Chapter 02
Chapter 02
CASE OPENER
In addition, UNITE, an organization that includes union, church, and college student
groups, reports that Nike is rapidly moving its production facilities to China, where in
16
PAR T O N E
CHAPT ER
2
The Legal Environment of B us i ne s s
factory-dormitory complexes, labor is regulated in military fashion. For example, young
migrant women who work for Nike in China are allegedly restricted from leaving company
grounds or quitting their jobs.
1. What would you do if you were in a position at Nike to decide whether to continue or
revise your labor practices in foreign countries?
2. Since 1992, Nike has been implementing a code of conduct that mandates the
enforcement of all child labor, fair wage, and health laws in its foreign plants. In
doing so, is Nike moving toward improved ethics?
The Wrap-Up at the end of the chapter will answer these questions.
Learning Objectives
After reading this chapter, you will be able to answer the following questions:
17
18 Part 1 The Legal Environment of Business
What a business manager in the situation described in the opening scenario should
do is not altogether clear. Ethical conversation is less about finding the one and only right
thing to do than it is about finding the better thing to do. Whatever you choose to do, some
stakeholders will be hurt and others will benefit.
This chapter provides some assistance for thinking systematically about issues of right
and wrong in business conduct. Initially, we need to sort through the meaning of key terms
like business ethics and social responsibility. Then, because it is helpful to have a useful
approach to ethical decision making, we provide a practical method by which future busi-
ness managers can think more carefully about the ethical dilemmas they will face during
their careers.
interfere with profit maximization, firms that choose to ignore that expectation do so at their
peril. See Exhibit 2-1 for a brief look at General Electric’s approach to social responsibility.
Exhibit 2-1
Given the number of corporate accounting scandals that have been revealed in the Good Citizenship
past few years, many corporations are making a point of assuring their investors that and Profits
their corporate goals are not focused solely on profit. As investors lost millions of dollars
during the collapse of companies such as WorldCom and Enron, some corporations
have been placing increased emphasis on promoting themselves not only as profitable
but as conscientious and ethical.
For example, the following three statements that compose GE’s Citizenship Framework
seek to assure current and potential investors that the company is dedicated to both
stock performance and company integrity.
19
20 Part 1 The Legal Environment of Business
The legality of the decision is the minimal standard that must be met. But the existence
of that minimum standard is essential for the development of business ethics. To make this
point, let’s take a look at the growing practice of bribery in the absence of such legal stan-
dards. In some countries businesses must pay bribes to receive legitimate supplies. Though
the businessperson may be morally opposed to paying the bribes, the supplies are neces-
sary to stay in business and there may be no other means of obtaining them.
Thus, foreign companies face an ethical dilemma: They must decide whether to pay
bribes or find alternative sources of supplies. For instance, when McDonald’s opened its
doors in Moscow, it made arrangements to receive its supplies from foreign providers.
These arrangements ensured that the franchise did not have to engage in questionable
business practices.
Look at Case 2-1 as an exercise in comparing what is legal with what is ethical. Busi-
ness law affects ethics because it provides a floor for managerial ethics. At a minimum,
ethics requires a presumption in favor of obedience to law. As you review the Kipps case,
consider the relationship between law and ethics.
Several universities actively recruited Kyle Kipps, a action. Furthermore, they claimed that they were enti-
talented football player in southern Louisiana, in 1996 tled to qualified immunity and Kipps’s termination was
and 1997. Kyle’s father, Rexford Kipps, was an assis- justified because Kyle’s choice would affect USL’s abil-
tant football coach at the University of Southwestern ity to recruit athletes. The district court granted Stokley,
Louisiana (USL) for eleven years. In March 1996, Schexnayder and Authement’s motion for summary judg-
Nelson Stokley, USL’s head football coach, told Rexford ment on qualified immunity grounds. Kipps appealed to
Kipps that Kyle was to attend either USL or a college the U. S. Court of Appeals, 5th District.
or university outside of Louisiana. When Kyle noti-
fied Stokley that he had orally committed to play at JUDGE PARKER: Public officials acting within
Louisiana State University (LSU) on a football schol- the scope of their official duties are shielded from civil
arship, Stokley told Rexford Kipps to forbid his son liability by the qualified immunity doctrine. Government
to play football for LSU. Rexford Kipps argued that officials are entitled to qualified immunity “insofar as
he could not and would not force his son to refuse to their conduct does not violate clearly established statu-
play for LSU. Consequently, Stokley terminated Kipps’s tory or constitutional rights of which a reasonable person
employment with LSU. Both Nelson Schexnayder, would have known.”
Jr., USL Director of Athletics, and Ray Authement, In order to establish that the defendants are not
President of USL, approved Kipps’s termination. The entitled to qualified immunity, plaintiffs must satisfy
President of the Board of Trustees, James Caillier, also a three-part test. First, “[a] court evaluating a claim of
approved Kipps’s termination. qualified immunity must first determine whether the
Rexford Kipps brought constitutional and state plaintiff has alleged the deprivation of a constitutional
law claims against defendants Caillier, Schexnayder, right at all.” Second, the court must “determine whether
Authement, and Stokley. These defendants filed for sum- that right was clearly established at the time of the
mary judgment, arguing that the at-will employment alleged violation.” Finally, the court “must determine
status of Kipps precluded any wrongful termination whether the record shows that the violation occurred, or
[CONTINUED]
at least gives rise to a genuine issue of material fact as to qualified immunity if their actions were objectively
whether the defendant actually engaged in the conduct reasonable. . . . The record indicates that Kipps was
that violated the clearly-established right.” If it is deter- fired because his son chose to play football for a
mined that the official’s conduct was unconstitutional, Louisiana school other than USL. Notwithstanding the
then the court must decide whether the conduct was defendants’ subjective motivation and belief as to the
nonetheless “objectively reasonable.” lawfulness of their conduct, we find the defendants’
Assuming arguendo that defendants violated motivation for terminating Kipps was objectively
Kipps’s clearly established constitutional liberty inter- reasonable. Defendants’ motivation, according to the
est in familial association, the resolution of this issue record in this case, was to mitigate the damage that
turns on whether the defendants’ actions were “objec- Kyle’s attendance at LSU as opposed to USL would
tively reasonable.” Because we find that defendants’ have on alumni relations and recruiting efforts.
actions were objectively reasonable, we affirm the The summary judgment record of this appeal con-
district court’s dismissal of Kipps’s 1983 claim on the tains no facts upon which we could find that defen-
basis of qualified immunity. dants’ actions were objectively unreasonable.
