Business ethics ethical decision making and cases 12th edition

Reflective Writing (Ethics In Business)

Business eTHiCs Ethical Decision Making and Cases

O.C. Ferrell Auburn University

John Fraedrich Southern Illinois University—Carbondale

Linda Ferrell Auburn University

TwElfTh EDiTion

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Business Ethics: Ethical Decision Making and Cases, Twelfth Edition O.C. Ferrell, John Fraedrich and Linda Ferrell

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To James Collins Ferrell and George Collins Ferrell.

—O.C. Ferrell

To Debbie FIBJ. —John Fraedrich

To Stanley J. Fredrick. —Linda Ferrell

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brief contents

4: POM Wonderful: Crazy Healthy! 368

5: Monsanto: A Growing Controversy 374

6: Starbucks Venti Social Responsibility and Brand Strategy 387

7: Walmart Juggles Risks and Rewards 398

8: New Belgium Brewing: Crafting a Fresh Social Responsibility and Sustainability Initiative 416

9: The NCAA Has Many Balls in the Air 426

10: Google: The Drive to Balance Privacy with Profit 439

11: Zappos: Taking Steps toward Maximizing Stakeholder Satisfaction 460

12: Lululemon: Turning Lemons into Lemonade 473

13: Insider Trading at the Galleon Group 482

14: Whole Foods: 365 Degrees of Commitment to Stakeholders 491

15: Apple Maintains Strong Ethical Roots 506

16: PepsiCo: Poised to Deal with the “Next Generation” 521

17: Fraud in Dixon, Illinois: All the Queen’s Horses Could Not Save Her 536

18: Herbalife Reborn 542

19: CVS: “Fired Up” about Social Responsibility 562

20: Enron: Not Accounting for the Future 574

Endnotes E-1 Index I-1

Part 1: An Overview of Business Ethics 1 1: The Importance of Business Ethics 1

2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 27

Part 2: Ethical Issues and the Institutionalization of Business Ethics 55 3: Emerging Business Ethics Issues 55

4: The Institutionalization of Business Ethics 84

Part 3: The Decision Making Process 113 5: Ethical Decision Making 113

6: Individual Factors: Moral Philosophies and Values 136

7: Organizational Factors: The Role of Ethical Culture and Relationships 163

Part 4: Implementing Business Ethics in a Global Economy 192 8: Developing an Effective Ethics Program 192

9: Managing and Controlling Ethics Programs 214

10: Globalization of Ethical Decision Making 244

11: Ethical Leadership 278

12: Sustainability: Ethical and Social Responsibility Dimensions 309

Part 5: Cases 342 1: The Volkswagen Scandal: An Admission to Emission

Fraud 344

2: Uber Hits a Bump in the Road 349

3: Wells Fargo: The Stage Coach Went Out of Control 361

iv

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contents

Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 27 Chapter Objectives, 27 | Chapter Outline, 27

An Ethical Dilemma 28

Stakeholders Define Ethical Issues in Business 29 Identifying Stakeholders, 31 • A Stakeholder Orientation, 32

Social Responsibility and Business Ethics 35 Issues in Social Responsibility 37 Social Responsibility and the Importance of a Stakeholder Orientation 39 Corporate Governance Provides Formalized Responsibility to Stakeholders 40

Views of Corporate Governance, 43 • The Role of Boards of Directors, 44 • Greater Demands for Accountability and Transparency, 45 • Executive Compensation, 46

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 Stakeholders and Social Responsibility, 48 • Step 5: Identifying Resources and Determining Urgency, 49 • Step 6: Gaining Stakeholder Feedback, 49

Contributions of a Stakeholder Perspective 49 Summary 50 Important Terms For Review, 52 | Resolving Ethical Business Challenges, 53 | Check Your EQ, 54

PArt 1: An OvervIew Of BUSIneSS ethICS 1

Chapter 1: The Importance of Business Ethics 1 Chapter Objectives, 1 | Chapter Outline, 1

An Ethical Dilemma 2

Business Ethics Defined 4 Why Study Business Ethics? 5

A Crisis in Business Ethics, 5 • Specific Issues, 7 • The Reasons for Studying Business Ethics, 8

The Development of Business Ethics 9 Before 1960: Ethics in Business, 10 • The 1960s: The Rise of Social Issues in Business, 10 • The 1970s: Business Ethics as an Emerging Field, 11 • The 1980s: Business Ethics Reaches Maturity, 11 • The 1990s: Institutionalization of Business Ethics, 12 • The Twenty-First Century of Business Ethics, 13

Developing Organizational and Global Ethical Cultures 15 The Benefits of Business Ethics 16

Ethics Contributes to Employee Commitment, 16 • Ethics Contributes to Investor Loyalty, 17 • Ethics Contributes to Customer Satisfaction, 18 • Ethics Contributes to Profits, 19

Our Framework for Studying Business Ethics 20 Summary 22 Important Terms for Review, 24 | Resolving Ethical Business Challenges, 25 | Check Your EQ, 26

v

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vi Contents

PArt 2: ethICAl ISSUeS And the InStItUtIOnAlIzAtIOn Of BUSIneSS ethICS 55

Chapter 3: Emerging Business Ethics Issues 55 Chapter Objectives, 55 | Chapter Outline, 55

An Ethical Dilemma 56

Recognizing an Ethical Issue (Ethical Awareness) 57 Foundational Values for Identifying Ethical Issues 58

Integrity, 59 • Honesty, 59 • Fairness, 60 Ethical Issues And Dilemmas In Business 61

Misuse of Company Time and Resources, 61 • Abusive or Intimidating Behavior, 62 • Lying, 64 • Conflicts of Interest, 65 • Bribery, 65 • Corporate Intelligence, 66 • Discrimination, 67 • Sexual Harassment, 69 • Fraud, 71 • Consumer Fraud, 74 • Financial Misconduct, 75 • Insider Trading, 76 • Intellectual Property Rights, 77 • Privacy Issues, 77

