Business ethics shaw 9th edition

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William H. Shaw San Jose State University

BUS INESS ETH ICS

9T H E DI T ION

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Business Ethics, Ninth Edition William H. Shaw

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iii

PREFACE viii

PA RT ON E | MOR A L PH I LOSOPH Y A N D BUSI N E S S 1

CHA PTER 1 THE N ATURE OF MOR AL IT Y 1 Ethics 3 Moral versus Nonmoral Standards 5 Religion and Morality 11 Ethical Relativism 13 Having Moral Principles 15 Morality and Personal Values 19 Individual Integrity and Responsibility 20 Moral Reasoning 24 Study Corner 31 Case 1.1: Made in the U.S.A.—Dumped in Brazil, Africa, Iraq . . . 32 Case 1.2: Loose Money 35 Case 1.3: Just Drop off the Key, Lee 36 Case 1.4: The A7D Affair 39

CHA PTER 2 NORMAT IV E THEOR IES OF E TH ICS 4 3 Consequentialist and Nonconsequentialist Theories 45 Egoism 46 Utilitarianism 49 Kant’s Ethics 56 Other Nonconsequentialist Perspectives 62 Utilitarianism Once More 68 Moral Decision Making: A Practical Approach 70 Study Corner 73 Case 2.1: Hacking into Harvard 74 Case 2.2: The Ford Pinto 77 Case 2.3: Blood for Sale 80

CONTENTS

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iv CONTENTS

CHA PTER 3 JUST ICE AND ECONOMIC D ISTR IBUT ION 83 The Nature of Justice 86 The Utilitarian View 89 The Libertarian Approach 93 Rawls’s Theory of Justice 100 Study Corner 109 Case 3.1: Eminent Domain 110 Case 3.2: Battling over Bottled Water 112 Case 3.3: Poverty in America 114

PA RT T WO | A M E R IC A N BUSI N E S S A N D ITS BA SIS 117

CHA PTER 4 THE N ATURE OF CA P ITAL ISM 117 Capitalism 119 Key Features of Capitalism 122 Two Arguments for Capitalism 124 Criticisms of Capitalism 128 Today’s Economic Challenges 136 Study Corner 142 Case 4.1: Catastrophe in Bangladesh 143 Case 4.2: Licensing and Laissez Faire 145 Case 4.3: One Nation under Walmart 148 Case 4.4: A New Work Ethic? 151 Case 4.5: Casino Gambling on Wall Street 152 Case 4.6: Paying College Athletes 154

CHA PTER 5 CORPOR AT IONS 156 The Limited-Liability Company 158 Corporate Moral Agency 160 Rival Views of Corporate Responsibility 164 Debating Corporate Responsibility 171 Institutionalizing Ethics within Corporations 176 Study Corner 183 Case 5.1: Yahoo in China 184 Case 5.2: Drug Dilemmas 186 Case 5.3: Free Speech or False Advertising? 189 Case 5.4: Corporations and Religious Faith 191 Case 5.5: Charity to Scouts? 193 Case 5.6: Corporate Taxation 195

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CONTENTS v

PA RT T H R E E | BUSI N E S S A N D SOCI ET Y 197

CHA PTER 6 CONSUMERS 197 Product Safety 199 Other Areas of Business Responsibility 211 Deception and Unfairness in Advertising 220 The Debate over Advertising 230 Study Corner 234 Case 6.1: Breast Implants 235 Case 6.2: Hot Coffee at McDonald’s 237 Case 6.3: Sniffing Glue Could Snuff Profits 239 Case 6.4: Closing the Deal 240 Case 6.5: The Rise and Fall of Four Loko 243

CHA PTER 7 THE EN V IRONMENT 24 5 Business and Ecology 249 The Ethics of Environmental Protection 252 Achieving Our Environmental Goals 258 Delving Deeper into Environmental Ethics 263 Study Corner 271 Case 7.1: Hazardous Homes in Herculaneum 272 Case 7.2: Poverty and Pollution 275 Case 7.3: The Fordasaurus 277 Case 7.4: The Fight over the Redwoods 279 Case 7.5: Palm Oil and Its Problems 282

PA RT FOU R | T H E ORG A N I Z AT ION A N D T H E PEOPL E I N IT 284

CHA PTER 8 THE WORK PL ACE (1) : BAS IC ISSUES 28 4 Civil Liberties in the Workplace 285 Hiring 291 Promotions 297 Discipline and Discharge 299 Wages 303 Labor Unions 307 Study Corner 316 Case 8.1: AIDS in the Workplace 317 Case 8.2: Web Porn at Work 319

