as upholding the abolition of child labor.

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23. What are Tom‘s options here?

Students‘ answers will vary. The ad agency that Tom is employed with is known for working only with clients whose corporate values match their own. Tom should bring the information of Smith‘s relationship with Jakarta Enterprises and the businesses practices of Jakarta Enterprises to the attention of his boss. The options are to continue fulfilling the obligations of the contract with Smith or bringing the information to the attention of his company.

Learning Outcome 1: Understand the Ethical Issues Arising in Global Business. 







When doing business on an international scale, the concept of business ethics changes dramatically. o A less-developed nation is a country that lacks the economic, social, and technological infrastructure of a developed nation. o A developed nation is a country that enjoys a high standard of living as measured by economic, social and technological criteria.

Both—less-developed and developed—nations are busy playing the game of globalization. o Everyone is pursuing the same goal of maximum profits with minimum costs, and if individual cultures present some challenges, those can be overcome with translations and cultural adaptations.

International markets represent growth, and with profitable growth come happy shareholders and rising stock prices. o In addition, international markets represent new customers as well as sources of cheaper materials and cheap labor.

From a business ethics perspective, the constant hunger for growth at any cost presents some challenges. o Utilitarianism refers to ethical choices that offer the greatest good for the greatest number of people. o Globalization is the expansion of international trade to a point where national markets have been overtaken by regional trade blocs (Latin America, Europe, Africa), leading eventually to a global marketplace. o A multinational corporation (MNC) is a company that provides and sells products and services across multiple national borders. Also known as transnational corporations.  Most MNCs have chosen to ignore all ethical standards in the pursuit of the almighty dollar on the basis of two arguments:  If they didn‘t pursue the business, somebody else would.

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 They are operating in full compliance with local laws and regulations, which conveniently happen to be far less restrictive than those they would face in their own country.

Learning Outcome 2: Explain the Issue of Ethical Relativism in a Global Environment. 

Ethical Relativism is a gray area in which your ethical principles are defined by the traditions of your society, your personal opinions, and the circumstances of the present moment. o Policies and procedures are hard to follow when the customers don‘t have comparable policies in their own organizations.  In addition, policies that have been outlawed in an attempt to legally enforce ethical corporate behavior may be standard operating procedure in lessdeveloped nations. o Social and political chaos can generate a bureaucracy that bears no relation to a logical reality, leaving companies with the tough decision whether to stand by their Western principles of ethical conduct or submit to the practical reality of the local market and ―grease the appropriate palms‖ to get things done.

Learning Outcome 3: Explain the Challenges in Developing a Global Code of Ethics. 



Globalization can be seen to have both an upside and a downside. o Supporters of the upside argue that globalization brings unprecedented improvements in the wealth and standards of living of citizens in developing nations as they leverage their natural resources or low costs of living to attract foreign investors  For the more economically advanced nations, access to these resources enables lower production costs that equate to lower prices and higher income standards for their customers. o Advocates for the downside of globalization argue that it is merely promoting the dark side of capitalism onto the global stage:  Developing countries are ravaged for their raw materials with no concern for the longer-term economic viability of their national economies.  Workers are exploited.  Corporations are free to take full advantage of less restrictive legal environments.

Companies find themselves tempted to take advantage of the less stringent laws and regulations of local markets and to operate in the absence of any standards rather than reverting to their own domestic ethical policies as they are faced with constant pressure to: o Increase revenue o Cut costs

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 

o Maximize profitability o Grow market share A global code of conduct is a general standard of business practice that can be applied equally to all countries over and above their local customs and social norms.

Richard DeGeorge developed the following guidelines for organizations doing business in less developed countries: o Do no intentional harm. o Produce more good than harm for the host country. o Contribute to the host country‘s development. o Respect the human rights of their employees. o Respect the local culture; work with it, not against it. o Pay their fair share of taxes. o Cooperate with the local government to develop and enforce just background institutions. o Majority control of a firm includes the ethical responsibility of attending to the actions and failures of the firm. o Multinationals that build hazardous plants are obliged to ensure that the plants are safe and operated safely. o Multinationals are responsible for redesigning the transfer of hazardous technologies so that such technologies can be safely administered in host countries.

Learning Outcome 4: Analyze the Ramifications of the UN Global Compact. 



The UN Global Compact is a voluntary corporate citizenship initiative endorsing 10 key principles that focus on four key areas of concern—the environment, anticorruption, the welfare of workers around the world, and global human rights. o It was launched in a speech to the World Economic Forum on January 31, 1999, by UN Secretary-General Kofi Annan. o It relies on public accountability, transparency, and the enlightened self-interest of companies, labor, and civil society to initiate and share substantive action in pursuing the principles on which the Global Compact is based. o With over 2000 companies and more than 80 countries making a voluntary commitment to this corporate citizenship initiative, the Global Compact is widely recognized as the world‘s largest initiative of its kind.

By endorsing and actively promoting the message of the Global Compact, companies make public commitments to a set of core values that are captured in 10 key principles that address the four areas of concern—human rights, labor standards, environment, and anticorruption. o Human Rights  Businesses should support and respect the protection of internationally

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o

o

o

proclaimed human rights.  Businesses should make sure they are not complicit in human rights abuses.

Labor Standards  Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining.  Businesses should uphold the elimination of all forms of forced and compulsory labor.  Businesses should uphold the effective abolition of child labor.  Businesses should uphold the elimination of discrimination in employment and occupation.

Environment  Businesses should support a precautionary approach to environmental challenges.  Businesses should undertake initiatives to promote greater environmental responsibility.  Businesses should encourage the development and diffusion of environmentally friendly technologies.

Anticorruption  Businesses should work against all forms of corruption, including extortion and bribery.

Learning Outcome 5: Explain the OECD Guidelines for Multinational Enterprises. 

The OECD Guidelines for Multinational Enterprises are guidelines that promote principles and standards of behavior in the following areas—human rights, information disclosure, anticorruption, taxation, labor relations, environment, competition, and consumer protection; endorsed by 30 members of the Organization for Economic Cooperation and Development and 9 nonmembers (Argentina, Brazil, Chile, Estonia, Israel, Latvia, Lithuania, Romania, and Slovenia). o Supporters argue that the government backing adds credibility to the issues being promoted, but the guidelines carry no criminal or civil enforcement and are not regarded as legally binding. What they do offer are principles and standards of behavior that draw on the same core values as the UN Global Compact across a broader series of issues captured in 10 ―chapters‖:  Concepts and Principles—sets out the principles which underlie the guidelines, such as their voluntary character, their application worldwide, and the fact that they reflect good practice for all enterprises.  General Policies—contains the first specific recommendations, including provisions on human rights, sustainable development, supply chain responsibility, and local capacity building; and, more generally, calls on

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





 



 

enterprises to take full account of established policies in the countries in which they operate.

Disclosure—recommends disclosure on all material matters regarding the enterprise such as its performance and ownership, and encourages communication in areas where reporting standards are still emerging such as social, environmental, and risk reporting.

Employment and Industrial Relations—addresses major aspects of corporate behavior in this area including child and forced labor, nondiscrimination and the right to bona fide employee representation, and constructive negotiations.

Environment—encourages enterprises to raise their performance in protecting the environment, including performance with respect to health and safety impacts.

Combating Bribery—covers both public and private bribery and ad dresses passive and active corruption.

Consumer Interests—recommends that enterprises, when dealing with consumers, act in accordance with fair business, marketing, and advertising practices; respect consumer privacy; and take all reasonable steps to ensure the safety and quality of goods or services provided.

Science and Technology—aims to promote the diffusion by multinational enterprises of the fruits of research and development activities among the countries where they operate, thereby contributing to the innovative capacities of host countries.

Competition—emphasizes the importance of an open and competitive business climate.

