Introduction to business ethics desjardins pdf

THE Business Ethics

1- ANSWER THE QUESTIONS BELOW. LIST YOUR SOURCE(S) FOR ALL ANSWERS: ( IN-TEXT AND IN A REFERENCE LIST USING A PROPER METHODOLOGY)

A) 1-HOW CAN BUSINESSES BE ENVIRONMENTALLY RESPONSIBLE? 2-NAME AND EXPLAIN 3 DETAILED EXAMPLES TO SUPPORT YOUR ANSWER.

B) 1-DEFINE ORGANIC PRODUCTS. 2-PROVIDE TWO EXAMPLES OF EXISTING PRODUCTS THAT ARE CERTIFIED ORGANIC IN CANADA.

C) 1-DEFINE FAIR TRADE PRODUCTS. 2-EXPLAIN WHY FAIR TRADE PRODUCTS ARE MORE ETHICAL.

D) 1- DEFINE ECO-FRIENDLY PRODUCTS. 2-PROVIDE TWO EXAMPLES OF EXISTING PRODUCTS THAT ARE CERTIFIED ECO-FRIENDLY IN CANADA. 3- NAME THE ORGANIZATION THAT CERTIFIED THESE PRODUCTS.

1000 WORDS MAXIMUM

using MLA OR APA

using the resource i applied below, cite all the resources has been used, thank you.

Since its inception, An Introduction to Business Ethics by Joseph DesJardins has been a cuting- edge resource for the business ethics course. DesJardins’ unique multidisciplinary approach offers critical analysis and integrates the perspective of philosophy with management, law, economics, and public policy, providing a clear, concise, yet reasonably comprehensive introductory survey of the ethical choices available to us in business.

Highlights of the Fifh Edition: • NEW! Discussion cases throughout focused on Goldman Sachs, the LIBOR banking

scandal, Patagonia, and Chick-fil-A and same-sex marriage. Additional revised and updated cases include discussions on Walmart and bribery in Mexico, Apple and Foxconn in China, executive compensation, conflicts of interest at Goldman Sachs, and employee privacy.

•   A revised discussion of ethical theory which de-emphasizes philosophical jargon, 

introduces ethics as involving frameworks and paterns of reasoning rather than as abstract “theories,” and expands discussion of ethical principles, rights, and duties.

What Instructors are Saying about An Introduction to Business Ethics: “A great book, thorough and accessible.”– Jessica McManus, Notre Dame University

“Provides all the major areas in Business Ethics . . . It is clear, challenging, and comprehensive.” 

– Andy Wible, Meskegon Community College

Visit www.mhhe.com/desjardins5e for a wealth of student and instructor resources! Fifth Edition

An Introduction to Business Ethics D

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Fi f th Ed it ion

An Introduction to

Joseph DesJardins

Business Ethics

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AN INTRODUCTION TO BUSINESS ETHICS, FIFTH EDITION

Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2014 by The McGraw-Hill Compa- nies, Inc. All rights reserved. Printed in the United States of America. Previous editions © 2011, 2009 and 2006. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

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Library of Congress Cataloging-in-Publication Data DesJardins, Joseph R. An introduction to business ethics/Joseph DesJardins.—Fifth edition. pages cm ISBN 978-0-07-803832-7 (alk. paper) 1. Business ethics. I. Title. HF5387.D392 2014 174’.4—dc23 2012048757

www.mhhe.com

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iii

About the Author

Joe DesJardins is Vice Provost, as well as Professor in the Department of Phi-losophy, at the College of St. Benedict and St. John’s University in Minnesota. His other books include Business Ethics: Decision Making for Personal Integrity and Social Responsibility (with Laura Hartman and Chris MacDonald); Environ- mental Ethics: An Introduction to Environmental Philosophy; Environmental Ethics: Concepts, Policy, and Theory; Contemporary Issues in Business Ethics (co-editor with John McCall); and Business, Ethics, and the Environment. He is the former Execu- tive Director of the Society for Business Ethics and has published and lectured extensively in the areas of business ethics, environmental ethics, and sustain- ability. He received his B.A. from Southern Connecticut State University and his M.A. and Ph.D. from the University of Notre Dame. He previously taught at Villanova University.

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To Linda

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v

Contents

Preface x

Chapter One: Why Study Ethics? 1

Learning Objectives 1 Discussion Case: The LIBOR Scandal: Is It Ok If Everyone Does It? 2 Discussion Questions 4 1.1 Why Study Business Ethics? 4 1.2 Values and Ethics: Doing Good and Doing Well 6 1.3 The Nature and Goals of Business Ethics 10 1.4 Business Ethics and the Law 12 1.5 Ethics and Ethos 13 1.6 Morality, Virtues, and Social Ethics 15 1.7 Ethical Perspectives: Managers and Other Stakeholders 16 1.8 A Model for Ethical Decision Making 17 Refl ections on the Chapter Discussion Case 18 Chapter Review Questions 19

Chapter Two: Ethical Theory and Business 20

Learning Objectives 20 Discussion Case: AIG Bonuses and Executive Salary Caps 21 Discussion Questions 22 2.1 Introduction 23 2.2 Ethical Relativism and Reasoning in Ethics 25 2.3 Modern Ethical Theory: Utilitarian Ethics 29 2.4 Challenges to Utilitarianism 33 2.5 Utilitarianism and Business Policy 35 2.6 Principle-Based Ethics 37 2.7 Virtue Ethics 41 2.8 Summary and Review 44 Refl ections on the Chapter Discussion Case 45 Chapter Review Questions 46

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vi Contents

Chapter Three: Corporate Social Responsibility 48

Learning Objectives 48 Discussion Case: Walmart 49 Discussion Questions 52 3.1 Introduction 53 3.2 The Economic Model of Corporate Social Responsibility 53 3.3 Critical Assessment of the Economic Model:

The Utilitarian Defense 56 3.4 Critical Assessment of the Economic Model:

The Private Property Defense 61 3.5 The Philanthropic Model of Corporate Social Responsibility 64 3.6 Modifi ed Version of the Economic Model: The Moral Minimum 65 3.7 The Stakeholder Model of Corporate Social Responsibility 67 3.8 Strategic Model of Corporate Social Responsibility:

Sustainability 71 3.9 Summary and Review 74 Refl ections on the Chapter Discussion Case 75 Chapter Review Questions 76

