David viniar santa barbara house

Business Ethics Case Studies and Selected Readings

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Business Ethics Case Studies and Selected Readings

EIGHTH EDITION

MARIANNE MOODY JENNINGS Arizona State University

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

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Business Ethics: Case Studies and Selected Readings, Eighth Edition Marianne Moody Jennings

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Brief Contents Preface xiv Acknowledgments xxii

UNIT 1 Ethical Theory, Philosophical Foundations, Our Reasoning Flaws, and Types of Ethical Dilemmas 1

SECTION A Defining Ethics 2 SECTION B Resolving Ethical Dilemmas 33

UNIT 2 Solving Ethical Dilemmas and Personal Introspection 53 SECTION A Business and Ethics: How Do They Work Together? 54 SECTION B What Gets in the Way of Ethical Decisions in Business? 65 SECTION C Resolving Ethical Dilemmas in Business 79

UNIT 3 Business, Stakeholders, Social Responsibility, and Sustainability 109 SECTION A Business and Society: The Tough Issues of Economics,

Social Responsibility, and Business 110 SECTION B Applying Social Responsibility and Stakeholder Theory 126 SECTION C Social Responsibility and Sustainability 170 SECTION D Government as a Stakeholder 179

UNIT 4 Ethics and Company Culture 189 SECTION A Temptation at Work for Individual Gain and That Credo 190 SECTION B The Organizational Behavior Factors 194 SECTION C The Psychological and Behavior Factors 219 SECTION D The Structural Factors: Governance, Example, and Leadership 246 SECTION E The Industry Practices and Legal Factors 274 SECTION F The Fear-and-Silence Factor 303 SECTION G The Culture of Goodness 342

UNIT 5 Ethics and Contracts 357 SECTION A Contract Negotiations: All Is Fair and Conflicting Interests 358 SECTION B Promises, Performance, and Reality 368

UNIT 6 Ethics in International Business 387 SECTION A Conflicts Between the Corporation’s Ethics and

Business Practices in Foreign Countries 388 SECTION B Bribes, Grease Payments, and “When in Rome …” 415

UNIT 7 Ethics, Business Operations, and Rights 423 SECTION A Workplace Safety 424 SECTION B Workplace Loyalty 439 SECTION C Workplace Diversity and Atmosphere 455 SECTION D Workplace Privacy and Personal Lives 461

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SECTION E Workplace Confrontation 471 SECTION F Workplace and the Environment 482

UNIT 8 Ethics and Products 491 SECTION A Advertising Content 492 SECTION B Product Safety 503 SECTION C Product Sales 527 SECTION D Products and Social Issues 543

UNIT 9 Ethics and Competition 547 SECTION A Covenants Not to Compete 548 SECTION B All’s Fair, or Is It? 558 SECTION C Intellectual Property and Ethics 565

The Ethical Common Denominator (ECD) Index: The Common Threads of Business Ethics 573

Alphabetical Index 585 Business Discipline Index 591 Product/Company/Individuals Index 601 Topic Index 639

vi Brief Contents

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Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiv Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxii

U N I T

1 Ethical Theory, Philosophical Foundations, Our Reasoning Flaws, and Types of Ethical Dilemmas

SECTION A Defining Ethics 2 Reading 1.1 You, Your Values, and a Credo 2 Reading 1.2 The Parable of the Sadhu: Pressure, Small Windows of Opportunity, and

Temptation 4 Reading 1.3 What Are Ethics? From Line-Cutting to Kant 9 Reading 1.4 The Types of Ethical Dilemmas: From Truth to Honesty

to Conflicts 17 Reading 1.5 On Rationalizing and Labeling: The Things We Do That Make Us

Uncomfortable, but We Do Them Anyway 23 Case 1.6 “I Was Just Following Orders”: The CIA, Interrogation, and the

Role of Legal Opinions 27 Reading 1.7 The Slippery Slope, the Blurred Lines, and How We Never Do Just

One Thing 30 Case 1.8 Hank Greenberg and AIG, and Steve Cohen and SAC Capital 31

SECTION B Resolving Ethical Dilemmas 33 Reading 1.9 Some Simple Tests for Resolving Ethical Dilemmas 33 Reading 1.10 Some Steps for Analyzing Ethical Dilemmas 38 Reading 1.11 On Plagiarism 39 Case 1.12 The Little Teacher Who Could: Piper, Kansas, and Term

Papers 40 Case 1.13 Dog Walkers and Scoopers 42 Case 1.14 Puffing Your Résumé 43 Case 1.15 Dad, the Actuary, and the Stats Class 46 Case 1.16 Wi-Fi Piggybacking 46 Case 1.17 Stuyvesant High School and the Cheating Culture of

Excellence 47 Case 1.18 Speeding: You Can’t Survive on the Road unless

You Do 48 Case 1.19 Hazing Drinking, and Campuses 50 Case 1.20 The Pack of Gum 51

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U N I T

2 Solving Ethical Dilemmas and Personal Introspection

SECTION A Business and Ethics: How Do They Work Together? 54 Reading 2.1 What’s Different about Business Ethics? 54 Reading 2.2 The Ethics of Responsibility 55 Reading 2.3 Is Business Bluffing Ethical? 56

