Chapter 4Ethics and Business Decision

Making

WHAT THIS CHAPTER IS ABOUT

The concepts set out in this chapter include the nature of business ethics and the relationship between ethics and business. Ultimately, the goal of this chapter is to provide you with basic tools for analyzing ethical issues in a business context.

CHAPTER OUTLINE

I. BUSINESS ETHICSEthics is the study of what constitutes right and wrong behavior. Ethics focuses on morality and the application of moral principles in everyday life.

A. WHAT IS BUSINESS ETHICS?Business ethics focuses on what constitutes ethical behavior in the world of business. Business ethics is not a separate kind of ethics.

B. WHY IS BUSINESS ETHICS IMPORTANT?An understanding of business ethics is important to the long-run viability of a business, the well being of its officers and directors, and the welfare of its employees.

II. SETTING THE RIGHT ETHICAL TONESome unethical conduct is founded on the lack of sanctions.

A. THE IMPORTANCE OF ETHICAL LEADERSHIP

Management must set and apply ethical standards to which they are committed. Employees will likely follow their example. Ethical conduct can be furthered by not tolerating unethical behavior, setting realistic employee goals, and periodic employee review.

B. CREATING ETHICAL CODES OF CONDUCT

Most large corporations have codes of conduct that indicate the firm’s commitment to legal compliance and to the welfare of those who are affected by corporate decisions and practices. Large firms may also emphasize ethics in other ways (for example, with training programs).

C. CORPORATE COMPLIANCE PROGRAMS

Components of a comprehensive corporate ethical-compliance program include an ethical code of conduct, an ethics committee, training programs, and internal audits to monitor compliance. These components should be integrated. The Sarbanes-Oxley Act of 2002 requires firms to set up confidential systems for employees to report suspected illegal or unethical financial practices.

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D. CONFLICTS AND TRADE-OFFS

A firm’s duty to its shareholders should be weighed against duties to others who may have a greater stake in a particular decision. For example, an employer should consider whether it has an ethical duty to loyal, long-term employees not to replace them with workers who will accept lower pay and whether this duty prevails over a duty to improve profitability by restructuring.

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III. COMPANIES THAT DEFY THE RULES

A. ENRON’S GROWTH AND DEMISE

Managers took advantage of accounting standards to overestimate future earnings, which resulted in inflated reports of current earnings. To maintain these exaggerations, the company created subsidiaries to which it could shift unreported losses and assets with inflated values. Many of these shifts occurred outside the U.S. to avoid federal income taxes. When questioned, management refused to investigate and reveal financial improprieties.

B. THE ENRON LEGACY

The unethical conduct resulted in the single largest bankruptcy of a U.S. business firm. This misconduct affected the firm’s managers, employees, suppliers, and shareholders, and the community and society in general.

C. MERCK & COMPANY—A BRIEF HISTORY OF VIOXX

The Food and Drug Administration (FDA) gave Vioxx an abbreviated review before allowing Merck to market the drug. Within a few years, studies revealed that the drug was riskier than was previously believed, and Merck voluntarily recalled the product.

D. MERCK’S AWARENESS OF THE RISKS OF VIOXX

Apparently, the FDA and others had alerted Merck Vioxx’s possibly dangerous side effects long before the company undertook serious studies of the drug and eventually recalled it. The FDA required Merck to send letters to physicians to correct false or misleading impressions and information.

E. MERCK’S CHOICE

Merck generally continued to maintain that Vioxx as safe until proved otherwise. Company shareholders lost billions in the value of their stock after the product was recalled. Merck lost its first lawsuit as many other claims were filed in state and federal courts against the company.

F. THE DEBATE CONTINUES

At what point does a company have an ethical duty to act when presented with evidence that its product may be harmful?

IV. BUSINESS ETHICS AND THE LAWThe minimal acceptable standard for ethical business behavior is compliance with the law. Ethical standards, such as those in a company’s policies or codes of ethics, must also guide decisions.

A. LAWS REGULATING BUSINESS

Because there are many laws regulating business, it is possible to violate one without realizing it. Ignorance of the law is no excuse.

B. “GRAY AREAS” IN THE LAW

There are many “gray areas” in which it is difficult to predict how a court will rule. For ex-ample, if a consumer’s misuse of a product harms the consumer, should the manufacturer bear the responsibility? Also, how laws apply in the context of cyberspace is not certain. The best course is to act responsibly and in good faith.

V. APPROACHES TO ETHICAL REASONINGEthical reasoning is the process by which an individual examines a situation according to his or her moral convictions or ethical standards. Fundamental ethical reasoning approaches include the following.

A. DUTY-BASED ETHICS

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1. Religious Ethical StandardsReligious standards provide that when an act is prohibited by religious teachings, it is unethical and should not be undertaken, regardless of the consequences. Religious standards also involve compassion.