The Challenge of Determining an Ethical Issue in Business 79 Summary 79 Important Terms for Review, 80 | Resolving Ethical Business Challenges, 82 | Check Your EQ, 83

Chapter 4: The Institutionalization of Business Ethics 84 Chapter Objectives, 84 | Chapter Outline, 84

An Ethical Dilemma 85

Managing Ethical Risk Through Mandated and Voluntary Programs 86 Mandated Requirements for Legal Compliance 88

Laws Regulating Competition, 89 • Laws Protecting Consumers, 91 • Laws Promoting Equity and Safety, 95

The Sarbanes–Oxley (SOx) Act 96 Public Company Accounting Oversight Board, 97 • Auditor and Analyst Independence, 98 • Whistle-Blower Protection, 98 • Cost of Compliance, 98

Dodd–Frank Wall Street Reform and Consumer Protection Act 99

Financial Agencies Created by the Dodd–Frank Act, 99 • Consumer Financial Protection Bureau, 99 • Whistle-Blower Bounty Program, 100

Laws that Encourage Ethical Conduct 100 Federal Sentencing Guidelines for Organizations 100 Core or Best Practices 104

Voluntary Responsibilities, 105 • Cause-Related Marketing, 105 • Strategic Philanthropy, 106 • Social Entrepreneurship, 106

The Importance of Institutionalization in Business Ethics 107 Summary 108 Important Terms for Review, 110 | Resolving Ethical Business Challenges, 111 | Check Your EQ, 112

PArt 3: the deCISIOn MAKInG PrOCeSS 113

Chapter 5: Ethical Decision Making 113 Chapter Objectives, 113 | Chapter Outline, 113

An Ethical Dilemma 114

A Framework for Ethical Decision Making in Business 115

Ethical Issue Intensity, 115 • Individual Factors, 117 • Organizational Factors, 119 • Opportunity, 121 • Business Ethics Intentions, Behavior, and Evaluations, 124

Using the Ethical Decision Making Model to Improve Ethical Decisions 125 Normative Considerations in Ethical Decision Making 126

Institutions as the Foundation for Normative Values, 127 • Implementing Principles and Core Values in Ethical Business Decision Making, 129

Understanding Ethical Decision Making 131 Summary 132 Important Terms for Review, 133 | Resolving Ethical Business Challenges, 134 | Check Your EQ, 135

Chapter 6: Individual Factors: Moral Philosophies and Values 136 Chapter Objectives, 136 | Chapter Outline, 136

An Ethical Dilemma 137

Moral Philosophy Defined 138 Moral Philosophies 140

Instrumental and Intrinsic Goodness, 140 • Teleology, 142 • Deontology, 144 • Relativist Perspective, 146 • Virtue Ethics, 147 • Justice, 149

Applying Moral Philosophy to Ethical Decision Making 150 Cognitive Moral Development and Limitations 152

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Contents vii

White-Collar Crime 154 Individual Factors in Business Ethics 157 Summary 158 Important Terms for Review, 160 | Resolving Ethical Business Challenges, 161 | Check Your EQ, 162

Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 163 Chapter Objectives, 163 | Chapter Outline, 163

An Ethical Dilemma 164

Defining Corporate Culture 165 The Role of Corporate Culture in Ethical Decision Making 167

Ethical Frameworks and Evaluations of Corporate Culture, 169 • Ethics as a Component of Corporate Culture, 170 • Compliance Versus Values-Based Ethical Cultures, 172 • Differential Association, 173 • Whistle-Blowing, 173

Leaders Influence Corporate Culture 176 Power Shapes Corporate Culture, 177 • Motivating Ethical Behavior, 179 • Organizational Structure, 180

Group Dimensions of Corporate Structure and Culture 182

Types of Groups, 182 • Group Norms, 184 Variation in Employee Conduct 185 Can People Control their Actions within a Corporate Culture? 187 Summary 188 Important Terms for Review, 189 | Resolving Ethical Business Challenges, 190 | Check Your EQ, 191

PArt 4: IMPleMentInG BUSIneSS ethICS In A GlOBAl eCOnOMy 192

Chapter 8: Developing an Effective Ethics Program 192 Chapter Objectives, 192 | Chapter Outline, 192

An Ethical Dilemma 193

The Responsibility of the Corporation to Stakeholders 194 The Need for Organizational Ethics Programs 195 An Effective Ethics Program 198

An Ethics Program can Help Avoid Legal Problems, 198 • Values Versus Compliance Programs, 201

Codes of Conduct 201 Ethics Officers 204 Ethics Training and Communication 205 Systems to Monitor and Enforce Ethical Standards 207

Continuous Improvement of an Ethics Program, 209 • Common Mistakes in Designing and Implementing an Ethics Program, 209

Summary 210

Important Terms for Review, 211 | Resolving Ethical Business Challenges, 212 | Check Your EQ, 213

Chapter 9: Managing and Controlling Ethics Programs 214 Chapter Objectives, 214 • Chapter Outline, 214 An Ethical Dilemma 215

Implementing an Ethics Program 216 The Ethics Audit 218 Benefits of Ethics Auditing 219

Ethical Crisis Management and Recovery, 222 • Measuring Nonfinancial Ethical Performance, 223 • Risks and Requirements in Ethics Auditing, 226

The Auditing Process 227 Secure Commitment of Top Managers and Board of Directors, 229 • Establish a Committee to Oversee the Ethics Audit, 229 • Define the Scope of the Audit Process, 230 • Review Organizational Mission, Values, Goals, and Policies and Define Ethical Priorities, 231 • Collect and Analyze Relevant Information, 232 • Verify the Results, 235 • Report the Findings, 236