SECTION B What Gets in the Way of Ethical Decisions in Business? 65 Reading 2.4 How Leaders Lose Their Way: What Price Hubris? 65 Reading 2.5 Moral Relativism and the Either/or Conundrum 67 Reading 2.6 P = f(x) The Probability of an Ethical Outcome Is a Function of the Amount of

Money Involved: Pressure 68 Case 2.7 MF Global, Jon Corzine, and a Bankruptcy 69 Case 2.8 On Saying One Thing and Doing Another: Public Perception and Deception

Covering for the CEO 75

SECTION C Resolving Ethical Dilemmas in Business 79 Reading 2.9 Framing Issues Carefully: A Structured Approach for Solving Ethical Dilemmas

and Trying Out Your Ethical Skills on Some Business Cases 79 Case 2.10 Galleon Hedge Fund: Expert Networks, Friendly Discussions or Insider

Trading? 80 Case 2.11 What Was Up with Wall Street? The Goldman Standard and Shades of

Gray 82 Case 2.12 Making Believe We Are at Work or Being Loyal: The Alibis of Technology 93 Case 2.13 Make-Believe Reality TV: Storage Wars and Reconstructed Home Sales 94 Case 2.14 Travel Expenses: A Chance for Extra Income 95 Case 2.15 Do Cheaters Prosper? 96 Case 2.16 The Home Repair Contractor Tempted By Customers and Contracts 96 Case 2.17 Penn State: Framing Ethical Issues 97

U N I T

3 Business, Stakeholders, Social Responsibility, and Sustainability

SECTION A Business and Society: The Tough Issues of Economics, Social Responsibility, and Business 110 Reading 3.1 The Social Responsibility of Business Is to Increase Its Profits 110 Reading 3.2 A Look at Stakeholder Theory 115 Reading 3.3 Business with a Soul: A Reexamination of What Counts in Business

Ethics 118 Reading 3.4 Appeasing Stakeholders with Public Relations 121 Reading 3.5 Conscious Capitalism: Creating a New Paradigm for Business 122 Reading 3.6 Marjorie Kelly and the Divine Right of Capital 123 Reading 3.7 Schools of Thought on Social Responsibility 124

SECTION B Applying Social Responsibility and Stakeholder Theory 126 Case 3.8 Skittles, Trayvon Martin, and Social Responsibility 126 Case 3.9 Guns, Stock Prices, Safety, Liability, and Social Responsibility 127 Case 3.10 The Craigslist Connections: Facilitating Crime 133

viii Contents

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Case 3.11 Planned Parenthood Backlash at Companies and Charities 133 Reading 3.12 The Regulatory Cycle, Social Responsibility, Business Strategy, and

Equilibrium 135 Case 3.13 Fannie, Freddie, Wall Street, Main Street, and the Subprime Mortgage Market:

Of Moral Hazards 139 Case 3.14 Cruises, Comfort, and Costs 150 Case 3.15 Ice-T, the Body Count Album, and Shareholder Uprisings 156 Case 3.16 Athletes and Doping: Costs, Consequences, and Profits 162 Case 3.17 Back Treatments and Meningitis in an Under-the-Radar Industry 168

SECTION C Social Responsibility and Sustainability 170 Reading 3.18 The New Environmentalism 170 Case 3.19 GM, the Volt, and Halted Sales and Production 172 Case 3.20 Buying Local: The Safety Issues in Farmers’ Markets 173 Case 3.21 Biofuels and Food Shortages in Guatemala 174 Case 3.22 The Dictator’s Wife in Louboutin Shoes Featured in Vogue Magazine 174 Case 3.23 Herman Miller and Its Rain Forest Chairs 175

SECTION D Government as a Stakeholder 179 Case 3.24 Solyndra: Bankruptcy of Solar Resources 179 Case 3.25 Stanford University and Government Payment for Research 180 Case 3.26 Minority-Owned Businesses and Reality 183 Case 3.27 Prosecutorial Misconduct: Ends Justifying Means? 183

U N I T

4 Ethics and Company Culture

SECTION A Temptation at Work for Individual Gain and That Credo 190 Reading 4.1 The Moving Line 190 Reading 4.2 Not All Employees Are Equal When It Comes to Moral Development 191

SECTION B The Organizational Behavior Factors 194 Reading 4.3 Why Corporations Can’t Control Chicanery 194 Case 4.4 Swiping Oreos at Work: Is It a Big Deal? 202 Reading 4.5 The Effects of Compensation Systems: Incentives, Bonuses, Pay, and

Ethics 202 Case 4.6 A Primer on Accounting Issues and Ethics and Earnings Management 206 Case 4.7 Law School Application Consultants 216 Case 4.8 The Daiquiri Concession and Ferragamo Shoes and the County

Supervisors 217

SECTION C The Psychological and Behavior Factors 219 Reading 4.9 The Layers of Ethical Issues: Individual, Organization, Industry, and

Society 219 Case 4.10 Rogues: Bad Apples or Bad Barrel: Jett and Kidder, Leeson and Barings Bank,

Kerviel and Société General, the London Whale and Chase, Kweku Adoboli and UBS, and LIBOR Rates for Profit 228

Case 4.11 FINOVA and the Loan Write-Off 239 Case 4.12 Inflating SAT Scores for Rankings and Bonuses 244 Case 4.13 Hiding the Slip-Up on Oil Lease Accounting: Interior Motives 244

