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BUSINESS ETHICS Ethical Decision Making and Cases

8TH EDITION

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O. C. Ferrell University of New Mexico

John Fraedrich Southern Illinois University—Carbondale

Linda Ferrell University of New Mexico

BUSINESS ETHICS Ethical Decision Making and Cases

8TH EDITION

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© 2011, 2008 South-Western, Cengage Learning

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Business Ethics: Ethical Decision Making & Cases, 8th Edition

O.C. Ferrell, John Fraedrich and Linda Ferrell

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Printed in the United States of America 1 2 3 4 5 6 7 13 12 11 10 09

To Anita and Robert Chandler. — O.C. Ferrell

To Brett Pierce Nafziger. — Linda Ferrell

To my parents, Bernice and Gerhard and my grandchildren Emma, Matthew, and Hyrum.

— John Fraedrich

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PART : An Overview of Business Ethics 1 . The Importance of

Business Ethics 2 . Stakeholder Relationships,

Social Responsibility, and Corporate Governance 28

PART : Ethical Issues and the Institutionalization of Business Ethics 55 . Emerging Business Ethics Issues 56 . The Institutionalization of

Business Ethics 90

PART : The Decision Making Process 125 . Ethical Decision Making and

Ethical Leadership 126 . Individual Factors: Moral

Philosophies and Values 148 . Organizational Factors:

The Role of Ethical Culture and Relationships 178

PART : Implementing Business Ethics in a Global Economy 213 . Developing an Effective

Ethics Program 214 . Implementing and Auditing

Ethics Programs 240 . Globalization of Ethical

Decision Making 270

PART : Cases 300 . Monsanto Attempts to Balance

Stakeholder Interests 302 . Wal-Mart: The Future Is Sustainability 314 . The American Red Cross 327 . Countrywide Financial: The Subprime Meltdown 338 . Arthur Andersen: Questionable

Accounting Practices 348 . Coping with Financial and Ethical Risks at

American International Group (AIG) 357 . Starbucks’ Mission: Social Responsibility

and Brand Strength 367 . The Fraud of the Century: The Case

of Bernard Madoff 375 . NIKE: Managing Ethical

Missteps—Sweatshops to Leadership in Employment Practices 386

. Banking Industry Meltdown: The Ethical and Financial Risks of Derivatives 397

. The Coca-Cola Company Struggles with Ethical Crises 407

. Enron: Questionable Accounting Leads to Collapse 419 . BP (Beyond Petroleum) Focuses on Sustainability 431 . Tyco International: Leadership Crisis 440 . Mattel Responds to Ethical Challenges 448 . PETCO Develops Successful Stakeholder

Relationships 458 . Home Depot Implements Stakeholder Orientation 466 . New Belgium Brewing: Ethical and

Environmental Responsibility 476

Notes 486 • Index 501

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Part 1: An Overview of Business Ethics 1 Chapter 1: The Importance of Business Ethics 2 Chapter Objectives, 3 • Chapter Outline, 3

An Ethical Dilemma 3

Business Ethics Defined 7 Why Study Business Ethics? 8

A Crisis in Business Ethics, 8 • The Reasons for Studying Business Ethics, 10

The Development Of Business Ethics 11 Before 1960: Ethics in Business, 11 • The 1960s: The Rise of Social Issues in Business, 12 • The 1970s: Business Ethics as an Emerging Field, 13 • The 1980s: Consolidation, 13 • The 1990s: Institutionalization of Business Ethics, 14 • The Twenty-First Century: A New Focus on Business Ethics, 15

Developing An Organizational And Global Ethical Culture 16 The Benefits Of Business Ethics 17

Ethics Contribute to Employee Commitment, 18 • Ethics Contribute to Investor Loyalty, 19 • Ethics Contribute to Customer Satisfaction, 20 • Ethics Contribute to Profits, 21

Our Framework For Studying Business Ethics 22 Summary 24 Important Terms For Review, 26 • Resolving Ethical Business Challenges, 26 • Check Your EQ, 27

Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 28 Chapter Objectives, 29 • Chapter Outline, 29

An Ethical Dilemma 29

Stakeholders Define Ethical Issues In Business 31 Identifying Stakeholders, 33 • A Stakeholder Orientation, 34

Social Responsibility And The Importance Of A Stakeholder Orientation 37 Social Responsibility And Ethics 38 Corporate Governance Provides Formalized Responsibility To Stakeholders 41

Views of Corporate Governance, 43 • The Role of Boards of Directors, 44

Implementing A Stakeholder Perspective 47 Step 1: Assessing the Corporate Culture, 47 • Step 2: Identifying Stakeholder Groups, 47 • Step 3: Identifying Stakeholder Issues, 48 • Step 4: Assessing Organizational Commitment to Social Responsibility, 48 • Step 5: Identifying Resources and Determining Urgency, 49 • Step 6: Gaining Stakeholder Feedback, 49

Summary 49 Important Terms For Review, 51 • Resolving Ethical Business Challenges, 51 • Check your EQ, 53