Taxation—calls on enterprises to respect both the letter and spirit of tax laws and to cooperate with tax authorities.

Life Skills A Subtle Influence Due to globalization, the ethical standards that we once followed can now be sheltered by the ethical standards from different cultural influences. If you have an open mind cultural impacts are able to change individual daily behavior. This would help an individual to adapt to different cultures or employees from different countries to better relate to globalized organizations.

Progress ✓ Questions 33. Explain the term globalization.

Globalization refers to the expansion of international trade to a point where national markets 1-200 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

have been overtaken by regional trade blocs (Latin America, Europe, Africa), leading eventually to a global marketplace.

34. What is an MNC? An MNC or multinational corporations is a company that provides and sells products and services across multiple national borders. MNCs are also known as transnational corporations.

35. When is ―operating in full compliance with local laws and regulations‖ unethical?

It is unethical when local laws and regulations are far less restrictive than those MNCs would face in their own country. An example would be an MNC that operates in a country only because it has cheaper labor costs.

36. Explain the term utilitarianism.

Utilitarianism refers to ethical choices that offer the greatest good for the greatest number of people.

37. Why would a global code of conduct be unrealistic?

Even though countries are working together to leverage their size and geographic advantage, it is still unrealistic for a global code of conduct because customs and norms of the individual societies are likely to prevail.

38. Select your top five from DeGeorge‘s guidelines for organizations doing business in lessdeveloped countries, and defend your selections.

Students‘ answers may vary. These are the possible choices for guidelines for organization doing business in less-developed countries:  Do no intentional harm.  Produce more good than harm for the host country.  Contribute to the host country‘s development.  Respect the human rights of their employees.  Respect the local culture; work with it, not against it.  Pay their fair share of taxes.  Cooperate with the local government to develop and enforce just background institutions.  Majority control of a firm includes the ethical responsibility of attending to the actions

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 

and failures of the firm.

Multinationals that build hazardous plants are obliged to ensure that the plants are safe and operated safely.

Multinationals are responsible for redesigning the transfer of hazardous technologies so that such technologies can be safely administered in host countries.

39. Can you think of any reasons why international organizations wouldn‘t follow these guidelines? Provide three examples.

Students‘ answers may vary. MNCs are faced with constant pressure to increase revenue, cut costs, maximize profitability, and grow market share. In such situations, companies find themselves tempted to take maximum advantage of the less stringent laws and regulations of local markets. If there are no clear local ethical standards, companies are tempted to operate in the absence of any standards rather than reverting to their own domestic ethical policies.

40. Do you think DeGeorge‘s guidelines represent a sufficiently ―flexible‖ solution? Why or why not?

Students‘ answers may vary. Some of the students may find that DeGeorge‘s guidelines do represent a ―flexible‖ solution because it provides standards of practice to guide managers as they conduct business across national borders. As they are only guidelines, the organization can still respect the individual customs of the country in which they operate.

41. What is the UN Global Compact?

The UN Global Compact is a voluntary corporate citizenship initiative endorsing 10 key principles that focus on four key areas of concern: the environment, anticorruption, the welfare of workers around the world, and global human rights.

42. When and why was it created?

It became operational in July 2000. It represents a commitment on the part of its members to promote good corporate citizenship with the focus on four key areas of concern—the environment, anticorruption, the welfare of workers around the world, and global human rights.

43. Explain the 10 key principles of the Global Compact.

The 10 key principles of the Global Compact are:  Businesses should support and respect the protection of internationally proclaimed.

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        

Businesses should make sure they are not complicit in human right abuses.

Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining.

Businesses should uphold the elimination of all forms of forced and compulsory labor.

Businesses should uphold the effective abolition of child labor.

Businesses should uphold the elimination of discrimination in employment and occupation.

Businesses should support a precautionary approach to environment challenges.

Businesses should undertake initiatives to promote greater environmental responsibility.

Businesses should encourage the development and diffusion of environmentally friendly technologies.

Businesses should work against all forms of corruption, including extortion and bribery.

44. What would a multinational corporation gain from signing the Global Compact?

By signing the Global Compact, an MNC would be a part of the world‘s largest initiative of its kind. Following these guidelines gives MNCs an opportunity to publicly support and endorse a strong message to their stakeholders that they are committed to ethical corporate conduct wherever they do business in the world.

45. What are the OECD Guidelines for Multinational Enterprises?

The OECD Guidelines for Multinational Enterprises are guidelines that promote principles and standards of behavior in the following areas—human rights, information disclosure, anticorruption, taxation, labor relations, environment, competition, and consumer protection.

It is a governmental initiative endorsed by 30 members of the Organization for Economic Cooperation and Development and 9 nonmembers (Argentina, Brazil, Chile, Estonia, Israel, Latvia, Lithuania, Romania, and Slovenia).

46. How do they differ from the UN Global Compact?

The UN Global Compact is voluntary corporate initiative, while the OECD takes a more governmental approach. Also, the OECD covers a broader series of issues.

47. How are they similar to the UN Global Compact?

Both promote principles and standards of behavior that draw on the same core values. Both the guidelines carry no criminal or civil enforcement and are not regarded as legally binding.

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48. Can you think of a situation in which a multinational corporation would endorse one or the other? Or should they both be endorsed? Explain your answer.

Students‘ answers may vary. Some corporations may be more responsive to a more nongovernmental approach rather than a governmental approach and vice versa. It would be beneficial to endorse both because both have different strengths and weaknesses, benefits and drawbacks.

Ethical Dilemma 9.1 – For Services Rendered 1.

Was this an ethical transaction? Explain why or why not.

Students‘ answers will vary. There have been three accidents at the mine in the past three years. In addition to the miners‘ injuries, there was also an environmental issue when a wall at the facility was damaged and thousands of gallons of chemical pollutants leaked out into the local river. Galaxy Mining made a public commitment to fresh clean water that it later quickly abandoned. Montgomery should have included more explanation or documentation for the amount of money he charged for services rendered.

2.

Montgomery ―managed‖ the incident as requested. Is there any evidence to suggest that he did anything unethical?

Students‘ answers will vary. Montgomery is a self-proclaimed specialist and Galaxy Mining did not question his credentials. The fact that he charged $1 million for his services with little explanation or documentation for his invoice is a questionable billing practice.

3.

Should the auditors accept his explanation of ―services rendered‖? Why or why not?

Students‘ answers will vary. The board did not receive any copies of documents representing the work performed on the project. The only thing the company received was a statement from Montgomery via an e-mail explaining his fees as services rendered in the management of the incident. Considering the amount of $1 million, auditors should not accept Montgomery‘s simple explanation of ―services rendered‖. They should demand a detailed, itemized invoice that illustrates the specific charges associated with the incident.

4.

What kind of policies should Galaxy Mining put in place to make sure these kinds of ―services‖ aren‘t utilized again?

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Students‘ answers will vary. Galaxy Mining needs to put policies in place that require documentation of the work performed from outside contractors on the projects. In addition, the company should request specific licenses or degrees for specialists in the field.

9.2 – Corporate Inversion: A Questionable Practice?

1.

Does the higher U.S. corporate tax rate provide sufficient justification for these inversion deals? Why or why not?

Students‘ answers will vary. Some will argue that these corporations are just making use of a tax-reduction option that is available to them in the name of maximizing shareholder value.

Others will argue that such actions represent a deliberate intent to avoid tax liability.

2.

Proponents of such deals claim that they are simply maximizing profits and shareholder value. Does that make them ethical? Explain your answer.

Students‘ answers will vary. Since such actions do nothing to deliver better products or services to customers, some students may argue that inversions are unethical. Others may feel that the lower tax rate achieved will release funds that can be reinvested into the business to produce new products and services or increased operational efficiencies.