The Strategic Importance of Ethics Auditing 237 Summary 240 Important Terms for Review, 241 | Resolving Ethical Business Challenges, 242| Check Your EQ, 243

Chapter 10: Globalization of Ethical Decision Making 244 Chapter Objectives, 244 | Chapter Outline, 244

An Ethical Dilemma 245

Global Culture, Values, and Practices 246 Economic Foundations of Business Ethics 249

Economic Systems, 251 Multinational Corporations 255

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viii Contents

Global Cooperation to Support Responsible Business 257

International Monetary Fund, 257 • United Nations Global Compact, 258 • World Trade Organization, 259

Global Ethics Issues 260 Global Ethical Risks, 260 • Bribery, 261 • Antitrust Activity, 263 • Internet Security And Privacy, 265 • Human Rights, 266 • Health Care, 267 • Labor and Right to Work, 268 • Compensation, 269 • Consumerism, 270

The Importance of Ethical Decision Making in Global Business 272 Summary 274 Important Terms for Review, 275 | Resolving Ethical Business Challenges, 276 | Check Your EQ, 277

Chapter 11: Ethical Leadership 278 Chapter Objectives, 278 | Chapter Outline, 278

An Ethical Dilemma 279

Defining Ethical Leadership 280 Requirements for Ethical Leadership 283 Benefits of Ethical Leadership 285 Ethical Leadership and Organizational Culture 287 Managing Ethical Business Conflicts 289

Conflict Management Styles, 289 Ethical Leaders Empower Employees 292 Ethical Leadership Communication 293

Ethical Leadership Communication Skills, 294 Leader–Follower Relationships 297

Ethics Programs and Communication, 297 • Power Differences and Workplace Politics, 298 • Feedback, 299

Leadership Styles and Ethical Decisions 299 The Radar Model 302 Summary 305 Important Terms for Review, 306 | Resolving Ethical Business Challenges, 307 | Check Your EQ, 308

Chapter 12: Sustainability: Ethical and Social Responsibility Dimensions 309 Chapter Objectives, 309 | Chapter Outline, 309

An Ethical Dilemma 310

Defining Sustainability 311 How Sustainability Relates to Ethical Decision Making and Social Responsibility 312

Global Environmental Issues 314 Atmospheric, 314 • Water, 317 • Land, 319

Environmental Legislation 322 Environmental Protection Agency (EPA), 323 • Environmental Regulations, 324

Alternative Energy Sources 328 Wind Power, 328 • Geothermal Power, 329 • Solar Power, 329 • Nuclear Power, 329 • Biofuels, 330 • Hydropower, 330

Business Response to Sustainability Issues 330 Green Marketing, 332 • Greenwashing, 333

Strategic Implementation of Environmental Responsibility 334

Recycling Initiatives, 334 • Stakeholder Assessment, 335 • Risk Analysis, 336 • The Strategic Environmental Audit, 337

Summary 338 Important Terms for Review, 339 | Resolving Ethical Business Challenges, 340 | Check Your EQ, 341

PArt 5: CASeS 342

Case 1: The Volkswagen Scandal: An Admission to Emission Fraud 344

Case 2: Uber Hits a Bump in the Road 349

Case 3: Wells Fargo: The Stage Coach Went Out of Control 361

Case 4: POM Wonderful: Crazy Healthy! 368

Case 5: Monsanto: A Growing Controversy 374

Case 6: Starbucks Venti Social Responsibility and Brand Strategy 387

Case 7: Walmart Juggles Risks and Rewards 398

Case 8: New Belgium Brewing: Crafting a Fresh Social Responsibility and Sustainability Initiative 416

Case 9: The NCAA Has Many Balls in the Air 426

Case 10: Google: The Drive to Balance Privacy with Profit 439

Case 11: Zappos: Taking Steps toward Maximizing Stakeholder Satisfaction 460

Case 12: Lululemon: Turning Lemons into Lemonade 473

Case 13: Insider Trading at the Galleon Group 482

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Contents ix

Case 14: Whole Foods: 365 Degrees of Commitment to Stakeholders 491

Case 15: Apple Maintains Strong Ethical Roots 506

Case 16: PepsiCo: Poised to Deal with the “Next Generation” 521

Case 17: Fraud in Dixon, Illinois: All the Queen’s Horses Could Not Save Her 536

Case 18: Herbalife Reborn 542

Case 19: CVS: “Fired Up” about Social Responsibility 562

Case 20: Enron: Not Accounting for the Future 574

Endnotes E-1

Index I-1

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PrefAce

x

The 12th edition of Business Ethics: Ethical Decision Making and Cases has been revised to provide the most up-to-date content and cases available. This edition is a complete and comprehensive revision. This means that we provide current coverage of changes in the ethical, legal, social, and political environments. As the first ethics textbook with a man- agerial framework, we continue to address ethical decision making in an organizational context.

Our approach is to help students understand and participate in effective ethical deci- sion making in organizations. We approach business ethics from an applied perspective, focusing on conceptual frameworks, risks, issues, and dilemmas that will be faced in the real world of business. We prepare students for the challenges they will face in understand- ing how organizational ethical decision making works. We describe how ethical decisions in an organization involve collaboration in groups, teams, and discussions with peers. Many decisions fall into gray areas where the right decision may not be clear and requires the use of organizational resources and the advice of others. Students will face many ethical challenges in their careers, and our approach helps them to understand risks and be pre- pared to address ethical dilemmas. One approach to business ethics education is to include only a theoretical foundation related to ethical reasoning. Our method is to provide a bal- anced approach that includes the concepts of ethical reasoning as well as the organizational environment that influences ethical decision making.