Chapter Four: Corporate Culture, Governance, and Ethical Leadership 79

Learning Objectives 79 Discussion Case: Goldman Sachs’s “Toxic Culture” 80 Discussion Questions 81 4.1 Introduction 81 4.2 What is Corporate Culture? 82 4.3 Culture and Ethics 83 4.4 Ethical Leadership and Corporate Culture 86 4.5 Effective Leadership and Ethical Leadership 87 4.6 Building a Values-Based Corporate Culture 89 4.7 Mandating and Enforcing Ethical Culture:

The Federal Sentencing Guidelines 92 Refl ections on the Chapter Discussion Case 94 Chapter Review Questions 94

Chapter Five: The Meaning and Value of Work 97

Learning Objectives 97 Discussion Case: Social Enterprises and Social Entrepreneurs 98 Discussion Questions 100 5.1 Introduction 101 5.2 The Meanings of Work 102 5.3 The Value of Work 104 5.4 Conventional Views of Work 107 5.5 The Human Fulfi llment Model 109

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Contents vii

5.6 The Liberal Model of Work 112 5.7 Business’s Responsibility for Meaningful Work 114 Refl ections on the Chapter Discussion Case 116 Chapter Review Questions 117

Chapter Six: Moral Rights in the Workplace 119

Learning Objectives 119 Discussion Case: Electronic Privacy at Work 120 Discussion Questions 121 6.1 Introduction: Employee Rights 122 6.2 The Right to Work 123 6.3 Employment at Will 127 6.4 Due Process in the Workplace 129 6.5 Participation Rights 132 6.6 Employee Health and Safety 134 6.7 Privacy in the Workplace 139 Refl ections on the Chapter Discussion Case 143 Chapter Review Questions 143

Chapter Seven: Employee Responsibilities 145

Learning Objectives 145 Discussion Case: Confl icts of Interests in Subprime Mortgages

and at Goldman Sachs and Enron 146 Discussion Questions 151 7.1 Introduction 151 7.2 The Narrow View of Employee Responsibilities:

Employees as Agents 152 7.3 Professional Ethics and the Gatekeeper Function 157 7.4 Managerial Responsibility and Confl icts of Interest 160 7.5 Trust and Loyalty in the Workplace 163 7.6 Responsibilities to Third Parties: Honesty,

Whistle-Blowing, and Insider Trading 165 Refl ections on the Chapter Discussion Case 171 Chapter Review Questions 172

Chapter Eight: Marketing Ethics: Product Safety and Pricing 174

Learning Objectives 174 Discussion Case: Life-Cycle Responsibility for Products 175 Discussion Questions 177 8.1 Introduction: Marketing and Ethics 177 8.2 Ethical Issues in Marketing: An Overview 178 8.3 Ethical Responsibility for Products: From Caveat

Emptor to Negligence 181

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viii Contents

8.4 Strict Product Liability 185 8.5 Ethics and Pricing 187 Refl ections on the Chapter Discussion Case 191 Chapter Review Questions 192

Chapter Nine: Marketing Ethics: Advertising and Target Marketing 194

Learning Objectives 194 Discussion Case: Predatory Lending: Subprime Mortgages and Credit Cards 195 Discussion Questions 196 9.1 Introduction: Ethics of Sales, Advertising, and

Product Placement 197 9.2 Regulating Deceptive and Unfair Sales and Advertising 200 9.3 Marketing Ethics and Consumer Autonomy 203 9.4 Targeting the Vulnerable: Marketing and Sales 208 Refl ections on the Chapter Discussion Case 212 Chapter Review Questions 214

Chapter Ten: Business’s Environmental Responsibilities 216

Learning Objectives 216 Discussion Case: Sustainable Business 217 Discussion Questions 219 10.1 Corporate Social Responsibility and the Environment 219 10.2 Business’s Responsibility as Environmental Regulation 221 10.3 Business Ethics and Sustainable Economics 223 10.4 Business Ethics in the Age of Sustainable Development 227 10.5 The “Business Case” for Sustainability 230 Refl ections on the Chapter Discussion Case 232 Chapter Review Questions 233

Chapter Eleven: Diversity and Discrimination 234

Learning Objectives 234 Discussion Case: Chick-fi l-A and Same-Sex Marriage 235 Discussion Questions 236 11.1 Introduction: Diversity and Equality 237 11.2 Discrimination, Equal Opportunity, and Affi rmative Action 238 11.3 Preferential Treatment in Employment 243 11.4 Arguments Against Preferential Hiring 247 11.5 Arguments in Support of Preferential Hiring 250 11.6 Sexual Harassment in the Workplace 253 Refl ections on the Chapter Discussion Case 258 Chapter Review Questions 259

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Contents ix

Chapter Twelve: International Business and Globalization 261

Learning Objectives 261 Discussion Case: Business in a Global Setting 262 Discussion Questions 263 12.1 Introduction 264 12.2 Ethical Relativism and Cross-Cultural Values 265 12.3 Cross-Cultural Values and International Rights 267 12.4 Globalization and International Business 269 12.5 Globalization and the Poor 271 12.6 “Race to the Bottom” 273 12.7 Democracy, Cultural Integrity, and Human Rights 275 Refl ections on the Chapter Discussion Case 278 Chapter Review Questions 279

Photo Credits 281 Index 283

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x

Preface to the Fifth Edition

My overarching goal in the fi fth edition of this text remains what it was for the fi rst edition: “to provide a clear, concise, and reasonably comprehensive introductory survey of the ethical choices available to us in business.” This book arose from the challenges encountered in my own teaching of business ethics. Over the years I have taught business ethics in many settings and with many formats. I sometimes relied on an anthology of readings, other times I emphasized case studies. I taught business ethics as a lecture course and in a small seminar. Most recently, I taught business ethics exclusively to under- graduates in a liberal arts setting. It is diffi cult to imagine another discipline that is as multidisciplinary, taught in as many formats and as many contexts, by faculty with as many different backgrounds and with as many different aims, as business ethics.