Contents ix

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SECTION D The Structural Factors: Governance, Example, and Leadership 246 Reading 4.14 Re: A Primer on Sarbanes-Oxley and Dodd-Frank 246 Case 4.15 WorldCom: The Little Company That Couldn’t After All 250 Case 4.16 Bank of America: The Merrill Takeover, the Disclosures, and

the Board 267 Reading 4.17 Getting Information from Employees Who Know to Those Who Can

and Will Respond 269 Case 4.18 Westland/Hallmark Meat Packing Company and the Cattle Standers 272

SECTION E The Industry Practices and Legal Factors 274 Reading 4.19 The Subprime Saga: Bear Stearns, Lehman, Merrill, and CDOs 274 Case 4.20 Enron: The CFO, Conflicts, and Cooking the Books with Natural Gas and

Electricity 281 Case 4.21 Arthur Andersen: A Fallen Giant 295 Case 4.22 The Ethics of Walking Away 302

SECTION F The Fear-and-Silence Factors 303 Case 4.23 HealthSouth: The Scrushy Way 303 Case 4.24 Royal Dutch and the Reserves 311 Case 4.25 Dennis Kozlowski: Tyco and the $6,000 Shower Curtain 313 Case 4.26 Bausch & Lomb and Krispy Kreme: Channel Stuffing and

Cannibalism 323 Reading 4.27 A Primer on Whistleblowing 328 Case 4.28 Beech-Nut and the No-Apple-Juice Apple Juice 328 Case 4.29 NASA and the Space Shuttle Booster Rockets 334 Case 4.30 Diamond Walnuts and Troubled Growers 337 Case 4.31 New Era: If It Sounds Too Good to Be True, It Is Too Good to

Be True 338

SECTION G The Culture of Goodness 342 Case 4.32 Bernie Madoff: Just Stay Away from the Seventeenth Floor 342 Case 4.33 Adelphia: Good Works via a Hand in the Till 344 Case 4.34 The Atlanta Public School System: Good Scores by Creative

Teachers 348 Case 4.35 The NBA Referee and Gambling for Tots 350 Case 4.36 Giving and Spending the United Way 351 Case 4.37 The Baptist Foundation: Funds of the Faithful 354

U N I T

5 Ethics and Contracts

SECTION A Contract Negotiations: All Is Fair and Conflicting Interests 358 Case 5.1 The Governor and Negotiations for Filling a President’s Senate

Seat 358 Case 5.2 Facebook and the Pre-IPO 359 Case 5.3 Finding a Way Around Government Regulations 361 Case 5.4 Subway: Is 11 Inches the Same as 12 Inches? 362 Case 5.5 Sears and High-Cost Auto Repairs 363

x Contents

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SECTION B Promises, Performance, and Reality 368 Case 5.6 Payday Loans and Checking Account Deductions 368 Case 5.7 Pensions: Promises, Payments, and Bankruptcy 369 Case 5.8 Department Store Returns or Rentals 374 Case 5.9 Government Contracts, Research, and Double-Dipping 375 Case 5.10 Yale University and the Compensation of Professors for Government

Research: Double-Dipping or Confusion? 377 Case 5.11 When Corporations Pull Promises Made to Government 378 Case 5.12 Intel and the Chips: When You Have Made a Mistake 380 Case 5.13 Mortgage Foreclosure: Robo-Signatures and “Close Enough” 384 Case 5.14 Red Cross and the Use of Funds 385

U N I T

6 Ethics in International Business

SECTION A Conflicts Between the Corporation’s Ethics and Business Practices in Foreign Countries 388 Reading 6.1 Why an International Code of Ethics Would Be Good for Business 388 Case 6.2 Chiquita Banana and Mercenary Protection 392 Case 6.3 Pirates: The Bane of Transnational Shipping 395 Case 6.4 The Former Soviet Union: A Study of Three Companies and Values in

Conflict 397 Case 6.5 Product Dumping 399 Case 6.6 Bangladesh, Sweatshops, Suicides, Nike, Apple, Foxconn, Apple, and Campus

Boycotts 400 Case 6.7 Bhopal: When Safety Standards Differ 407 Case 6.8 Nestlé: Products That Don’t Fit Cultures 409 Case 6.9 The Internet, Censorship, and Human Rights in China 412

SECTION B Bribes, Grease Payments, and “When in Rome …” 415 Reading 6.10 A Primer on the FCPA 415 Case 6.11 Siemens and Bribery, Everywhere 418 Case 6.12 Walmart in Mexico 420 Case 6.13 Italy’s Freeway Corruption 421

U N I T

7 Ethics, Business Operations, and Rights

SECTION A Workplace Safety 424 Reading 7.1 Two Sets of Books on Safety 424 Case 7.2 Sleeping on the Job and on the Way Home 425 Case 7.3 Cintas and OSHA 425 Case 7.4 Massey Coal Mines, Fatalities, and Indictments 426 Case 7.5 BP and the Deepwater Horizon Explosion: Safety First? 427

SECTION B Workplace Loyalty 439 Case 7.6 Aaron Feuerstein and Malden Mills 439 Case 7.7 JCPenney and Its Wealthy Buyer 441 Case 7.8 The Trading Desk, Perks, and “Dwarf Tossing” 442