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Contents ix

Part 2: Ethical Issues and the Institutionalization of Business Ethics 55 Chapter 3: Emerging Business Ethics Issues 56 Chapter Objectives, 57 • Chapter Outline, 57

An Ethical Dilemma 57

Recognizing An Ethical Issue 60 Honesty, 62 • Fairness, 63 • Integrity, 63

Ethical Issues And Dilemmas In Business 64 Abusive or Intimidating Behavior, 64 • Lying, 67 • Conflicts of Interest, 68 • Bribery, 68 • Corporate Intelligence, 69 • Discrimination, 70 • Sexual Harassment, 72 • Environmental Issues, 74 • Fraud, 76 • Consumer Fraud, 79 • Financial Misconduct, 80 • Insider Trading, 81 • Intellectual Property Rights, 81 • Privacy Issues, 82

The Challenge Of Determining An Ethical Issue In Business 84 Summary 85 Important terms for review, 86 • Resolving Ethical Business Challenges, 87 • Check your EQ, 89

Chapter 4: The Institutionalization of Business Ethics 90 Chapter Objectives, 91 • Chapter Outline, 91

An Ethical Dilemma 91

Managing Ethical Risk Through Mandated And Voluntary Programs 93 Mandated Requirements For Legal Compliance 95

Laws Regulating Competition, 97 • Laws Protecting Consumers, 98 • Laws Promoting Equity and Safety, 101 • Laws Protecting the Environment, 102

Gatekeepers and Stakeholders 105 Accountants, 106 • Risk Assessment, 106

The Sarbanes–Oxley Act 107 Public Company Accounting Oversight Board, 109 • Conflicts of Interest: Auditor and Analyst Independence, 110 • Enhanced Financial Disclosures, 110 • Whistle-Blower Protection, 110 • Corporate and Criminal Fraud Accountability, 111 • Cost of Compliance, 111

Laws That Encourage Ethical Conduct 112 Federal Sentencing Guidelines For Organizations 113 Highly Appropriate Core Practices 116

Philanthropic Contributions, 117 • Strategic Philanthropy, 118

SUMMARY 119 Important terms for review, 120 • resolving ethical business challenges, 120 • Check your EQ, 123

Part 3: The Decision Making Process 125 Chapter 5: Ethical Decision Making and Ethical Leadership 126 Chapter Objectives, 127 • Chapter Outline, 127

An Ethical Dilemma 127

A Framework for Ethical Decision Making in Business 128

Ethical Issue Intensity, 129 • Individual Factors, 130 • Organizational Factors, 132 • Opportunity, 133 • Business Ethics Evaluations and Intentions, 135

Using the Ethical Decision Making Framework to Improve Ethical Decisions 136 The Role of Leadership in a Corporate Culture 137 Leadership Styles Influence Ethical Decisions 138 Habits of Strong Ethical Leaders 140

Ethical Leaders Have Strong Personal Character, 141 • Ethical Leaders Have a Passion to Do Right, 141 • Ethical Leaders Are Proactive, 141 • Ethical Leaders Consider Stakeholders’ Interests, 142 • Ethical Leaders Are Role Models for the Organization’s Values, 142 • Ethical Leaders Are Transparent and Actively Involved in Organizational Decision Making, 143 • Ethical Leaders Are Competent Managers Who Take a Holistic View of the Firm’s Ethical Culture, 143

Summary 144 Important Terms for Review, 145 • Resolving Ethical Business Challenges, 145 • Check your EQ, 147

x Contents

Chapter 6: Individual Factors: Moral Philosophies and Values 148 Chapter Objectives, 149 • Chapter Outline, 149

An Ethical Dilemma 149

Moral Philosophy Defined 151 Moral Philosophies 152

Goodness—Instrumental and Intrinsic, 154 • Teleology, 155 • Deontology, 158 • Relativist Perspective, 160 • Virtue Ethics, 161 • Justice, 163

Applying Moral Philosophy to Ethical Decision Making 164 Cognitive Moral Development 166 White-Collar Crime 168 The Role of Individual Factors in Business Ethics 172 Summary 172 Important terms for review, 174 • Resolving Ethical Business Challenges, 175 • Check your EQ, 177

Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 178 Chapter Objectives, 179 • Chapter Outline, 179

An Ethical Dilemma 179

Defining Corporate Culture 181 The Role of Corporate Culture in Ethical Decision Making 183

Ethical Frameworks and Evaluations of Corporate Culture, 184 • Ethics as a Component of Corporate Culture, 186 • Compliance versus Value-based Ethical Cultures, 188 • Differential Association, 190 • Whistle-Blowing, 191

Leaders Influence Corporate Culture 194 Reward Power, 194 • Coercive Power, 195 • Legitimate Power, 195 • Expert Power, 196 • Referent Power, 196

Motivating Ethical Behavior 197 Organizational Structure and Business Ethics 198 Group Dimensions of Corporate Structure and Culture 201