Yet, although the students, format, pedagogy, and teaching goals change, the basic philosophical and conceptual structure for the fi eld remains relatively stable. There are a range of stakeholders with whom business interacts: em- ployees, customers, suppliers, governments, society. Each of these relationships creates ethical responsibilities, and every adult unavoidably will interact with business in several of these roles. A course in business ethics, therefore, should ask students to examine this range of responsibilities from the perspective of employee, customer, and citizen as well as from the perspective of business manager or executive. Students should consider such issues in terms of both the type of lives they themselves wish to lead and the type of public policy for governing business they are willing to support.

My hope was that this book could provide a basic framework for examin- ing the range of ethical issues that arise in a business context. With this basic framework provided, individual instructors would then be free to develop their courses in various ways. I have been grateful to learn that this book is being used in a wide variety of settings. Many people have chosen to use it as a supplement to the instructor’s own lectures, an anthologized collection of readings, a series of case studies, or some combination of all three. Others have chosen to use this text to cover the ethics component of another course in such business-related disciplines as management, marketing, account- ing, human resources. The book also has been used to provide coverage of

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Preface to the Fifth Edition xi

business-related topics in more general courses in applied or professional eth- ics. I take this variety of uses as evidence that the fi rst edition was reasonably successful in achieving its goals.

NEW TO THE FIFTH EDITION

The primary goal of this new edition is to update cases with more contempo- rary examples and to continue to revise the text for the sake of clarity and ac- cessibility for students. To those ends, readers will note the following major changes for the fi fth edition:

• Every chapter begins with a new, or revised and updated, discussion case. Highlights include new cases on Goldman Sachs, the LIBOR banking scandal, Patagonia, and Chick-fil-A and same-sex marriage. Revised and updated cases include new discussions on Walmart and bribery in Mexico, Apple and Foxconn in China, executive compensation, conflicts of interest at Goldman Sachs, and employee privacy.

• A revised discussion of ethical theory that deemphasizes philosophical jargon (readers will no longer see the word “deontological” for example!). The new discussion introduces ethics as involving frameworks and pat- terns of reasoning rather than as “theories” and substitutes a discussion of ethical principles, rights, and duties for the former section on deontologi- cal ethics.

As always, a new edition provides an opportunity to not only update mate- rial, but to present it in a more accessible style. It has been gratifying to learn that readers have found the book clearly written and accessible to students un- familiar with the fi eld. In continuing to strive for these goals, I have rewritten some sections, deleted some outdated cases and dated material, and worked to improve the clarity of the more philosophical sections.

Readers of previous editions will fi nd a familiar format. Each chapter be- gins with a discussion case developed from actual events. The intent of these cases is to raise questions and get students thinking and talking about the ethi- cal issues that will be introduced in the chapter. The text of each chapter then tries to do three things:

• Identify and explain the ethical issues involved; • Direct students to an examination of these issues from the points of view

of various stakeholders; and • Lead students through some initial steps of a philosophical analysis of

these issues.

The emphasis remains on encouraging student thinking, reasoning, and de- cision making rather than on providing answers or promoting a specifi c set of conclusions. To this end, a section on ethical decision making at the end of chapter 1 provides one model for decision making that might prove useful throughout the remainder of the text.

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xii Preface to the Fifth Edition

ACKNOWLEDGMENTS

As with previous editions, my greatest debt in writing this book is to those scholars engaged in the academic research of business ethics. I tried to acknowl- edge their work whenever I relied on it in this text, but in case I have missed anyone, I hope this general acknowledgment can serve to repay my debt to the business ethics community. I also acknowledge three members of that com- munity who deserve special mention and thanks. My own work in business ethics has, for over 20 years, benefi ted from the friendships of John McCall, Ron Duska, and Laura Hartman. They will no doubt fi nd much in this book that sounds familiar. Twenty years of friendship and collaboration tends to blur the lines of authorship, but it is fair to say that I have learned much more from John, Ron, and Laura than they from me.

Previous editions have also benefi ted from the advice of a number of people who read and commented on various chapters. In particular, I would like to thank Norman Bowie, Ernie Diedrich, Al Gini, Patrick Murphy, Denis Arnold, and Christopher Pynes.

I owe sincere thanks to the following teachers and scholars who were gracious enough to review previous editions of this book for McGraw-Hill: Dr. Edwin A. Coolbaugh—Johnson & Wales University; Jill Dieterlie—Eastern Michigan University; Glenn Moots—Northwood University; Jane Hammang- Buhl—Marygrove College; Ilona Motsif—Trinity College; Bonnie Fremgen— University of Notre Dame; Sheila Bradford—Tulsa Community College; Donald Skubik—California Baptist University; Sandra Powell—Weber State University; Gerald Williams—Seton Hall University; Leslie Connell— University of Central Florida; Brad K. Wilburn—Santa Clara University; Carlo Filice—SUNY, Genesco; Brian Barnes—University of Louisville; Marvin Brown—University of San Francisco; Patrice DiQuinzio—Muhlenberg Col- lege; Julian Friedland—Leeds School of Business, University of Colorado at Boulder; Derek S. Jeffreys—The University of Wisconsin, Green Bay; Albert B. Maggio Jr.—bicoastal-law.com; Andy Wible—Muskegon Community College; Christina L. Stamper—Western Michigan University; Charles R. Fenner, Jr.— State University of New York at Canton; Sandra Obilade—Brescia University; Lisa Marie Plantamura—Centenary College; James E. Welch—Kentucky Wesleyan College; Adis M. Vila—Dickinson College; Chester Holloman— Shorter College; Jan Jordan—Paris Junior College; Jon Adam Matthews— Central Carolina Community College; Bruce Alan Kibler—University of Wisconsin-Superior

The fifth edition benefited from the thorough and thoughtful reviews by:

• Carla Johnson, St. Cloud State University • Martha Helland, University of Sioux Falls • Jessica MacManus, Notre Dame • David Levy, State University of New York—Geneseo • Barbara Barresi, Capital University

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Preface to the Fifth Edition xiii

• Kenneth Ferguson, East Carolina University • Michael Shaffer, St. Cloud State University • Wake Maki, University of North Carolina–Greensboro • Andy Wible, Muskegon Community College • Richard McGowan, Butler University

Joseph DesJardins

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1

1 C H A P T E R Why Study Ethics?

L E A R N I N G O B J E C T I V E S

After reading this chapter, you will be able to:

• Identify reasons why the study of ethics is important; • Explain the nature and meaning of business ethics; • Explain the difference between ethical values and other values; • Clarify the difference between ethics and the law; • Describe the distinction between ethics and ethos; • Distinguish between personal morality, virtues, and social ethics; • Identify ethical issues within a case description.