Contents xi

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Case 7.9 The Analyst Who Needed a Preschool 443 Case 7.10 Taser and Stunning Behavior 447 Case 7.11 Boeing and the Recruiting of the Government Purchasing Agent 448 Case 7.12 Kodak, the Appraiser, and the Assessor: Lots of Backscratching on

Valuation 450 Case 7.13 Medtronics, Journal Articles, Consulting, and Ethics 451 Case 7.14 Cornell Researchers and Foundation Funding 454

SECTION C Workplace Diversity and Atmosphere 455 Case 7.15 English-Only Employer Policies 455 Case 7.16 Employer Tattoo and Piercing Policies 456 Case 7.17 On-the-Job Fetal Injuries 457 Case 7.18 Office Romances 458 Case 7.19 Employee Screening: Personality, Intelligence, and Disparate Impact 459

SECTION D Workplace Diversity and Personal Lives 461 Case 7.20 Julie Roehm: The Walmart Ad Exec with Expensive Tastes 461 Case 7.21 Facebook, YouTube, Instagram, LinkedIn, and Employer Tracking 462 Case 7.22 Tweeting, Blogging, Chatting, and E-Mailing: Employer Control 465 Case 7.23 Jack Welch and the Harvard Interview 468

SECTION E Workplace Confrontation 471 Reading 7.24 The Ethics of Confrontation 471 Reading 7.25 The Ethics of Performance Evaluations 474 Case 7.26 Ann Hopkins and Price Waterhouse 476 Case 7.27 The Glowing Recommendation 480

SECTION F Workplace and the Environment 482 Case 7.28 Exxon and Alaska 482 Case 7.29 Biofuels and Hunger in Guatemala 488

U N I T

8 Ethics and Products

SECTION A Advertising Content 492 Case 8.1 Skechers and the Muscle-Building Shoes 492 Case 8.2 Joe Camel: The Cartoon Character Who Sold Cigarettes and Nearly Felled an

Industry 493 Case 8.3 Cereal Claims of Health, Better Grades, Immunity, and Sugar Content 498 Case 8.4 Eminem vs. Audi 501

SECTION B Product Safety 503 Reading 8.5 From Shunning to Anonymity 503 Case 8.6 Peanut Corporation of America: Salmonella and Indicted Leaders 506 Case 8.7 Tylenol: The Swing in Product Safety 507 Case 8.8 Merck and Vioxx 512 Case 8.9 Ford and Its Pinto and GM and Its Malibu: The Repeating Exploding Gas Tank

Problem 516

xii Contents

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Case 8.10 E. Coli, Jack-in-the-Box, and Cooking Temperatures 523 Case 8.11 Bucky Balls and Safety 524 Case 8.12 Energy Drinks: Healthy or Risky? 525

SECTION C Product Sales 527 Case 8.13 Cardinal Health, CVS, and Oxycodone Sales 527 Case 8.14 Pfizer, Pharmas, Fines, and Sales Tactics 528 Case 8.15 The Mess at Marsh McLennan 530 Case 8.16 Selling Your Own Products for Higher Commissions 533 Case 8.17 Frozen Coke and Burger King and the Richmond Rigging 533 Case 8.18 Slotting: Facilitation, Costs, or Bribery? 537

SECTION D Products and Social Issues 543 Case 8.19 The Mommy Doll 543 Case 8.20 Fast-Food Liability 543 Case 8.21 Barbie Doesn’t Like Math 545

U N I T

9 Ethics and Competition

SECTION A Covenants Not to Compete 548 Reading 9.1 A Primer on Covenants Not to Compete: Are They Valid? 548 Case 9.2 Boeing, Lockheed, and the Documents 549 Case 9.3 Starwood, Hilton, and the Suspiciously Similar New Hotel Designs 554

SECTION B All’s Fair, or Is It? 558 Reading 9.4 Adam Smith: An Excerpt from The Theory of Moral Sentiments 558 Case 9.5 Sabotaging Your Employer’s Information Lists before You Leave to Work for a

Competitor 559 Case 9.6 Bad-Mouthing the Competition: Where’s the Line? 560 Case 9.7 Online Pricing Differentials and Customer Questions 560 Case 9.8 Brighton Collectibles: Terminating Distributors for Discounting Prices 561 Case 9.9 Electronic Books and the Amazon War 562 Case 9.10 Mattel and the Bratz Doll 562

SECTION C Intellectual Property and Ethics 565 Case 9.11 Tiffany, Louis Vuitton, eBay, Landlords, and Knock-Offs 565 Case 9.12 The Little Intermittent Windshield Wiper and Its Little Inventor 569 Case 9.13 Copyright, Songs, and Charities 570

The Ethical Common Denominator (ECD) Index: The Common Threads of Business Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .573

Alphabetical Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .585 Business Discipline Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .591 Product/Company/Individuals Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .601 Topic Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .639

Contents xiii

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Preface

The Josephson Institute released its data for 2012 on cheating in high school andfound that 52 percent of the students surveyed say that they have cheated on anexam in the past year, and 82 percent say that they have lied to a teacher in the past year. A New York Times survey of high school students puts the cheating level at 90 percent.1 When the Josephson researchers asked the high school students if they had copied another’s homework, 76 percent said that they had but did not consider it cheat- ing. “Team work” was their label for this practice. The Center for Academic Integrity at Clemson University and Professor Donald McCabe of Rutgers report that college cheat- ing has grown from 11 percent in 1963 to 49 percent in 1993 to 75 percent in 2006.2