Types of Groups, 201 • Group Norms, 204 Variation in Employee Conduct 204

Can People Control Their Own Actions Within a Corporate Culture? 206 Summary 208 Important terms for review, 209 • Resolving Ethical Business Challenges, 210 • Check your EQ, 211

Part 4: Implementing Business Ethics in a Global Economy 213 Chapter 8: Developing an Effective Ethics Program 214 Chapter Objectives, 215 • Chapter Outline, 215

An Ethical Dilemma 215

The Responsibility of the Corporation as a Moral Agent 217 The Need for Organizational Ethics Programs 219 An Effective Ethics Program 221

An Ethics Program Can Help Avoid Legal Problems, 222 • Values versus Compliance Programs, 224

Codes of Conduct 224 Ethics Officers 227 Ethics Training and Communication 228 Systems to Monitor and Enforce Ethical Standards 230

Continuous Improvement of the Ethics Program, 232 • Common Mistakes in Designing and Implementing an Ethics Program, 233

Summary 235 Important Terms for Review, 236 • resolving ethical Business Challenges, 237 • Check your EQ, 239

Chapter 9: Implementing and Auditing Ethics Programs 240 Chapter Objectives, 241 • Chapter Outline, 241

An Ethical Dilemma 241

The Ethics Audit 243 Benefits of Ethics Auditing 244

Ethical Crisis Management and Recovery, 246 • Challenges of Measuring Nonfinancial Performance, 248 • Risks and Requirements in Ethics Auditing, 251

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The Auditing Process 252 Secure Commitment of Top Managers and Board of Directors, 253 • Establish a Committee to Oversee the Ethics Audit, 254 • Define the Scope of the Audit Process, 255 • Review Organizational Mission, Values, Goals, and Policies and Define Ethical Priorities, 255 • Collect and Analyze Relevant Information, 257 • Verify the Results, 261 • Report the Findings , 262

The Strategic Importance of Ethics Auditing 262 Summary 265 Important Terms for Review, 267 • Resolving Ethical Business Challenges, 267 • Check your EQ, 269

Chapter 10: Globalization of Ethical Decision Making 270 Chapter Objectives, 271 • Chapter Outline, 271

An Ethical Dilemma 271

Capitalism, Economics, and Business Ethics 273 Common Values, Goals, and Business Practices 278 Global Business Practices 281

Consumerism, 284 • Human Rights, 286 • Health Care, 288 • Labor, 288

Sustainable Development 290 International Monetary Fund (IMF) 291 World Trade Organization (WTO) 292 The Multinational Corporation (MNC) 293 Summary 296 Important Terms for Review, 297 • Resolving Ethical Business Challenges, 297 • Check your EQ, 299

Part 5: Cases 300 Case 1: Monsanto Attempts to Balance Stakeholder Interests 302

Case 2: Wal-Mart: The Future Is Sustainability 314

Case 3: The American Red Cross 327

Case 4: Countrywide Financial: The Subprime Meltdown 338

Case 5: Arthur Andersen: Questionable Accounting Practices 348

Case 6: Coping with Financial and Ethical Risks at American International Group (AIG) 357

Case 7: Starbucks’ Mission: Social Responsibility and Brand Strength 367

Case 8: The Fraud of the Century: The Case of Bernard Madoff 375

Case 9: NIKE: Managing Ethical Missteps—Sweatshops to Leadership in Employment Practices 386

Case 10: Banking Industry Meltdown: The Ethical and Financial Risks of Derivatives 397

Case 11: The Coca-Cola Company Struggles with Ethical Crises 407

Case 12: Enron: Questionable Accounting Leads to Collapse 419

Case 13: BP (Beyond Petroleum) Focuses on Sustainability 431

Case 14: Tyco International: Leadership Crisis 440

Case 15: Responds to Ethical Challenges 448

Case 16: PETCO Develops Successful Stakeholder Relationships 458

Case 17: Home Depot Implements Stakeholder Orientation 466

Case 18: New Belgium Brewing: Ethical and Environmental Responsibility 476

Notes 486 Index 501

Twenty years ago, the first edition of Business Ethics: Ethical Decision Making and Cases became the first textbook to use a managerial framework to teach business ethics. The Eighth Edition builds on this record of success and provides an enhanced teaching package to help teach the fastest-growing business course in the last two decades. In all higher education institutions there are three times as many courses in business ethics than there were in 1990. This dramatic increase has occurred as a result of stakeholder concerns about ethical conduct and public policy to encourage corporate ethics programs. No longer is ethics considered merely an independent personal decision; rather, managers are held responsible both within and outside their company for building an ethical organizational culture. As the market leader with over 550 institutions using our book, we are working to keep you, the instructor, up to date on the ever-changing issues and research within business ethics.

The Eighth Edition continues to change the way business ethics is taught and reflects the issues, challenges, and opportunities students will face in managing ethics in any organization. While we base each chapter on ethical frameworks and research from the academic community, we also include knowledge and best practices from business and public policy decisions from governments and international entities. This real-world approach to business ethics helps prepare students to face ethical challenges in business, and develop an ability to make ethical decisions in our global economy.