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2 Chapter 1

DISCUSSION CASE: The LIBOR Scandal: Is It Ok If Everyone Does It?

On June 27, 2012, as part of a U.S. Department of Justice Investigation, Barclays Bank admitted to manipulating and reporting fraudulent inter- est rates used in international fi nancial markets. Barclays, a multinational fi nan- cial services and banking fi rm headquartered in London, was fi ned more than $450 million dollars (U.S.) by both U.K. and U.S. regulators. Evidence showed that Barclays had regularly manipulated the LIBOR (London InterBank Offered Rate) since at least 2005, in order both to profi t from large trades and to falsely portray the bank as fi nancially stronger than it was.

The LIBOR is the rate at which major London banks report that they are able to borrow. This rate then serves as the benchmark at which interest rates are set for countless other loans, ranging from credit cards to mortgages and interbank loans. It also acts as a measure of market confi dence in the bank; if a bank must pay a higher rate to borrow than others do, then markets must have less confi dence in the institution’s fi nancial strength.

The LIBOR is established in a surprisingly simple manner. Each morning at 11 a.m. London time, members of the British Bankers Association (BBA) report to the fi nancial reporting fi rm of Thomson Reuters the rates at which they would expect to pay for loans from other banks. Discarding the high- est and lowest quartiles, Thomson Reuters then calculates a daily average, which becomes the daily LIBOR benchmark. Within an hour, Thomson Re- uters publicizes this average worldwide, along with all of the individual rates reported to them. This benchmark is then used to settle short-term in- terest rates as well as futures and options contracts. By one estimate, the LIBOR is used to set interest rates for global fi nancial transactions worth more than $500 trillion. The individual rates also provide an indirect mea- sure of the fi nancial health of each reporting institution—the lower their rates, the stronger their fi nancial position.

Evidence shows that as early as 2007, before the major fi nancial collapse of Lehman Brothers and the economic meltdown that followed, regulators in both the United States and the United Kingdom were aware of allegations that Barclays was underreporting their rates. In the early days of the 2008 fi nancial collapse, the Wall Street Journal published a series of articles questioning the in- tegrity of LIBOR reporting and suggested that banks were intentionally misre- porting rates to strengthen public perception of their fi nancial health. Timothy Geithner, U.S. Secretary of Treasury under President Obama, acknowledged that in 2008 when he was chairman of the New York Federal Reserve Bank, he recommended that British regulators change the process for setting the LIBOR. In testimony to the U.S. Congress in July 2012, Geithner said “We were aware [in 2008] of the risks that the way this was designed created not just the incen- tive to underreport, but also the opportunity to underreport.”

Internal documents and e-mails showed that traders, compliance of- fi cers, and senior management at Barclays were aware of and approved the

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Why Study Ethics? 3

underreporting. An e-mail sent from a Barclays employee to his supervisor in 2007 said: “My worry is that we are being seen to be contributing patently false rates. We are therefore being dishonest by defi nition and are at risk of dam- aging our reputation in the market and with the regulators. Can we discuss urgently please?”

Evidence also showed that Barclays employees were in regular commu- nication with traders who would explicitly ask that Barclays report specific higher or lower rates in order to benefit their trades. For example, Deriva- tive traders, who would stand to gain or lose millions of dollars depend- ing on the rate, would communicate directly with their Barclays banking contacts and request that certain rates be reported. The tone of their com- munication demonstrates the familiarity that existed between these parties: “Dude. I owe you big time! . . . I’m opening a bottle of Bollinger,” wrote one trader to his Barclays contact. “Pls set 3m libor as high as possible today,” wrote another. Yet another, “Dude, what’s up with ur guys . . fix this . . .tell him to get it up!

Investigations into the LIBOR scandal showed widespread intentional fraud among many individual employees and executives at Barclays. But from the earliest days of the scandal, allegations were being made that other banks were equally involved. While admitting guilt, Barclays denied that they were the only bank involved in misreporting data. In a recorded interview, one Barclays employee told investigators that “We did stick our head above the parapet last year, got it shot off, and put it back down again. So, to the extent that, um, the Libors have been understated, are we guilty of being part of the pack? You could say we are. . . . Um, so I would, I would sort of express us maybe as not clean clean, but clean in principle.” In a conversation between a senior executive at Barclays’ and a representative of the British banking Ad- ministration, which was reported by the U.S. investigation, the Barclays em- ployee defended the bank, saying “We’re clean, but we’re dirty-clean, rather than clean-clean.”

The BBA representative responded: “No one’s clean-clean.” By the end of August 2012, the investigation had spread to include allega-

tions of fraudulent LIBOR reporting by HSBC and royal bank of Scotland, the two other largest banks in the United Kingdom, as well as more than a dozen other international banks.

The scandal even spread to the British government. Barclays CEO Bob Diamond testifi ed that at the height of the fi nancial collapse in fall 2008, he received a call from Paul Tucker, deputy governor of the Bank of England. According to Diamond, Tucker called on behalf of “senior Whitehall” fi gures and put pressure on Mr. Diamond to lower his reported LIBOR rates. The al- legation is that the higher rates would undermine confi dence in Barclays at a time that fi nancial markets needed boosting, and it increased the likelihood that the British government would need to bail out Barclays as it already had done for other failing banks. Mr. Tucker claims that he was misunderstood by Mr. Diamond.

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4 Chapter 1

DISCUSSION QUESTIONS

1. What ethical issues are involved in this case? 2. Who are the stakeholders in this case? Who would be hurt by rate fixing? 3. What responsibilities did senior executives at Barclays have to pre-

vent fraud in circumstances that, in Timothy Geithner’s words, “cre- ated not just the incentive to underreport, but also the opportunity to underreport”?

4. If the LIBOR scandal is as widespread as ongoing investigations suggest, are there ethical issues involved in this case that are different from those that would be involved if only Barclays was guilty? What are they?

5. Who is responsible for the ethical integrity of such institutional practices as the LIBOR? Is anyone at fault for this fraud other than the individuals involved in reporting false information?

