Chapter 5 business ethics and the legal environment of business

Accounting Homework

Focus on Ethics

Answer questions 1 - 5 in this reading on "Ethics and the Legal Environment of Business." Be sure to fully explain the reasoning used in your answers.

Ethics and the Legal Environment of Business

In Chapter 5, we examined the importance of ethical standards in the business context. We also offered suggestions on how business decision makers can create an ethical workplace. Certainly, it is not wrong for a businessperson to try to increase his or her firm’s profits. But there are limits, both ethical and legal, to how far businesspersons can go. In preparing for a career in business, you will find that a background in business ethics and a commitment to ethical behavior are just as important as a knowledge of the specific laws that are covered in this text. Of course, no textbook can give an answer to each and every ethical question that arises in the business environment. Nor can it anticipate the types of ethical questions that will arise in the future, as technology and globalization continue to transform the workplace and business relationships.

The most we can do is examine the types of ethical issues that businesspersons have faced in the past and that they are facing today. In the Focus on Ethics sections in this book, we provide examples of specific ethical issues that have arisen in various areas of business activity.

In this initial Focus on Ethics feature, we look first at the relationship between business ethics and business law. We then examine various obstacles to ethical behavior in the business context. We conclude the feature by exploring the parameters of corporate social responsibility through a discussion of whether corporations have an ethical duty to the community or society at large.

Business Ethics and Business Law

Business ethics and business law are closely intertwined because ultimately the law rests on social beliefs about right and wrong behavior in the business world. Thus, businesspersons, by complying with the law, are acting ethically. Mere legal compliance (the “moral minimum” in terms of business ethics), however, is often not enough. This is because the law does not—and cannot—provide the answers for all ethical questions.

In the business world, numerous actions may be unethical but not necessarily illegal. Consider an example. Suppose that a pharmaceutical company is banned from marketing a particular drug in the United States because of the drug’s possible adverse side effects. Yet no law prohibits the company from selling the drug in foreign markets—even though some consumers in those markets may suffer serious health problems as a result of using the drug. At issue here is not whether it would be legal to market the drug in other countries but whether it would be ethical to do so. In other words, the law has its limits—it cannot make all ethical decisions for us. Rather, the law assumes that those in business will behave ethically in their day-to-day dealings. If they do not, the courts will not come to their assistance.

Legal Reasoning

1. Can you think of a situation in which a business firm may be acting ethically but not in a socially responsible manner? Explain.

Obstacles to Ethical Business Behavior

People sometimes behave unethically in the business context, just as they do in their private lives. Some businesspersons knowingly engage in unethical behavior because they think that they can “get away with it”—that is, no one will ever learn of their unethical actions.

Examples of this kind of unethical behavior include padding expense accounts, casting doubts on the integrity of a rival co-worker to gain a job promotion, and stealing company supplies or equipment. Obviously, these acts are unethical, and many of them are illegal as well. In some situations, however, businesspersons who would choose to act ethically may be deterred from doing so because of situational circumstances or external pressures.

Ethics and the Corporate Environment Individuals in their personal lives normally are free to decide ethical issues as they wish and to follow through on those decisions. In the business world, and particularly in the corporate environment, rarely is such a decision made by one person. If you are an officer or a manager of a large company, for example, you will find that the decision as to what is right or wrong for the company is not totally yours to make. Your input may weigh in the decision, but ultimately a corporate decision is a collective undertaking.

Additionally, collective decision making, because it places emphasis on consensus and unity of opinion, tends to hinder individual ethical assertiveness. For example, suppose that a director has ethical misgivings about a planned corporate venture that promises to be highly profitable. If the other directors have no such misgivings, the director who does may be swayed by the others’ enthusiasm for the project and downplay her or his own criticisms.

Furthermore, just as no one person makes a collective decision, so no one person (normally) is held accountable for the decision. The corporate enterprise thus tends to shield corporate personnel from both individual exposure to the consequences of their decisions (such as direct contact with someone who suffers harm from a corporate product) and personal accountability for those decisions.

Ethics and Management Much unethical business behavior occurs simply because management does not always make clear what ethical standards and behaviors are expected of the firm’s employees. Although most firms now issue ethical policies or codes of conduct, these policies and codes are not always effective in creating an ethical workplace. At times, this is because the firm’s ethical policies are not communicated clearly to employees or do not bear on the real ethical issues confronting decision makers. Additionally, particularly in a large corporation, unethical behavior in one corporate department may simply escape the attention of those in control of the corporation or the corporate officials responsible for implementing and monitoring the company’s ethics program.

Unethical behavior may also occur when corporate management, by its own conduct, indicates that ethical considerations take a second seat. If management makes no attempt to deter unethical behavior—through reprimands or employment terminations, for example—it will be obvious to employees that management is not very serious about ethics. Likewise, if a company gives promotions or salary increases to those who clearly use unethical tactics to increase the firm’s profits, then employees who do not resort to such tactics will be at a disadvantage. An employee in this situation may decide that because “everyone else does it,” he or she might as well do it too.

Of course, an even stronger encouragement of unethical behavior occurs when employers engage in blatantly unethical or illegal conduct and expect their employees to do so as well. An employee in this situation faces two options, neither of which is satisfactory: participate in the conduct or “blow the whistle” on (inform authorities of) the employer’s actions—and, of course, risk being fired. (Whistleblowing is a controversial issue because it is sometimes difficult to prove employers’ motivations for dismissals.)

