Discuss eli lilly practice from the perspectives of utilitarianism

BUSINESS ETHICS Seventh Edition

Manuel G. Velasquez Santa Clara University

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1. Business ethics. 2. Business ethics—Case studies. I. Title. HF5387.V44 2011 174’.4—dc23 2011018696 10 9 8 7 6 5 4 3 2 1

Contents Preface vi

PART ONE Basic Principles 1

1 Ethics and Business 3 Introduction 4 1.1 The Nature of Business Ethics 8 1.2 Ethical Issues in Business 27

ON THE EDGE: A Traditional Business 35 1.3 Moral Reasoning 37

ON THE EDGE: WorldCom’s Whistleblower 42 1.4 Moral Responsibility and Blame 56

ON THE EDGE: Gun Manufacturers and Responsibility 63 CASES FOR DISCUSSION 64 Slavery in the Chocolate Industry 64 Aaron Beam and the HealthSouth Fraud 68

2 Ethical Principles in Business 73 Introduction 74 2.1 Utilitarianism: Weighing Social Costs and Benefits 76

ON THE EDGE: Should Companies Dump Their Wastes In Poor Countries? 80

2.2 Rights and Duties 90 ON THE EDGE: Working for Eli Lilly & Company 92

2.3 Justice and Fairness 105 ON THE EDGE: ExxonMobil, Amerada Hess, and Marathon Oil in Equatorial Guinea 113

2.4 The Ethics of Care 119 2.5 Integrating Utility, Rights, Justice, and Caring 124 2.6 An Alternative to Moral Principles: Virtue Ethics 126 2.7 Unconscious Moral Decisions 135

CASES FOR DISCUSSION 143 Traidos Bank and Roche’s Drug Trials in China 143 Unocal in Burma 145

PART TWO The Market and Business 149

3 The Business System: Government, Markets, and International Trade 151 Introduction 152 3.1 Free Markets and Rights: John Locke 157

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iv CONTENTS

3.2 Free Markets and Utility: Adam Smith 164 ON THE EDGE: Commodification or How Free Should Free Markets Be? 166

3.3 Free Trade and Utility: David Ricardo 172 3.4 Marx and Justice: Criticizing Markets and Free Trade 176

ON THE EDGE: Marx’s Children 178 ON THE EDGE: Napster’s Lost Revolution 182

3.5 Conclusion: The Mixed Economy, the New Property, and the End of Marxism 185

CASES FOR DISCUSSION 190 The GM Bailout 190 Accolade versus Sega 194

4 Ethics in the Marketplace 197 Introduction 198 4.1 Perfect Competition 200 4.2 Monopoly Competition 209

ON THE EDGE: Drug Company Monopolies and Profits 212 4.3 Oligopolistic Competition 215

ON THE EDGE: Fixing the Computer Memory Market 218 4.4 Oligopolies and Public Policy 225

ON THE EDGE: Oracle and Peoplesoft 229

CASES FOR DISCUSSION 230 Intel’s “Rebates” and Other Ways It “Helped” Customers 230 Archer Daniels Midland and the Friendly Competitors 235

PART THREE Business and Its External Exchanges: Ecology and Consumers 241

5 Ethics and the Environment 243 Introduction 244 5.1 The Dimensions of Pollution and Resource Depletion 246

ON THE EDGE: Ford’s Toxic Wastes 250 5.2 The Ethics of Pollution Control 263

ON THE EDGE: The Auto Companies in China 264 5.3 The Ethics of Conserving Depletable Resources 283

ON THE EDGE: Exporting Poison 286

CASES FOR DISCUSSION 293 The Ok Tedi Copper Mine 293 Gas or Grouse? 297

6 The Ethics of Consumer Production and Marketing 303 Introduction 304 6.1 Markets and Consumer Protection 306

CONTENTS v

6.2 The Contract View of Business Firm’s Duties to Consumers 308 6.3 The Due Care Theory 314

ON THE EDGE: The Tobacco Companies and Product Safety 316 6.4 The Social Costs View of the Manufacturer’s Duties 319

ON THE EDGE: Selling Personalized Genetics 320 6.5 Advertising Ethics 322

ON THE EDGE: Advertising Death to Kids? 324 6.6 Consumer Privacy 330

CASES FOR DISCUSSION 335 Becton Dickinson and Needle Sticks 335 Reducing Debts at Credit Solutions of America 339