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vi CONTENTS

Case 8.3: Speaking Out about Malt 320 Case 8.4: Have Gun, Will Travel . . . to Work 321 Case 8.5: Union Discrimination 324

CHA PTER 9 THE WORK PL ACE ( 2 ) : TODAY’S CHALLENGES 326 Organizational Influence in Private Lives 327 Testing and Monitoring 332 Working Conditions 338 Redesigning Work 347 Study Corner 351 Case 9.1: Unprofessional Conduct? 352 Case 9.2: Testing for Honesty 353 Case 9.3: She Snoops to Conquer 356 Case 9.4: Protecting the Unborn at Work 357 Case 9.5: Swedish Daddies 360

CHA PTER 10 MOR AL CHOICES FAC ING EMPL OY EES 363 Obligations to the Firm 364 Abuse of Official Position 368 Bribes and Kickbacks 374 Gifts and Entertainment 378 Conflicting Obligations 380 Whistle-Blowing 383 Self-Interest and Moral Obligation 387 Study Corner 391 Case 10.1: Changing Jobs and Changing Loyalties 392 Case 10.2: Conflicting Perspectives on Conflicts of Interest 393 Case 10.3: Inside Traders or Astute Observers? 395 Case 10.4: The Housing Allowance 397 Case 10.5: Ethically Dubious Conduct 398

CHA PTER 11 JOB D ISCR IMINAT ION 4 01 The Meaning of Job Discrimination 403 Evidence of Discrimination 405 Affirmative Action: The Legal Context 410 Affirmative Action: The Moral Issues 415 Comparable Worth 418 Sexual Harassment 420

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CONTENTS vii

Study Corner 424 Case 11.1: Minority Set-Asides 425 Case 11.2: Hoop Dreams 427 Case 11.3: Raising the Ante 429 Case 11.4: Consenting to Sexual Harassment 430 Case 11.5: Facial Discrimination 433

SUGGESTIONS FOR FURTHER READING 435

NOTES 439

INDEX 465

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viii

PREFACE It is difficult to imagine an area of study that has greater importance to society or greater relevance to students than business ethics. As this text enters its ninth edition, business ethics has become a well- established academic subject. Most colleges and universities offer courses in it, and scholarly interest continues to grow.

Yet some people still scoff at the idea of business ethics, jesting that the very concept is an oxymoron. To be sure, recent years have seen the newspapers filled with lurid stories of corporate misconduct and felo- nious behavior by individual businesspeople, and many suspect that what the media report represents only the proverbial tip of the iceberg. However, these scandals should prompt a reflective person not to make fun of business ethics but rather to think more deeply about the nature and purpose of business in our society and about the ethical choices individuals must inevitably make in their business and professional lives.

Business ethics has an interdisciplinary character. Questions of economic policy and business practice intertwine with issues in politics, sociology, and organizational theory. Although business ethics remains anchored in philosophy, even here abstract questions in normative ethics and political philosophy mingle with analysis of practical problems and concrete moral dilemmas. Furthermore, business ethics is not just an academic study but also an invitation to reflect on our own values and on our own responses to the hard moral choices that the world of business can pose.

GOAL S, ORG ANI Z AT ION, AND TOPICS Business Ethics has four goals: to expose students to the important moral issues that arise in various business contexts; to provide students with an understanding of the moral, social, and economic environ- ments within which those problems occur; to introduce students to the ethical and other concepts that are relevant for resolving those problems; and to assist students in developing the necessary reasoning and analytical skills for doing so. Although the book’s primary emphasis is on business, its scope extends to related moral issues in other organizational and professional contexts.

The book has four parts. Part One, “Moral Philosophy and Business,” discusses the nature of morality and presents the main theories of normative ethics and the leading approaches to questions of economic justice. Part Two, “American Business and Its Basis,” examines the institutional foundations of business, focusing on capitalism as an economic system and the nature and role of corporations in our society. Part Three, “Business and Society,” concerns moral problems involving business, consumers, and the natural environment. Part Four, “The Organization and the People in It,” identifies a variety of ethical issues and moral challenges that arise out of the interplay of employers and employees within an organization, includ- ing the problem of discrimination.

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PREFACE ix

Case studies enhance the main text. These cases vary in kind and in length, but they are all designed to enable instructors and students to pursue further some of the issues discussed in the text and to analyze them in more specific contexts. The case studies should provide a lively springboard for classroom discus- sions and the application of ethical concepts.