Legal Reasoning

2. What might be some other deterrents to ethical behavior in the business context, besides those discussed in this Focus on Ethics feature?

Corporate Social Responsibility

As discussed in Chapter 5, just what constitutes corporate social responsibility has been debated for some time. In particular, questions arise concerning a corporation’s ethical obligations to its community and to society as a whole.

A Corporation’s Duty to the Community In some circumstances, the community in which a business enterprise is located is greatly affected by corporate decisions and therefore may be considered a stakeholder. Assume, for example, that a company employs two thousand workers at one of its plants. If the company decides that it would be profitable to close the plant, the employees—and the community—would suffer as a result. To be considered ethical in that situation (and, in some circumstances, to comply with laws governing plant shutdowns), a corporation must take both the employees’ needs and the community’s needs into consideration when making its decision.

Another ethical question sometimes arises when a firm moves into a community. Does the company have an obligation to evaluate first how its presence will affect that community (even though the community is not a stakeholder yet)? This question has surfaced in regard to the expansion of Wal-Mart Stores, Inc., into smaller communities. Generally, most people in such communities welcome the lower prices and wider array of goods that Wal-Mart offers relative to other, smaller stores in the area. A vocal minority of people in some communities, however, claim that smaller stores often find it impossible to compete with Wal-Mart’s prices and thus are forced to go out of business. Many of these smaller stores have existed for years and, according to Wal-Mart’s critics, enhance the quality of community life. These critics claim that it is unethical of Wal-Mart to disregard a town’s interest in the quality and character of its community life.

In addition to expanding, Wal-Mart has been consolidating some of its smaller stores into large “superstores.” As it consolidates, Wal-Mart is closing stores in some of the very towns in which it drove its smaller competitors out of business. This development raises yet another ethical question: Does a store such as Wal-Mart have an obligation to continue operations in a community once it has driven its competitors out of business?

Legal Reasoning

0. Why are consumers and the public generally more concerned with ethical and socially responsible business behavior today than they were, say, fifty years ago?

A Corporation’s Duty to Society Perhaps the most disputed area of corporate social responsibility is the nature of a corporation’s duty to society at large. Those who contend that corporations should first and foremost attend to the goal of profit maximization would argue that it is by generating profits that a firm can best contribute to society. Society benefits from profit-making activities because profits can only be realized when a firm markets products or services that are desired by society. These products and services enhance the standard of living, and the profits accumulated by successful business firms generate national wealth. Our laws and court decisions promoting trade and commerce reflect the public policy that the fruits of commerce (wealth) are desirable and good. Because our society values wealth as an ethical goal, corporations, by contributing to that wealth, automatically are acting ethically.

Those arguing for profit maximization as a corporate goal also point out that it would be inappropriate to use the power of the corporate business world to further society’s goals by promoting social causes. Determinations as to what exactly is in society’s best interest involve questions that are essentially political. Therefore the public, through the political process, should have a say in making those determinations. Thus, the legislature—not the corporate boardroom—is the appropriate forum for making such decisions.

Critics of the profit-maximization view believe that corporations should become actively engaged in seeking and furthering solutions to social problems. Because business controls so much of the wealth and power of this country, business has a responsibility to use its resources in socially beneficial ways. Corporations should therefore promote human rights, strive for equal treatment of minorities and women in the workplace, take steps to preserve the environment, and generally not profit from activities that society has deemed unethical. The critics also point out that it is ethically irresponsible to leave decisions concerning social welfare up to the government, because many social needs are not being met sufficiently through the political process.

Legal Reasoning

0. Suppose that an automobile manufacturing company has to choose between two alternatives: contributing $1 million annually to the United Way or reinvesting the $1 million in the company. In terms of ethics and social responsibility, which is the better choice? Why?

It Pays to Be Ethical

Most corporations today have learned that it pays to be ethically responsible—even if this means less profit in the short run (and it often does). Today’s corporations are subject to more intensive scrutiny—by both government agencies and the public—than corporations of the past. “Corporate watch” groups monitor the activities of U.S. corporations, including activities conducted in foreign countries. Through the Internet, complaints about a corporation’s practices can easily be disseminated to a worldwide audience. Similarly, dissatisfied customers and employees can voice their complaints about corporate policies, products, or services in Internet chat rooms and other online forums. Thus, if a corporation fails to conduct its operations ethically or to respond quickly to an ethical crisis, its goodwill and reputation (and future profits) will likely suffer as a result.

There are other reasons as well for a corporation to behave ethically. For example, companies that demonstrate a commitment to ethical behavior—by implementing ethical programs, complying with environmental regulations, and promptly investigating product complaints, for example—often receive more lenient treatment from government agencies and the courts. Additionally, investors may shy away from a corporation’s stock if the corporation is perceived to be socially irresponsible. Finally, unethical (and/or illegal) corporate behavior may result in government action, such as new laws imposing further requirements on corporate entities.

Legal Reasoning

0. Have Internet chat rooms and online forums affected corporate decision makers’ willingness to consider the community and public interest when making choices? Are corporate decision makers more apt to make ethical choices in the cyber age?