PART FOUR Ethics and Employees 345

7 The Ethics of Job Discrimination 347 Introduction 348 7.1 Job Discrimination: Its Nature 350

ON THE EDGE: Helping Patients at Plainfield Healthcare Center 355 7.2 Discrimination: Its Extent 356 7.3 Discrimination: Utility, Rights, and Justice 367

ON THE EDGE: Driving for Old Dominion 372 ON THE EDGE: Peter Oiler and Winn-Dixie Stores 376

7.4 Affirmative Action 378

CASES FOR DISCUSSION 389 Should Kroger Pay Now for What a Ralphs’ Employee Did in the Past 389 Wal-Mart ’s Women 392

8 Ethics and the Employee 399 Introduction 400 8.1 The Rational Organization 401

ON THE EDGE: HP’s Secrets and Oracle’s New Hire 410 ON THE EDGE: Insider Trading or What Are Friends For? 414

8.2 The Political Organization 421 ON THE EDGE: Sergeant Quon’s Text Messages 425

8.3 The Caring Organization 446

CASES FOR DISCUSSION 450 Death at Massey Energy Company 450 Who Should Pay? 456

Notes 458 Photo Credits 485 Text Credits 485 Index 488

Preface

Business Ethics: Concepts and Cases continues to be one of the most widely used textbooks on business ethics, and remains popular among students because of its accessi- ble style and lucid explanations of complex theories and concepts. Providing clear explanations of ideas without oversimplifying them into caricatures of themselves is a major challenge for texts in this field (as any instruc- tor knows who has examined several texts on business ethics). Instructors who have used previous editions of this textbook have said that it does an outstanding job of meeting this challenge, while also providing an ex- cellent balance of ethical theory and managerial prac- tice. But the world does not stand still. Not only have our technologies, organizational forms, and managerial practices changed over the last few years, but our un- derstanding of ethical reasoning has developed and new moral issues have continued to challenge business. So it was necessary to revise the text and to provide fresh and updated treatments of these and other enduring ethical issues in business. To facilitate the study of these issues, this edition incorporates a number of valuable and ex- citing pedagogical devices including:

■ Six new and seven updated end-of-chapter cases ■ Twelve completely new “On the Edge” short

cases and six updated short cases in the body of the chapters

■ Eight newly illustrated short cases ■ Eight ABC News video clips posted online on the

book’s companion website, www.mythinkinglab. com to accompany eight of the end-of-chapter cases.

■ New graphs and charts, new pictures, and other visual materials

■ Study questions at the beginning of each chapter

■ Definitions of key terms in the margins and in the glossary

■ Summaries in the margins of all the basic ideas discussed in the text

■ New discussions of: moral reasoning, cor- porate social responsibility, impediments to

moral behavior, the influence of unconscious processes on moral behavior, globalization, technology, predatory pricing, the fraud tri- angle, sustainability, the value of work, recent business scandals, and much more.

■ Up-to-date statistics and data in all chapters. ■ End-of-chapter web resources

Although this new edition updates the contents of its predecessor, it retains both the basic organization and the conceptual framework of previous versions.

The primary aims of the text remain the same as in earlier editions. They are: (1) to introduce the reader to the ethical concepts that are relevant to resolving moral issues in business; (2) to impart the reasoning and ana- lytical skills needed to apply ethical concepts to business decisions; (3) to identify the moral issues involved in the management of specific problem areas in business; (4) to provide an understanding of the social, techno- logical, and natural environments within which moral issues in business arise; and (5) to supply case studies of actual moral dilemmas faced by businesses and business people.

The text is organized into four parts each contain- ing two chapters. Part One provides an introduction to basic ethical theory. A fundamental perspective de- veloped here is the view that ethical behavior is the best long-term business strategy for a company. By this I do not mean that ethical behavior is never costly. Nor do I mean that ethical behavior is always rewarded or that unethical behavior is always punished. It is ob- vious, in fact, that unethical behavior sometimes pays off, and that ethical behavior can impose serious losses on a company. When I argue that ethical behavior is the best long-range business strategy, I mean merely that over the long run, and for the most part, ethi- cal behavior can give a company important competi- tive advantages over companies that are not ethical. I present this idea and argue for it in Chapter 1, where I also indicate how we come to accept ethical stan- dards and how such standards can be incorporated into our moral reasoning processes. Chapter 2 critically discusses four kinds of moral principles: utilitarian

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principles, principles based on moral rights, principles of justice, and the principles of an ethic of care. These four kinds of moral principles, it is argued, provide a framework for resolving most of the kinds of ethical dilemmas and issues that arise in business. In addition, Chapter 2 discusses virtue theory as an alternative to a principles-based approach and discusses automatic moral decision-making and casuistry.