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2. Kantian EthicsImmanual Kant believed that people should be respected because they are qualitatively different from other physical objects. Kant’s categorical imperative is that individuals should evaluate their actions in light of what would happen if everyone acted the same way.

3. The Principle of RightsAccording to the principle that persons have rights (to life and liberty, for example), a key factor in determining whether a business decision is ethical is how that decision affects the rights of others, including employees, customers and society.

B. OUTCOME-BASED ETHICS: UTILITARIANISM

Utilitarianism is a belief that an action is ethical if it produces the greatest good for the greatest number. This approach is often criticized, because it tends to reduce the welfare of people to plus and minus signs on a cost-benefit worksheet.

VI. BUSINESS ETHICS ON A GLOBAL LEVEL

A. MONITORING THE EMPLOYMENT PRACTICES OF FOREIGN SUPPLIERS

Concerns include the treatment of foreign workers who make goods imported and sold in the United States by U.S. firms. Should a U.S firm refuse to deal with certain suppliers or monitor their workplaces to make sure that the workers are not being mistreated?

B. THE FOREIGN CORRUPT PRACTICES ACT

The Foreign Corrupt Practices Act (FCPA) of 1977 applies to—

1. U.S. CompaniesIncluding their directors, officers, shareholders, employees, and agents.

a. What Is ProhibitedThe FCPA prohibits the bribery of most foreign government officials to get an official to act in an official capacity to provide business opportunities.

b. What Is PermittedThe FCPA permits payments to (1) minor officials whose duties are ministerial, (2) foreign officials if the payments are lawful in the foreign country, or (3) private foreign companies or other third parties unless the U.S. firm knows payments will be made to a foreign government.

2. Accountants

a. What Is RequiredAll companies must (1) keep detailed records that “accurately and fairly” reflect the company’s financial activities and (2) have an accounting system that provides “reasonable assurance” that all transactions are accounted for and legal.

b. What Is ProhibitedThe FCPA prohibits false statements to accountants and false entries in accounts.

3. Penalties for ViolationsFirms: fines up to $2 million. Officers or directors: fines up to $100,000 (cannot be paid by the company); imprisonment up to five years.

C. OTHER NATIONS DENOUNCE BRIBERY

A treaty signed by members of the Organization for Economic Cooperation and Development makes the bribery of foreign officials a crime. Other international institutions are also working against bribery.

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TRUE-FALSE QUESTIONS(Answers at the Back of the Book)

1. Ethics is the study of what constitutes right and wrong behavior.

2. A background in business ethics is as important as knowledge of specific laws.

3. The minimal acceptable standard for ethical behavior is compliance with the law.

4. According to utilitarianism, it does not matter how many people benefit from an act.

5. The best course towards accomplishing legal and ethical behavior is to act responsibly and in good faith.

6. The ethics of a particular act is always clear.

7. To foster ethical behavior among employees, managers should apply ethical standards to which they are committed.

8. If an act is legal, it is ethical.

9. The roles that women play in other countries can present ethical problems for U.S. firms doing business internationally.

10. Bribery of public officials is only an ethical issue.

FILL-IN QUESTIONS (Answers at the Back of the Book)

______________________________________ (Religious standards/ Kantian ethics/ The principle of rights) provide that when an act is prohibited by religious teachings, it is unethical and should not be undertaken, regardless of the consequences. According to ______________________________________ (religious standards/ Kantian ethics/ the principle of rights), individuals should evaluate their actions in light of what would happen if everyone acted the same way. According to ______________________________________ (religious standards/ Kantian ethics/ the principle of rights), a key factor in determining whether a business decision is ethical is how that decision affects the rights of others.

MULTIPLE-CHOICE QUESTIONS (Answers at the Back of the Book)

1. Beth is a marketing executive for Consumer Products Company. Compared to Beth’s personal actions, her business actions require the application of

a. more complex ethical standards.b. simpler ethical standards.c. the same ethical standards.d. no ethical standards.

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2. Pete, an employee of Quality Sales, Inc., takes a duty-based approach to ethics. Pete believes that he must

a. achieve the greatest good for the most people.b. avoid unethical behavior regardless of the consequences.c. conform to society’s standards.d. place his employer’s interest first.

3. Jill, chief financial officer of Kwik Delivery Company, adopts religious ethical standards. These involve an element of

a. compassion.b. cost-benefit analysis.c. discretion.d. utilitarianism.

4. Eve, an employee of First Federal Bank, takes an outcome-based approach to ethics. Eve believes that she must

a. achieve the greatest good for the most people.b. avoid unethical behavior regardless of the consequences.c. conform to society’s standards.d. place his employer’s interest first.