1.1 WHY STUDY BUSINESS ETHICS?

Why should anyone study business ethics? The short answer is that a class in business ethics should not aim simply to help you learn about ethics, but it should also aim to help you do ethics and be ethical. That is, the goal of busi- ness ethics is more than just teaching and learning about what happens in business. The goal is also to help each of us become more ethical and to help us all create and promote ethical institutions. We can achieve these goals by developing three intellectual capacities: a better understanding of ethical is- sues, a more fi nely tuned set of analytical skills with which to evaluate ethical issues, and a refi ned sensitivity to appreciate the signifi cance of leading an ethical life.

But as recently as the mid-1990s, articles in such major publications as the Wall Street Journal , the Harvard Business Review , and U.S. News and World Re- port questioned the value of teaching classes in business ethics. Throughout the 1980s and 1990s, this skeptical attitude was as common among business practitioners as it was among students. Few disciplines faced the amount of skepticism that commonly confronted courses in business ethics. Many stu- dents believed that, like “jumbo shrimp,” business ethics was an oxymoron. Many also viewed ethics as a mixture of sentimentality and personal opinion that would interfere with the effi cient functioning of business. After all, who’s to say what’s right or wrong?

Yet a great deal has changed since then. Beginning in 2001, with the col- lapse of Enron and Arthur Andersen, hardly a month has gone by without a major corporate ethical scandal making headlines. In just the fi rst fi ve years of the twenty-fi rst century, a wave of ethical scandals swept though the corpo- rate world as fraudulent and dishonest practices were uncovered at such fi rms as WorldCom, Tyco, Adelphia, Global Crossing, Health South, Qwest, Merrill Lynch, Citigroup Salomon Smith Barney, Parmalat, Marsh and McClennen, Credit Suisse First Boston, and even the New York Stock Exchange itself. In

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Why Study Ethics? 5

more recent years, that list has grown to include such cases as AIG, Bernard Madoff, the fi nancial industry’s subprime lending practices, and Fannie Mae and Freddie Mac. Risky investment and lending practices that bordered on incompetence if not malfeasance led to the collapse of such fi rms as Lehman Brothers, Countrywide Financial, Merrill Lynch, Bear Stearns, Washington Mu- tual, and Wachovia. In 2012 alone, WalMart has admitted to a major bribery scandal in Mexico, Goldman Sachs saw a senior executive offer a very public resignation because of what he characterized as a corrupt corporate culture, and virtually every major British bank has been implicated in the LIBOR scandal described in the opening discussion case.

At the start of the second decade of the twenty-fi rst century, today’s ques- tions are less about why or should ethics be a part of business, than about which ethics should guide business decisions and how ethics can be integrated within business. 1 Students unfamiliar with ethical issues will fi nd themselves as un- prepared for careers in business as students who are unfamiliar with account- ing and fi nance. Indeed, it is fair to say that students will not be fully prepared even within fi elds such as accounting, fi nance, human resource management, marketing, and management unless they are familiar with the ethical issues that arise specifi cally within those fi elds. You simply will not be prepared for a career in accounting, fi nance, or any area of business if you are unfamiliar with the ethical issues of these fi elds.

Why has this change come about? To answer this question, consider the phrase used to describe the potential collapse of AIG and other large fi nan- cial institutions: “too big to fail.” This phrase was used to justify the need for trillions of dollars of U.S. government guarantees and bailouts that were used to avoid a more signifi cant economic collapse in 2008–2009. It is not an exaggeration to say that ethical failures have been responsible for some of the most dramatic business failures in the past decade, and that such major business failures in turn can jeopardize entire national economies, if not the entire global economy.

On a smaller scale, consider the people who would be harmed by the LIBOR rate-fi xing scheme. Millions of consumers, businesses, fi nancial institu- tions, and even governments lost hundreds of millions of dollars to this fraud. Dishonest traders fraudulently benefi ted at the expense of honest traders. Com- peting fi nancial institutions who played by the rules lost while cheaters ben- efi ted. The entire fi nancial system was revealed to be operating on the basis of fraud and cheating. Multiply these harms by the dozens of other companies implicated in similar scandals and one gets an idea of why ethics is no longer dismissed as irrelevant. The consequences of unethical behavior and unethical business institutions are too serious to be ignored.

Today, business managers have many reasons to be concerned with the eth- ical standards of their organizations. Perhaps the most straightforward reason is that the law requires it. In 2002, the U.S. Congress passed the Sarbanes-Oxley Act to address the wave of corporate and accounting scandals. Section 406 of that law, “Code of Ethics for Senior Financial Offi cers,” requires that corpo- rations have a code of ethics “applicable to its principal fi nancial offi cer and

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6 Chapter 1

comptroller or principal accounting offi cer, or persons performing similar func- tions.” The code must include standards that promote:

1. honest and ethical conduct, including the ethical handling of actual or apparent confl icts of interest between personal and professional relationships;

2. full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be fi led by the issuer; and

3. compliance with applicable governmental rules and regulations.

Beyond these specifi c legal requirements, contemporary business manag- ers have many other reasons to be concerned with ethical issues. Unethical behavior not only creates legal risks for a business, it creates fi nancial and mar- keting risks as well. Managing these risks requires managers and executives to remain vigilant about their company’s ethics. It is now more clear than ever that a company can lose in the marketplace, it can go out of business, and its employees can go to jail if no one is paying attention to the ethical standards of the fi rm. Ethical behavior and an ethical reputation can provide a competitive advantage, in the marketplace and with customers, suppliers, and employees. Consumer boycotts based on allegations of unethical conduct have targeted such well-known fi rms as Nike, McDonald’s, Home Depot, Gap, Shell Oil, Levi-Strauss, Donna Karen, K-Mart, and Walmart. Managing ethically can also pay signifi cant dividends in organizational structure and effi ciency. Trust, loy- alty, commitment, creativity, and initiative are just some of the organizational benefi ts that are more likely to fl ourish within ethically stable and credible organizations.

For business students, the need to study ethics should now be as clear as the need to study the other subfi elds of business education. Without this back- ground, students will be unprepared for a career in contemporary business. But even for students not anticipating a career in business management or busi- ness administration, familiarity with business ethics is just as crucial. It was not, after all, only clients of Barclay’s Bank itself that suffered because of unethi- cal behavior. Our lives as employees, as consumers, as citizens are affected by decisions made within business institutions, and therefore everyone has good reasons for being concerned with the ethics of those decision makers.