Business Ethics covers a wide range of topics relevant to today’s world. Three of these are worth drawing particular attention to.

Business and Globalization The moral challenges facing business in today’s globalized world economy are well represented in the book and seamlessly integrated into the chapters. For example, Chapter 1 discusses ethical relativism, Chapter 4 outsourcing and globalization, and Chapter 8 overseas bribery and the Foreign Corrupt Practices Act; and there are international examples or comparisons throughout the book. Moreover, almost all the basic issues discussed in the book (such as corporate responsibility, the nature of moral reasoning, and the value of the natural world—to name just three) are as crucial to making moral decisions in an international business context as they are to making them at home. In addition, cases 1.1, 2.3, 4.1, 5.1, 5.2, 6.3, 7.2, 7.5, 9.5, and 10.4 deal explicitly with moral issues arising in today’s global economic system.

The Environment Because of its ongoing relevance and heightened importance in today’s world, an entire chapter, Chapter 7, with five case studies is devoted to this topic. In particular, the chapter highlights recent environmental disasters, the environmental dilemmas and challenges we face, and their social and business costs, as well as the changing attitude of business toward the environment and ecology.

Health and Health Care Far from being a narrow academic pursuit, the study of business ethics is relevant to a wide range of important social issues—for example, to health and health care, which is currently the subject of much discussion and debate in the United States. Aspects of this topic are addressed in the text and developed in the following cases: 2.3: Blood for Sale, 4.2: Licensing and Laissez Faire, 5.2: Drug Dilemmas, 6.1: Breast Implants, 8.1: AIDS in the Workplace, and 9.4: Protecting the Unborn at Work.

CHANGES IN TH IS ED IT ION YOUR TEXTBOOK

Instructors who have used the previous edition will find the organization, general content, and overall design of the book familiar. However, the text has been revised throughout, as examples and information have been updated, and the clarity of its discussions and the accuracy of its treatment of both philosophical and empirical issues have been improved. At all times the goal has been to provide a textbook that students will find clear, understandable, and engaging.

Fifty-two case studies—more than ever before—now supplement the main text. Five of them are brand new; a number of the others have been revised or updated. Of the cases that are new to this edi- tion, Case 1.2, “Loose Money,” deals with whether to return cash that has been dropped to its owner;

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x PREFACE

Case 4.1, “Catastrophe in Bangladesh,” concerns responsibility for a factory collapse that killed over a thou- sand workers making clothing for Western firms; Case 4.6, “Paying College Athletes,” examines the move to give athletes a greater share of the revenues from college sports; Case 5.4, “Corporations and Religious Faith,” deals with the claim that corporations have a right to do business in a way that reflects the religious beliefs of their owners; and Case 5.6, “Corporate Taxation,” discusses tax avoidance by large corporations.

MINDTAP

MindTap® Ethics for Shaw’s Business Ethics is a digital learning solution that helps instructors engage and transform today’s students into critical thinkers. Through paths of dynamic assignments and applica- tions that can personalized by instructors (including ethics simulations, quizzing and BBC videos), real-time course analytics and an accessible reader, MindTap helps turn cookie cutter into cutting edge, apathy into engagement, and memorizers into higher-level thinkers.

WAYS OF US ING THE BOOK A course in business ethics can be taught in a variety of ways. Instructors have different approaches to the subject, different intellectual and pedagogical goals, and different classroom styles. They emphasize different themes and start at different places. Some of them may prefer to treat the foundational questions of ethical theory thoroughly before moving on to particular moral problems; others reverse this priority. Still other instructors frame their courses around the question of economic justice, the analysis of capitalism, or the debate over corporate social responsibility. Some instructors stress individual moral decision making, others social and economic policy.

Business Ethics permits teachers great flexibility in how they organize their courses. A wide range of theoretical and applied issues are discussed; and the individual chapters, the major sections within them, and the case studies are to a surprising extent self-contained. Instructors can thus teach the book in what- ever order they choose, and they can easily skip or touch lightly on some topics in order to concentrate on others without loss of coherence.

ACKNOWLEDGMENTS I wish to acknowledge my great debt to the many people whose ideas and writing have influenced me over the years. Philosophy is widely recognized to involve a process of ongoing dialogue. This is nowhere more evident than in the writing to textbooks, whose authors can rarely claim that the ideas being synthesized, organized, and presented are theirs alone. Without my colleagues, without my students, and without a larger philosophical community concerned with business and ethics, this book would not have been possible.