3.

Why did the U.S. Treasury introduce a rule change?

Students‘ answers will vary. President Barack Obama made it clear that he considered such deals as ―insidious‖ and ―unpatriotic‖ which contributed to the characterization of the tax rule as a ―loophole.‖ The U.S. Treasury followed through on that characterization by closing the loophole in the interests of ensuring that corporations were no longer able to evade their full tax obligations.

4.

Do you think the change will hold, or will lobbyists succeed in getting the rule reversed?

Explain your answer.

Students‘ answers will vary. With billions of dollars on the line in potential tax savings, it is likely that corporations will fund aggressive lobbying strategies to have the rule reversed.

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Frontline Focus ―A Matter of Definition–Tom Makes a Decision‖ Questions 22. What do you think Charles Cooper will say to his counterpart at Smith‘s?

Students‘ answers will vary. Charles Cooper will most likely explain to his counterpart at Smith‘s that the original billing paperwork was left with prep kit and he noticed that they were doing business with Jakarta Enterprises, a corporation with unethical business practices. If Smith‘s says they are doing business with them, it seems as though Mr. Cooper will tell them to find a new agency.

23. What do you think Smith‘s reaction will be?

Students‘ answers will vary. Smith‘s will probably be upset, but cannot get mad at the agency when it was Smith‘s fault for leaving the billing paperwork behind. It is possible that Smith‘s will attempt to hurt Mr. Cooper‘s agency out of revenge or anger.

24. Is there a chance that Tom‘s company could save its relationship with Smith‘s?

Students‘ answers will vary. It would be in the best interest of Mr. Cooper and the agency to inquire with Smith‘s about their relationship with Jakarta Enterprises to find the truth. If it is true, then the relationship will become non-existent. If Smith‘s can explain, then it is possible that the relationship could be saved.

Key Terms Developed Nation: A country that enjoys a high standard of living as measured by economic, social and technological criteria.

Ethical Relativism: Gray area in which your ethical principles are defined by the traditions of your society, your personal opinions, and the circumstances of the present moment.

Global Code of Conduct: A general standard of business practice that can be applied equally to all countries over and above their local customs and social norms.

Globalization: The expansion of international trade to a point where national markets have been overtaken by regional trade blocs (Latin America, Europe, Africa), leading eventually to a global market.

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Less-Developed Nation: A country that lacks the economic, social, and technological infrastructure of a developed nation.

Multinational Corporation (MNC): A company that provides and sells products and services across multiple national borders. Also known as transnational corporations.

OECD Guidelines for Multinational Enterprises: Guidelines that promote principles and standards of behavior in the following areas—human rights, information disclosure, anticorruption, taxation, labor relations, environment, competition and consumer protection; a governmental initiative endorsed by 30 members of the Organization for Economic Cooperation and Development and 9 nonmembers (Argentina, Brazil, Chile, Estonia, Israel, Latvia, Lithuania, Romania, and Slovenia).

UN Global Compact: A voluntary corporate citizenship initiative endorsing 10 key principles that focus on four key areas of concern—the environment, anticorruption, the welfare of workers around the world, and global human rights.

Utilitarianism: Ethical choices that offer the greatest good for the greatest number of people.

Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions.

1.

Do you think global businesses would be willing to subscribe to a global code of conduct?

Explain your answer.

Students‘ answers will vary. Subscribing to a global code of conduct will be easier than global businesses creating a code of conduct for each geographic location. However, it can be be difficult to create a global code of conduct that satisfies all the different regions of the world.

2.

Would it be easier to just follow the business practices and customs of the country in which you‘re doing business? Why or why not?

Students‘ answers will vary. Following the business practices and customs of the country in which you‘re doing business would not be easier because of the numerous different countries these businesses have operations.

3.

Are there more stakeholders for an international or global company than a domestic one?

Explain your answer.

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Students‘ answers will vary. In an international or global company, the number of stakeholders greatly increases. The population of each country the company is operating in is now considered a stakeholder. Also, the numerous employees in each geographic location and the suppliers all over the world are all stakeholders of multinational corporations.

4.

How would the Foreign Corrupt Practices Act (FCPA) that we reviewed in Chapter 6 come into play here?

Students should recall that the Foreign Corrupt Practices Act (FCPA) is a U.S. law that applies to accounting methodologies through the SEC and it prohibits the bribery of foreign officials.

5.

Which offers greater guidance to international businesses, the UN Global Compact or the OECD guidelines? Explain your answer.

Students‘ answers will vary. Students should mention that the Organization for Economic Cooperation and Development (OECD) promotes guidelines that enhance the standardization of global ethical conduct by promoting behavior guidelines that MNCs can publically support. The UN Global Compact is the voluntary corporate citizen group that focuses on and endorses key principles on the environment, anticorruption, the welfare of workers, and global human rights. Thus, the OECD provides greater guidance to international organizations.

6.

What is the most ethical way to do business internationally?

Students‘ answers will vary. The most ethical way to do business internationally may be to develop and implement a global code of conduct, such as DeGeorge‘s suggested guidelines.

However, the customs and norms of individual societies are likely to prevail. Another way to justify global companies‘ actions is by following the utilitarianism philosophy.

Review Exercises 34. What is the right thing to do here?

Students‘ answers will vary. With an opportunity to lead the training for Universal‘s new South African client, Kathy does not want to commit a social blunder. It is important that she recognizes each language and nationality, even if it means changing the American threeday program to accommodate these differences.

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35. Why shouldn‘t National just deliver the American version of CFS? If it works here, it should work there.

Students‘ answers will vary. National should not deliver the American version of CFS to their South African division because the norms, customs, and cultures are vastly different.

Just because the program works in the U.S. does not mean that it will work in South Africa.

The program needs to be modified to accommodate the differences in languages, traditions, customs, and norms.

36. Which stakeholders will be affected by Kathy‘s decision?

Students‘ answers will vary. The stakeholders that will be impacted by Kathy‘s decision include all of the people at the National Bank of SA and the employees and investors of Universal Training Solutions.

37. What are her options here?

Students‘ answers will vary. Kathy can choose to not modify the program to accommodate and recognize the 11 different languages and nationalities, or she can use the information that the translator relayed and create a new program for her South African clients that is respectful.

Internet Exercises 1.

Visit the website for the Institute for Global Ethics (IGE) at www.globalethics.org. a.

What is IGE‘s stated purpose?

IGE‘s stated purpose is to promote ethical behavior in individuals and cultures of integrity in institutions and nations through research, public disclosure, and practical action.

b.

Which five values does the IGE identify in building a code of ethics?     

Honesty Responsibility Respect Fairness Compassion

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c.

How could a corporation benefit from the services of the Institute for Global Ethics?

Students‘ answers will vary. The services of the Institute for Global Ethics (IGE) strengthen the ethical culture of corporations and they integrate ethics into everyday cultures. Their goal is to help build an organization that employees and stakeholders are proud to describe and quick to defend. A corporation can benefit from a variety of services at the IGE. For example, they offer fitness training, ethical fitness training, train the trainer workshops, communication and maintenance, ethical cultural training needs in the businesses in the United States and abroad.

2.

Visit the website for Walmart‘s Global Ethics at http://www.walmartethics.com/Landing.aspx# a.

Why did Walmart create a Statement of Ethics?

As of June 7th, 2019: “Our unique culture drives our purpose of saving people money so they can live better, and the foundation of our culture is a commitment to operating with integrity.

Even as we change to meet the needs of our customers, Walmart will stay true to the values, beliefs and behaviors that have guided us over the last 50 years. Regardless of where each of us works in our global company, this Statement of Ethics is the guide to exemplifying integrity as a Walmart associate. It‟s a daily resource for making honest, fair and objective decisions while operating in compliance with all laws and our policies.”

b.