Having defined the nature and significance of ethi- cal standards and having identified four basic criteria for resolving moral issues in business, I then bring the resulting theory to bear on specific moral issues. Thus, Part Two examines the ethics of markets and prices; Part Three discusses environmental and consumer is- sues; and Part Four looks at employee issues. I assume in each part that in order to apply a moral theory to the real world we must have some information (and theory) about what that world is really like. Consequently, each chapter in these last three parts devotes several pages to laying out the empirical information and theory that the decision-maker must have if he or she is to apply moral- ity to reality. The chapter on market ethics, for exam- ple, provides a neoclassical analysis of market structure; the chapter on discrimination presents several statistical and institutional indicators of discrimination; the chap- ter on the individual in the organization relies on three models of organizations.

Each chapter of the text contains two kinds of ma- terials. The main text of the chapter sets out the con- ceptual materials needed to understand and address some particular type of moral issue. In addition, each chapter includes short cases in the main body of the chapter, and longer cases at the end of the chapter, that describe real business situations in which these moral issues are raised. I have provided these discussion cases on the pedagogical assumption that a person’s ability to reason about moral matters will improve if the person attempts to think through some concrete moral prob- lems and allows himself or herself to be challenged by others who resolve the issue on the basis of different moral standards. These kinds of challenges, when they arise in dialogue and discussion with others, force us to confront the adequacy of our moral norms and motivate us to search for more adequate principles when our own are shown to be inadequate. Some of the rationale for these pedagogical assumptions is discussed in Chapter 1 in the section on moral development and moral reason- ing. I hope that I have provided sufficient materials to allow the reader to develop, in discussion and dialogue with others, a set of ethical norms that they can accept as adequate.

New to this Edition

Although dozens of large and small revisions have been made in all the chapters of this edition, the follow- ing changes from the previous edition’s text should be noted by previous users of this text.

Chapter 1 includes new discussions of corporate social responsibility, integrative social contracts the- ory, the link between emotions and moral reasoning, and impediments to moral behavior. A new “On the Edge” short case has been added entitled “A Tra- ditional Business,” and an older one entitled “Was National Semiconductor Morally Responsible?” has been removed and, like all other deleted cases, was archived on the Companion Website. The end- of-chapter case “Aaron Beam and the HealthSouth Fraud” is added, and “Enron’s Fall” was removed and archived.

Chapter 2 has an expanded discussion of the mis- takes people can make when approaching utilitarian theory for the first time; a new discussion of the claim that context, not character, determines moral behavior; a new section on the influence of unconscious mental processes on moral behavior; and a new discussion of the relation between conscious moral reasoning on the one hand, and unconscious moral decision-making, moral intuition, and cultural influences on the other hand. The “On the Edge” short case, “Conflict Diamonds” was dropped and a new one added titled “Should Com- panies Dump Their Wastes in Poor Countries?” The end-of-chapter case “Publius” was removed and ar- chived, and a new case added named “Traidos Bank and Roche’s Drug Trials in China.”

Chapter 3 has a revised introduction and an expanded discussion of “alienation” in Marx. New “On the Edge” short cases include: “Commodification or How Free should Free Markets Be?” and “Marx’s Children,” while “Brian’s Franchise” was removed and archived. The older end-of-chapter case “Glaxo- SmithKline, Bristol-Myers Squibb, and AIDS in Africa” was replaced with the new case “The GM Bailout.”

Chapter 4 has a revised introduction, a new discus- sion of predatory pricing, and a new section on “Incen- tives, Opportunities, and Rationalization.” The new end-of-chapter case “Intel’s ‘Rebates’ and Other Ways It ‘Helped’ Customers” replaces the older “Playing Monopoly: Microsoft.”

The introduction to Chapter 5 has been revised, and its discussions of pollution and resource deple- tion have been revised and completely updated with new charts and graphs. A new section on sustainability

PREFACE vii

viii PREFACE

was added. The new “On the Edge” short case, “Ford’s Toxic Wastes” replaced “The Aroma of Tacoma,” and the short case, “The Auto Companies in China” was ex- tensively revised and updated. Both of the two end-of- chapter cases were revised and updated.

The introduction to Chapter 6 has been revised. The new short case “Selling Personalized Genetics” was added, and the other two cases on the tobacco industry were revised. At the end of the chapter, the case “Reducing Debts at Credit Solutions of America” was added and “The Ford/Firestone Debacle” was removed.