Another study puts the level at 85 percent.3 Professor McCabe also found that MBAs have the highest rate of self-reported academic dishonesty (57 percent) of all graduate disciplines. In the spring of 2013, Harvard expelled 60 students for cheating on an exam in their required course on Congress.4 Longitudinally, it would seem we have a decline. Many argue that there is no decline; rather, they offer, we are simply more hon- est about our ethical breaches. There is little comfort in this reassurance that we’re more honest about our cheating. And there remains a disconnect between this conduct and an understanding of what ethics is. The Josephson Institute also found that the high school students who report that they cheat feel very comfortable about their behavior, with 95 percent saying they are satisfied with their character and ethics. Perhaps we are more honest about our cheating. But perhaps that honesty results from our belief that cheating is not an ethical issue.

Research indicates that if students cheat in high school, they will bring the practices into college. And if they cheat in college, they will bring those practices into the work- place. A look at some of the events in business since the publication of the seventh edi- tion of this book tells us that we are not quite there yet in terms of helping business people understand when they are in the midst of an ethical dilemma and how those dilemmas should be resolved. Following the collapses of Enron and WorldCom, and the ethical lapses at Tyco and Adelphia, we entered the Sarbanes-Oxley era with funda- mental changes in the way we were doing business and audits. However, we did not make it even five years before we found ourselves in the midst of the collapse of the housing market and revelations about shoddy and undisclosed lending practices for mortgages. The end result was a dramatic drop in the stock market and a recession because of all the secondary instruments tied to the risky mortgages. The reforms enacted by the Dodd-Frank bill (Wall Street Reform and Consumer Protection Act) have not yet been implemented, and as the work of implementation proceeds, we find that British banks were fixing the LIBOR interest rate; MF Global was using funds from customer accounts to cover margin calls; and Bernie Madoff pulled off an 18-year, $50 billion Ponzi scheme. Government pension plans collapsed for lack of funding based on flawed

“Never trust the people you cheat with. They will throw you under the bus. Just ask Michael Vick.”

—Marianne M. Jennings

“Three people can keep a secret if two are dead.”

—Hell’s Angels (Quoting Ben Franklin)

“Ethical standards and practices in the workplace are the pillars of successful employment and ultimately the benchmark for a strong business.” —Franklin Raines, former CEO of

Fannie Mae (ousted in 2005); with a $6 billion restatement of

its financials, the board concluded that “[management

was] manipulating earnings and creating an ‘unethical and

arrogant culture.’”

“We are doing God’s work.” —Jeffrey Skilling, former CEO of

Enron (completing a 24.6-year sentence for fraud)’”

—Lloyd Blankfein, CEO of Goldman Sachs

1 “Main Street Woes,” Forbes, November 17, 2008, p. 20.

2The Center for Academic Integrity study has been conducted by Professor Donald McCabe on a regular basis over the years. This survey had 4,500 student respondents. For more information on Professor McCabe and his work on academic integrity and the Center for Academic Integrity, go to http://www.cai.org. 3Corey Ciochetti, “The Uncheatable Class,” Proceedings, Academy of Legal Studies in Business, August 2013 (unpublished paper). 4Richard Pérez-Peña, “Students Accused of Cheating Return Awkwardly to a Changed Harvard,” New York Times, September 17, 2013, p. A12.

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actuarial studies, and municipal bankruptcies have revealed that government officials received personal benefits for awarding everything from bond underwriting agreements to construction contracts. Insider trading charges affected more than a dozen traders at SAC Capital, with SAC agreeing to settle civil and criminal charges.

And then there are those events that fall short of criminal conduct or civil fines mis- conduct. These are the day-to-day ethical breaches that capture media headlines and cause continuing concerns about the ethical culture of business. There are the questions about television reality shows: Was the storage locker a setup, or were those things really in there? And why did Facebook not disclose the problems it knew about on its advertis- ing revenues before its IPO? Did Subway really cut us short with an 11-inch sub sand- wich when we thought we were buying a footlong? The world of sports brought us questions such as, “Is it really cheating if everyone does the same thing?” Lance Arm- strong’s admissions about his use of performance-enhancing drugs found us all debating that issue. BP’s spill from the Deepwater Horizon rig off the coast of Louisiana resulted in a $20 billion down payment by the company on damages, and resulting issues of fraud in claims against that fund.

From analysts not offering their true feelings about a company’s stock to the factory workers producing peanut base for cookies and crackers, pressure often got in the way of moral clarity in business decisions. Those pressures then translated into ethical lapses that involve everything from pushing the envelope on truth to earnings management that crosses over into cooking the books and fraud. Weak product designs and products’ defects often produce a chain of memos or e-mails in the company that reflect employee concerns about product safely. College sports, baseball, and politics all have their ethical issues. The cycles between major ethical and financial collapses seem to be growing shorter. Businesses do exist to make a profit, but business ethics exists to set parameters for earning that profit. Business ethics is also a key element of business decision processes and strategies, because the cases in this book teach us that the long-term perspective, not the short-term fix, serves businesses better in that profit role.