Even if defendants violated Kipps’s clearly estab-
lished constitutional right, they are still entitled to AFFIRMED.
CRITICAL THINKING
What reasons did the judge offer to support his decision that Kipps’s termination was
legal? Which facts in the case are most important in your mind when evaluating the
reasoning?
Identify various meanings of the phrase “objectively reasonable.” Which meaning do
you think the court is using? Is it clear? How does this affect the validity of the argument
given by Judge Parker?
The Kipps case provides a snapshot of the complexity of the link between ethics and the
law. Do you believe that some view of what it means to do the right thing is responsible
for the legal decision in this case?
As the Kipps case demonstrates, business managers must sometimes decide whether
to hire and fire particular employees. Their decisions will be guided by legal rules that have
both ethical foundations and implications for needed legal reform.
In addition, the definition of business ethics refers to standards of business conduct. It
does not result in a set of correct decisions. Business ethics can improve business decisions
by serving as a reminder not to choose the first business option that comes to mind or the
one that enriches us in the short run. But business ethics can never produce a list of correct
business decisions that all ethical businesses will make.
Well-managed firms try to provide ethical leadership by establishing codes of ethics
for the firm. For example, Exhibit 2-2 addresses the attempt by General Motors, a major
automobile maker, to make a statement about the importance of business ethics to its firm.
Notice, however, that this corporate code can never do more than provide guidance. The
complications associated with managerial decisions do not permit any ethical guide to
provide definitive lists of right and wrong decisions.
21
22 Part 1 The Legal Environment of Business
Exhibit 2-2
Ethical Business GENERAL MOTORS’ CODE OF BUSINESS CONDUCT
Practices The foundation for all conduct by GM and its employees is one of our core values:
Integrity. Integrity is essential to achieving our vision of becoming the world leader
in transportation products and services, earning the enthusiasm of our customers,
working together as a team, innovating, and continuously improving. We call this
Winning With Integrity.
These Guidelines are designed to help GM and its employees understand and meet
fundamental obligations that are vital to our success. Some of those obligations are
legal duties. They are established by the laws, regulations, and court rulings applicable
to our business. Other obligations result from policies GM establishes to make sure our
actions align with our core values and cultural priorities. Compliance with both types of
obligation—our legal duties and our internal policies—is vital to our goal of winning with
integrity.
Employees who violate these guidelines may be subject to disciplinary action which,
in the judgment of management, is appropriate to the nature of the violation and which
may include termination of employment. Employees may also be subject to civil and
criminal penalties if the law has been violated.
Exhibit 2-3
Enron, WorldCom, During the past several years, ethics violations have been uncovered in the accounting
and Shifts in practices of a number of large companies. Enron and WorldCom were two of the
Business Regulation perpetrators in these scandals. Both companies failed to report or record billions of
dollars in profit losses, which resulted in stockholders believing that the companies
were in a much better financial state than actually existed.
Enron’s tangled web involved the company’s creating multiple subsidiaries and
related companies. These businesses were often treated as companies independent of
Enron and not shown on the accounting books. Enron used the subsidiaries to conceal
debts and losses in a very complex fraud scheme. When the company went bankrupt,
employees who had based their retirement plans around Enron stock lost almost
everything. Additionally, Enron auditor Arthur Andersen was found guilty of shredding
documents about Enron’s audits.
In June 2002, shortly after the Enron bankruptcy was announced, WorldCom
revealed that it also had engaged in unethical accounting practices. WorldCom’s
violations included counting profits twice and concealing billions of dollars in expenses
when making reports to the SEC. The company thereby made itself appear profitable
when it was actually losing money. In total, WorldCom had more than $7 billion in
misreported debt.
These two cases, among others, left investors understandably concerned about
the truthfulness of individuals who were in charge of operating large corporations.
Those in charge of these companies had been awarded million-dollar bonuses while
completely disregarding stockholders and employees, who lost millions of dollars when
the companies collapsed.
The revelations of Enron and WorldCom suggested quite blatantly that the
business world could not be allowed to regulate itself ethically. Their downfall in part
led to many federal regulations designed to promote truthfulness and ethical practices
among business managers. In this new business environment, there is a much greater
degree of government oversight to ensure that companies maintain high standards of
ethical behavior. Companies are required to make their accounting records far more
transparent, to satisfy not only the federal government but their understandably wary
investors.
global context
Contractual Relationships based on trust. Often the relationship is finalized ver-
and Ethics in Japan bally rather than by a signature. These verbal agree-
ments are called yakusoku.
In the United States, business contracts are extensive
Because contracts are founded on mutual trust
and lengthy. They stipulate action for nearly every pos-
between parties, the contents are open and flexible in
sible situation that may arise between parties. Lawyers
comparison to the painstakingly rigid American con-
direct the process of creating and agreeing to a contract.
tracts. This structure allows Japanese businesspersons
Most American businesspersons would not think of
to deal with problematic issues between the parties as
drawing up a contract without legal assistance.
they arise. The Japanese also prefer to solve contract
In Japan, however, the idea of involving lawyers in
problems through arbitration or compromise rather than
contractual relationships is quite upsetting. The Japa-
through litigation. Executives will go to great lengths to
nese are disturbed that American contracts discuss what
avoid involving lawyers and the court system with their
would happen if one party in the contract cheated, lied,
business. Japanese contractual relationships are shaped
or wished to terminate. Such discussion is seen as a sign
by the dominant sense of ethics in Japanese culture.
of distrust between the parties. Japanese contracts are
At the same time that business ethics guides decisions within firms, ethics helps guide
the law. Law and business ethics serve as an interactive system—informing and assessing
each other. For example, our ethical inclination to encourage trust, dependability, and effi-
ciency in market exchanges shapes many of our business laws. See Exhibit 2-3 for instance.