In Chapter 7 all the statistical materials were brought up to date and several new graphs were added, while the section on comparable worth programs was removed. Two new “On the Edge” short cases in this chapter are “Helping Patients at Plainfield Healthcare Center” and “Driving for Old Dominion.” The older short case “Wall Street: It’s a Man’s World” was re- moved and archived. Both of the end-of-chapter cases have been updated.

In Chapter 8 all the statistics have been updated and the discussion of conflicts of interest was revised; the older section, “Working Conditions: Job Satisfac- tion” was removed and a new discussion on the value of work was added. All of the older “On the Edge” short cases were removed, and three completely new short cases were added entitled “HP’s Secrets and Oracle’s New Hire,” “Insider Trading or What Are Friends For?” and “Sergeant Quon’s Text Messages.” The new end-of-chapter case “Death at Massey Energy Com- pany” replaces “Gap’s Labor Problems.”

Support for Instructors and Students

The moment you know. Educators know it. Students know it. It’s that inspired moment when something that was difficult to understand suddenly makes perfect sense. Our MyLab products have been designed and refined with a single purpose in mind—to help educa- tors create that moment of understanding with their students. The new MyThinkingLab delivers proven results in helping individual students succeed. It pro- vides engaging experiences that personalize, stimu- late, and measure learning for each student. And, it comes from a trusted partner with educational exper- tise and an eye on the future. MyThinkingLab can be used by itself or linked to any learning management sys- tem (LMS). MyThinkingLab—the moment you know.

Instructor’s Manual with Tests ( 0-205-01767-3 ):

For each chapter in the text, this valuable resource pro- vides a detailed outline, list of objectives, and discussion questions. In addition, test questions in multiple-choice, true/false, fill-in-the-blank, and short answer formats are available for each chapter; the answers are page refer- enced to the text. For easy access, this manual is available at Preface vii www.pearsonhighered.com/irc.

PowerPoint Presentation Slides for Ethics: Theory and Practice (0-205-01769-X):

These PowerPoint Slides help instructors convey ethical principles in a clear and engaging way. For easy access, they are available at www.pearsonhighered.com/irc.

MyTest Test Generator (0-205-01768-1):

This computerized software allows instructors to cre- ate their own personalized exams, edit any or all of the existing test questions, and add new questions. Other special features of the program include random genera- tion of test questions, creation of alternate versions of the same test, scrambling question sequence, and test preview before printing. For easy access, this software is available at www.pearsonhighered.com/irc.

Acknowledgments

Like every textbook author, I owe a very large debt of gratitude to the numerous colleagues and other scholars around the world from whom I have shamelessly bor- rowed ideas and materials. They all, I hope, have been duly recognized in the notes. Thank you to Marc Or- litzky, The University of Redlands; Barbara Fechner, South East Community College; and Rodney Stevenson, University of Wisconsin—Madison for their feedback. I owe a special debt to my colleagues in the Management Department where I teach, especially to Dennis Moberg. But my largest debt is owed to my wife and family who have patiently (and sometimes not so patiently) had to put up with me while I remained obsessively preoccupied with writing and revising the present edition of this book. To Maryann, Brian, Kevin, and Daniel: Thank You.

Manuel G. Velasquez Aptos, California

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1

PART ONE

Basic Principles BUSINESS ETHICS IS APPLIED ETHICS. IT IS THE APPLICATION OF OUR UNDERSTANDING OF WHAT IS GOOD

AND RIGHT TO THAT ASSORTMENT OF INSTITUTIONS, TECHNOLOGIES, TRANSACTIONS, ACTIVITIES, AND

PURSUITS THAT WE CALL BUSINESS. A DISCUSSION OF BUSINESS ETHICS MUST BEGIN BY PROVIDING A

FRAMEWORK OF BASIC PRINCIPLES FOR UNDERSTANDING WHAT IS MEANT BY THE TERMS GOOD AND RIGHT ;

ONLY THEN CAN ONE PROCEED TO PROFITABLY DISCUSS THE IMPLICATIONS THESE HAVE FOR OUR BUSI-

NESS WORLD. THESE FIRST TWO CHAPTERS PROVIDE SUCH A FRAMEWORK. CHAPTER 1 DESCRIBES WHAT

BUSINESS ETHICS IS IN GENERAL AND EXPLAINS THE GENERAL ORIENTATION OF THE BOOK. CHAPTER 2

DESCRIBES SEVERAL SPECIFIC APPROACHES TO BUSINESS ETHICS, WHICH TOGETHER FURNISH A BASIS FOR

ANALYZING ETHICAL ISSUES IN BUSINESS.

3

What is “business ethics”?