The 12th edition provides new examples and cases that make foundational concepts come to life. Each chapter has been revised based on the latest research and best practices available. There are five new cases and the remaining cases have been completely revised. Most of the case titles are new and reflect current developments and are designed to engage students. The five new cases include: The Volkswagen Scandal: An Admission to Emission Fraud; Uber Hits a Bump in the Road; Wells Fargo: The Stage Coach Went Out of Control; POM Wonderful: Crazy Healthy!; and Fraud in Dixon, IL: All The Queen’s Horses Could not Save Her. All of the new cases were developed with the author’s oversight, exclusively for this book. They are crafted to provide students an opportunity to apply what they are learning to real world business ethics challenges. They are also designed to enhance critical thinking skills.

Using a managerial framework, we explain how ethics can be integrated into stra- tegic business decisions. This framework provides an overview of the concepts, processes, mandatory, core, and voluntary business practices associated with successful business eth- ics programs. Some approaches to business ethics are excellent as exercises in intellectual

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Preface xi

reasoning, but they cannot deal with the many actual issues and considerations that people in business organizations face. Our approach supports ethical reasoning and the value of individuals being able to face ethical challenges and voice their concerns about appropriate behavior. Employees in organizations are ultimately in charge of their own behavior and need to be skillful in making decisions in gray areas where the appropriate conduct is not always obvious.

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.

By focusing on individual issues and organizational environments, this book gives students the opportunity to see roles and responsibilities they will face in business. The past decade has reinforced the value of understanding the role of business ethics in the effective management of an organization. Widespread misconduct reported in the mass media every day demonstrates that businesses, governments, nonprofits, and institutions of higher learning need to address business ethics.

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 challeng- ing 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

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 impor- tant 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.

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 pre- scribe 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 con- victions in making business decisions and to encourage everyone to think about the effects of their decisions on business and society.

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xii Preface

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 pro- vides evidence that attitudes and behavior can be changed with new information, aware- ness, and shared values.

CONTENT AND ORGANIZATION

In writing Business Ethics, 12th Edition, we strived to be as informative, complete, acces- sible, 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 12 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 1, “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 Busi- ness 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.

Part 2, “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 reorganized and updated and provides expanded coverage of business ethics issues. Chapter 4, “The Institutionalization of Business Ethics,” examines key elements of core or best practices in corporate America today along with legislation and regulation require- ments that support business ethics initiatives. The chapter is divided into three main areas: voluntary, mandated, and core boundaries.

Part 3, “The Decision Making Process” consists of three chapters, which provide a framework to identify, analyze, and understand how businesspeople make ethical deci- sions and deal with ethical issues. Chapter 5, “Ethical Decision Making,” has been revised and updated to reflect current research and understanding of ethical decision making and contains a section on normative considerations in ethical decision making. 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. 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 4, “Implementing Business Ethics in a Global Economy,” looks at specific mea- sures that companies can take to build an effective ethics program as well as how these programs may be affected by global issues, leadership, and sustainability issues. Chapter 8, “Developing an Effective Ethics Program,” has been refined and updated with corporate

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Preface xiii

best practices for developing effective ethics programs. Chapter 9, “Managing and Con- trolling 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. Chapter 10, “Globalization of Ethical Decision Making” has been updated to reflect the complex and dynamic events that occur in global business. This chapter will help stu- dents understand the major issues involved in making decisions in a global environment. Chapter 11 focuses on ethical leadership. Reviewers indicated that they wanted more infor- mation provided on the importance of leadership to an ethical culture, and this chapter answers these requests. Finally, Chapter 12 is a chapter on sustainability. It examines the ethical and social responsibility dimensions of sustainability.

Part 5 consists of 20 cases that bring reality into the learning process. Five of these cases are new to the 12th edition, and the remaining 15 have been revised and updated. In addition, three shorter cases are available on the Instructor’s Companion website: •   The Challenges of Expense Account Fraud •   The Container Store: An Employee-Centric Retailer •   The Ethics Program at Eaton Corporation

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 middle of 2015. By reading and analyzing these cases, students can gain insight into ethical decisions and the realities of making decisions in complex situations.

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. All new ethical dilemmas have been provided for this edition.

•  Each chapter has a contemporary real-world debate issue. Many of these debate issues  have been updated to reflect current ethical issues in business. These debate issues have been found to stimulate thoughtful discussion relating to content issues in the chap- ter. Topics of the debate issues include the truthfulness of health claims, the universal health care debate, the contribution of ethical conduct to financial performance, legisla- tion concerning whistle-blowing, and the impact of carbon emission restrictions.

•  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 “Resolv- ing Ethical Business Challenges” section. The vignette describes a realistic drama that helps students experience the process of ethical decision making. The “Resolving Ethi- cal Business Challenges” minicases presented in this text are hypothetical; any resem- blance 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.

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xiv Preface

Each chapter concludes with a series of questions that allow students to test their EQ (Ethics Quotient). •  Cases. In Part 5, following each real-world case are questions to guide students in rec-

ognizing 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.

EFFECTIVE TOOLS FOR TEACHING AND LEARNING

MindTap. MindTap is a digital learning solution that powers students from memorization to mastery. MindTap is a personalized teaching experience that gives you complete ownership of your course. With it, you can challenge all students, build their confidence, and empower them to be unstoppable. •   Access Everything You Need in One Place. Cut down on prep with MindTap’s

preloaded, organized course materials. Teach more efficiently with interactive multi- media, assignments, quizzes, and more. And give your students the power to read, lis- ten, and study on their phones, so they can learn on their terms.

•   Empower Your Students to Reach Their Potential. Twelve distinct metrics give you actionable insights into student engagement. Identify topics troubling your entire class and instantly communicate with struggling students. And students can track their scores to stay motivated toward their goals. Together, you can accelerate progress.