The principles of contract law, for instance, facilitate market exchanges and trade because
the parties to an exchange can count on the enforceability of agreements. Legal rules that
govern the exchange have been shaped in large part by our sense of commercial ethics.
Of course, different ethical understandings prevail in different countries. Thus, ethi-
cal conceptions shape business law and business relationships uniquely in each country.
Increasingly, business leaders require sensitivity to the differences in legal guidelines in
the various countries in which they operate. These differences are based on somewhat dif-
ferent understandings of ethical behavior among businesspeople in diverse countries.
As we mentioned above, business ethics does not yield one “correct” decision. So how
are business managers to chart their way through the ethical decision-making process?
One source of assistance consists of the general theories and schools of thought about eth-
ics. Each ethical system provides a method for resolving ethical dilemmas by examining
duties, consequences, virtues, justice, and so on. A detailed look at each of these ethical
systems can be found in Appendix A-2.
In the interest of providing future business managers with a practical approach to busi-
ness ethics that they can use, we suggest a three-step process: the WPH approach. This
approach offers future business managers some ethical guidelines, or practical steps, that
provide a dependable stimulus to ethical reasoning in a business context. Appendix A-2
provides the theoretical basis for the WPH approach used in this book.
23
global context
Business Ethics of the current return, the two parties agree on a payment
and Italian Taxes that is usually much higher than the original estimation
but is still less than face value.
When Italian corporations file their tax returns, the tax
This negotiating process, while it may seem foreign
authorities assume that the corporations are underes-
to Americans, is a common business practice in Italy.
timating their profits by 30 to 70 percent. Although
In the early 1980s an American banker learned the dif-
this assumption has proved to be true, the Italian Rev-
ficult lesson that, for a firm doing business in a for-
enue Service does not press charges. In fact, purposely
eign country, local custom has a significant impact on
understating profits is the accepted practice within
ethical practice. The banker refused, on ethical grounds,
Italy.
to underestimate profits on the tax return. The Italian
Knowing the faulty nature of the tax return, the
Revenue Service suggested several times that he hire a
Revenue Service sends an “invitation to discuss” about
commercialista and resubmit his tax return.
six months after a corporation has filed. The parties
The American banker refused all such suggestions.
agree on a meeting date. At the meeting the corpora-
Finally, the Revenue Service sent the American a notice
tion’s executives do not attend. Instead, they send a
that demanded payments 15 times larger than what he
commercialista whose “function exists for the primary
owed. The banker immediately arranged an appointment
purpose of negotiating corporation tax payments.”
to express his outrage. When he arrived at the meeting,
Several rounds of bargaining take place between the
the Italian tax authorities were pleased to see him and
commercialista and the tax authorities. On the basis of the
said, “Now we can begin our negotiations.”
corporation’s taxes the previous year and the estimation
24
Chapter 2 Business Ethics 25
Exhibit 2-5 gives a portrait of Nortel Networks’ commitments to its primary stakeholders
and demonstrates that Nortel is aware of the people involved in its various decisions.
When you consider the relevant stakeholders, try to go beyond the obvious. In the
Case Nugget, Maria’s encounter with her company’s vice president clearly highlights cer-
tain common interests of management and its employees. However, a useful exercise for
all of us is to force ourselves to think more broadly about additional stakeholders who may
be affected just as much in the long run. Then we will be less likely to make decisions that
have unintended negative ethical impacts.
Maria Lopez
Maria recently became the purchasing manager of a small lawn-mower manufactur-
ing firm. She is excited about the opportunity to demonstrate her abilities in this
new responsibility. She is very aware that several others in the firm are watching her
closely because they do not believe she deserves the purchasing manager position.
Her new job at the firm requires that she interact with several senior manag-
ers and leaders. One vice president in particular, Brian O’Malley, is someone she
admires because he has earned the respect of the CEO on the basis of his success at
making profits for the firm. Again and again, he just seems to know how to discover
and take advantage of competitive opportunities that end up paying off royally for
the firm.
Maria’s first responsibility is to buy the motors for the assembly line. The motors
constitute 30 percent of the total construction cost of the lawn mowers. Consequently,
even a small error on Maria’s part would have huge implications for the firm’s profit-
ability. The bids from the motor suppliers are required to be secret in order to maxi-
mize competition among the suppliers. The bids are due at 5 p.m. today.
At 3 p.m., Maria accidentally sees Brian returning the submitted bids to the
locked safe where they are to be stored, according to company policy, until all bids
have been submitted at 5 p.m. Then at 4:45 p.m., she notices a postal delivery of a
bid from Stein’s Motor Company. Her head buzzes as it hits her that Stein’s president
is one of Brian O’Malley’s cousins.
She has no idea what to do. However, she knows she has to decide quickly.
Maria’s ethical dilemma is complex. Many of the issues in the dilemma pertain to her
career and the welfare of her firm. But consider the many stakeholders whose interests
were not introduced into the conversation. When we overlook important, relevant stake-
holders, we are ignoring a significant component of ethical reasoning.
Consider the negative impact that results when a firm fails to show adequate respect
for a major stakeholder. On December 3, 1984, a horrible catastrophe occurred at a chemi-
cal plant in Bhopal, India. The plant was a subsidiary of Union Carbide. Damage to some
equipment resulted in the emission of a deadly gas, methyl isocyanate, into the atmosphere.