Summarize how Walmart employees can contact Global Ethics.

As of June 7th, 2019, the FAQ page lists the following: You can contact Global Ethics to ask for advice or submit a concern through the following channels:     

c.

Walmartethics.com Global Ethics Helpline 1-800-WM-ETHIC Email us at ethics@walmart.com Call or email your ethics manager

What guidance does Walmart give to employees looking for confirmation that they are making ethical decisions?

As of June 7th, 2019, from the Statement of Ethics: 1-210

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“When faced with making any decision, you should ask yourself the following questions:  

Is it consistent with Our Beliefs?

Would I want others to know about it?

If the answer to either question is no consider whether your potential action complies with our Statement of Ethics. If it does not, identify a better plan of action. If you are unsure about a decision, talk to your manager or contact Global Ethics.”

Team Exercises 17. Global or local?

Divide into two teams. One team must prepare a presentation advocating for the development of a standardized global code of conduct. The other team must prepare a presentation arguing for the development of a more flexible local code of conduct that takes into account the cultural norms of individual nations.

Students‘ answers will vary. A global code of conduct creates a flexible solution that provides standards of practice to guide managers as they conduct business across national boundaries in the name of global commerce, while at the same time respecting the individual customs of the countries in which they are operating. Arguments for a development of a more flexible local code of conduct include the fact that individual countries within trading blocs are not disappearing and that the customs and norms of those individual societies are likely to prevail.

18. Restoring a reputation.

Divide into groups of three or four. Each group must map out its proposal for restoring the ethical reputation of a multinational corporation that has been fined for one of the following transgressions: bribery, pollution, operating sweatshops, or employing child labor. Prepare a presentation outlining your plan for restoring the reputation of the company with its stakeholders.

Students‘ answers will vary. Reputations are crucial to uphold, but once a company is found guilty and fined for any unethical transgression it is difficult to restore and regain its positive image. In order to combat these transgressions (such as bribery, pollution, operating sweatshops, and employing child labor), the MNC must emphasize its new standards. The OECD guidelines represent a governmental approach and should be followed to incorporate new ethical practices, as well as the nongovernmental UN Global Compact.

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19. Tamiflu.

Divide into two groups and prepare arguments for and against the following behavior: Your American company operates manufacturing plants throughout Asia, with a combined staff of 20,000 employees. In 2003, after Asia was hit with the severe acute respiratory syndrome (SARS) epidemic, your company introduced a policy to stockpile drugs in locations where employees don‟t have access to high-quality health care. In 2005, SARS was replaced by avian influenza—bird flu—as the primary risk for the next pandemic. Your company responded by stockpiling quantities of the drug Tamiflu, the antiviral drug that is regarded as the best treatment for bird f u in humans.

There has been a reported outbreak of bird flu in a remote region of Vietnam, about 100 miles from where you have a manufacturing plant. The government clinic has a small supply of Tamiflu, but aware of your company‟s stockpile, the clinic has approached your local plant manager to share some of your supply. The plant manager contacted you for help in responding to the request. Your company policy on this is to make sure employees are taken care of first, and so you decline the request for assistance, claiming that you have insufficient quantities of Tamiflu to meet your immediate needs.

Students‘ answers will vary. Arguments for this behavior include respect and concern for the employees‘ health, and maintenance of the productivity of healthy employees. Also, the government clinic has a small supply and until more is absolutely necessary, the company can remain in control of their stockpile.

Arguments against denying assistance include the fact that the company lied about having insufficient quantities. Also, the company is unwilling to share its supply that, at that point, was not needed for the employees. Therefore, the stockpile is not being used or benefiting anyone.

20. Looking the other way.

Divide into two groups and prepare arguments for and against the following behavior: You have been sent to investigate a fraud claim made against your company by the Customs [department] in one of the countries where you do business. On arrival, an officer explains that your company is being fined for underdeclaring the number of safety boots imported into the country. You notice he is wearing a pair of the “missing” boots.

In preparation for your trip you verified that all the shipment and customs paperwork was in order, and you are certain that the number of safety boots has not been underdeclared. Since your company‟s strategic plan features high growth expectations from this region, you are tempted to simply pay the fi ne and get the officer‟s name and

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address so you can send him some other samples of your company‟s products. However, your company‟s senior management team recently returned from a strategic planning retreat in which they made a clear commitment to enforce the organization‟s code of ethics in all business transactions, here and abroad, even at the risk of losing short-term business. Your CEO was quoted in the company newsletter as saying: “We should use our higher moral standards as an opportunity to win customers who want to do business with a reputable organization.”

So, you reach into your briefcase for your copies of the customs paperwork and begin to challenge the officer‟s accusation of underdeclaring.

Students‘ answers will vary. An argument for this behavior is to uphold your company‘s commitment to ethics. The investigation must be thoroughly analyzed, especially since the accusing officer is wearing a pair of the missing boots and you verified that all the shipment and customs paperwork was in order and was not underdeclared.

Arguments against this behavior would include ruining a business transaction, as well as possible future transactions. It would be easier to simply pay the fine and get the officer‘s name and address to send him some other samples of your company‘s products, plus it may increase the amount of business with the company.

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Thinking Critically 9.1 – TOMS Shoes: Ethically Global?

1.

Does TOMS buy-one-give-one-away model make it a more ethical company than a traditional manufacturer donating money to a charity? Why? Students‘ answers will vary. Most of the students may state that the TOMS model is more ethical than the traditional manufacturer because the company was set up to give the shoes away when Mycoskie started the company.

2.

Why would customers pay such a high price for a simple linen shoe or pair of sunglasses?

Students‘ answers will vary. Students should note that individuals and groups might be more willing to pay an additional fee for the shoes because they know it‘s supporting a good cause.

3.

Mycoskie designed the TOMS model from the ground up. Could an established company improve its ethical standards by launching a model like TOMS? How? Students‘ answers will vary. TOMS is a for-profit company. An established company could improve ethical standards if they launched a model like TOMS, but as a non-profit organization. In addition, an established company could use its brand image and reputation to launch the model.

4.

Will Mycoskie‘s new campaign help or harm the ethical reputation of the TOMS brand?

Explain your answer.

Students‘ answers will vary. Many will see the decision to focus on ending gun violence as a distraction from TOMS‘ core mission. Others may see the social message as being compatible with the broader corporate mission.

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9.2 – Follow the Money: The 1MDB Affair 1.

Was 1MDB a fraudulent venture from the beginning? Why or why not?

Students‘ answers will vary. Some may feel that regional development funds are already ethically questionable given their inclusion of tax incentives and preferential zoning changes. Other may feel that there was evidence of a genuine commitment to redevelopment of an impoverished region and that government involvement added legitimacy to that commitment.

2.

How did the US Government become involved in the 1MDB saga?

Students‘ answers will vary. The above average fees received by US financial institutions in return for an accelerated timeline to raise funds were sufficiently out of the norm to draw the attention of regulators. The fact that so many US-based institutions took such a leadership role in an international fund was also a concern.

3.

What does the involvement of so many financial institutions in the 1MDB scandal say about the general state of business ethics in international finance? Explain your answer.

Students‘ answers will vary. The more cynical may feel that this case is just more evidence of a global state of corruption among financial institutions who happily ignore regulations in the safe knowledge that profits generated will far exceed any penalties paid – and that‘s only if they are discovered. Those with more faith in the system may argue that it shows that commerce is truly global these days.

4.

Do you think the multiple lawsuits will bring about real change as a result of the 1MDB scandal? Why or why not?

Students‘ answers will vary. Given the track record of penalties imposed under FCPA, it seems highly unlikely. Most institutions simply absorb the penalties as the cost of doing business and continue to be reassured that those penalties will continue to fall far below the profits being earned. While the FSGO does offer the option of a death penalty that can basically shut a business down, most financial institutions are too directly entangled within the economy for that to be an option. The disruption to their millions of customers would prompt outrage.