•   Your Course, Your Content. Only MindTap gives you complete control over your course. You have the flexibility to reorder textbook chapters, add your own notes, and embed a variety of content including OER. Personalize course content to your students’ needs. They can even read your notes, add their own, and highlight key text to aid their progress.

•   A Dedicated Team Whenever You Need Them. MindTap isn’t just a tool, it’s backed by a personalized team eager to support you. We help you set up your course and tailor it to your specific objectives, so you’ll be ready to make an impact from day one. And we’ll be standing by to help you and your students until the final day of the term.

Instructor’s Resource Website. You can find the following teaching tools on the password-protected instructor site. •  Case Notes. Case notes for every chapter provide additional context around each case,

discussion questions, and resource links. This tool includes talking points to help instructors lead student discussion and debate.

•  PowerPoints. PowerPoint continues to be a very popular teaching device, and a special effort has been made to upgrade the PowerPoint program to enhance classroom teach- ing. Lecture slides, containing such content as tables, graphs, and data, have been created to provide instructors with up-to-date content to supplement in-class chapter discussion.

•  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 Ethi- cal 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

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Preface xv

the instructor in analyzing or grading the cases. Simulation role-play cases, as well as implementation suggestions, are included.

•  Role-Play Cases. The 12th edition provides eight 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 cov- ered 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. Stu- dents form teams and make decisions based on an assigned role. The role-play case com- plements and enhances traditional approaches to business learning experiences because it (1) gives students the opportunity to practice making decisions that have business eth- ics consequences; (2) recreates the power, pressures, and information that affect decision making at various levels of management; (3) provides students with a team-based experi- ence 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. •  Cengage Learning Testing Powered by Cognero. This is a flexible, online system that

allows you to author, edit, and manage test bank content from multiple Cengage Learn- ing solutions; create multiple test versions in an instant; and deliver tests from your LMS, your classroom or wherever you want.

•  B-Reality Simulation: This online simulation helps to reinforce basic business ethics concepts, increases textbook comprehension, and helps the user better understand that business decisions usually have an ethics, moral, and/or legal component. The simula- tion makes no judgments; rather, it takes what is imputed by the user, and at the end of each year it explains whether the user acted ethically, unethically, legally/illegally, and why. At the end of four decades of decisions, a report is generated giving a list of the users morals, income, promotions, and how the company defined which decisions were ethical or unethical and which were legal or illegal. Users better understand all angles of the reality of their business decisions before they confront them in the workplace.

•  Additional Teaching Resources. The Center for Ethical Organizational Cultures in the Raymond J. Harbert College of Business at Auburn University offers teaching resources, including cases and debate issues, that are not included with the textbook. These resources have been developed by the authors to allow open source access to enhance customization in teaching. The Center for Ethical Organizational Cultures provides other information related to business ethics education. The Center email address is ecoc@auburn.edu. Please feel free to communicate any questions or suggestions. The teaching resources can be accessed at: http://harbert.auburn.edu/research-and-centers/ center-for-ethical-organizational-cultures/index.php

•  Ethical Leadership Certification. Students also have the ability to receive ethical leadership certification from the National Association of State Boards of Account- ancy (NASBA) Center for Public Trust. This program is comprised of six modules of online content (delivered through Brain-shark, containing videos, graphics, and a voice over). At the end of each of the six modules, students will take an online examination through NASBA. When students complete all six modules successfully, they will receive NASBA Center for the Public Trust Ethical Leadership Certification. As business ethics increases in importance, such certification can give your students an edge in the work- place. For more information, visit https://thecpt.org/student-certification/.

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xvi Preface

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 Philanthropy Ohio

Carolyn Ashe University of Houston—Downtown

Laura Barelman Wayne State College

Russell Bedard Eastern Nazarene College

B. Barbara Boerner Brevard College

Serena Breneman University of Arkansas at Pine Bluff

Lance Brown Miami Dade College Judie Bucholz Guilford College

Greg Buntz Conflict Resolution Center of Iowa, LLC

Hoa Burrows Miami Dade College

Robert Chandler University of Central Florida

April Chatham-Carpenter University of Northern Iowa

Leslie Connell University of Central Florida

Peggy Cunningham Dalhousie 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 E. Esler University of Gloucestershire

Joseph M. Foster Indiana Vocational Technical College—Evansville

Lynda Fuller Wilmington University

Terry Gable Truman State University

Robert Giacalone University of Richmond

Suresh Gopalan Winston-Salem University

Karen Gore Ivy Technical College

Mark Hammer Northwest Nazarene University

Charles E. Harris, Jr. Texas A&M University

Kenneth A. Heischmidt Southeast Missouri State University

Neil Herndon South China University of Technology

Walter Hill Green River Community College

Jack Hires Valparaiso University

David Jacobs Morgan State University

R. J. Johansen Montana State University—Bozeman

ACKNOWLEDGMENTS

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Preface xvii

Jeff Johnson Athens State University

Eduard Kimman Vrije Universiteit

Janet Knight Purdue North Central

Anita Leffel University of Texas at San Antonio

Barbara Limbach Chadron State College

Victor Lipe Trident Tech

Nick Lockard Texas Lutheran College

Terry Loe Kennesaw State University

Nick Maddox Stetson University

Isabelle Maignan Dutchwaters B.V.