The past decade has seen the demise of many corporations, and some industries, that failed to appropriately incorporate ethics into their decision making processes. In

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the first few years of the twenty-first century, we saw the failure of Enron, Worldcom, and many other firms that engaged in deception, fraud, and misconduct. The focus was on excessive risk-taking. Public policy in the form of the Sarbanes-Oxley Act and Federal Sentencing Guidelines for Organizations (FSGO) amendments was developed to prevent future misconduct. Only five years after these events, the financial industry pushed the global economy into the deepest recession in 80 years. It was discovered that excessive risk-taking, misconduct, and the failure to address stakeholders’ interests were again to blame. These factors contributed to the downfall of many financial institutions, including Lehman Brothers, Bears Stearns, Countrywide Financial, Merrill Lynch, and Washington Mutual. Without a government rescue, many large banks would have failed. All these events increased regulations and laws encouraging organizations to develop programs that improve ethical conduct and prevent misconduct.

Using a managerial framework, we explain how ethics can be integrated into strategic business decisions. This framework provides an overview of the concepts, processes, mandatory, core, and voluntary business practices associated with successful business ethics programs. Some approaches to business ethics are excellent as exercises in intellectual reasoning, but they cannot deal with the many actual issues and considerations that people in business organizations face. Our approach prepares students for the real ethical issues and dilemmas that they will face in their business careers.

We have been diligent in this revision to provide the most relevant examples of how the lack of business ethics has challenged our economic viability and entangled countries and companies around the world. This book remains the market leader because it addresses the complex environment of ethical decision making in organizations and pragmatic, actual business concerns. Every individual has unique personal principles and values, and every organization has its own set of values, rules, and organizational ethical culture. Business ethics must consider the organizational culture and interdependent relationships between the individual and other significant persons involved in organizational decision making. Without effective guidance, a businessperson cannot make ethical decisions while facing a short-term orientation, feeling organizational pressure to perform well and seeing rewards based on outcomes in a challenging competitive environment.

Employees cannot make the best, most ethical decisions in a vacuum devoid of the influence of organizational codes, policies, and culture. Most employees and all managers are responsible not only for their own ethical conduct, but for the conduct of coworkers and those who they supervise. Therefore, teaching business ethics as an exercise in independent and group decision making helps to acknowledge key influences upon (un)ethical conduct of coworkers and managers. Employees must be taught how to recognize and when to

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report and address ethical issues in the workplace. Students must also learn how to “fit in” the ethical culture of their organization and be responsible for their own decisions while upholding the ethical standards of the organization. In this edition we help readers understand that in an organizational environment, their values are weighted differently from actions taken outside the business world. Profit is one element that distinguishes business versus nonbusiness decisions.

By focusing on the issues and organizational environments, this book provides students the opportunity to see the roles and responsibilities they will face in business. The past decade has reinforced that business ethics is not a “fad” but a prevailing set of risks that organizations face on an ongoing basis, and organizations are now demanding better, more informed employees. Governments, universities, and colleges now understand that the ethical decision process must be taught.

Our primary goal has always been to enhance the awareness and the ethical decision making skills that students will need to make business ethics decisions that contribute to responsible business conduct. By focusing on these concerns and issues of today’s challenging business environment, we demonstrate that the study of business ethics is imperative to the long-term well-being of not only businesses, but also our economic system.

PHILOSOPHY OF THIS TEXT Business ethics in organizations requires principle-based leadership from top management and purposeful actions that include planning and implementation of standards of

appropriate conduct, as well as openness and continuous effort to improve the organization’s ethical performance. Although personal values are important in ethical decision making, they are just one of the components that guide the decisions, actions, and policies of organizations. The burden of ethical behavior relates to the organization’s values and traditions, not just to the individuals who make the decisions and carry them out. A firm’s ability to plan and implement ethical business standards depends in part on structuring resources and activities to achieve ethical objectives in an effective and efficient manner.

The purpose of this book is to help students improve their ability to make ethical decisions in business by providing them with a framework that they can use to identify, analyze, and resolve ethical issues in business decision making. Individual values and ethics are important in this process. By studying business ethics, students begin to understand how to cope with conflicts between their personal values and those of the organization.

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Many ethical decisions in business are close calls. It often takes years of experience in a particular industry to know what is acceptable. We do not, in this book, provide ethical answers but instead attempt to prepare students to make informed ethical decisions. First, we do not moralize by indicating what to do in a specific situation. Second, although we provide an overview of moral philosophies and decision making processes, we do not prescribe any one philosophy or process as best or most ethical. Third, by itself, this book will not make students more ethical nor will it tell them how to judge the ethical behavior of others. Rather, its goal is to help students understand and use their current values and convictions in making business decisions and to encourage everyone to think about the effects of their decisions on business and society.