What is corporate social responsibility?

Is ethical relativism right?

How does moral development happen?

What role do emotions have in ethical reasoning?

What are the impediments to moral behavior?

When is a person morally responsible for doing wrong?

Ethics and Business

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In business the handshake is an expression of trust, and ethical behavior is the foundation of trust.

4 BASIC PRINCIPLES

Maybe the best way to introduce a discussion of business ethics is by looking at how a real company has incorporated ethics into its operations. Consider then how Merck & Co., Inc., a U.S. drug company, dealt with the issue of river blindness.

River blindness is a debilitating disease that has afflicted about 18 million impov- erished people living in remote villages along the banks of rivers in tropical regions of Africa and Latin America. The disease is caused by a tiny parasitic worm that is passed from person to person by the bite of the black fly, which breeds in fast-flowing river waters. The tiny worms burrow under a person’s skin, where they grow as long as 2 feet curled up inside ugly round nodules half an inch to an inch in diameter. Inside the nodules, the female worms reproduce by releasing millions of microscopic offspring called microfilariae that wriggle their way throughout the body moving beneath the skin, discoloring it as they migrate, and causing lesions and such intense itching that vic- tims sometimes commit suicide. Eventually, the microfilariae invade the eyes and blind the victim. In some West African villages, the parasite had already blinded more than 60 percent of villagers over fifty-five. The World Health Organization estimated that the disease had blinded 270,000 people and left another 500,000 with impaired vision.

Pesticides no longer stop the black fly because it has developed immunity to them. Moreover, until the events described below, the only drugs available to treat the parasite in humans were so expensive, had such severe side effects, and required such lengthy hospital stays that the treatments were impractical for the destitute victims who lived in isolated rural villages. In many countries, young people fled the areas along the rivers, abandoning large tracts of rich fertile land. Villagers who stayed to live along the rivers accepted the nodules, the torturous itching, and eventual blind- ness as an inescapable part of life.

In 1980, Dr. Bill Campbell and Dr. Mohammed Aziz, research scientists working for Merck, discovered evidence that one of the company’s best-selling animal drugs, Ivermectin, might kill the parasite that causes river blindness. Dr. Aziz, who had once worked in Africa and was familiar with river blindness, traveled to Dakar, Senegal, where he tested the drug on villagers who had active infections. Astonishingly, he discovered that a single dose of the drug not only killed all the microfilariae, it also made the fe- male worms sterile and made the person immune to new infections for months. When Aziz returned to the United States, he and Dr. Campbell went to see Merck’s head of research and development, Dr. P. Roy Vagelos, a former physician. They showed him their results and recommended that Merck develop a human version of the drug.

At the time, it cost well over $100 million to develop a new drug and test it in the large-scale clinical studies the U.S. government required. Roy Vagelos realized that even if they succeeded in developing a human version of the drug for the victims of river blindness, “It was clear that we would not be able to sell the medicine to these people, who would not be able to afford it even at a price of pennies per year.” 1 And even if the drug was affordable, it would be almost impossible to get it to most of the people who had the disease since they lived in remote areas without access to doctors, hospitals, clinics, or drug stores. Moreover, if the drug had bad side effects for hu- mans, these could threaten sales of the animal version of the drug, which were about $300 million a year. Finally, if a cheap version of the human drug was made available, it could be smuggled through black markets and resold for use on animals, thereby undermining the company’s sales of Ivermectin to veterinarians.

Although Merck had worldwide sales of $2 billion a year, its net income as a percent of sales had been in decline due to the rapidly rising costs of developing new drugs, the increasingly restrictive and costly regulations being imposed by govern- ment agencies, a lull in basic scientific breakthroughs, and a decline in the produc- tivity of company research programs. The U.S. Congress was getting ready to pass

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ETHICS AND BUSINESS 5

the Drug Regulation Act, which would intensify competition in the drug industry by allowing competitors to more quickly copy and market drugs originally developed by other companies. Medicare had recently put caps on reimbursements for drugs and required cheaper generic drugs in place of the branded-name drugs that were Merck’s major source of income. In the face of these worsening conditions in the drug indus- try, was it a good idea for Merck to undertake an expensive project that showed little economic promise? On top of all this, Vagelos later wrote:

There was a potential downside for me personally. I hadn’t been on the job very long and I was still learning how to promote new drug development in a corporate setting. While we had some big innovations in our pipeline, I was still an unproven rookie in the business world. I would be spending a consid- erable amount of company money in a field, tropical medicine, that few of us other than Mohammed Aziz knew very well .