This book of readings and cases explores those parameters and their importance. This book teaches, through detailed study of the people and companies, that business con- ducted without ethics is a nonsustainable competitive model. Ethical shortcuts translate into a short-term existence. Initially, these shortcuts produce a phenomenon such as those seen with Lehman Brothers, Merrill Lynch, and Countrywide Mortgage. These companies are no longer viable entities because they crossed ethical lines. For a time, they were at the top of their game—flummoxing their competitors on how they were able to do what they were doing—and so profitably. But then that magnificent force of truth finds its way to the surface, and the company that does not factor in the ethics of its decisions, and conduct finds itself falling to the earth like a meteor’s flash. Long-term personal and business success demand ethics. This edition takes a look at everything from the subprime lending market, a market that brought easy pickings in terms of profit so long as real-estate values held firm, to the world of sports and the downfall of so many. This book connects the moral sentiments of markets with the wealth of nations. Business without ethics is self-destructive.

New to This Edition

A Slightly New Structure and Approach to Address the Chronic Repetition of the Ethical Lapses We’ve been down this road before, and the historic patterns are now emerging for study and insight. In 1986, before Ivan Boesky was a household name and Michael Douglas

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was Gordon Gekko in Wall Street, I began teaching a business ethics course in the MBA program in the College of Business at Arizona State University. The course was an elec- tive. I had trouble making the minimum enrollments. However, two things changed: my enrollments and my fate. First, the American Association of Collegiate Schools of Business (AACSB) changed the curriculum for graduate and undergraduate business degree pro- grams and required the coverage of ethics. The other event actually was a series of events. Indictments, convictions, and guilty pleas by major companies and their officers—from E.F. Hutton to Union Carbide, to Beech-Nut, to Exxon—brought national attention to the need to incorporate values in American businesses and instill them in business leaders.

Whether out of fear, curiosity, or the need for reaccreditation, business schools and students began to embrace the concept of studying business ethics. My course went from a little-known elective to the final required course in the MBA program. In the years since, the interest in business ethics has only increased. Following junk bonds and insider trading, we rolled into the savings and loan collapses; and once we had that straightened out, we rolled into Enron, WorldCom, HealthSouth, Tyco, and Adelphia, and we even lost Martha Stewart along the way. We were quite sure—what with all the Sarbanes- Oxley changes and demands on boards, CEO, CFOs, and auditors—that we were through with that level of misconduct. We were, however, wrong. New Century Financial, one of the first of the subprime lenders to collapse, found one angry bankruptcy trustee. The trustee’s report concluded that he found astonishing the acquiescence of the auditor to the client’s refusal to write down the bad loans in what he called “the post-Enron era.” The Lehman Brothers bankruptcy trustee found a letter from a risk officer at the invest- ment banker who tried to warn the CEO and CFO that the firm’s financial reports vio- lated its code of ethics. The trustee also found that the risk officer was fired.

Three decades plus after Boesky, we have the SAC Capital insider trading web emerge in 2012 with a staggering repetitiveness that finds us wondering, “Do they not see the ethical and legal issues? Do they just not know that they are crossing these lines? Do they see the patterns from business history?” The good thing about repetitive patterns is that we gain insight into the paths, the reasoning, and the pressures of those involved. The key is to bring out those patterns and train our new business leaders to recognize them and, most importantly, to stop the train of self-destruction those patterns set off. This edition is reorganized to offer greater insights, knowledge, and perspective on these patterns for a new generation of leaders. Today, nearly 100 percent of the Fortune 500 companies have a code of ethics. We are up to over 75 percent of companies having some form of ethics training. But we are not quite there until our business leaders grasp the perspective of ethics and its relationship to economics, organizational behavior, company culture, reputation, and financial performance. This edition is structured to walk us through all aspects and types of ethical dilemmas and how we can cope with the pressures that often deprive us of good ethical analysis.

Unit 1: Our Ethics Unit 1 addresses the following questions: What is this ethics thing? How do I manage to work philosophy into my decision processes? How do I find solutions to ethical dilem- mas? How do I know when I am really analyzing as opposed to rationalizing or suc- cumbing to pressure? This unit begins with introspection, a right-out-of-the-blocks focus on developing a credo—a way of helping us to think about ethical issues in advance and decide what we would and would not do in a situation. If we think about issues in advance, then when the pressure hits, we at least have the cognitive dissonance of realiz- ing that we did see the issues differently when we were not under so much pressure.

xvi Preface

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Unit 2: Solving Ethical Dilemmas and Personal Introspection Once we have focused on our ethical standards and ourselves, we move into analysis of ethical issues in business. This unit offers the introspection of this question: Are my per- sonal ethical standards different when I am at work? Should they be? Why are they dif- ferent? Further, the magnitude of the mistakes that business people continued to make, despite all the warnings from ongoing debacles, did not indicate that these were close calls. Something had gone awry in their ethics training in business school for them to drift so far from virtue. I continue to emphasize in teaching, consulting, and writing that helping students and business people see that personal ethics and business ethics are one and the same is critical to making virtue a part of business culture. Virtue is the goal for most of us in all aspects of our lives. Whether we commit to fidelity in a personal relationship or honesty in taking the laundry detergent back into the store to pay because we forgot it was on the bottom of our grocery cart, we show virtue. Ethics in business is no different, and we need not behave differently at work than we do in that grocery store parking lot as we make the decision to be honest and fair with the store owner. Substitute a shareholder and the disclosure of option dates and true costs, and we have our laundry detergent example with a stock market twist.