Many people believe that business ethics cannot be taught. Although we do not claim to teach ethics, we suggest that by studying business ethics a person can improve ethical decision making by identifying ethical issues and recognizing the approaches available to resolve them. An organization’s reward system can reinforce appropriate behavior and help shape attitudes and beliefs about important issues. For example, the success of some campaigns to end racial or gender discrimination in the workplace provides evidence that attitudes and behavior can be changed with new information, awareness, and shared values.

CONTENT AND ORGANIZATION In writing Business Ethics, Eighth Edition, we strived to be as informative, complete, accessible, and up to date as possible. Instead of focusing on one area of ethics, such as moral philosophy or social responsibility, we provide balanced coverage of all areas relevant to the current development and practice of ethical decision making. In short, we have tried to keep pace with new developments and current thinking in teaching and practices.

The first half of the text consists of ten chapters, which provide a framework to identify, analyze, and understand how businesspeople make ethical decisions and deal with ethical issues. Several enhancements have been made to chapter content for this edition. Some of the most important are listed in the next paragraphs.

Part One, “An Overview of Business Ethics,” includes two chapters that help provide a broader context for the study of business ethics. Chapter 1, “The Importance of Business Ethics,” has been revised with many new examples and survey results to describe issues and concerns important to business ethics. Chapter 2, “Stakeholder Relationships, Social Responsibility, and Corporate Governance,” has been significantly reorganized and updated with new examples and issues. This chapter was reorganized and expanded to develop an overall framework for the text.

Part Two, “Ethical Issues and the Institutionalization of Business Ethics,” consists of two chapters that provide the background that students need to identify ethical issues and understand how society, through the legal system, has attempted to hold organizations responsible for managing these issues. Chapter 3, “Emerging Business Ethics Issues,” has been significantly reorganized and updated and provides expanded coverage of business ethics issues. Reviewers requested more detail on key issues that create ethical decisions. Within this edition, we have increased the depth of ethical issues and have updated the following new issues: abusive and intimidating behavior, lying, bribery, corporate

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intelligence, environmental issues, intellectual property rights, and privacy. Chapter 4, “The Institutionalization of Business Ethics” examines key elements of core or best practices in corporate America today along with legislation and regulation requirements that support business ethics initiatives. The chapter is divided into three main areas: voluntary, mandated,

and core boundaries.

Part Three, “The Decision Making Process” consists of three chapters, which provide a framework to identify, analyze, and understand how businesspeople make ethical decisions and deal with ethical issues. Chapter 5, “Ethical Decision Making and Ethical Leadership,” has been revised and updated to reflect current research and understanding of ethical decision making and contains a new section on ethical leadership. Chapter 6, “Individual Factors: Moral Philosophies and Values,” has been updated and revised to explore the role of moral philosophies and moral development as individual factors in the ethical decision making process. This chapter now includes a new section on white- collar crime. Chapter 7, “Organizational Factors: The Role of Ethical Culture and Relationships,” considers organizational influences on business decisions, such as role relationships, differential association, and other organizational pressures, as well as whistle-blowing.

Part Four, “Implementing Business Ethics in a Global Economy,” looks at specific measures that companies can take to build an effective ethics program, as well as how these programs may be affected by global issues. Chapter 8, “Developing an Effective Ethics Program,” has been refined and updated with corporate best practices for developing effective ethics programs. Chapter 9, “Implementing and Auditing Ethics Programs,” offers a framework for auditing ethics initiatives as well as the importance of doing so. Such audits can help companies pinpoint problem areas, measure their progress in improving conduct, and even provide a “debriefing” opportunity after a crisis. Finally, Chapter 10, “Globalization of Ethical Decision Making” is completely revised to reflect the complex and dynamic events that almost caused a global depression. This chapter will help students understand the major issues involved in making decisions in a global environment.

Part Five consists of eighteen cases that bring reality into the learning process. Nine of these cases are new to the eighth edition, and the remaining nine have been revised and updated. The companies and situations portrayed in these cases are real; names and other facts are not disguised; and all cases include developments up to the end of 2009. By reading and analyzing these cases, students can gain insight into ethical decisions and the realities of making decisions in complex situations.

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Part Four “I l ti B i Ethi

P A R T 3 The Decision Making Process

Chapter 5: Ethical Decision Making and Ethical Leadership 126

Chapter 6: Individual Factors: Moral Philosophies and Values 148

Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 178

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TEXT FEATURES Many tools are available in this text to help both students and instructors in the quest to improve students’ ability to make ethical business decisions.

• Each chapter opens with an outline and a list of learning objectives.

• Immediately following is “An Ethical Dilemma” that should provoke discussion about ethical issues related to the chapter. The short vignette describes a hypothetical incident involving an ethical conflict. Questions at the end of the “Ethical Dilemma” section focus discussion on how the dilemma could be resolved.

• At the end of each chapter are a chapter summary and an important terms list, both of which are handy tools for review. Also included at the end of each chapter is a “Resolving Ethical Business Challenges” section. The vignette describes a realistic drama that helps students experience the process of ethical decision making. The “Resolving Ethical Business Challenges” minicases presented in this text are hypothetical; any resemblance to real persons, companies, or situations is coincidental. Keep in mind that there are no right or wrong solutions to the minicases. The ethical dilemmas and real-life situations provide an opportunity for students to use concepts in the chapter to resolve ethical issues.