The emission of the gas caused injuries to more than 200,000 workers and other people in
the neighborhood of the chemical plant. Several thousand people died.
26 Part 1 The Legal Environment of Business
Many factors, including worker error, faulty management decisions, equipment failures,
and poor safety standards combined to cause the accident. Union Carbide was accused of not
demanding the same rigorous safety standards in India as it had in the United States. Citizens
of both India and the United States demanded the corporation be held responsible for its
evident neglect of safety. Union Carbide argued that it could not operate the plant if it were
required to obey rigid Indian safety standards and that the economic benefits of the plant to
India outweighed the risks of not following these standards. After years of litigation in both
U.S. and Indian courts, Union Carbide was eventually ordered to monetarily compensate the
victims of the accident. Among other factors, Union Carbide’s failure to respect the interests
of a major stakeholder resulted in a disaster for the firm and for the community.
After we consider stakeholders, the next step in the WPH framework is to consider the
purpose of business decisions. In the next section, we look first at the parties involved, and
then we explore the purposes that bring these various parties together in a common effort.
Exhibit 2-6
VALUE ALTERNATIVE MEANINGS Primary Values and
Freedom 1. To act without restriction from rules imposed by others. Business Ethics
2. To possess the capacity or resources to act as one wishes.
3. To escape the cares and demands of this world entirely.
Security 1. To possess a large enough supply of goods and services to meet
basic needs.
2. To be safe from those wising to interfere with your property rights.
3. To achieve the psychological condition of self-confidence to such an
extent that risks are welcome.
Justice 1. To receive the products of your labor.
2. To treat all humans identically, regardless of race, class, gender,
age, and sexual preference.
3. To provide resources in proportion to need.
4. To possess anything that someone else is willing to grant you.
Efficiency 1. To maximize the amount of wealth in society.
2. To get the most from a particular output.
3. To minimize costs.
important values influencing business ethics and presents alternative meanings for each.
Exhibit 2-6 should not only help clarify the importance of values in your own mind but
also enable you to question others who claim to be acting in an ethical fashion.
For instance, a manager might be deciding whether to fire an employee whose perfor-
mance is less than impressive. In making this decision, the manager explores alternative
visions of key values such as justice and efficiency and then makes choices about which
action to take. Values and their alternative meanings are often the foundation for different
ethical decisions.
To avoid ambiguity, many companies summarize their values in brief statements. Nor-
tel Networks’ statement of core values, shown in Exhibit 2-7, identifies for Nortel’s stake-
holders which positive abstractions guide its business decisions.
The Golden Rule. The idea that we should interact with other people in a manner con-
sistent with the way we would like them to interact with us has deep historical roots. Both
Confucius and Aristotle suggested versions of that identical guideline. One scholar has
identified six ways the Golden Rule can be interpreted:
1. Do to others as you want them to gratify you.
2. Be considerate of others’ feelings as you want them to be considerate of yours.
3. Treat others as persons of rational dignity like you.
28 Part 1 The Legal Environment of Business
Exhibit 2-7
Core Values: A NORTEL NETWORKS’ CORE VALUES
Guide to Ethical 1. We create superior value for our customers.
Business Practice
2. We work to provide shareholder value.
3. Our people are our strength.
4. We share one vision. We are one team.
5. We have only one standard—excellence.
6. We embrace change and reward innovation.
7. We fulfill our commitments and act with integrity.
New ways of organizing people and work within the corporation are giving
each of us more decision-making responsibility. Given the complexity and constantly
changing nature of our work and our world, no book of hard-and-fast rules—however
long and detailed—could ever adequately cover all the dilemmas people face. In this
context, every Nortel Networks’ employee is asked to take leadership in ethical decision
making.
In most situations, our personal values and honesty will guide us to the right
decision. But in our capacity as employees and representatives of Nortel Networks,
we must also always consider how our actions affect the integrity and credibility of
the corporation as a whole. Our business ethics must reflect the standard of conduct
outlined in this document—a standard grounded in the corporation’s values and
governing Nortel Networks’ relationships with all stakeholders.
4. Extend brotherly or sisterly love to others, as you would want them to do to you.
5. Treat others according to moral insight, as you would have others treat you.
6. Do to others as God wants you to do to them.
Regardless of the version of the Golden Rule we use, this guideline urges us to be aware
that other people—their rights and needs—matter.
Let’s return to the ethical problem outlined at the beginning of this chapter. Using the
Golden Rule as your ethical guideline, how you would you behave? Would you hide the
information about where your company’s shoes are manufactured, or would you disclose
the information? Put yourself into the consumer’s position. As a consumer, would you want
to know that a shoe was manufactured in another country? Are there other stakeholders
in the organization whose interests should be the focus of your application of the Golden
Rule? The focus on others that is the foundation of the Golden Rule is also clearly reflected
in a second ethical guideline: the public disclosure test.
Public disclosure test. Applying what you have learned to the ethical dilemma faced
by Nike, suppose you decide to ignore the complaints about working conditions in your
plants in foreign countries. Now suppose that your decision to ignore the complaints is
printed in the newspaper. How would the public react? How would you feel about the
public’s having full knowledge of what you intend to do?
We tend to care about what others think about us as ethical agents. Stop for a mo-
ment and think of corporations that failed to apply the public disclosure test and generated
negative reactions as a result. For example, Dr. Hugh Davis, a professor at Johns Hopkins
University, invented the Dalkon Shield birth control device. In the late 1960s and early
Chapter 2 Business Ethics 29
1970s, Dr. Davis was considered a rising star in the field of women’s health and family
planning. By the mid-1980s, Dr. Davis was known as a dishonest man. A. H. Robins, the
company that sold the Dalkon Shield, was bankrupt.