This unit also focuses on the patterns that interfere with good ethical analysis in busi- ness such as pressure, hubris, and a singular focus on moral relativism as opposed to a deeper look at the consequences of reliance on that model. This unit allows us to switch back and forth from personal dilemmas to business dilemmas so that we are able to see that the ethical issues are the same in our personal lives as they are in business—only the fact patterns change. We can see that honesty is important, whether studying the com- plexities of Goldman’s laddering sales structures or the simple questions contractors face when homeowners ask them to include additional repair work as part of a storm damage claim to their insurers. Instructors and students gain the ability to reduce the most com- plex of financial cases to the common denominators found in returning that laundry detergent to the store—is this honest? Is this fair? With this understanding of the com- mon denominators, we are free to focus on the psychology of our decision processes rather than on the details of the underlying transactions. The obligation of good faith in dealing with each other does not change simply because we are buying a CDO rather than Tide. This unit also includes the overarching theme of the book over all of its edi- tions: plenty of real-life examples from newspapers, business journals, and my experi- ences as a consultant and board member. Knowing that other instructors and students were in need of examples, I have turned my experiences into cases and coupled them with the most memorable readings in the field to provide a training and thought- provoking experience on business ethics.

Unit 3: Business, Stakeholders, Social Responsibility, and Sustainability Unit 3 offers us the bigger perspective—once we slog through the decision processes of fraud, embezzlement, puffing résumés, and cheating on our travel expenses, we move to discussion and understanding of the role of business in society. The cases in this unit are broken into an introduction to business and society, the obligations of business toward our moral ecology, and the issues of the environment and sustainability.

Unit 4: Ethics and Organizational Culture Unit 4 is the psychology section that tackles companies’ ethical lapses, with the realiza- tion that beyond individual ethical lapses (as with one bad apple), there are barrel factors

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that must be addressed to prevent ethical lapses. This section, through the finance cases and the weaving in of corporate governance, explores those barrel factors with the recog- nition that beyond individual lapses there are company, industry, and societal norms that do cause companies and individuals to move that line away from ethical standards to “everybody does it” here at the company, in our industry, and in society. The cases here explore how incentives, organizational behavior practices and processes, reporting mechanisms, industry practices, and societal norms contribute to poor ethical analysis, decisions, and that self-destructive behavior. Recognizing and addressing those barrel issues is the theme of Unit 4.

New to this edition is a restructuring that becomes clear in Unit 4. The cases on gov- ernment and nonprofit ethical lapses have been integrated into the other units. The cases in these two areas were set aside in separate units in previous editions. Through reviews and the study of ethical debacles in these two sectors, a realization brought about the structural change: The psychology of organizations and employee decision making in those organizations does not change because they work in a nonprofit or government agency. Nonprofit employees have the pressures of raising funds. Government employees experience the pressure of dealing with the powerful and the prospect of losing their jobs. The issues these employees and organizations face are the same as those in for-profit businesses. Indeed, the addition of their issues in an integrative fashion in this edition helps drive home the point that the questions and dilemmas are the same. The principles of ethics are universally applicable.

Unit 5: Ethics and Contracts Unit 5 is new to this edition, with a special focus on the ethics of contracts, from adver- tising through negotiations, to performance. Issues related to pension promises and cer- tification of minority status for government contracts are a part of this new unit. The ethical challenges in contract formation and performance, again, cross all sectors, so this unit has nonprofit and government examples integrated as well.

Unit 6: Ethics in International Business This unit helps students understand the need for better and deeper ethical analysis of the issues in international business and the importance of analyzing the countries and their ethical standards prior to doing business there. The section addresses the risks and costs of ethical lapses and succumbing to local standards as opposed to establishing company standards prior to those pressure points that occur in international competition. New to this edition is a discussion of the emerging safety issues in international production facil- ities. Fires, collapsing buildings, and unsafe working conditions have brought headlines, and a great deal of backlash toward companies that use these facilities for product manufacturing.

Unit 7: Ethics, Operations, and Rights This new unit is one that draws together all the cases on workplace issues that affect employees and managers: from safety to conflicts, to privacy, to diversity, to the lost art of confrontation about employee conduct, this section is the one for understanding how ethics bumps shoulders with production demands, technology, profits, and privacy. From honesty in letters of recommendations to office romances, all matters that affect employ- ers and employees are now in one unit.

xviii Preface

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Unit 8: Ethics and Products Unit 8 includes all the issues related to product development, sales, safety, and advertising. From recalls to racy dolls, to advertising, to the contracts themselves, this section focuses on the ethical issues that involve the how, what, and where of sales of products. The issues of social responsibility and products are found here in cases that address everything from Barbie not liking math to Bucky Balls, the product that could not be made safe.

Unit 9: Ethics and Competition Unit 9 has the luxury of focusing entirely on competition. With the contracts issues grouped in Unit 7 on products, this unit has expanded coverage of the ever-growing concerns about covenants not to compete and employee breaches of those covenants. The societal issues of infringement are emphasized as students analyze cases that illus- trate the costs of not honoring intellectual property rights.