I particularly want to acknowledge my debt to Vincent Barry. Readers familiar with our textbook and reader Moral Issues in Business1 will realize the extent to which I have drawn on material from that work. Business Ethics is, in effect, a revised and updated version of the textbook portion of that collaborative work, and I am very grateful to Vince for permitting me to use our joint work here.

1William H. Shaw and Vincent Barry, Moral Issues in Business, 13th ed. (Boston, Mass.: Cengage Learning, 2016).

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INTRODUCTION

1

end. Even with the company’s financial demise fast approach- ing, Kenneth Lay was still recommending the company’s stock to its employees—at the same time that he and other execu- tives were cashing in their shares and bailing out.

Enron’s crash cost the retirement accounts of its employ- ees more than a billion dollars as the company’s stock fell from the stratosphere to only a few pennies a share. Outside

investors lost even more. The reason Enron’s collapse caught investors by surprise—the company’s market value was $28 billion just two months before its bankruptcy—was that Enron had always made its financial records and accounts as opaque as possible. It did this by creating a Byzantine financial structure of off-balance-sheet special- purpose entities—reportedly as many as 9,000—that were supposed to be separate and independent from the main company. Enron’s board of direc-

tors condoned these and other dubious accounting practices and voted twice to permit executives to pursue personal interests that ran contrary to those of the company. When Enron was obliged to redo its financial statements for one three-year period, its profits dropped $600 million and its debts increased $630 million.

SOMETIMES THE RICH AND MIGHTY FALL. Take Kenneth Lay, for example. Convicted by a jury of conspiracy and multiple counts of fraud, he had been chairman and CEO of Enron until that once mighty company took a nose dive and crashed. Founded in the 1980s, Enron soon became a domi- nant player in the field of energy trading, growing rapidly to become America’s seventh biggest company. Wall Street loves growth, and Enron was its darling, ad- mired as dynamic, innovative, and—of course—profitable. Enron stock ex- ploded in value, increasing 40 percent in a single year. The next year it shot up 58 percent and the year after that an unbelievable 89 percent. The fact that nobody could quite understand exactly how the company made its money didn’t seem to matter.

Fortune magazine voted Enron Amer- ica’s “Most Innovative Company” for six consecutive years, and Enron proudly took to calling itself not just “the world’s leading energy com- pany” but also “the world’s leading company.” But when Enron was later forced to declare bankruptcy—at the time the largest Chapter 11 filing in U.S. history—the world learned that its leg- endary financial prowess was illusory and the company’s suc- cess built on the sands of hype. And the hype continued to the

CHAPTER 1

THE NATURE OF MORAL ITY

THE REASON ENRON’S

collapse caught investors by surprise . . . was

that Enron had always made its financial

records and accounts as opaque as possible.

PART ONE | MORAL PHILOSOPHY AND BUSINESS

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2 PART ONE MORAL PHILOSOPHY AND BUSINESS

who are compensated according to their ability to bring in and support investment banking deals. Enron was known in the industry as the “deal machine” because it generated so much investment banking business—limited partnerships, loans, and derivatives. That may explain why, only days before Enron filed bankruptcy, just two of the sixteen Wall Street analysts who cov- ered the company recommended that cli- ents sell the stock. The large banks that Enron did business with played a corrupt role, too, by helping manufacture its fraudu- lent financial statements. (Subsequent law- suits have forced them to cough up some

of their profits: Citibank, for example, had to pay Enron’s victimized shareholders $2 billion.) But the rot didn’t stop there. Enron and Andersen enjoyed extensive political connec- tions, which had helped over the years to ensure the passage of a series of deregulatory measures favorable to the energy company. Of the 248 members of Congress sitting on the eleven House and Senate committees charged with investigat- ing Enron’s collapse, 212 had received money from Enron or its accounting firm.1

Stories of business corruption and of greed and wrongdoing in high places have always fascinated the popular press, and media interest in business ethics has never been higher. But one should not be misled by the headlines and news reports. Not all moral issues in business involve giant corporations and their well-heeled executives, and few cases of business ethics are widely publicized. The vast majority of them involve the mundane, uncelebrated moral challenges that working men and women meet daily.