What caused the change in public opinion? Many women became infertile because of
the device, and a few women died. The public learned that Dr. Davis—the man who was
performing the apparently objective medical studies of the Dalkon Shield’s safety—had a
financial interest in the Dalkon Shield. Because of Dr. Davis’s failure to disclose this inter-
est, the birth control device was not tested appropriately, and many women were harmed
as a result.
Dr. Davis is likely to have behaved differently if he had realized that the public would
eventually know of his financial interest in the Dalkon Shield. Presumably, he would have
made sure that he took actions to protect his reputation and ensure the safety of women
who used the Dalkon Shield.
Another way to think of the public disclosure test is to view it as a ray of sunlight that
makes our actions visible, rather than obscured. As Exhibit 2-8 suggests, the issue of trans-
parency of behavior is often seen as a method of improving ethical behavior. The public
disclosure test is sometimes called the “television test,” for it requires us to imagine that
our actions are being broadcast on national television. The premise behind the public dis-
closure test is that ethics is hard work, labor that we might resist if we did not have frequent
reminders that we live in a community. As a member of a community, our self-concept is
tied, at least in part, to how that community perceives us.
Universalization test. A third general guideline shares with the other two a focus on
the “other”—the stakeholders whom our actions affect. Before we act, the universalization
test asks us to consider what the world would be like were our decision copied by everyone
else. Applying the universalization test causes us to wonder aloud: “Is what I am about to
Exhibit 2-8
THE SARBANES-OXLEY ACT A Mandate for
The Corporate and Criminal Fraud Accountability Act, also known as the Sarbanes- Ethical Behavior
Oxley Act, was signed by President Bush in 2002 in the wake of several corporate
accounting scandals. The act is intended to promote high ethical standards among
business managers and employees through a series of stringent requirements and
controls that regulate several different facets of corporate operation.
Among other things, the act created the Public Company Accounting Oversight
Board. This board is responsible for ensuring that auditors and public accounting
firms compile accurate and truthful financial reports for the companies they audit. The
act also requires that companies devise a system that allows employees to report
suspicions of unethical behavior within the company. The act also protects these
whistle-blowers from being fired or from retaliation by their employer for reporting a
possible problem within the company.
Additionally, the chief executive officer (CEO) or chief financial officer (CFO) must
personally vouch that the company’s financial statements are correct, meet all SEC
requirements for disclosure, and represent company finances accurately. The act
provides for very harsh penalties in the case of violations. If the CEO or CFO knows
that the company’s financial reports are incorrect but claims they are truthful, or if he or
she destroys or changes financial documents, the imposed fine can run into the millions
of dollars.
e-commerce AND THE LAW
Computer Use and Ethics earlier privacy statements that its customers’ personal
The use of computers to store and transfer important data would never be shared with a third party. The cus-
business information has resulted in a new set of ethi- tomer lists were included as assets to be sold as part of
cal concerns. How private is the computer screen? Are the company’s bankruptcy proceedings. The FTC issued
companies allowed to collect information about their a settlement with Toysmart.com allowing the lists to be
customers? Who owns the information customers give sold as long as (1) the sale occurred before July 2001,
to e-businesses? E-commerce law is gradually adjusting (2) the lists would be sold to a family-oriented company,
to such questions. But as the beginning of this chapter and (3) the buyer would agree to abide by the original
pointed out, knowing the law is just the first step in dis- Toysmart.com privacy policy. After the FTC imposed
covering ethical business decisions. these restrictions, the end result was that customers’
One case that considered questions related to personal information was not sold.
e-commerce and privacy involved Toysmart.com and its The Toysmart.com case makes it clear that, for
privacy policy. In 2000, the Federal Trade Commission both ethical and legal reasons, companies that adopt a
(FTC) filed a complaint against Toysmart.com, charg- privacy policy need to think that policy through before
ing the online retailer with selling customer lists despite announcing it to customers.
do the kind of action that, were others to follow my example, makes the world a better place
for me and those I love?”
In summary, business managers can apply the WPH approach to most ethical dilem-
mas. The WPH framework provides a practical process suited to the frequently complex
ethical dilemmas that business managers must address quickly in today’s society.
Nike
Nike, as well as other firms, affects the lives of many stakeholders in many countries.
Nike’s owners, workers, and customers are perhaps the most obvious stakeholders in deci-
sions Nike makes about its production, marketing, and human relations policies. But the
scope of Nike’s activities is much broader than is suggested by that list of stakeholders. The
company’s activities also influence the lives of future generations, competing local busi-
nesses, and international relations among diverse trading partners. All of Nike’s decisions
have ethical implications.
What those decisions are can be guided by an appreciation of the conflicting values
that lie under the surface when we make decisions that affect others. The WPH system of
ethical decision making stimulates Nike and similar companies to ask questions about their
behavior that highlight their possible effects on the community.
All of us would probably agree that Nike has a responsibility to try to be a sustainable
business enterprise. Toward that end, profits are essential. But labor practices that cut costs
may not be an effective way to make long-run profits because the multiple Nike stakehold-
ers disagree about the benefits of such practices. Some argue that more humane labor and
environmental policies would better support the firm’s long-range goals of being a com-
petitive and successful business firm.
30
Chapter 2 Business Ethics 31
Summary
Business Ethics Business ethics is the application of ethics to the special problems and opportunities
and Social experienced by businesspeople.
Responsibility
The social responsibility of business consists of the expectations that the community
imposes on firms doing business with its citizens.
Business Law Business ethics builds on business law. The law both affects and is affected by evolving
and Business ethical patterns. But business law provides only a floor for business ethics, telling business
Ethics leaders the minimally acceptable course of action.
The WPH Who are the relevant stakeholders? This question determines which interests (consumers,
Framework for employees, managers, owners) are being pushed and prodded.
Business Ethics
What are the ultimate purposes of the decision? This question determines which values
(freedom, efficiency, security, and justice) are being upheld by the decision.