5. Don is a manager with Engineering Aviation Systems. At a company ethics meeting, Don’s most effective argument against utilitarianism is that it

a. gives profits priority over costs.b. ignores the practical costs of a given set of circumstances.c. justifies human costs that many persons find unacceptable.d. requires complex cost-benefit analyses of simple situations.

6. In resolving an ethical problem, in most cases a decision by a business firm will have a negative effect on

a. one group as opposed to another.b. the firm’s competitors.c. the government.d. none of the above.

7. Ethical standards would most likely be considered to have been violated if Acme Services, Inc., represents to Best Production Company that certain services will be performed for a stated fee, but it is apparent at the time of the representation that

a. Acme cannot perform the services alone.b. the actual charge will be substantially higher.c. the actual charge will be substantially lower.d. the fee is a competitive bid.

8. Tina, the president of United Sales, Inc., tries to ensure that United’s actions are legal and ethical. To ensure this result, the best course of Tina and United is to act in

a. good faith.b. ignorance of the law.c. regard for the firm’s shareholders only.d. their own self interest.

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9. Alan, an executive with Beta Corporation, follows the “principle of rights” theory, under which an action may be ethical depending on how it affects

a. the right determination under a cost-benefit analysis.b. the right of Alan to maintain his dignity.c. the right of Beta to make a profit.d. the rights of others.

10. Gamma, Inc., a U.S. corporation, makes a side payment to the minister of commerce of another country for a favorable business contract. In the United States, this payment would be considered

a. illegal and unethical.b. illegal only.c. neither illegal nor unethical.d. unethical only.

SHORT ESSAY QUESTIONS

What is the difference between legal and ethical standards? How are legal standards affected by ethical standards?

ISSUE SPOTTERS (Answers at the Back of the Book)

1. If, like Robin Hood, a person robs the rich to pay the poor, does his or her benevolent intent make his or her actions ethical?

2. Delta Tools, Inc., markets a product that under some circumstances is capable of seriously injuring consumers. Does Delta owe an ethical duty to remove this product from the market, even if the injuries result only from misuse?

3. Acme Corporation decides to respond to what it sees as a moral obligation to correct for past discrimination by adjusting pay differences among its employees. Does this raise an ethical conflict between Acme’s employees? Between Acme and its employees? Between Acme and its shareholders?

CUMULATIVE HYPOTHETICAL PROBLEM

FOR UNIT ONE—INCLUDING CHAPTERS 1–4(Answers at the Back of the Book)

Computer Data, Inc. (CDI), incorporated and based in California, signs a contract with Eagle Manufacturing Corporation, incorporated and based in Arizona, to make and sell customized software to Eagle for resale to consumers. CDI ships defective software to Eagle, which causes losses estimated at $100,000.

1. Eagle and CDI enter into mediation. In mediation, the parties

a. may come to an agreement by mutual consent.b. must accept a winner-take-all result.

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c. settle their dispute without the assistance of a third party.d. submit their dispute to a mediator for a legally binding decision.

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2. Eagle could file a suit against CDI in

a. Arizona only.b. California only.c. a federal court only.d. Arizona, California, or a federal court.

3. Eagle files a suit against CDI, seeking the amount of its losses as damages. Damages is a remedy

a. at law.b. in equity.c. at law or in equity, depending on how the plaintiff phrases its complaint.d. at law or in equity, depending on whether there was any actual “damage.”

4. Federal authorities file charges against CDI, alleging that the shipment of defective software violated a federal statute. CDI asks the court to exercise its power of judicial review. This means that the court can review

a. the actions of the federal authorities and declare them excessive.b. the charges against CDI and declare them unfounded.c. the statute and declare it unconstitutional.d. the totality of the situation and declare it unethical.

5. CDI’s managers evaluate the shipment of defective software in terms of CDI’s ethical obligations, if any. In other words, CDI’s managers are considering the firm’s

a. legal liability.b. maximum profitability.c. optimum profitability.d. right or wrong behavior.

QUESTIONS ON THE FOCUS ON ETHICS FOR UNIT ONE—ETHICS AND THE LEGAL ENVIRONMENT OF BUSINESS

(Answers at the Back of the Book)

1. The managers of Standard Products Company (SPC) evaluate its sale of possibly defective goods in terms of its ethical obligations, if any. In other words, the managers are considering SPC’s

a. legal liability.b. maximum profitability.c. optimum profitability.d. right or wrong behavior.

2. Obstacles to ethical business behavior by SPC’s managers include

a. co-workers’ dissent to unethical decisions.b. legislative determinations as to what is in society’s best interest.c. the accountability of SPC to society for the firm’s actions.d. the collectivity of corporate decision making.

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3. If SPC conducts its operations ethically, there will be a likely increase in its

a. future profits, goodwill, and reputation.b. future profits only.c. good will only.d. reputation only.