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9.3 – The Ethics of Offshoring Clinical Trials 1.

Identify three factors that are driving pharmaceutical companies to host clinical drug trials overseas.

Students‘ answers will vary. Some factors that are driving pharmaceutical companies to host clinical drug trials overseas include a decreasing number of patients in North America, an increasing number of willing patients in developing countries, a greater population in developing countries, and cheaper costs to conduct the trials in developing countries.

2.

What regulations are in place to oversee the professional and ethical management of these trials?

Students‘ answers will vary. Many developing countries have laws against ―first in man‖ trials to prevent the treatment of their citizens as guinea pigs in highly experimental drug trials. Russia and China have both limited the export of blood and patient tissue samples in recent years, partly out of concern over illegal trafficking in human organs. The FDA recently set up an office in China to increase inspections of the rapidly growing number of clinical trials. The World Medical Association‘s 2004 Helsinki declaration called for stringent ethical practices in drug trials, but these remain voluntary practices.

3.

If patients lack the language skills or education to understand the significance of informed consent or the use of a placebo, is it ethical to allow them to participate in the drug trial?

Why or why not?

Students‘ answers will vary. If patients lack the language skills or education to understand the significance of informed consent or the use of a placebo, it is not ethical to allow them to participate in the drug trial. Patients should be allowed to participate only if they fully understand the procedure, the consequences of participating, and the liability.

4.

What proposals would you offer to make the offshoring of clinical drug trials a more ethical process for all the stakeholders involved?

Students‘ answers will vary. To make the offshoring of clinical drug trials a more ethical process for stakeholders, it may be beneficial to interview each willing patient and have an educational and literacy requirement that patients must meet. It is important that these patients have a full understanding of what they are offering to participate in and the potential outcomes.

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Making It Stick: Doing What’s Right in a Competitive Market Table of Contents Chapter Summary Learning Outcomes Frontline Focus: You Scratch My Back Questions Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Life Skills Progress ✓Questions Ethical Dilemma Frontline Focus: You Scratch My Back – Adam Makes a Decision Questions Key Terms Review Questions Review Exercises Internet Exercises Team Exercises Thinking Critically

10-2 10-2 10-2 10-3 10-6 10-6 10-6 10-7 10-7 10-11 10-13 10-13 10-14 10-15 10-16 10-19 10-20

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Chapter Summary This chapter begins by explaining how a tough market environment can be difficult for a company to hold on to the promise of running an ethical business. Next, the chapter states how a company can sustain such promises by establishing a code of ethics and by hiring an ethics officer who is willing to monitor the employees in an organization. The chapter also argues that employees need to have extensive training and the company‘s code of ethics needs to be updated, due to the ever changing environment. After the code of ethics has been set, it is time to reward employees who have demonstrated exceptional ethical behavior. Employees who are not up to par with the ethics program must go through additional training. Finally, the chapter presents reactive and proactive policies and suggests that organizations become transparent in all their communications with their stakeholders.

Learning Outcomes After studying this chapter, the student should be able to: 16. Develop the key components of an ethics policy.

17. Analyze the ramifications of becoming a transparent organization.

18. Understand the difference between reactive and proactive ethical policies.

19. Discuss the challenges of commitment to organizational integrity.

Extended Chapter Outline Frontline Focus You Scratch My Back Questions 24. The four key points of a code of ethics are outlined in the ―Making It Stick – Key Components of an Ethics Policy‖ section. If we assume that Adam‘s company has such a code, what guidance could Adam find in those four key points?

Assuming that Adam‘s company has such a code, it should identify the company‘s values statement, provide a detailed guide to acceptable behavior, state policies for behavior in this situation, and document punishment for violating the policies.

25. Do you think Zachary is willing to provide those ―marketing funds‖ to win the business away from Adam, or is Dr. Green just bluffing?

If Zachary‘s company does not abide by such codes of ethics, he may be willing to provide such funds. It is also possible that Dr. Green is simply bluffing to get such funds or to see 1-218 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

how far he can push Adam.

26. What should Adam do now?

Adam certainly needs to follow his company‘s code of ethics and not get involved with individuals like Dr. Green.

Learning Outcome 1: Develop the Key Components on an Ethics Policy. 



 



Ask any CEO to describe the market she is working in, and she will probably describe the same set of characteristics: o Demanding customers who want new and better products and services at lower prices. o Impatient stockholders who want the stock price to rise each and every quarter. o Aggressive vendors who want to sell more of everything. o Demanding federal, state, and local officials who want to burden the business with more rules and regulations while encouraging it to hire more people and pay more taxes. o Demanding creditors who want their loan payments on time. o Aggressive competitors who want to steal the business‘s customers from it.

When people operate a business in such a tough environment, holding on to the promise to run an ethical business and to do ―the right thing‖ for all the stakeholders can be very challenging. o It‘s easy to see why so many executives, after the unethical behavior of their companies has been exposed, point to the ruthless competition of the business world as their excuse for not doing the right thing.

Sustainable ethics is ethical behavior that persists long after the latest public scandal or the latest management buzzword.

Making ethical behavior sustainable requires the involvement of every member of the organization in committing to a formal structure to support an ongoing process of monitoring and enforcement. This can be summarized in the following six stages: o Establish a code of ethics. o Support the code of ethics with an extensive training for every member of the organization. o Hire an ethics officer. o Celebrate and reward the ethical behavior demonstrated by your employees. o Promote your organization‘s commitment to ethical behavior. o Continue to monitor the behavior as you grow.

In order for everyone to begin from the same starting point, the organization‘s commitment to ethical behavior must be documented in a code of ethics. A well-written code of ethics

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









can do several things: o It can capture what the organization understands ethical behavior to mean—the values statement. o It can establish a detailed guide to acceptable behavior. o It can state policies for behavior in specific situations. o It can document punishments for violations of those policies.

If an organization is involved in creating a code of ethics from scratch, it could consider the following advice from the Institute of Business Ethics: o Find a champion. o Get endorsement from the chairman and the board. o Find out what bothers people. o Pick a well-tested model. o Produce a company code of conduct. o Try it out first. o Issue the code and make it known. o Make it work.

Writing the code is the easy part. Getting the commitment to ethical performance down on paper and specifying the standards of behavior the organization will accept and the punishments it will enforce is a good starting point. o However, the code can only be a guide—it cannot cover every possible event.

An extensive training program to support the published code of ethics is important. o Since the code can‘t capture every possible example, each department of the organization should take the code and apply it to examples that could arise in its area. o In the department or in team meetings, employees can work on:  Recognizing the ethical issue  Discussing options for an appropriate response  Selecting the best option for the organization An ethics officer is a senior executive responsible for monitoring the ethical performance of the organization both internally and externally. o The role is usually developed as a separate department with the responsibility of enforcing the code of ethics and providing support to any employees who witness unethical behavior. o This person can be:  Promoted from within the organization (selecting a familiar face who can be trusted)  Hired from outside (selecting an independent face who is new to company history and office politics) The Ethics and Compliance Officers Association documented the chief responsibilities of their members in a survey, which may be summarized as: o Oversight of hotline/guideline/internal reporting

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



o Preparation and delivery of internal presentations o Organizationwide communications o Senior management and/or board briefings/communications o Training design o Assessing/reviewing vulnerabilities o Assessing/reviewing success/failure of initiatives o Overseeing investigations of wrongdoing o Management of program documentation o Direct handling of hotline/guideline/internal reporting o Preparation and delivery of external presentations o Establishing company policy and procedures o International program development o Training delivery o International program implementation o Conducting investigations of wrongdoing With standards of behavior specified in the code of ethics, along with the punishment served for failing to follow those standards, the ethics program can become harsh. o So the threats of punishment must be balanced with promised rewards for successful behavior:  Celebrate examples of good ethical behavior in the company newsletter.  Award prizes for ethical behavior—and let the employee choose the reward.  Award prizes for new and creative ideas—and let the employee choose the reward.  Recognize employees who represent the standard of behavior to which the company is committing.  Declare an Ethics Day, and allow every department to share success stories.