• Each chapter concludes with a series of questions that allow students to test their EQ (Ethics Quotient).

• Cases. In Part Five, following each real-world case are questions to guide students in recognizing and resolving ethical issues. For some cases, students can conduct additional research to determine recent developments because many ethical issues in companies take years to resolve.

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EFFECTIVE TOOLS FOR TEACHING AND LEARNING

Instructor’s Resource Manual. The Instructor’s Resource Manual contains a wealth of information. Teaching notes for every chapter include a brief chapter summary, detailed lecture outline, and notes for using the “Ethical Dilemma” and “Resolving Ethical Business Challenges” sections. Detailed case notes point out the key issues involved and offer suggested answers to the questions. A separate section provides guidelines for using case analysis in teaching business ethics. Detailed notes are provided to guide the instructor in analyzing or grading the cases. Simulation role-play cases, as well as implementation suggestions, are included. For others involved in attempting to simulate more of the actual constructs students will face in their business careers we suggest accessing http://www .businessreality.org/.

Role-Play Cases. The Eighth Edition provides six behavioral simulation role-play cases developed for use in the business ethics course. The role-play cases and implementation methods can be found in the Instructor’s Resource Manual and on the website. Role-play cases may be used as a culminating experience to help students integrate concepts covered in the text. Alternatively, the cases may be used as an ongoing exercise to provide students with extensive opportunities for interacting and making ethical decisions.

Role-play cases simulate a complex, realistic, and timely business ethics situation. Students form teams and make decisions based on an assigned role. The role-play case complements and enhances traditional approaches to business learning experiences because it (1) gives students the opportunity to practice making decisions that have business ethics consequences; (2) re-creates the power, pressures, and information that affect decision making at various levels of management; (3) provides students with a team-based experience that enriches their skills and understanding of group processes and dynamics; and (4) uses a feedback period to allow for the exploration of complex and controversial issues in business ethics decision making. The role-play cases can be used with classes of any size.

Test Bank and Exam View. The Test Bank provides multiple-choice and essay questions for each chapter and includes a mix of objective and application questions. ExamView, a computerized version of the Test Bank, provides instructors with all the tools they need to create, author/edit, customize, and deliver multiple types of tests. Instructors can import questions directly from the test bank, create their own questions, or edit existing questions.

Instructor’s Resource CD-ROM. This instructor’s CD provides a variety of teaching resources in electronic format, allowing for easy customization to meet specific instructional needs. Files include Word files of the Test Bank, along with its computerized version, ExamView; Lecture PowerPoint® slides; and Word and PDF files from the Instructor’s Resource Manual.

Videos. A DVD is also available to support the Eighth Edition. The seventeen segments can be used across several chapters, and the Video Guide (which appears at the end of the

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Instructor Manual) contains a matrix intended to show the closest relationships between the videos and chapter topics. The Video Guide also includes summaries of each video as well as teaching guidelines and issues for discussion.

Instructor Companion Site. The Instructor Companion Site can be found at www.cengage .com/management/ferrell. It includes a complete Instructor Manual, Word files from both the Instructor Manual and Test Bank, and PowerPoint slides for easy downloading.

e - b u s i n e s s e t h i c s .com. Additional instructor resources can be found at www.e-businessethics.com. Also at e-businessethics.com, instructors can learn more about a teaching business ethics certificate program offered twice annually through the University of New Mexico. Instructors will find an opportunity to sign up for WSJ business ethics abstracts at www.professorjournal.com.

Student Companion Site. The Student Companion Site can also be found at www.cengage. com/management/ferrell. The website developed for the eighth edition provides up-to-date examples, issues, and interactive learning devices to assist students in improving their decision making skills. “The Business Ethics Learning Center” has been created to take advantage of information available on the Internet while providing new interactive skill-building exercises that can help students practice ethical decision making. The site contains links to companies and organizations highlighted in each chapter; Internet exercises; ACE (ACyber Evaluation) interactive quizzes, which help students master chapter content through multiple-choice questions; links to association, industry, and company codes of conduct; case website links; company and organizational examples; and academic resources, including links to business ethics centers throughout the world. Four Ethical Leadership Challenge scenarios are available for each chapter. Training devices, including Lockheed Martin’s Gray Matters ethics game, are also available. A Premium Companion Site is also available with a number of online study

created to take advantage of information available on

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tools, including flashcards, additional interactive quizzes, student PowerPoint slides, crossword puzzles, and games.

WebTutor ™. Whether you want to Web-enable your class or teach entirely online, WebTutor provides customizable text-specific content within your course system. This content-rich, web-based teaching and learning aid reinforces chapter concepts and acts as an electronic student study guide. WebTutor provides students with interactive chapter review quizzes, critical-thinking, writing-improvement exercises, flashcards, PowerPoints, and links to online videos.