The case for ethics is by now clear and persuasive. Business must take eth- ics into account and integrate ethics into its organizational structure. Students need to study business ethics. But what does this mean? What is “ethics” and what is “business ethics”? To begin our investigation let us turn to a more gen- eral question: Is ethics good for business?

1.2 VALUES AND ETHICS: DOING GOOD AND DOING WELL

It is clear, from cases ranging from Enron through AIG, Lehman Brothers, and Countrywide Financial, that unethical behavior can lead directly to business failure. But is the opposite true? Does good ethics mean business success?

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Why Study Ethics? 7

As described in their best-selling book, Built to Last: Successful Habits of Visionary Companies, authors James Collins and Jerry Porras researched doz- ens of very successful companies looking for common practices that might explain their success. These companies not only outperformed their competi- tors in fi nancial terms, they also have outperformed their competition over the long term. On average, the companies they studied were founded in 1897. Among their key fi ndings was the fact that the truly exceptional and endur- ing companies all placed great emphasis on a set of core values. These core values are described as the “essential and enduring tenets” that help defi ne the company and are “not to be compromised for fi nancial gain or short-term expediency.” 2

Collins and Porras cite numerous examples of core values being articulated and promoted by the founders and CEOs of such companies as IBM, Johnson & Johnson, Hewlett Packard, Procter and Gamble, Walmart, Merck, Motorola, Sony, Walt Disney, General Electric, and Philip Morris. Some companies made a commitment to customers as their core value; others focused on employees, their products, innovation, or even risk-taking. The common theme was that core values and a clear corporate purpose, what together are described as the organization’s core ideology, were essential elements of enduring and fi nan- cially successful companies.

These examples suggest that there are many different type of values. In general, we can think of values as those beliefs or standards that incline us to act or to choose in one way rather than another. Thus, the value that I place on an education leads me to study rather than play video games. I choose to spend my money on groceries rather than on a vacation because I value food more than relaxation. A company’s core values, then, are those beliefs and principles that provide the ultimate guide in its decision making. Understood in this way, we can recognize that there can be many different types of values. There are fi nancial, religious, historical, nutritional, political, scientifi c, and aesthetic val- ues. Individuals can have their own personal values and, importantly, institu- tions also have values. Talk of a corporation’s “culture” is a way of saying that a corporation has a set of identifi able values. All the companies described by Collins and Porras, have been described as having strong corporate cultures and clear sets of values.

At fi rst glance, Built to Last seems to reach an extremely attractive conclu- sion. The most successful companies all share in common a commitment to core values. This would seem to provide very persuasive reasons for any business to make a strong commitment to ethics. Good ethics seem to be connected to good business. Unfortunately, things are not as they appear. Collins and Porras are explicit in pointing out that while having a set of core values was essential in long-term success, they discovered no right set of core values. Their conclusion was that it was important only that companies have values, not that they have any particular values. In fact, executives at one of their “visionary” companies, Philip Morris, were described as defi ant and self-righteous in their prosmoking ideology. The authors quote a Fortune magazine description of Philip Morris CEO Michael Miles as “ruthless, focused . . . cold-blooded.” Miles is also quoted

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8 Chapter 1

as saying “I see nothing morally wrong with the [tobacco] business. . . . I see nothing wrong with selling people products they don’t need.” 3

Collins and Porras make a strong case for the conclusion that having a set of strong core values is important for the long-term fi nancial success of a business. But, if these values can include ruthless and cold-blooded promo- tion of smoking, much more needs to be said about ethical values. One way to distinguish these various types of values is in terms of the ends that they serve. Financial values serve monetary ends, religious values serve spiritual ends, aesthetic values serve the end of beauty, and so forth. So, how are ethi- cal values to be distinguished from these other types of values? What ends are served by ethics?

Values, in general, were earlier described as those beliefs or standards that incline us to act or choose in one way rather than another. Different types of values were distinguished by the various ends served by those acts and choices. Ethical values serve the ends of human well-being. Acts and choices that aim to promote human well-being are acts and choices based on ethical values. Con- troversy may arise when we try to specify more precisely what is involved in human well-being, but we can start with some general observations. Happiness certainly is a part of it, as is respect, integrity, and meaning. Freedom and auton- omy surely seem a part of human well-being, as do companionship and health.

Second, the well-being promoted by ethical values is not a personal and selfi sh well-being. After all, the Madoff scandal resulted from many individuals seeking to promote their own well-being. Ethics requires that the promotion of human well-being be done impartially. From the perspective of ethics, no one person’s well-being counts as more worthy than any other’s. Ethical acts and choices should be acceptable and reasonable from all relevant points of view. Thus, we can offer an initial characterization of ethics and ethical values. Ethical values are those beliefs and principles that seek to promote human well-being in an impartial way.

Chapter 2 will examine the nature of philosophical ethics in more detail. But we should acknowledge that there are disagreements about what ethics commits us to and what ends are served by ethical values. There are also cases in which ethical values confl ict, and such ethical dilemmas are a signifi cant part of business ethics. The prosmoking values of Philip Morris, for example, alleg- edly promoted the values of personal freedom and autonomy. Critics charge that these same values result in serious illness and death to many people. How do we decide if Philip Morris is an ethical company?

Simply, there are few if any unambiguous and absolute rules that can guide ethical decision making. To evaluate the Philip Morris case we would begin by exploring the meaning and value of the freedom to choose relative to the value of health. We might also examine the motivation of Philip Morris executives to discover if they truly valued the personal freedom of their customers or if their motivation was less impartial and more self-serving. Ethical controversy is only the starting point of philosophical ethics. Accordingly, one major goal of this text will be to emphasize reasoning and analytical skills as much as informa- tional content.

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Why Study Ethics? 9

Let us now return to the question with which this section began. Is ethics good for business? Consider Malden Mills, a well-known business case that made headlines some years ago.

