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Ethics 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 ETHICS
Ethics is the study of what constitutes right and wrong behavior. Ethics focuses on morality and the appli
cation 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 longrun viability of a business, the well being
of its officers and directors, and the welfare of its employees.
II. SETTING THE RIGHT ETHICAL TONE
Some 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 ethicalcompliance program include an ethical code of con
duct, an ethics committee, training programs, and internal audits to monitor compliance. These compo
nents should be integrated. The SarbanesOxley Act of 2002 requires firms to set up confidential systems
for employees to report suspected illegal or unethical financial practices.
D. CONFLICTS AND TRADEOFFS
25
26 UNIT ONE: THE FOUNDATIONS
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, longterm 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.
CHAPTER 4: ETHICS AND BUSINESS DECISION MAKING 27
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 in
flated 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 share
holders 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 LAW
The 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. Igno
rance 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 example, 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 REASONING
Ethical 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. DUTYBASED ETHICS
28 UNIT ONE: THE FOUNDATIONS
1. Religious Ethical Standards
Religious 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.
CHAPTER 4: ETHICS AND BUSINESS DECISION MAKING 29
2. Kantian Ethics
Immanual 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 Rights
According 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. OUTCOMEBASED 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 costbenefit 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. Companies
Including their directors, officers, shareholders, employees, and agents.
a. What Is Prohibited
The 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 Permitted
The FCPA permits payments to (1) minor officials whose duties are ministerial, (2) foreign of
ficials 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 Required
All 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 Prohibited
The FCPA prohibits false statements to accountants and false entries in accounts.
3. Penalties for Violations
Firms: fines up to $2 million. Officers or directors: fines up to $100,000 (cannot be paid by the com
pany); imprisonment up to five years.
C. OTHER NATIONS DENOUNCE BRIBERY
30 UNIT ONE: THE FOUNDATIONS
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.
CHAPTER 4: ETHICS AND BUSINESS DECISION MAKING 31
TRUEFALSE 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.
FILLIN QUESTIONS
(Answers at the Back of the Book)
MULTIPLECHOICE 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.
32 UNIT ONE: THE FOUNDATIONS
d. no ethical standards.
CHAPTER 4: ETHICS AND BUSINESS DECISION MAKING 33
2. Pete, an employee of Quality Sales, Inc., takes a dutybased 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. costbenefit analysis.
c. discretion.
d. utilitarianism.
4. Eve, an employee of First Federal Bank, takes an outcomebased 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 effec
tive 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 costbenefit 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., repre
sents to Best Production Company that certain services will be performed for a stated fee, but it is ap
parent 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.
34 UNIT ONE: THE FOUNDATIONS
c. regard for the firm’s shareholders only.
d. their own self interest.
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 costbenefit analysis.
b. the right of Alan to maintain his dignity.
c. the right of Beta to make a profit.
d. the rights of others.
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? Be
tween 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.
CHAPTER 4: ETHICS AND BUSINESS DECISION MAKING 35
1. Eagle and CDI enter into mediation. In mediation, the parties
a. may come to an agreement by mutual consent.
b. must accept a winnertakeall result.
c. settle their dispute without the assistance of a third party.
d. submit their dispute to a mediator for a legally binding decision.
36 UNIT ONE: THE FOUNDATIONS
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. coworkers’ dissent to unethical decisions.
b. legislative determinations as to what is in society’s best interest.
CHAPTER 4: ETHICS AND BUSINESS DECISION MAKING 37
c. the accountability of SPC to society for the firm’s actions.
d. the collectivity of corporate decision making.
38 UNIT ONE: THE FOUNDATIONS
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.