ACKNOWLEDGMENTS A number of individuals provided reviews and suggestions that helped to improve this text. We sincerely appreciate their time and effort.

Donald Acker Brown Mackie College Donna Allen Northwest Nazarene University

Suzanne Allen Walsh University

Carolyn Ashe University of Houston–Downtown Laura Barelman Wayne State College Russell Bedard Eastern Nazarene College B. Barbara Boerner Brevard College Judie Bucholz Guilford College Greg Buntz University of the Pacific Julie Campbell Adams State College

April Chatham-Carpenter University of Northern Iowa Leslie Connell University of Central Florida Peggy Cunningham Queen’s University Carla Dando Idaho State University James E. Donovan Detroit College of Business Douglas Dow University of Texas at Dallas A. Charles Drubel Muskingum College Philip F. Esler University of St. Andrews Joseph M. Foster Indiana Vocational Technical College— Evansville Terry Gable Truman State University Robert Giacalone University of Richmond Suresh Gopalan West Texas A&M University

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Mark Hammer Northwest Nazarene University Charles E. Harris, Jr. Texas A&M University Kenneth A. Heischmidt Southeast Missouri State University Neil Herndon Educational Consultant Walter Hill Green River Community College Jack Hires Valparaiso University David Jacobs American University R. J. Johansen Montana State University–Bozeman Edward Kimman Vrije Universiteit Janet Knight Purdue North Central Anita Leffel University of Texas at San Antonio Barbara Limbach Chadron State College Nick Lockard Texas Lutheran College Terry Loe Kennesaw State University Nick Maddox Stetson University Isabelle Maignan Vrije Universiteit Amsterdam Phylis Mansfield Pennsylvania State University–Erie Robert Markus Babson College Randy McLeod Harding University Francy Milner University of Colorado Ali Mir William Paterson University

Debi P. Mishra Binghamton University, State University of New York

Patrick E. Murphy University of Notre Dame

Lester Myers University of San Francisco

Cynthia Nicola Carlow College

Carol Nielsen Bemidji State University

Lee Richardson University of Baltimore

William M. Sannwald San Diego State University

Zachary Shank Albuquerque Technical Vocational Institute Cynthia A. M. Simerly Lakeland Community College Karen Smith Columbia Southern University Filiz Tabak Towson University Debbie Thorne Texas State University–San Marcos Wanda V. Turner Ferris State College Gina Vega Salem State College William C. Ward Mid-Continent University David Wasieleski Duquesne University Jim Weber Duquesne University Ed Weiss National-Louis University Joseph W. Weiss Bentley University Jan Zahrly University of North Dakota

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We wish to acknowledge the many people who assisted us in writing this book. We are deeply grateful to Jennifer Jackson for her work in organizing and managing the revision process. We would also like to thank Jennifer Sawayda and Jessica Talley for all their assistance in this edition. We are also indebted to Melanie Drever, Barbara Gilmer, and Gwyneth V. Walters for their contributions to previous editions of this text. Debbie Thorne, Texas State University–San Marcos, provided advice and guidance on the text and cases. Finally, we express appreciation to the administration and to our colleagues at the University of New Mexico and Southern Illinois University at Carbondale for their support.

We invite your comments, questions, or criticisms. We want to do our best to provide teaching materials that enhance the study of business ethics. Your suggestions will be sincerely appreciated.

O. C. Ferrell John Fraedrich Linda Ferrell

P A R T 1 An Overview of Business Ethics

Chapter 1: The Importance of Business Ethics 2

Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 28

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AN ETHICAL DILEMMA* John Peters had just arrived at the Memphis branch offi ces of Bull Steins (BS) brokerage fi rm. BS is one of the top 50 fi rms in the industry with a wide range of fi nancial products. Five years prior, John graduated from Midwest State University and went to Marell and Pew Brokerage. While there, he learned that in fi nance one must follow the letter and spirit of the law. BS started courting John after working at Marell for four years because he had a good reputation and an investment portfolio worth approximately $100 million with some 400 investors.

A hard worker, John acquired his clients through various networking avenues, including family, the country club, cocktail parties, and serving on boards of charitable organizations. He called one client group the Sharks. These were investors who took risks, made multiple transactions every month, and looked for short-term, high-yield investments. The second group he called Cessnas, because most of them owned twin-engine planes. This group was primarily employed in the medical fi eld, but included a few bankers and lawyers. He called the fi nal group the Turtles because they wanted stability and security. This group would normally trade only a few times a year.

John was highly trained and was not only comfortable discussing numbers with bankers and medical billing with physicians, but also had the people skills to convey complex fi nancial products and solutions in understandable terms to his Turtles, who were primarily older and semiretired. This was one of the main reasons Al Dryer had wanted to hire him. “You’ve got charisma, John, and you know your way around people and fi nancial products,” Dryer explained.