During the early evening hours of December 11, 1995, a fi re broke out in a textile mill in Lawrence, Massachusetts. By morning, the fi re had destroyed most of Malden Mills, the manufacturer of Polartec fabric. The fi re seemed a disaster to the company, its employees, its customers, and the surrounding communities. Malden Mills was a family-owned business, founded in 1906 and run by the founder’s grandson Aaron Feuerstein. Polartec is a high-quality fabric well known for the outdoor apparel featured by such popular compa- nies as L.L. Bean, Land’s End, REI, J. Crew, and Eddie Bauer. As the major supplier of Polartec, the company had sales of $400 million in the year leading up to the fi re. The disaster promised many headaches for Malden Mills, for its employees, for the numerous businesses that depend on its products, and for an entire community.

The towns surrounding the Malden Mills plant have long been home to textile manufacturing. The textile industry was born in the nineteenth cen- tury and thrived for one hundred years along the rivers in these New England towns. The textile industry effectively died during the middle decades of the twentieth century when outdated factories and increasing labor costs led many companies to abandon the area and relocate, fi rst to the nonunionized South, and later to foreign countries such as Mexico and Taiwan. As happened in many northern manufacturing towns, the loss of major industries, along with their jobs and tax base, began a long period of economic decline from which many have never recovered. Malden Mills was the last major textile manufac- turer in town and with 2,400 employees it supplied the economic lifeblood for the surrounding communities. Considering both its payroll and taxes, Malden Mills contributed approximately $100 million a year to the local economy. The fi re was a disaster for many people and many businesses beyond those directly involved with Malden Mills.

As CEO and President, Aaron Feuerstein faced some major decisions, deci- sions that would be guided by his core values. He could have used the fi re as an opportunity to follow his competitors and relocate to a more economically attractive area. He certainly could have found a location with lower taxes and cheaper labor and thus have maximized his earning potential. He could have simply taken the insurance money and decided not to reopen at all. Instead, as the fi re was still smoldering, Feuerstein pledged to rebuild his plant at the same location and keep the jobs in the local community. But even more surprising, he promised to continue paying his employees and extend their medical coverage until they could be brought back to work. For this, Feuerstein became famous. Featured on television and in such magazines as Fortune, Newsweek, and Time, Mr. Feuerstein was honored by President Clinton and invited to attend the State of the Union address as the president’s guest. He was praised by many as a model of ethical business behavior.

Initially, all went well. Malden Mills was able to rebuild its factory and re- open sections within a year. Employees came back to work and the community

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10 Chapter 1

seemed to recover. Unfortunately, Malden Mills couldn’t recover fully. Insur- ance covered only three-fourths of the $400 millions cost of rebuilding and by 2001 Malden Mills fi led for bankruptcy protection. During the summer of 2004, Malden Mills emerged from bankruptcy, but its board of directors was now controlled by its creditors, led by GE Commercial Finance Division. The new board replaced Aaron Feuerstein as CEO and Board Chairman, although he retained the right to buy back the controlling interest if he could raise suf- fi cient fi nancing. In October 2004, the board rejected Feuerstein’s offer to buy back the company. In response to the company’s contract offer that included cuts in health care benefi ts, the union representing the remaining 1,000 work- ers at Malden Mills voted to authorize a strike in December 2004, the fi rst in company history.

Are strong ethical values good for business? The only reasonable answer is that sometimes they are and sometimes they are not, at least over the short term. Many of the companies examined by Collins and Porras seem to attain the ideal, high ethical standards and long-term fi nancial success. Others, like Philip Morris, attained long-term success with values that would not indisputably be considered ethical. Some unethical companies, Enron perhaps most famously, failed as a business because of their ethical failures. Others, like Malden Mills, seem to suffer fi nancially because of their high ethical standards. The record is mixed. The choice is yours.

1.3 THE NATURE AND GOALS OF BUSINESS ETHICS

How, then, might we defi ne business ethics? In a descriptive sense, “business ethics” refers to those values, standards, and principles that operate within business. But “business ethics” also refers to an academic discipline that not only studies those standards, values, and principles, but also seeks to articulate and defend the ones that ought to or should operate in business. In this way, business ethics includes normative as well as descriptive elements. This text is a contribution to that academic fi eld of business ethics. Its aim is to describe, examine, and evaluate ethical issues that arise within business settings.

Unlike some business disciplines, there is no single set of answers in ethics, no single body of information, nor is there even a single framework for think- ing about ethics. Business ethics is a truly multidisciplinary fi eld, incorporating information from a variety of disciplines, including philosophy, management, economics, law, marketing, and public policy.

Given this diversity, there is no single way—let alone single right way—to teach and learn business ethics. But this does not mean that there are not com- mon goals, concepts, principles, and frameworks of business ethics. There is a growing body of scholarly literature in business ethics, and, in an academic setting at least, an important element of a course in business ethics is to become familiar with that scholarly literature. Just as there are Generally Accepted Accounting Principles (GAAP) for accountants, there are a set of principles, standards, concepts, and values common to business ethics. Chapter 2 will

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Why Study Ethics? 11

introduce some of the most common ethical theories and principles. But beyond this academic side, business ethics has a practical side in the sense that it aims at judgment, behavior, and actions. We all hope that books and classes in business ethics translate into more ethical behavior among business practitioners.

Unfortunately, things are not always that simple. First, there is the daunting gap between ethical judgment and ethical behavior. From at least the time of Plato and Aristotle, Western philosophy has acknowledged a real discontinu- ity between judging some act as right and following through and doing it. It is diffi cult enough knowing the difference between good and bad, right and wrong. But knowing is different from doing, and not everyone has the fortitude, strength of character, or motivation to act in ways that we know are best. While many observers expect an ethics class to teach ethical behavior, most ethicists have the more modest goal for their courses. It is not at all clear, for example, that an ethics course would have made any difference to the individuals who perpetrated the fraud at Barclays Bank.

A more modest and judicious goal for business ethics is to focus on the cognitive and intellectual (as opposed to behavioral) side of ethics. Business ethics as an academic discipline is more a matter of ethical reasoning and thinking than ethical behavior. But even here there is a major dilemma con- fronting ethics courses. On one hand, few would teach ethics in a way that aims to indoctrinate students. Few teachers would think that it is the role of an ethics course to tell students the right answers or proclaim what they ought to think and how they ought to live. The role of an ethics course should not be to convey information to a passive audience, but to treat students as ac- tive learners and engage them in an active process of thinking and question- ing. Taking Socrates as the model, philosophical ethics rejects the view that blind obedience to authority or the simple acceptance of customary norms is an adequate ethical perspective. Teaching ethics must, in this view, involve students thinking for themselves. The unexamined life, Socrates claimed, is not worth living.