What’s New and What’s Back The eighth edition continues the features students and instructors embraced in the first seven editions, including both short and long cases, discussion questions, hypothetical situations, and up-to-the-moment current, ongoing, and real ethical dilemmas. Some of the long-standing favorites remain by popular demand—such as the Nestlé infant for- mula experience and Union Carbide in Bhopal, with their long-standing lessons in doing the right thing. There are so many “oldies but goodies” when it comes to ethics cases, but length constraints do not allow me to continue to include in this book all the oldies along with the new cases that promise to be “oldies but goodies.” Check out the availability of custom options noted at the end of this section in order to keep using those “oldies but goodies.” Now there are further opportunities to integrate cases from previous editions into your course.

The eighth edition continues the new training tool introduced in the previous edition to help business people who are working their way through an ethical dilemma. Following the discussion questions for many of the cases, the “Compare and Contrast” questions con- tinue. These are questions provide an example of a company making a decision different from the one made by management in the case at hand. For example, in the Tylenol case (Case 8.7—an “oldie but goodie” that has been updated for this edition to include the com- pany’s recent problems with metal flecks in its infant products), students find a question that highlights this company’s past conduct in comparison with its conduct in a current situation in which the FDA has accused the company of surreptitiously buying up tainted product in order to avoid a recall. There is a contrast between its recall of a product in the 1980s, which was so rapid and received so much acclaim, and its behavior in this event. Why do some companies choose one path, whereas others succumb to pressure? What was different about their decision-making processes? What did they see that the other com- panies and their leaders did not take into account? This feature is a response to those who worry that students are not given examples of “good companies.” The problem with tout- ing goodness is that it is impossible to know everything a company is or is not doing. For example, Fannie Mae was named the most ethical company in America for two years running. Yet it had to do a $7 billion restatement of earnings and is now defunct as a shored-up government entity. BP was an environmental darling for nearly a decade for its responsible environmental programs. However, recent events cast doubt on how much environmental and safety dedication the company had. There is a risk in learning of good- ness if that goodness is superficial or limited. Studying individual scenarios of contrasting

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behavior is the learning tool, not the touting of a single company that can always have a lapse. There are no saints in this journey, and keeping the text credible requires a recogni- tion of that limitation but uses it to emphasize the vigilance we all need, as individuals and in business, to avoid lapses and progress in moral development.

Finding and Studying the Cases and Readings The eighth edition continues the classic readings in business ethics that provide insight into the importance of ethics in business and how to resolve ethical dilemmas. The eighth edition also continues the presence of integrated readings throughout the book to provide substantive thoughts on the particular areas covered in each section. The organizational structure and indexes, continued from the seventh edition, make material, companies, people, and products easy to locate. A case can be located using the table of contents, the alphabetical index, the topical index, the people index, or the product index, which lists both products and companies by name. An index for business disciplines groups the cases by accounting, management, and the other disciplines in colleges of business. A case can also be located using the Ethical Common Denominator Chart,” which is explained below.

How to Use the “Ethical Common Denominators Across Business Topics Chart” The Ethical Common Denominators Across Business Topics chart, or simply the ECD chart, is a tool that appears along with the indexes for the book, can be used to help students understand the point that only the facts change, but the ethical dilemmas remain the same. This chart provides some ease for that slight discomfort some instruc- tors have with the financial cases and helps students understand that underlying every ethical dilemma are the common patterns of psychology and pressure as well as the need for solid ethical analysis. The ECD chart provides instructors with the opportunity to structure their courses in a way that is comfortable for them. All an instructor needs to know is a general business term; that term can then be referenced in the ECD chart in various ways for instruction, according to instructor preference, needs, and time con- straints. The chart groups the cases by the usual business and ethics topics. If, for exam- ple, you wanted to cover the environmental cases all in one fell swoop, simply go to “environmentalism” or “sustainability,” and you find the cases and readings listed there. However, if you are looking for a variety of fact patterns to teach, for example, pressure’s role in ethical decision making, you could look under that topic and find the BP case (also an environmental case) as well as the financial factors in the Enron case. If you wanted students to see what pressure can do in the area of contracts, you can use the Facebook decision not to publicly disclose the realization of their losses of ad revenues on the eve of the company’s IPO. Students will learn that pressure affects all aspects of business operations. Adam Smith and his theories on markets appear in Section 9, but there is no reason this reading could not be shifted back to the coverage of the philo- sophical foundations.

An instructor can mix in cases from all the units in covering ethical analysis. The ECD includes a case from each unit under “Ethical Analysis,” because you can pick and choose what topics to cover as you teach how to analyze ethical issues. The ECD chart allows you to introduce that broad exposure to the pervasiveness of ethical issues early in your course, or you can simply use the cases in that unit and go on to topical areas. The chart also allows you to break up the finance cases into areas of discussion on psychology, culture, organizational behavior, hubris, and pressure. You need not focus on the

xx Preface

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structure of CDOs and secondary instruments markets to understand the culture at Leh- man and how its culture led its sales force and managers down a path that proved to be self-destructive. Likewise, you can mix in a Ponzi scheme in a nonprofit with Bernie Madoff, to help students understand how similar the cases are in the issues missed as those running the organizations pursued a business model that could not be sustained over time. The case on the Medtronics and research funding and journal publication tea- ches students about conflicts, but it would fit well in Unit 1 as you ask students to deal with the importance of speaking up when they see an ethical dilemma. The ECD chart allows a mix-and-match approach or a straight topical approach—both of which allow us to see that the facts change, but good ethical analysis applies, always.