An ethics policy commits the company to do the right thing for all its stakeholders, so that message must be shared with all the stakeholders—both inside and outside the company. o The organization should offer concrete examples that the organization is committed to winning the trust (and the business) of the customers by building a reputation they can count on. For example:  Offer a no-questions-asked refund policy like Lands‘ End.  Offer a 110-percent price match guarantee like Home Depot.  If the organization overcharges clients by mistake, it should give them a refund plus interest before their accounting department figures out the error and asks for the money.  Get the clients involved in the development of the ethics policies. Ask them to tell you what forms of behavior or guarantees will make them feel reassured that they are dealing with an ethical company.  Let the employees visit client sites to talk about the code of ethics in person.

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 Share the success stories with all of the stakeholders, not just the employees.  Invite the stakeholders to the Ethics Day celebration.

Learning Outcome 2: Analyze the Ramifications of Becoming a Transparent Organization.  

 



Reactive ethical policies are policies that result when organizations are driven by events and/or fear of future events.

Proactive ethical policies are policies that result when the company develops a clear sense of what it stands for as an ethical organization. o One characteristic that is common to such organizations is a commitment to organizational transparency.

Transparency is a characteristic of an organization that maintains open and honest communications with all stakeholders.

Microsoft‘s 2006 white paper, ―The New World of Work: Transparent Organizations,‖ summarized transparency as follows: o Transparency in business means that stakeholders have visibility deep into the processes and information of an organization. Important qualities of transparency include the following:  A requirement that is being enforced on markets and companies through regulation.  An enabler of better relationships with partners and customers.  A great opportunity to rework business processes to increase efficiency.  A risk to confidential intellectual property.

It is the risk factor of becoming too transparent that still remains as the biggest obstacle to change in this area.

Learning Outcome 3: Understand the Difference between Reactive and Proactive Ethical Policies.  

Reactive ethical policies are policies that result when organizations are driven by events and/or fear of future events.

Proactive ethical policies are policies that result when the company develops a clear sense of what it stands for as an ethical organization.

Learning Outcome 4: Discuss the Challenges of a Commitment to Organizational Integrity. 

Recognizing the concept of business ethics allows people to categorize behavior as unethical, but when one is looking to manage the reputation and policies of an organization, the commitment to doing the right thing becomes more about organizational integrity than any sense of a written ethics policy.

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o

Organizational integrity is a characteristic of publicly committing to the highest professional standards and sticking to that commitment.

Life Skills A Lone Voice For an organization to operate ethically, senior executives must commit to developing a culture that supports ethical principles beyond minimal compliance to federal legislation. Ultimately, however, ethical conduct comes down to the actions of individual employees each and every day. ―Doing the right thing‖ becomes an individual interpretation based on personal ethics and a series of guidelines from a company code of ethics. Can you make that work? What if you work with colleagues who don‘t share that perspective? If they operate from the perspective that it‘s a ―dog-eat-dog world‖ with ―‗victory at all costs,‖ you may find yourself as the lone voice in trying to do the right thing. How will you handle that?

Progress Check Questions 49. List six characteristics of a tough market.

The following are the six characteristics of a tough market:  Demanding customers who want new and better products and services at lower prices.  Impatient stockholders who want the stock price to rise each and every quarter.  Aggressive vendors who want to sell you more of everything.  Demanding federal, state, and local officials who want to burden you with more rules and regulations while encouraging you to hire more people and pay more taxes.  Demanding creditors who want their loan payments on time.  Aggressive competitors who want to steal your customers from you.

50. List four key items in a code of ethics.

The following are the four key items in a code of ethics:  It can capture what the organization understands ethical behavior to mean—the values statement.  It can establish a detailed guide to acceptable behavior.  It can state policies for behavior in specific situations.  It documents punishment for violations of those policies.

51. Provide three examples of unethical behavior by a customer.

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Students‘ answers may vary. The following are some examples of unethical behavior by a customer:  Swapping a used piece of goods with a brand new item  Telling the cashier you gave him a $20 when you really gave him a $10 and you want the rest of your change back  Wearing a new piece of clothing keeping the tags on it knowing you will return it after you have worn it 52. Provide three examples of unethical behavior by a supplier.

Students‘ answers may vary. The following are some examples of unethical behavior by a supplier:  Having sweat shops in international countries to create profit maximization  Selling an item that is a defective product  False advertising 53. When hiring an ethics officer, is it better to promote someone from within the company or hire someone from outside? Explain your answer.

Students‘ answers may vary. Some of the students may say that an ethics officer should be promoted from within the organization. The ethics officer should be a familiar face who can be trusted. He or she should have a history with the company and know the office politics.

However, other students may say that the ethics officer should be hired from outside. Such an ethics officer will not know the employees or the company history and office politics, and can therefore, serve as an unbiased person.

54. List six key responsibilities of an ethics officer.

Students‘ answers will vary. Their answers could include some of the following points:  Oversight of hotline/guideline/internal reporting  Preparation and delivery of internal presentations  Organizationwide communications  Senior management and/or board briefings/ communications  Training design  Assessing/reviewing vulnerabilities  Assessing/reviewing success/failure of initiatives  Overseeing investigations of wrongdoing  Management of program documentation  Direct handling of hotline/guideline/internal reporting 1-224 Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

     

Preparation and delivery of external presentations Establishing company policy and procedures International program development Training delivery International program implementation Conducting investigations of wrong doing

55. Give three examples of celebrating ethical behavior.

Students‘ answers will vary. Their answers could include some of the following points:  Celebrate examples of good ethical behavior in the company newsletter.  Award prizes for ethical behavior—and let the employee choose the reward.  Award prizes for new and creative ideas—and let the employee choose the reward.  Recognize employees who represent the standard of behavior to which the company is committing.  Declare an Ethics Day and allow every department to share success stories.

56. If you publicly celebrate ethical behavior, should you also publish punishment for unethical behavior? Why or why not?

Students‘ answers may vary. Some of them may say that if a company is dedicated enough to put in a code of ethics and enforces it to the extent of giving rewards, then it should definitely publish punishment for unethical behavior. The company should be dedicated enough to punish employees who demonstrate unethical behavior.

57. List six examples of commitments that companies can make to win the trust of their shareholders.

Students‘ answers will vary. Their answers could include some of the following points:  Offer a no-questions-asked refund policy like Lands‘ End.  Offer a 110-percent price match guarantee like Home Depot.  If the company overcharges clients by mistake, it should give them a refund plus interest before their accounting department figures out the error and asks for the money.  Get the clients involved in the development of the ethics policies. Ask them to tell you what forms of behavior or guarantees will make them feel reassured that they are dealing with an ethical company.  Let the employees visit client sites to talk about the code of ethics in a person.  Share the success stories with all the stakeholders, not just your employees.

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

Invite the stakeholders to the Ethics Day celebration.

58. Provide four of your own examples.

Students‘ answers may vary. Some examples include the following:  Create a survey so employees and stakeholders can share ethical problems they have dealt with the company.  Design a website that lists the code of ethics on it. The stakeholders and the employees should be able to access the document at any time.  Have an ethical standards ratio to determine employees‘ successful ethics stories compared to ethical complaints.  Have a greeter at the exit ask customers if there was a way to better serve their needs while they were at the company.