Although the financial shenanigans at Enron were compli- cated, once their basic outline is sketched, the wrongdoing is pretty easy to see: deception, dishonesty, fraud, disregarding one’s professional responsibilities, and unfairly injuring others for one’s own gain. But many of the moral issues that arise in busi- ness are complex and difficult to answer. For example:

How far must manufacturers go to ensure product safety? Must they reveal everything about a product, including any possible defects or shortcomings? At what point does acceptable exaggeration become lying

Still, Enron’s financial auditors should have spotted these and other problems. After all, the shell game Enron was playing is an old one, and months before the company ran aground, Enron Vice President Sherron Watkins had warned Lay that the com- pany could soon “implode in a wave of accounting scandals.” Yet both Arthur Andersen, Enron’s longtime outside auditing firm, and Vinson & Elkins, the company’s law firm, had routinely put together and signed off on various dubious financial deals, and in doing so made large profits for themselves. Arthur Andersen, in particular, was supposed to make sure that the company’s public records reflected financial reality, but Andersen was more wor- ried about its auditing and consulting fees than about its fiduciary responsibilities. Even worse, when the scandal began to break, a partner at Andersen organized the shredding of incriminating Enron documents before investigators could lay their hands on them. As a result, the eighty-nine-year-old accounting firm was convicted of obstructing justice. The Supreme Court later over- turned that verdict on a technicality, but by then Arthur Andersen had already been driven out of business. (The year before Enron went under, by the way, the Securities and Exchange Commission fined Andersen $7 million for approving misleading accounts at Waste Management, and it also had to pay $110 million to settle a lawsuit for auditing work it did for Sunbeam before it, too, filed for bankruptcy. And when massive accounting fraud was later uncovered at WorldCom, it came out that the company’s auditor was—you guessed it—Arthur Andersen.)

Enron’s fall also revealed the conflicts of interest that threaten the credibility of Wall Street’s analysts—analysts

The collapse of Enron’s stock price in late 2001

0 Oct. 16 Oct. 22 Oct. 24 Nov. 28

5

10

15

20

25

30

35

40 $38.44

$20.65

$16.41

$0.61

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CHAPTER ONE THE NATURE OF MORALITY 3

about a product or a service? When does aggressive marketing become consumer manipulation? Is adver- tising useful and important or deceptive, misleading, and socially detrimental? When are prices unfair or exploitative?

Are corporations obliged to help combat social prob- lems? What are the environmental responsibilities of business, and is it living up to them? Are pollution per- mits a good idea? Is factory farming morally justifiable?

May employers screen potential employees on the basis of lifestyle, physical appearance, or personality tests? What rights do employees have on the job? Under what conditions may they be disciplined or fired? What, if anything, must business do to improve work conditions? When are wages fair? Do unions promote the interests of workers or infringe their rights? When, if ever, is an employee morally required to blow the whistle?

May employees ever use their positions inside an orga- nization to advance their own interests? Is insider trad- ing or the use of privileged information immoral? How much loyalty do workers owe their companies? What say should a business have over the off-the-job activi- ties of its employees? Do drug tests violate their right to privacy?

What constitutes job discrimination, and how far must business go to ensure equality of opportunity? Is affir- mative action a matter of justice, or a poor idea? How

should organizations respond to the problem of sexual harassment?

LEARNING OBJECTIVES

These questions typify business issues with moral significance. The answers we give to them are determined, in large part, by our moral standards—that is, by the moral principles and values we accept. What moral standards are, where they come from, and how they can be assessed are some of the concerns of this opening chapter. In particular, you will encounter the fol- lowing topics:

1. The nature, scope, and purpose of business ethics

2. The distinguishing features of morality and how it differs from etiquette, law, and professional codes of conduct

3. The relationship between morality and religion

4. The doctrine of ethical relativism and its difficulties

5. What it means to have moral principles; the nature of conscience; and the relationship between morality and self-interest

6. The place of values and ideals in a person’s life

7. The social and psychological factors that sometimes jeopardize an individual’s integrity

8. The characteristics of sound moral reasoning

E THICS Ethics (or moral philosophy) is a broad field of inquiry that addresses a fundamental query that all of us, at least from time to time, inevitably think about—namely, How should I live my life? That question, of course, leads to others, such as: What sort of person should I strive to be? What values are important? What standards or principles should I live by? Exploring these issues immerses one in the study of right and wrong. Among other things, moral philosophers and others who think seriously about ethics want to understand the nature of morality, the meaning of its basic concepts, the charac- teristics of good moral reasoning, how moral judgments can be justified, and, of course, the principles or properties that distinguish right actions from wrong actions. Thus, ethics deals with individual character and with the moral rules that govern and limit our conduct. It investigates questions of right and wrong, fairness and unfairness, good and

SUMMARY Ethics deals with

individual character and the moral rules

that govern and limit our conduct.

It investigates questions of right

and wrong, duty and obligation, and moral

responsibility.

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