Phylis Mansfield Pennsylvania State University—Erie

Robert Markus Babson College

Therese Maskulka Kutztown University

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 Georgetown University

Catherine Neal Northern Kentucky University

Cynthia Nicola Carlow College

Carol Nielsen Bemidji State University

Sharon Palmitier Grand Rapids Community College

Lee Richardson University of Baltimore

James Salvucci Curry College

William M. Sannwald San Diego State University

Ruth Schaa Black River Technical College

Zachary Shank Central New Mexico Community College

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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xviii Preface

We wish to acknowledge the many people who assisted us in writing this book. We are deeply grateful to Kelsey Reddick for helping to manage the chapter revision and support in revising the text bank. We are also appreciative of the work of Jennifer Sawayda for help- ing to develop the cases and revise the case notes. Finally, we express appreciation to the administration and to colleagues at the Auburn University 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

xviii Preface

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CHAPTER 1

CHAPTER OBJECTIVES

• Explore conceptualizations of business ethics from an organizational perspective

• Examine the historical foundations and evolution of business ethics

• Provide evidence that ethical value systems support business performance

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

THE IMPORTANCE OF BUSINESS ETHICS

CHAPTER OUTLINE

Business Ethics Defined

Why Study Business Ethics?

A Crisis in Business Ethics

Specific Issues

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: Business Ethics Reaches Maturity

The 1990s: Institutionalization of Business Ethics

The Twenty-First Century of Business Ethics

Developing Organizational and Global Ethical Cultures

The Benefits of Business Ethics

Ethics Contributes to Employee Commitment

Ethics Contributes to Investor Loyalty

Ethics Contributes to Customer Satisfaction

Ethics Contributes to Profits

Our Framework for Studying Business Ethics

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“It’s easy. Every cab driver will give you blank receipts for cab fares. I usually put the added expenses there. We all do it,” said Emma. “I don’t use Uber or Lyft even though it is cheaper on business trips because there is an electronic record of the fare. As long as everyone cooperates, the vice president of sales doesn’t question the expense vouchers. I imagine she even did it when she was a lowly salesperson.”

“What if people don’t go along with this arrangement?” asked Sophie.

“In the past, we have had some who reported it like corporate wants us to. I remember there was a person who didn’t report the same amounts as the coworker traveling with her. Several months went by and the accountants came in, and she and all the salespeople that traveled together were investigated. After several months the one who ratted out the others was fired or quit, I can’t remember. I do know she never worked in our industry again. Things like that get around. It’s a small world for good salespeople, and everyone knows everyone.”

“What happened to the other salespeople who were investigated?” Sophie asked.

“There were a lot of memos and even a 30-minute video as to the proper way to record expenses. All of them had conversations with the vice president, but no one was fired.”

“No one was fired even though it went against policy?” Sophie asked Emma.

“At the time, my conversation with the vice president went basically this way. She told me that corporate was not going to change the forms, and she acknowledged it was not fair or equitable to the salespeople. She hated the head accountant because he didn’t want to accept the reality of a salesperson’s life in the field. That was it. I left the office and as I walked past the Troll’s office—that’s what we call the head accountant—he just smiled at me.”

This was Sophie’s first real job out of school and Emma was her mentor. What should Sophie report on her expense report?

QUESTIONS | EXERCISES 1. Identify the issues Sophie has to resolve. 2. Discuss the alternatives for Sophie. 3. What should Sophie do if company policy appears to

conflict with the firm’s corporate culture?

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

Sophie just completed a sales training course with one of the firm’s most productive sales representatives, Emma. At the end of the first week, Sophie and Emma sat in a motel room filling out their expense vouchers for the week. Sophie casually remarked to Emma that the training course stressed the importance of accurately filling out expense vouchers.

Emma replied, “I’m glad you brought that up, Sophie. The company expense vouchers don’t list the categories we need. I tried many times to explain to the accountants that there are more expenses than they have boxes for. The biggest complaint we, the salespeople, have is that there is no place to enter expenses for tipping waitresses, waiters, cab drivers, bell hops, airport baggage handlers, and the like. Even the government assumes tipping and taxes them as if they were getting an 18 percent tip. That’s how service people actually survive on the lousy pay they get from their bosses. I tell you, it is embarrassing not to tip. One time I was at the airport and the skycap took my bags from me, so I didn’t have the hassle of checking them. He did all the paperwork and after he was through, I said thank you. He looked at me in disbelief because he knew I was in sales. It took me a week to get that bag back.”

“After that incident I went to the accounting department, and every week for five months I told them they needed to change the forms. I showed them the approximate amount the average salesperson pays in tips per week. Some of them were shocked at the amount. But would they change it or at least talk to the supervisor? No! So I went directly to him, and do you know what he said to me?”

“No, what?” asked Sophie. “He told me that this is the way it has always been

done, and it would stay that way. He also told me if I tried to go above him on this, I’d be looking for another job. I can’t chance that now, especially in this economy. Then he had the nerve to tell me that salespeople are paid too much, and that’s why we could eat the added expenses. We’re the only ones who actually generate revenue and he tells me that I’m overpaid!”

“So what did you do?” inquired Sophie. “I do what my supervisor told me years ago. I pad my

account each week. For me, I tip 20 percent, so I make sure I write down when I tip and add that to my overall expense report.”

“But that goes against company policy. Besides, how do you do it?” asked Sophie.

AN ETHICAL DILEMMA*

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Chapter 1: The Importance of Business Ethics 3

The ability to anticipate and deal with business ethics issues and dilemmas has become a significant priority in the twenty-first century. In recent years, a number of well-publicized scandals resulted in public outrage about deception, fraud, and dis- trust in business and a subsequent demand for improved business ethics, greater corporate responsibility, and laws to protect the public. The publicity and debate surrounding highly publicized legal and ethical lapses at well-known firms highlight the need for businesses to integrate ethics and responsibility into all business decisions. On the other hand, most businesses have a few major ethical lapses and are rarely recognized in the mass media for their good conduct. Companies doing business based on responsible and ethical decisions do not generate media interest. However, organizations need to develop an ethical culture and deal with instances of minor lapses in conduct.

Highly visible business ethics issues influence the public’s attitudes toward business and destroy trust. Ethically charged decisions are a part of everyday life for those who work in organizations at all levels. Business ethics is not just an isolated personal issue; codes, rules, and informal communications for responsible conduct are embedded in an organi- zation’s operations. This means ethical or unethical conduct is the province of everyone who works in an organization, from the lowest level employee to the CEO.