How do we make ethical decisions? This question leads us to apply general ethical
guidelines:
• Golden Rule: Do unto others as you would have them do unto you.
• Public disclosure test: If the public knew about this decision, how would you decide?
• Universalization test: What would the world be like were our decision copied by every-
one else.
Point / Counterpoint
Sarbanes-Oxley Act of 2002
Are the Costs Associated with the Sarbanes-Oxley Act Reason for Reform?
No Yes
Corporate and accounting scandals, such as Enron, Corporations need incentives to remain or go public.
were the reason the Sarbanes-Oxley Act of 2002 was The Sarbanes-Oxley Act of 2002 is not an incentive.
drafted. The act promotes honesty and accountabil- Although there may have been ample motivation for
ity in financial reporting, thus bringing increased the development of an act that addresses accounting
security to investors. For example, corporations scandals, the costs associated with Sarbanes-Oxley are
must now ensure the segregation of all duties related much too high. Simply purchasing and learning to use
to accounting procedures. the materials needed for compliance with the act would
Although critics assert that the financial bur- cost approximately $3.5 million.
den associated with the act is reason for reform, the Those who argue that the act should not be
compliance costs about which they speak are begin- reformed often focus on the idea that every corpora-
ning to fall as individuals become familiar with the tion is now being held to the same standards. However,
new systems. In addition, the Dow Jones Industrial as a result of the substantial economic costs associated
Average is rising as a result of increased investor with implementation of the guidelines, smaller busi-
confidence. This confidence is the direct result of nesses that would like to go public are forced to remain
the requirement that corporations disclose informa- private to avoid the costs. Among small businesses
tion and allow for investigations by the Public Com- that are already public, many are not able to gather the
pany Accounting Oversight Board. resources necessary to comply with the act.
32 Part 1 The Legal Environment of Business
Since the passing of the Sarbanes-Oxley Act, In addition to the costs associated with the act, cor-
there have not been any known major accounting porations are now monitored by commissions that are
scandals. Without public disclosure, corporations appointed rather than elected. These commissions lack
would have little incentive to engage in rigorous the accountability that is necessary to make decisions
evaluation of their own accounting practices. By about how to regulate, tax, and punish companies and
forcing the corporations to disclose information, individuals that may violate the provisions of the act.
they are being held to higher ethical standards than Thus, the act as it is currently written does not provide an
they were previously. equal opportunity to all corporations and businesses.
from filming the execution of Oklahoma City bomber Timothy McVeigh and selling
the footage of the execution online. The government officials argued that a Justice
Department regulation prohibiting audio and visual recording devices at federal
executions applied in the case at hand. ENI, however, argued that the regulation
violated the company’s First Amendment right to free speech. How do you think the
court should have ruled in this case? Do you think ENI might have altered its decision
to broadcast the execution if it had applied the Golden Rule? [Entm’t Network, Inc. v.
Lappin, 134 F. Supp. 2d 1002 (2001).]
8. Heather Reider, a student at McNeese State University, was purchasing a ticket
for a university baseball game at the ballpark ticket booth when a foul ball struck
her in the eye, shattering her eye socket and causing permanent blindness in her
right eye. Reider sued the university, claiming that because the ticket booth was
not adequately protected from foul balls, the ballpark had an unreasonable defect
that created the risk of substantial harm to patrons. Who do you think won the suit?
What ethical issues does this case raise? [Reider v. State of Louisiana, 897 So. 2d
893 (2005).]
9. Javier Galindo, the husband of Richard Clark’s housekeeper, was sitting in his car,
parked in the driveway of Clark’s house, waiting to pick up his wife. While he was
waiting, a leaning 80-foot tree located on an adjacent property fell on Galindo’s car
and killed him. Galindo’s wife sued Clark, alleging that Clark was liable for failing
to notify Galindo about the danger posed by the leaning tree. Do you think that Clark
had a legal responsibility to tell Galindo about the tree? Do you think Clark had an
ethical responsibility to tell Galindo about the tree? Why might the answer to these
questions be different? [Galindo v. Town of Clarkstown, 2 N.Y. 3d 633 (2004).]
10. The decedent in the case became very sick and sent a messenger to his longtime fam-
ily physician, Dr. Eddingfield. The messenger told Eddingfield about the decedent’s
dangerous illness, told him that no other doctor could be reached in time to save
the decedent, and paid Eddingfield up front for medical services for the decedent.
Eddingfield refused to tender his services to the decedent without reason. When
the decedent died, the administrator of his estate brought suit against Eddingfield,
contending that Eddingfield wrongfully refused to enter into an employment contract
with the decedent. How do you think the court should have ruled in this case? Does a
doctor have a legal or ethical responsibility to help individuals against his or her will?
[Hurley v. Eddingfield, 156 Ind. 416 (1901).]
11. Aileen Morris was an employee at a Kauszer’s convenience store. Convenience Man-
agement Services, Inc. (CMSI), own Krauszer’s. While working at the store, Aileen, a
mother of nine children, was shot to death by a robber. The store was located in a dan-
gerous area and had a history of robberies and criminal attacks. Despite the dangerous
location, the store did not have an alarm, a security camera, or an immediate connec-
tion to the police. According to the plaintiffs, the absence of these security precautions
created a dangerous environment. CMSI argued that it had no duty to protect Morris
because the robbery and shooting were unforeseeable. How far do you think a com-
pany should go to protect employees? Do you think that CMSI was responsible for the
shooting? Why or why not? [Morris v. Krauszer’s Food Stores, 693 A.2d 510 (1997).]