59. Why would a code of ethics need to be updated?

Students‘ answers may vary. Some of them may say that the continued growth of technology will present new situations for ethical dilemmas as well as globalization and therefore, a code of ethics would need to be updated.

60. Find out when your company‘s code of ethics was last updated.

Students‘ answers will vary.

61. What is a reactive ethical policy?

Reactive ethical policies are policies that result when organizations are driven by events and/or fear of future events.

62. What is a proactive ethical policy?

Proactive ethical policies are policies that result when the company develops a clear sense of what it stands for as an ethical organization.

63. Why would a company want to be transparent?

Students‘ answers may vary. Some of them may say that companies want to show to stakeholders that they are committed to ethical policies and that they have nothing to hide and therefore, they would want to be transparent.

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64. Would you say the company you work for is transparent? Explain your answer.

Students‘ answers will vary.

Ethical Dilemma 10.1 – The Price of Profit Maximization 1.

Is maximum profit a sufficient rationalization for cutting corners on safety? Why or why not?

Students‘ responses will vary. Some may argue that company executives must pursue every opportunity to maximize profits for shareholders. Others will argue that putting your workforce safety at risk represents an unethical (and illegal) option.

2.

Does the fact that ―other coal mining firms play the same game‖ make a difference? Why or why not?

Students‘ responses will vary. Finding examples of similar behavior by your competitors is one of the most common rationalizations for unethical corporate conduct.

3.

Do you think the mining industry will change its safety practices as a result of the UBB verdict? Why or why not?

Students‘ responses may vary. A $209 million fine as part of an $8 billion deal can be absorbed as a cost of doing business. As long as regulatory agencies remain seriously underresourced, and the potential financial penalties are too small to matter, it would seem unlikely that safety practices will improve. Safety measures cost money, and in a cost-driven industry like mining, those costs are traditionally kept as low as possible.

4.

Why would Blankenship consider his prison term to be a political asset? Explain your answer.

Students‘ responses will vary. Supporters of an allegedly-maligned coal industry might be willing to forgive Blankenship‘s past transgressions in light of his decision not to comply with regulators – ―sticking it to the man,‖ as it were. Others may see his brief incarceration as a humbling experience for him, though, based on press releases and interviews following his release, that seems unlikely.

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10.2 – Nestlé Water: A Crisis Profiteer?

1.

Is this issue being blown out of proportion? Why or why not?

Student answers may vary. 250 million gallons may not seem like much when you‘re looking to save 500 billion gallons, but some may argue that the conduct was indicative of a larger lack of concern for corporate social responsibility. Expecting everyone else to cut back water usage while a company that is generating profits from retail water sales does not, does seem to be an unfair arrangment.

2.

Does Nestlé bear any responsibility for not notifying the Forest Service about the expired permit? Why or why not?

Students‘ answers will vary. Some might argue that the responsibility lies with the regulatory agency. Others may feel that Nestlé could have been a better community citizen here and reached out to the Forest Service about the expired permit.

3.

If Governor Jerry Brown had included water bottling plants in his water reduction plans, do you think Nestlé would have agreed? Explain your answer.

Students‘ responses may vary. Given the company‘s less than proactive stance on these issues, it would seem likely that the company would have pursued a request for an exception.

4.

What did Nestlé do to win a new permit? Explain your answer.

Students‘ answers may vary but the answer is in the final paragraph. The company agreed to: ―measures to improve the watershed‘s impaired health.‖ There was no mention of any accountability for impairing that health in the first place.

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Frontline Focus You Scratch My Back—Adam Makes a Decision Questions 1.

What do you think the reaction of Adam‘s regional manager was to the initial news of the loss of Dr. Green‘s business?

Students‘ answers will vary. Any supervisor would first react with shock and a disappointment after hearing about loss of business. He or she may even get upset. However, a good manager is one who understands and follows ethical business practices. Such a manager would understand and applaud Adam‘s decision to give up the account and stick to the principles that guide the company.

2.

Do you think Zach‘s company supported his willingness to provide Dr. Green‘s ―marketing funds‖?

Students‘ answers will vary. It is possible that some managers go to any stretch to obtain business. It is very difficult to believe that the company as a whole and the top management team would bless such funds. However, with two-way deals being cooked up between both the parties, it is entirely possible.

3.

What do you think will happen to Zach and Dr. Green now?

Students‘ answers will vary. Some of them may say that the legal ramifications for bribery of such marketing funds and massaging patient data will result in loss of medical privileges for Dr. Green.

Key Terms Ethics Officer: A senior executive responsible for monitoring the ethical performance of the organization both internally and externally.

Organizational Integrity: A characteristic of publicly committing to the highest professional standards and sticking to that commitment.

Proactive Ethical Policies: Policies that result when the company develops a clear sense of what it stands for as an ethical organization.

Reactive Ethical Policies: Policies that result when organizations are driven by events and/or fear of future events.

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Sustainable Ethics: Ethical behavior that persists long after the latest public scandal or the latest management buzzword.

Transparency: A characteristic of an organization that maintains open and honest communications with all stakeholders.

Review Questions NOTE: Some questions allow for a number of different answers. Below are some suggestions.

1.

You have been asked to join a team as a representative of your department. The team has been tasked with the development of an ethics training program to support the company‘s new code of ethics. What would your recommendations be?

Students‘ responses will vary. Since the code can‘t capture every possible example, each department rep should take the code and apply it to examples that could arise in their area. In the team meetings, everyone can work on:  Recognizing the ethical issue  Discussing options for an appropriate response  Selecting the best option for the organization Additional training for supervisors and managers in ethical conflict resolution can also be recommended. If the organization is large, hiring of an ethics officer could also be recommended.

2.

Your company wrote its code of ethics in 1986. You have been assigned to a team that has been tasked with updating the code to make it more representative of current business ethics issues like the Internet and modern business technology. What are your recommendations?

Students‘ responses will vary. Continued growth of technology will present situations where the code needs updating such as e-mail monitoring and Web surfing. Large organizations can make this a responsibility of an ethics officer/team. Smaller companies need to include this as part of their strategic planning exercise to make sure it is as up-to-date as possible.

Originally, written and if never updated since 1986, it is apparent that this has not been a part of the strategy. It needs to be included as part of the strategic planning with regular updates.

3.

Does the role of an ethics officer bring real value to an organization, or is it just ―window dressing‖ to make the company look good?

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Students‘ responses will vary. The role of an ethics officer should not be ridiculed or taken lightly. The company implements an ethics policy and they establish a code of ethics to ensure the organizational commitment to ethical behavior. The ethics officer is the individual that managers or employees can turn when they need guidance and support. In addition, the ethics officer is responsible for monitoring both the internal and external ethical performance of employees. The ethics officer should not be considered just a ―window dressing‖ to make the company look good.

4.

Do you think you could be an ethics officer? Why or why not?

Students‘ responses will vary. An individual with a strong moral code and a commitment to strong and sound ethical policies and procedures could make a great ethics officer.

5.

When you go shopping, do you pay attention to how transparent the company is in its business practices? Why or why not?

Students‘ responses will vary. Students should discuss whether they researched the company (before buying its brand) in order to find out how transparent the company was in its business practices.

6.

Would organizational integrity make a difference in your loyalty to a company? Why or why not?

Students‘ responses will vary. Most students would agree that organizational integrity makes a difference in the consumers‘ loyalty to a company. Consumers demand strong ethical and legal practices in the organizations that conduct their business. The students should note that when an individual or group has a sense of commitment and they have a hand to manage the reputation of the company, the commitment to loyalty to a company improves.

Review Exercises 1.

Which ethical theories could be applied here?

Students‘ responses will vary. Organizational integrity, which is a characteristic of publicly committing to the highest professional standards and sticking to that commitment, can be applied here. This helps in explaining that the city office finance is committed to the fiveyear budget plan that included predetermined tax increases and is sticking to that commitment though Brad‘s house was now worth less, not more.