Making good business ethical decisions are just as important to business success as mastering management, marketing, finance, and accounting. While education and training emphasize functional areas of business, business ethics is often viewed as easy to master, something that happens with little effort. You will hear the suggestion that business eth- ics is just doing what is right. All you have to do is remember your values and stick to them. The exact opposite is the case. Decisions with an ethical component are an everyday occurrence requiring people to identify issues and make quick decisions. Ethical behavior in business requires understanding and identifying issues, areas of risk, and approaches to making choices in an organizational environment. On the other hand, people can act unethically simply by failing to identify a situation that has an ethical issue. Ethical blind- ness results from individuals who fail to sense the nature and complexity of their decisions.1

Some approaches to business ethics look only at the philosophical backgrounds of individuals and the social consequences of decisions. This approach fails to address the complex organizational environment of businesses and pragmatic business concerns. By contrast, our approach is managerial and incorporates real-world decisions that impact the organization and stakeholders. Our book will help you better understand how ethics is important in the business world.

It is important to learn how to make decisions in the internal environment of an organization to achieve personal and organizational goals. But business does not exist in a vacuum. As stated, decisions in business have implications for investors, employees, cus- tomers, suppliers, and society. Ethical decisions must take these stakeholders into account, for unethical conduct can negatively affect people, companies, industries, and society as a whole. Our approach focuses on the practical consequences of decisions and on posi- tive outcomes that have the potential to contribute to individuals, business, and society at large. The field of business ethics deals with questions about whether specific conduct and business practices are acceptable. For example, should a salesperson omit facts about a product’s poor safety record in a sales presentation to a client? Should accountants report inaccuracies they discover in an audit of a client, knowing the auditing company will prob- ably be fired by the client for doing so? Should an automobile tire manufacturer intention- ally conceal safety concerns to avoid a massive and costly tire recall? Regardless of their legality, others will certainly judge the actions in such situations as right or wrong, ethi- cal or unethical. By its very nature, the field of business ethics is controversial, and there is no universally accepted approach for resolving its dilemmas. All organizations have to

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4 Part 1: An Overview of Business Ethics

deal with misconduct, but some highly visible misconduct creates damaging publicity for firms. Wells Fargo experienced a loss of confidence when its sales department opened new accounts for clients without their knowledge.2 The opportunity for the sales department to manipulate clients was created by an unethical culture that top managers supported. The result was loss of trust and closed accounts as well as loss of many potential new clients.

Before we get started, it is important to state our approach to business ethics. First, we do not moralize by stating what is right or wrong in a specific situation, although we offer background on normative guidelines for appropriate conduct. Second, although we pro- vide an overview of group and individual decision making processes, we do not prescribe one approach or process as the best or most ethical. However, we provide many examples of successful ethical decision making. Third, by itself, this book will not make you more ethical, nor will it tell you how to judge the ethical behavior of others. Rather, its goal is to help you understand, use, and improve your current values and convictions when mak- ing business decisions so that you think about the effects of those decisions on business and society. Our approach will help you understand what businesses are doing to improve their ethical conduct. To this end, we aim to help you learn to recognize and resolve eth- ical issues within business organizations. As a manager, you will be responsible for your decisions and the conduct of the employees you supervise. For this reason, we provide a chapter on ethical leadership. The framework we developed focuses on how organizational decisions are made and on ways companies can improve their ethical conduct. This process is more complex than many think. People who believe they know how to make the “right” decision usually come away with more uncertainty about their own decision skills after learning about the complexity of ethical decision making. This is a normal occurrence, and our approach will help you evaluate your own values as well as those of others. It will also help you to understand the nature of business ethics and incentives found in the workplace that change the way you make decisions in business versus at home.

In this chapter, we first develop a definition of business ethics and discuss why it has become an important topic in business education. We also discuss why studying business ethics can be beneficial. Next, we examine the evolution of business ethics in North Amer- ica. Then we explore the performance benefits of ethical decision making for businesses. Finally, we provide a brief overview of the framework we use for examining business ethics in this text.

BUSINESS ETHICS DEFINED

To understand business ethics, you must first recognize that most people do not have spe- cific definitions they use to define ethics-related issues. The terms morals, principles, val- ues, and ethics are often used interchangeably, and you will find this is true in companies as well. Consequently, there is much confusion regarding this topic. To help you under- stand these differences, we discuss these terms.

For our purposes, morals refer to a person’s personal philosophies about what is right or wrong. The important point is that when one speaks of morals, it is personal or singular. Morals, your philosophies or sets of values of right and wrong, relate to you and you alone. You may use your personal moral convictions in making ethical decisions in any context. Business ethics comprises organizational principles, values, and norms that may originate from individuals, organizational statements, or from the legal system that primarily guide individual and group behavior in business. Principles are specific and pervasive boundar- ies for behavior that should not be violated. Principles often become the basis for rules.

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Chapter 1: The Importance of Business Ethics 5

Some examples of principles could include human rights, freedom of speech, and the fun- damentals of justice. Values are enduring beliefs and ideals that are socially enforced. Sev- eral desirable or ethical values for business today are teamwork, trust, and integrity. Such values are often based on organizational or industry best practices. Investors, employees, customers, interest groups, the legal system, and the community often determine whether a specific action or standard is ethical or unethical. Although these groups influence the determination of what is ethical or unethical for business, they also can be at odds with one another. Even though this is the reality of business and such groups may not necessarily be right, their judgments influence society’s acceptance or rejection of business practices.