At Marell and Pew, Skyler was John’s trainer. Skyler had been in the business for 15 years and had worked for three of the top brokerage fi rms in the world. She had chosen to stay at Marell and Pew for so many years because of her family. Skyler quickly taught John some complicated tricks of the trade. For example, “Your big clients (Sharks and Cessnas) will like IPOs (initial public off erings) but you have to be careful about picking the right ones,” Skyler said. “Before suggesting one, look at who is on their board of directors, cross-reference them to other IPO boards in the last 5–7 years. Next, cross-check everyone to see where the connections are, especially if they have good ties to the SEC

CHAPTER OBJECTIVES To explore conceptualizations of • business ethics from an organizational perspective

To examine the historical foundations • and evolution of business ethics

To provide evidence that ethical value • systems support business performance

To gain insight into the extent of • ethical misconduct in the workplace and the pressures for unethical behavior

CHAPTER OUTLINE Business Ethics Defined Why Study Business Ethics?

A Crisis in Business Ethics

The Reasons for Studying Business Ethics

The Development of Business Ethics Before 1960: Ethics in Business

The 1960s: The Rise of Social Issues in Business

The 1970s: Business Ethics as an Emerging Field

The 1980s: Consolidation

The 1990s: Institutionalization of Business Ethics

The Twenty-First Century: A New Focus on Business Ethics

Developing an Organizational and Global Ethical Culture The Benefits of Business Ethics

“Ethics Contribute” to Employee Commitment

Ethics Contribute to Investor Loyalty

Ethics Contribute to Customer Satisfaction

Ethics Contribute to Profits

Our Framework for Studying Business Ethics

*This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental.

(Securities and Exchange Commission). Finally, you want to check these people and the companies they have been associated with. Check every IPO these people were involved in and what Moody’s ratings were prior to the IPO. As you know, Moody’s is one of two IPO rating companies in the United States and they’re hurting for revenue because of the fi nancial downturn. If you see a bias in how they rate because of personal relations to the IPO people, you’ve got a winner,” Skyler smiled.

During his fi ve years at the company, Skyler had taught John about shorting, naked shorting, and churning. She explained shorting by using an example. “If I own 1,000 shares at $100/share and you think the stock is going to tank (go down), you ‘borrow’ my shares at $100/share, sell them, and the next week the stock goes down to $80/ share. You call your broker and buy back the 1,000 shares at $80 and give me my 1,000 shares at $80/ share. Do you see what happened?” Skyler asked. “You borrowed my shares and sold them for $100,000. The following week, when the company stock fell to $80, you repurchased those 1,000 shares for $80,000 and gave them back to me. In the meantime, you pocketed the diff erence of $20,000.” Skyler went on, “Naked short selling is the same as shorting but you don’t pay any money for the stock,” explained Skyler. “There is a three- day grace period between buying and selling. That means you have at least three days of FREE MONEY!”

Al Dryer instructed John to wait to resign until late on Friday so that BS could send out packets to each of his accounts about switching companies. John thought about this, but was told by others this was standard practice. “But what about the noncompete clause I signed? It says I can’t do that,” said John to a few brokers not associated with either fi rm. Their response was, “It’s done all the time.” On Friday John did what BS asked and nothing happened. Six months went by and John’s portfolio had increased to $150 million. Other brokers began imitating John’s strategy. For example, for his Sharks, John would buy and sell at BS and call some of his buddies to do the same thing using money from his SHARKS. Another tactic involved selling futures contracts without

providing evidence that he held the shares sold (naked shorting). While much of what he was doing was risky, John had become so successful that he guaranteed his Turtles against any loss.

Several years later John was buying and selling derivatives, a form of futures contract that gets its value from assets such as commodities, equities (stocks), bonds, interest rates, exchange rates, or even an index of weather conditions. While his risk-taking Shark group had expanded threefold, John’s Cessna pool had all but dried up. However, his Turtles had grown dramatically to an average worth of $500,000. The portfolio he managed had topped $750 million, a lot more than he had when he started at BS ($500 million in Sharks and $250 million for Turtles).

“This year is going to be better than last year,” said John to some of the brokers at BS. But expenses had been rising fast. John’s expense account included country club memberships, sports tickets, trips for clients, etc. Instead of charging the fi rm, John would always pay them from his own pocket. By indirectly letting his clients know it was his money he was spending on them, his clients were grateful for his largess and those who would have grumbled about delays in the delivery of securities purchased were less apt to do so. John saw a great opportunity to make his heavy hitters happy with him. Unbeknownst to them, he would buy and sell stocks for these clients and later surprise them with the profi ts.

By this time, John was training new hires at BS, which would have taken away a lot of his personal and professional time if he had done it right. But John had a lot of other things on his mind. He had decided to get married and adopt children. His soon-to-be wife, Leslie, quit her job to be a full- time mom and was designing their new 18,000- square-foot home. With all these activities going on at once, John was not paying attention to the four new brokers and their training. Because John was a senior partner, he had to sign off on every trade they made. It became so time consuming to manage everything that he spent an hour a day just signing the four other brokers’ trades.