Proactive policies can also be applied here. They are policies which occur when the

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company develops a clear sense of what it stands for as an ethical organization—not only what ethics means to that company and its stakeholders but also the extent of the actions it will take (and the necessary punishments it will enforce) to get there. This can be applied in the above case as it explains that the city finance office exemplifies what ethics is to it. The office executed predetermined tax increases irrespective of Hurricane Sandy‘s occurrence.

Also, it shows the extent of the actions it will take, as the council advised Brad that property taxes would increase though his house was in such a hopeless condition.

2.

When Brad took his complaint to the local media, a spokesperson for the city finance office pointed out that the city‘s property taxes were paying for the emergency services that were currently working overtime to help everyone impacted by the storm. Is that an ethical argument? Why or why not?

Students‘ responses will vary. Some of them may say that it is an ethical argument as the city property‘s taxes are being used for a good cause. Others may say that the council should not implement predetermined increase on property which was destroyed due to the hurricane.

3.

If you were in Brad‘s situation, how would you react?

Students‘ responses will vary based on their personalities.

4.

How would you resolve the situation?

Students‘ responses will vary based on their perception of the case. The ethical policies and code of ethics is going to be different for different individuals.

Internet Exercises 1.

Review the commitment of the Charity Commission (the regulator for charities in England and Wales) at https://www.gov.uk/government/organisations/charity-commission/about. a.

What are the stated priorities of the commission?

To develop: - public confidence in the charity sector - the sector‘s compliance and accountability - the self-reliance of individual charities

b.

What guidance does the commission offer in managing a conflict of interest?

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The commission offers publication CC29: Conflicts of Interest: a guide for charity trustees (https://www.gov.uk/government/publications/conflicts-of-interest-a-guide-forcharity-trustees-cc29) c.

What guidance does the commission offer for the role of a trustee?

The commission offers publication CC3: The essential trustee: what you need to know (https://www.gov.uk/government/publications/the-essential-trustee-what-you-need-toknow-cc3)

2.

Review the website of the United States Department of Justice (DOJ) at https://www.justice.gov/oip/government-transparency a.

What was the message of President Obama‘s FOIA Memorandum?

Issued on his first full day in Office, the memorandum had a clear message: ―In the face of doubt, openness prevails.‖

b.

What are the Flagship Initiatives of the Open Government Plan 3.0?

As of June 7th, 2019: “The flagship initiatives for this plan focused on the leading role of the Department to modernize FOIA through four key initiatives -- standardizing FOIA regulations, developing a consolidated FOIA portal on FOIA.gov, improving internal agency FOIA processes through the sharing of best practices, and improving access to FOIA training through government-wide e-Learning modules and resources.”

c.

Select and summarize three example initiatives of how transparency is being promoted across the government.

Student responses will vary.

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Team Exercises 1.

A different Massey Energy.

Divide into two teams. One team must defend the decision made in the lawsuit against Don Blankenship from Massey Energy. The other team must critique the decision and come up with an alternative resolution to the mine explosions.

2.

Student responses will vary.

An ethics charter.

Divide into groups of three or four. Each group develops a charter that documents its company‟s commitment to ethical behavior. What industry is your company in? What does ethical behavior look like in that industry? What will your company‟s commitment consist of? A code of ethics? Performance guarantees? Corporate governance policies?

Students‘ responses will vary.

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Thinking Critically 10.1 – Deferred Prosecution Agreements 1.

Why are DPA‘s criticized for bypassing the formal legal system?

Students‘ responses will vary. DPA‘s come with an admission of wrongdoing (NPA‘s do not), but the agreement negates any potential criminal prosecution, so the wrongdoers are basically allowed to buy their way out of jail. The addition to the coffers of the DoJ is also very attractive.

2.

Do the multi-billion-dollar settlements recovered prove that the DPA framework works?

Why or why not?

Students‘ responses will vary. Your answer will depend on your definition of ―works.‖ If the large financial settlement with an admission of wrongdoing meets your definition of justice served, then the system works. However, if you feel there should be criminal prosecutions as a greater deterrent to recidivism, then the system does not work.

3.

Using internet research, identify the largest DPA settlement in the last two years. What other conditions were imposed in addition to the financial penalties?

Students‘ responses will vary.

4.

In what ways could the DPA framework be modified to fulfil its promise as a more effective alternative to expensive trial litigation? Explain your answer.

Students‘ responses will vary. There is nothing inherently wrong with imposing penalties for illegal conduct – especially if those funds are used to compensate victims of that conduct.

However, the lack of criminal prosecutions remains a series flaw in this supposedly corrective practice.

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10.2 – The Failed Transformation of BP 1.

What evidence is there in this case that BP simply addresses fines ―as a cost of doing business‖?

Students‘ responses will vary. Both seem to have played a role in company‘s motivation.

One way to approach this question is to form two groups, with each taking one side and presenting a debate in class.

2.

BP chief executive Tony Hayward argued that ―changing the culture of a 100,000 person company couldn‘t happen overnight.‖ He had been in charge for three years before the Deepwater Horizon spill. Were critics right to expect more change than they saw?

Students‘ responses will vary. Some of them may say that the critics were right in expecting more changes than they saw. If the company‘s efforts would have been real, the changes would have had positive impact on all stakeholders. Greater good could have come from such efforts and could have served as a model for other organizations.

3.

Has BP been successful in its move ―Beyond Petroleum‖?

Students‘ responses will vary. The students should recall that ―Beyond Petroleum‖ was developed to illustrate a company that was environmentally conscious and committed to the development of alternative energy sources such as wind and solar power.

4.

How can BP begin to restore its reputation going forward?

Students‘ responses will vary. The students should note the importance of an ongoing ethics policy and that organizations today need to have both reactive and proactive ethical policies.

Finally, students should suggest that BP needs to become a transparent organization and maintain honest and open communications with its stakeholders. They need a sound commitment to organizational transparency.

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10.3 – Unprofessional Conduct 1.

What were the perceived conflicts of interest in Wakefield‘s research activities?

The perceived conflicts of interest occurred in Wakefield‘s research because the paper proposed a new syndrome with two conditions—chronic intestinal disease and the loss of behavioral skills that had already been acquired as part of normal child development. Eight out of twelve cases in the paper had parents that associated the vaccine to behavioral problems. Although the paper clearly stated that no association between the MMR and the condition had been proven, the implication was perceived that it had.

2.

If Wakefield had disclosed the source of the funding of his study and his interest in the experimental vaccine, would that have added credibility to his campaign against MMR? Why or why not?

Students‘ responses will vary. Wakefield was conducting research out of his normal scope of work. Even if he had disclosed the source of funding and his interest in the experimental vaccine, his actions would have been considered as unethical.

3.

Why did Wakefield lose his license to practice medicine?

Wakefield lost his license to practice medicine as a result of conflicts of interest. It was discovered that he was employed at Royal Free Hospital as a gastroenterologist at the time of the study and he did not have ethical approval or medical permission to conduct the tests outside of his approved area. It was also discovered that at the time of his follow-up study at Wakefield, he took blood samples from the children of fellow medical professionals at his son‘s birthday party in return for payments of £5.

4.

Wakefield‘s messaging is continuing to cause serious disruption and a resurgence of measles around the world. How should individual governments respond?

Students‘ responses will vary based on their perception of the case. Some may find the DeBlasio response to be excessive, but given that vaccinations only work if there is a level of ―herd immunity‖ achieved, simply broadcasting messages may not be enough. Antivaxxers are convinced that their concerns are valid and feel ostracized by the larger population. This conviction leads to a level of stubbornness that increased messaging will not penetrate.

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