Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Chapter 7 Business

Ethics

7-2

Bernard Ebbers

o Bernard Ebbers built WorldCom into a global

telecommunications giant

o Ebbers used use all of his WorldCom stock as

collateral for bank loans

o In 2000 Ebbers gave the first in a string of

instructions to report false revenues and use

accounting tricks to disguise rising expenses

7-3

Bernard Ebbers

o Ebbers testified that he had no knowledge of the

fraud, but five of his subordinates testified against

him

o Ebbers was sentenced to 25 years in prison for

securities fraud, unprecedented for a white-collar

crime

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What are Business Ethics?

o Ethics: The study of good and evil, right and wrong,

and just and unjust

o Business ethics: The study of good and evil, right

and wrong, and just and unjust actions in business

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What are Business Ethics?

o All managers face difficult ethical conflicts

o Applying clear guidelines resolves the majority of

them

o Ethical traditions that apply to business support truth

telling, honesty, protection of life, respect for rights,

fairness, and obedience to law

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What are Business Ethics?

o Eliminating unethical behavior may be difficult, but

knowing the rightness or wrongness of actions is easy

o Some ethical decisions are troublesome because

although basic ethical standards apply, conflicts

between them defy resolution

o Some ethical issues are hidden and hard to recognize

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Two Theories of Business Ethics

o Theory of amorality: The belief that business should

be conducted without reference to the full range of

ethical standards, restraints, and ideals in society

o Theory of moral unity: Business actions are judged

by the general ethical standards o society, not by a

special set of more permissive standards

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Figure 7.1 - Major Sources of Ethical

Values in Business

7-9

Religion

o The great religions converge in the belief that a divine

will reveals the nature of right and wrong behavior in

all areas of life, including business

o Christian managers often seek guidance in the Bible

o In Islam the Koran is a source of ethical inspiration

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Philosophy

o Even after two millennia, there remains considerable

dispute among ethical thinkers about the nature of

right action

o The great Catholic theologians St. Augustine and St.

Thomas Aquinas both believed that humanity should

follow God’s will

o Correct behavior in business and in all worldly activity

was necessary to achieve salvation and life after death

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Philosophy

o Immanuel Kant tried to find universal and objective

ethical rules in logic

o Jeremy Bentham developed the idea of utilitarianism

as a guide to ethics, validating two dominant

ideologies: democracy and industrialism

o John Locke developed and refined doctrines of

human rights and left an ethical legacy supporting

belief in the inalienable rights of human beings

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The Realist School of Ethics

o The realists believed that both good and evil were

naturally present in human nature

o Human behavior would inevitably reflect this mixture

o Niccolò Machiavelli argued that important ends

justified expedient means

o Herbert Spencer supported a harsh ethic that justified

vicious competition among companies because it

furthered evolution

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The Realist School of Ethics

o Friedrich Nietzsche said that “nice” ethics were

prescriptions of the timid, designed to fetter the

actions of great men whose irresistible power and will

were regarded as dangerous by ordinary mortals

7-14

Cultural Experience

o Every culture transmits between generations a set of

traditional values, rules, and standards that define

acceptable behavior

o Civilization is a cumulative cultural experience

consisting of three stages:

oHunting and gathering stage

oAgricultural stage

o Industrial stage

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Ethical Variation in Cultures

o Ethical values differ among nations as historical

experiences have interacted with philosophies and

religions to create diverging cultural values and laws

o Ethical universalism: The theory that because

human nature is everywhere the same, basic ethical

rules are applicable in all cultures

o There is some room for variation in the way these rules

are followed

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Ethical Variation in Cultures

o Ethical relativism: The theory that ethical values are

created by cultural experience

o Different cultures may create different values and there

is no universal standard by which to judge which

values are superior

o Because of globalization, corporations struggle with

the question of how to apply conduct codes across

cultures

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Law

o Laws codify, or formalize, ethical expectations

o Corporations and their managers face a range of

mechanisms set up to:

o Deter illegal acts

o Punish offenses

o Rehabilitate offenders

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Damages

o In civil cases courts may assess damages, or

payments for harm done to others by a corporation

o Compensatory damages: Payments awarded to

redress actual, concrete losses suffered by injured

parties

o Punitive damages: Payments in excess of a wronged

party’s actual losses to deter similar actions and punish

a corporation that has exhibited reprehensible conduct

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Criminal Prosecution of Managers and

Corporations

o Managers may be prosecuted for criminal actions

undertaken in the course of their employment

o Corporations are criminally liable for corrupt actions

or omissions of managers if those actions are

intended to benefit the corporation

o Criminal prosecution of corporations and their

executives is exceptionally difficult

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Criminal Prosecution of Managers and

Corporations

White-collar crime A nonviolent economic offense of cheating and deception done in the course employment for personal or corporate gain

Deferred prosecution agreement

An agreement between a prosecutor and a corporation to delay prosecution while the company takes remedial actions

Nonprosecution agreement

An agreement in which U.S. attorneys decline prosecution of a corporation that has taken appropriate steps to report a crime, cooperate, and compensate victims

Monitor

A person hired by a corporation to oversee fulfillment of conditions in an agreement to avoid criminal indictment

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Sentencing and Fines

o In 1991 the U.S. Sentencing Commission released

guidelines for sentencing both managers and

corporations

o Managers can go to prison, be fined, put on

probation, given community service, make restitution,

or be banned from working in their occupations

o Corporations cannot be imprisoned, but they can be

fined and their actions restricted

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Figure 7.2 - Four Internal Forces Shaping

Corporate Ethics

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Leadership

o The example of company leaders is perhaps the

strongest influence on integrity

o A common failing is for managers to show by their

actions that ethical duties can be compromised

o If the leader does something, an opportunistic

employee can rationalize his or her entitlement to do

it also

7-24

Strategies and Policies

o A critical function of managers is to create strong

competitive strategies that enable the company to

meet financial goals without encouraging ethical

compromise

o Unrealistic performance goals can pressure those who

must make them work

o Reward and compensation systems can expose

employees to ethical compromises

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Corporate Culture

o Corporate culture: A set of values, norms, rituals,

formal rules, and physical artifacts that exists in a

company

o Three levels of corporate culture:

o Artifacts

o Espoused values

o Tacit underlying values

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Individual Characteristics

o Personality traits may be more important, but are less

studied in the literature of ethics

o The only personality trait extensively studied and

correlated with unethical behavior is

Machiavellianism

o The tendency of an individual to use self-centered,

immoral, manipulative behavior in a group

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How Corporations Manage Ethics

o Establish standards and procedures

o Create high-level oversight

o Screen out criminals

o Communicate standards to all employees

o Monitor and set up a hotline

o Enforce standards, discipline violators

o Assess areas of risk, modify the program

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How Corporations Manage Ethics

Ethics and compliance program A system of structures, policies, procedures, and controls used by corporations to promote ethical behavior and ensure compliance with laws and regulations

Compliance approach An ethics and compliance program that emphasizes following rules in laws, regulations, and policy.

Ethics approach An ethics and compliance program that teaches employees to make decisions based on ethical values

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Concluding Observations

o Ethics is the study of good and evil

o The most important single factor in good corporate

ethics is the example of leaders, who shape strategies

and cultures