12. Deborah Vargo-Adams was employed as a distribution clerk for the U.S. Postal
Service. Adams was regularly absent from work and had been reprimanded and
suspended several times. After receiving a notice of removal, Adams filed a grievance
claiming that she suffered from migraine headaches and was frequently unable to go
34 Part 1 The Legal Environment of Business
to work. The Postal Service reinstated Adams under the condition that she provide
them with medical documentation of her illness and acceptable evidence for future
absences when required. At first, Adams complied with the conditions. During an
eight-month period, Adams was absent without leave more than two days, was late to
work seven times, and was absent nine days. On each of these occasions she provided
notice and excuses for her absences. Seven of her notices were rejected because her
supervisor claimed that they lacked the proper documentation. After receiving the
rejections, Adams stopped submitting her written excuses, but continued to verbally
notify her supervisor that the absences were related to her illness. She continued to
have an attendance problem and was terminated in 1995. Do you think the Postal
Service should have made a better attempt to accommodate her “serious health condi-
tion”? Did the termination constitute a “wrongful discharge”? [Vargo-Adams v. U.S.
Postal Service, 992 F. Supp. 939 (1998).]
13. Grand Central Partnership Social Services Corporation is a not-for-profit organization.
The organization provides counseling, referrals, clothing, showers, and mail access for
the homeless. Additionally, the organization implemented a program known as Path-
ways to Employment (PTE), designed to assist in the development of vocational skills.
The program provided workshops covering topics such as interviewing skills and
résumé writing. Participants in the PTE program were assigned to five areas: main-
tenance, food services, administration, outreach, and recycling. Each of these tasks
related to the overall operation and goals of the center. Individuals participating in the
PTE program were required to participate 40 hours per week and were paid between
$40 and $60 per week. The plaintiffs, predominantly homeless and jobless individu-
als, alleged that the wages paid by Grand Central were below minimum wage and
therefore unlawful. Grand Central argued that participants in the PTE program were
trainees, not employees, and that the participants were learning valuable job readiness
skills. Do you think that this is an appropriate distinction? What ethical issues should
be considered? [Archie v. Grand Central Partnership, 997 F. Supp. 504 (1998).]
14. Doctors diagnosed Leo Guilbeault with lung cancer. He had been smoking the same
brand, Camel cigarettes, since 1951. Guilbeault filed a complaint against the manufac-
turer of Camel cigarettes, R. J. Reynolds Tobacco Co. According to Guilbeault, Reyn-
olds failed to adequately warn consumers about the dangers of smoking. Prior to 1970,
Camel cigarettes were sold without a warning label. After the Labeling Act of 1966,
Reynolds began to put warning labels on packages of cigarettes. Guilbeault believes
that Reynolds knew about the adverse health consequences of smoking before 1970
and, therefore, that Reynolds had a duty to warn consumers of these consequences.
Do you agree with his argument? Should Reynolds have warned consumers earlier?
[Guilbeault v. R. J. Reynolds Tobacco Co., 44 Fed. R. Serv. 3d 124 (1999).]
Absolutism
Absolutism, or ethical fundamentalism, requires that individuals defer to a set of rules
to guide them in the ethical decision-making process. Unlike ethical relativism and situ-
ational ethics, absolutism holds that whether an action is moral does not depend on the
perspective of the person facing the ethical dilemma. Rather, whether an action is moral
depends on whether the action conforms to the given set of ethical rules.
Of course, people disagree about which set of rules to follow. Why should we accept
and act on any one absolutist set of rules? Absolutism cannot tell us, for example, why we
ought to follow the doctrines set forth in the Koran and not Hindu doctrines.
Moreover, the unquestionable nature of the rules in most absolutist repositories seems
overly inflexible when applied to different situations. For instance, “Thou shalt not kill”
seems to be an absolute rule, but, in practice, killing in self-defense seems to be an accept-
able exception to this rule.
35
36 Part 1 The Legal Environment of Business
Consequentialism
In contrast to absolutism, consequentialism does not provide a rigid set of rules to fol-
low regardless of the situation. Rather, as the word consequentialism suggests, this ethi-
cal approach “depends on the consequences.” Consequentialism is a general approach to
ethical dilemmas that requires that we inquire about the consequences to relevant people of
our making a particular decision.
Utilitarianism is one form of consequentialism that business managers may find use-
ful. Like many consequentialist theories of ethics, utilitarianism urges managers to take
those actions that provide the greatest pleasure after having subtracted the pain or harm
associated with the action in question.
Utilitarianism has two main branches: act utilitarianism and rule utilitarianism. Act utili-
tarianism tells business managers to examine all the potential actions in each situation and
choose the action that yields the greatest amount of pleasure over pain for all involved. For
example, according to act utilitarianism, a business manager who deceives an employee may
be acting morally if the act of deception maximizes pleasure over pain for everyone involved.
Rule utilitarians, on the other hand, see great potential for the abuse of act utilitari-
anism. Instead of advocating the maximization of pleasure over pain in each individual
situation, rule utilitarianism holds that general rules that on balance produce the greatest
amount of pleasure for all involved should be established and followed in each situation.
Thus, even if the business manager’s decision to deceive an employee maximizes pleasure
over pain in a given situation, the act probably would not be consistent with rule utilitarian-
ism because deception does not generally produce the greatest satisfaction.
Rule utilitarianism underlies many laws in the United States. For example, labor laws
prohibit employers from hiring children to do manufacturing work, even though in some
situations the transaction would maximize pleasure over pain.
One form of utilitarianism commonly applied by firms and government is cost-
benefit analysis. When a business makes decisions based on cost-benefit analysis, it is
comparing the pleasure and pain of its optional choices, as that pleasure and pain are mea-
sured in monetary terms.
As we have shown, consequentialism is not altogether helpful because of the extreme
difficulty in making the required calculations about consequences. Another issue raises
an important additional objection to consequentialist thinking: Where does the important
social value of justice fit into consequentialist reasoning? Many business decisions could
be beneficial in their consequences for a majority of the population, but is it fair to require
that a few be harmed so that the majority can be improved? Consequentialism does not
provide definite answers to these questions, but an alternative ethical theory does.