Ethics is defined as behavior or decisions made within a groups’ values. In our case, we are discussing decisions made in business by groups of people that represent the business organization. One can have business ethics such as health care, account- ing, marketing, management, or financial ethics. But one can also have engineering, architectural, or publishing ethics as related to different disciplines or associations. The important concept in business ethics is that right and wrong behavior is defined by the group, which might be a company or an industry. Because the Supreme Court defined companies as having limited individual rights, it is logical such groups have an identity that includes core values.3 This is known as being part of a corporate culture. Within this culture there are rules and regulations—both written and unwritten—that deter- mine what decisions employees consider right or wrong as it relates to the firm. Such evaluations are judgments by the organization and are defined as its ethics (or, in this case, their business ethics). One difference between an ordinary decision and an eth- ical one lies in “the point where the accepted rules no longer serve, and the decision maker is faced with the responsibility for weighing values and reaching a judgment in a situation which is not quite the same as any he or she has faced before.”4 Another differ- ence relates to the amount of emphasis decision makers place on their own values and accepted practices within their company. Consequently, values and judgments play a critical role when we make ethical decisions.

Building on these definitions, we begin to develop a concept of business ethics. Most people agree that businesses should hire individuals with sound moral principles. However, some special aspects must be considered when applying ethics to business. First, to survive and contribute to society, businesses must earn a profit. There is no conflict or trade-offs between profits and business ethics. For instance, Google, Texas Instruments, and Star- bucks are highly profitable companies that have earned a reputation for ethical conduct.5 Second, to be successful, businesses must address the needs and desires of stakeholders. The good news is that the world’s most ethical companies often have superior stock per- formance.6 To address these unique aspects of the business world, society has developed rules—both legal and implicit—to guide businesses in their efforts to earn profits in ways that help individuals or society and contribute to social and economic well-being.

WHY STUDY BUSINESS ETHICS?

A Crisis in Business Ethics Business ethics has become a major concern. The Ethics Resource Center (ERC) con- ducts the Ethics & Compliance Initiative Global Business Ethics Survey (GBES) that measures the risk and promotion of workplace integrity. Sample sizes average 1,000 employees per country and gather reliable data on key ethics and compliance outcomes

14436_ch01_ptg01_001-026.indd 5 02/01/18 3:01 PM

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

6 Part 1: An Overview of Business Ethics

to help identify and better understand the ethics issues that are important to employ- ees. The GBES measures workplace integrity as the pressure to compromise organiza- tional standards, observed misconduct, reporting of misconduct when observed, and retaliation against reports. Table 1–1 provides an overview of observed misconduct in the United States. While observed misconduct was 30 percent in the United States, it was 33 percent globally. Globally, 73 percent of employees that felt pressure also wit- nessed misconduct.7

Business ethics decisions and activities have come under greater scrutiny by many different stakeholders, including consumers, employees, investors, government regu- lators, and special interest groups.8 Figure 1–1 shows the percentage of global respon- dents who say they trust a variety of businesses in various industries. Financial services have some of the lowest ratings, indicating that the financial sector has not been able to restore its reputation since the most recent recession. There is no doubt negative pub- licity associated with major misconduct lowered the public’s trust in certain business

TABLE 1–1 Observed Misconduct in the U.S. Workforce

Observed misconduct 30%

Abusive behavior 22%

Lying to stakeholders 22%

Conflict of interest 19%

Pressure to compromise standards 22%

Report observed misconduct 76%

Experience retaliation for reporting 53%

Source: Ethics and Compliance Initiative, 2016 Global Business Ethics Survey™: Measuring Risk and Promoting Workplace Integrity (Arlington, VA: Ethics and Compliance Initiative, 2016), 43.

Source: Edelman, 2016 Edelman Trust Barometer, http://www.edelman.com/insights/intellectual-property/2016-edelman-trust-barometer/executive- summary/ (accessed April 9, 2017).

51%

53%

58%

60%

60%

61%

64%

74%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Financial Services

Pharmaceuticals

Energy

Telecommunications

Automotive

Consumer Packaged Goods

Food and Beverage

Technology

FIGURE 1–1 Global Trust in Industry Sectors

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Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

Chapter 1: The Importance of Business Ethics 7

sectors.9 Decreased trust leads to a reduction in customer satisfaction and customer loyalty, which in turn can negatively impact the firm or industry.10

Specific Issues There are a number of ethical issues that must be addressed to prevent misconduct. Misuse of company resources, abusive behavior, harassment, accounting fraud, conflicts of inter- est, defective products, bribery, product knockoffs, and employee theft are all problems cited as potential risk areas. Chinese e-commerce giant Alibaba, which trades on the New York Stock Exchange, was reprimanded by Chinese government authorities for ignor- ing the sales of knockoff products through Taobao, its biggest e-commerce platform.11 Walmart spent over $800 million in legal fees defending itself against allegations of bribery in Mexico.12

General ethics plays an important role in the public sector as well. In government, several politicians and high-ranking officials have experienced significant negative pub- licity, and some resigned in disgrace over ethical indiscretions. South Korea’s president, Park Geun-hye, was removed from office over a bribery scandal. The heir to the Samsung Group was found to have engaged in bribery based on an investigation into bribery and embezzlement charges. There was a “donation” of $25 million to the National Pension Fund at the time of a Samsung merger. This case heightens the awareness of the political risks associated with bribery.13 Such political scandals demonstrate that political ethical behavior must be proactively practiced at all levels of public service.

Every organization has the potential for unethical behavior. For instance, the U.S. Defense Secretary ordered a renewed focus on military ethics after cheating scandals occurred in different branches of the military. Air force officers at the Malmstrom Air Force Base in Montana were suspended after widespread cheating on monthly profi- ciency tests on operating warheads. Similarly, the U.S. Navy was criticized when sailors cheated on qualification exams for becoming nuclear reactor instructors. The Defense Secretary at the time believed the issue might be systemic, requiring an ethics overhaul in the military.14