Deontology
Deontology is an alternative theoretical approach to consequentialism. When you see refer-
ences to Kantian ethics, the analysis that follows the reference will be a discussion of the
most famous of the deontological approaches to business ethics. Unlike a person espousing
consequentialism, a person using a deontological approach will not see the relevance of
making a list of harms and benefits that result from a particular decision. Instead, deontol-
ogy consists of acting on the basis of the recognition that certain actions are right or wrong,
regardless of their consequences. For example, a business leader might consider it wrong
to terminate a person whose spouse has terminal cancer because a firm has an obligation to
support its employees when they are vulnerable, period.
Chapter 2 Business Ethics 37
But how are business managers to decide whether an action is right or wrong? The
German deontological philosopher Immanuel Kant proposed the categorical imperative to
determine whether an action is right. According to the categorical imperative, an action
is moral only if it would be consistent for everyone in society to act in the same way.
Thus, for example, applying the categorical imperative would lead you to conclude that
you should not cheat on a drug test, because if everyone acted in the same way, the drug
test would be meaningless.
From the deontological viewpoint, the duties or obligations that we owe one another
as humans are much more ethically significant than are measurements of the impacts of
business decisions. For example, a person using a deontological theory of ethics may see
any business behavior that violates our duty of trust as being wrong. To sell a car that one
knows will probably not be usable after four years is, from this perspective, unethical. No
set of positive consequences that might flow from the production decision can overcome
the certainty of the deontological recognition that the sale is wrong.
The duties that we owe others imply that human beings have fundamental rights based
on the dignity of each individual. This principle of rights asserts that whether a business
decision is ethical depends on how the decision affects the rights of all involved. This
principle is foundational to Western culture: the Declaration of Independence, for example,
asserts that everyone has the right to “life, liberty, and the pursuit of happiness.”
But just as consequentialism is incredibly complicated, deontology is difficult to apply
because people disagree about what duties we owe to one another and which duties are
more important than others when they conflict. For example, imagine the dilemma of a
scientist working for a tobacco firm who discovers that cigarettes are carcinogenic. She
owes a duty of trust to her employer, but she also has a conflicting duty to the community
to do no harm. Where would a business manager find a list of relevant duties under the
deontological framework, and why should we accept and act on any particular list?
In addition, as with absolutism, the absolute nature of many deontological lists
of duties and rights seems overly rigid when applied to a wide variety of contexts. For
instance, saying that we owe a duty to respect human life sounds absolute. In application,
however, we might be forced to harm one life to preserve other life. An alternative theory
of ethics, called virtue ethics, avoids this rigidity problem by providing us with abstract
goals to pursue continually.
Virtue Ethics
Virtue ethics is an ethical system in which the development of virtues, or positive char-
acter traits such as courage, justice, and truthfulness, is the basis for morality. A morally
excellent (and thus good) person develops virtues and distinguishes them from vices, or
negative character traits such as cowardice and vanity. This development of virtues occurs
through practice. Virtues are the habits of mind that move us toward excellence, the good
life, or human flourishing.
As a guide to business ethics, virtue ethics requires that managers act in such a way
that they will increase their contributions to the good life. Virtue ethics tells them to fol-
low the character traits that, upon introspective reflection, they see as consistent with vir-
tue. Identifying the relevant virtues and vices requires reasoning about the kind of human
behavior that moves us toward the good, successful, or happy life.
A difficulty with the application of virtue ethics is the lack of agreement about the
meaning of “the good life.” Without that agreement, we are not able to agree about what
types of behavior are consistent with our achievement of that goal. Even so, virtue ethics
38 Part 1 The Legal Environment of Business
Ethics of Care
The ethics of care holds that the right course of action is the option most consistent with
the building and maintaining of human relationships. Those who adhere to an ethic of care
argue that traditional moral hierarchies ignore an important element of life: relationships.
Care for the nurturing of our many relationships serves as a reminder of the importance of
responsibility to others.
According to someone who adheres to an ethic of care, when one person cares for
another person, the first person is acting morally. When other ethical theories emphasize
different moral dimensions as a basis for resolving ethical dilemmas, they rarely consider
the harm they might do to relationships; thus, from the perspective of the ethics of care,
alternative theories of business ethics often encourage unethical behavior.
Ethics-of-care theorists argue that when one individual, the caregiver, meets the needs
of one other person, the cared-for party, the caregiver is actually helping to meet the needs
of all the individuals who fall within the cared-for party’s web of care. Thus, by specifically
helping one other individual, the caregiver is assisting numerous people.
The strength of this theoretical approach is that it focuses on the basis of ethics in
general: the significance of the interests of other people. The urging to care for relation-
ships speaks to the fundamental basis of why we are concerned about ethics in the first
place. Most of us do not need any encouragement to think about how a decision will affect
us personally. But ethical reasoning requires that we weigh the impact of decisions on the
larger community.
Let’s examine how these ethical theories are applied in real-world firms. Exhibit A-2.1
is an abridged version of the Johnson & Johnson Credo, or statement of shared corporate
values. General Robert Wood Johnson, who guided Johnson & Johnson from a small,
family-owned business to a worldwide enterprise, believed the corporation had social
responsibilities beyond the manufacturing and marketing of products. In 1943, he wrote
and published the Johnson & Johnson Credo, a document outlining those responsibilities.
Does the credo depend more on ethical relativism, situational ethics, absolutism,
consequentialism, deontology, virtue ethics, or the ethics of care for its ethical vision?
THE CREDO
We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others
who use our products and services. In meeting their needs everything we do must be of high quality. We
must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be
serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit.
We are responsible to our employees, the men and women who work with us throughout the world. Everyone
must be considered as an individual. We must respect their dignity and recognize their merit. They must have a
sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly
and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must
feel free to make suggestions and complaints. There must be equal opportunity for employment, development
and advancement for those qualified. We must provide competent management, and their actions must be just
and ethical.
Chapter 2 Business Ethics 39
At a Glance