The problem, of course, is that when people think for themselves they don’t always agree with each other, and they certainly don’t always act in a way that others would judge as ethical. The other side of this dilemma is the specter of relativism and emotivism. If the ethics classroom does not teach students the right answers, many students will conclude that there are no right answers. If there are few teachers who use the classroom to preach ethical dogma, there are probably fewer still who believe that there are no right answers and that any- thing goes from an ethical point of view.

Thus a major challenge for business ethics is to fi nd a middle ground be- tween preaching the truth to passive listeners on one hand, and encouraging the relativistic conclusion that all opinions are equal to one another. A common goal for most courses in business ethics navigates this diffi culty by emphasiz- ing the process of ethical reasoning. Business ethics is concerned more with rea- soning than with answers. Responsible reasoning must begin with an accurate and fair account of the facts; one must listen to all sides with an open mind, one must become familiar with all the relevant issues at stake, and one must

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12 Chapter 1

pursue the logical analysis of each issue fully and with intellectual rigor. Busi- ness ethics essentially involves this process of ethical analysis. Without it, one risks turning ethics into dogmatism; with it, one has gone as far as possible to defl ate relativism. With this process, we are best prepared to avoid the dilemma of dogmatism and relativism.

This dilemma not only confronts business ethics in an academic setting, it is also true for ethics within business settings as well. Even if they could be successful in doing so, few business managers would want to approach ethical issues by making pronouncements of ethical dogma. Like good teachers, good business managers and leaders seek to empower their employees to make their own decisions. But responsible businesses also do not suggest that anything goes or that all values are equal. Value relativism in the workplace will likely lead only to power struggles and confl ict.

1.4 BUSINESS ETHICS AND THE LAW

Some believe that the way out of this dilemma is to concentrate on legal com- pliance. For many businesspeople, ethics is identifi ed with the law. Business behaves ethically when it obeys the law. An ethical business, therefore, should have an ethics offi cer or an ethics department that monitors compliance with the legal and professional standards of conduct.

Unfortunately, compliance with the law alone will prove insuffi cient for ethically responsible business. It is common to think of the law as a set of rules that one can obey or violate in an unambiguous way. Traffi c laws, for example, require stopping at a red light and prohibit speeds over a certain limit. But this is a very incomplete understanding of the law. Even when there are specifi c regulations requiring or prohibiting certain action, ambiguity is always possible in the application of those regulations.

For example, consider the following case. At a management training pro- gram I recently attended, two corporate attorneys outlined some of the legal responsibilities for managers under the Americans with Disabilities Act. This law requires business to make “reasonable accommodations” for workers with disabilities. This law goes on to specify some, but not all, of the condi- tions that would count as a disability. During the question period, one man- ager explained that she had an employee who suffered from asthma and she wondered if asthma was a disability. The two attorneys conferred for a mo- ment and answered simply: “It depends.” The law’s defi nition of a disabil- ity involves, in part, how serious the impairment is, how much it limits the worker’s life activities, and whether or not it is easily corrected by medication. Given this ambiguity, the manager must make a judgment about how to treat this worker. Imagine this manager is committed to doing the ethically correct thing, but believes that one’s ethical responsibility is to obey the law. What should this manager do? In such a case, the decision is unavoidable, the law doesn’t help, and the manager therefore is forced to make a judgment about what ought to be done.

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Why Study Ethics? 13

More generally, much of the civil law governing business is based on the legal precedents of case law rather than on specifi c statutes or regulations. Case law is fundamentally ambiguous in a way that statutory law is not. In a very real sense, many acts are not illegal until a court rules that they are. For ex- ample, both the attorneys and the auditors in the Enron case were expected to “push the envelope” of legality by Enron’s aggressive management practices. Given that many of Enron’s fi nancial practices were quite literally unprece- dented, their attorneys and accountants offered advice that they believed could be defended in court. Until and unless these acts were challenged in court there was a real sense in which they were perfectly legal. While admittedly pushing the envelope on accounting and tax regulations, what they did was not obvi- ously illegal. The Barclays case demonstrates that even when the law is clear, there can be great incentives and opportunities to ignore the law, especially if it appears that competitors are doing it as well.

These facts demonstrate that one cannot always rely on the law to decide what is right or wrong. The manager whose employee suffers from asthma will need to make a decision and the law won’t decide this for her. Sometimes, the law itself requires ethical analysis for many of its decisions. Legal decisions in the Enron case will not be based solely on legal precedent (since, by defi ni- tion, pushing the envelope is to go into the gray area beyond what is obviously prohibited by precedent) but upon a judge and jury’s determination that the acts were unfair and unethical. Because most business decisions never get to the point where a judge and jury are asked to make a determination, business managers will be faced with the unavoidable responsibility of looking beyond the law for guidance in making ethical decisions.

Expressed in these terms, perhaps the major reason to study ethics is because whether we examine ethical questions explicitly or not, they are an- swered by each and every one of us every day in the course of living our lives. Presumably, the executives at Enron did not wake up one morning and choose to defraud their stockholders and employees. The actions we take and the lives we lead give practical answers to these fundamental ethical questions. Our only real choice is whether we answer them deliberately or unconsciously. Thus, the philosophical answer to why you should study eth- ics was given by Socrates over 2,000 years ago. “The unexamined life is not worth living.”

1.5 ETHICS AND ETHOS

Ethics is a vast fi eld of study that really addresses only one question: How should we live our lives? The question of human well-being ultimately focuses on how we should live. But while this may seem a simple question, it is perhaps the most fundamental question any human can ask. We can begin to answer it by refl ecting on the nature of philosophical ethics. Within the Western tradition, philosophical ethics is often traced to the ancient Greek philosopher Socrates. There is perhaps no better characterization of ethics than Socrates’ statement that it “deals with no

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small thing, but with how we ought to live.” Like all cultures, the Greeks had a set of beliefs, attitudes, and values that guided their lives. The word ethics is de- rived from the Greek word ethos, meaning “customary” or “conventional.” Most Greeks would have answered Socrates by claiming that we ought to live an ethi- cal life. Like most people in other cultures, an ethical life for the Greeks would have been a life lived according to the beliefs, attitudes, and values that were customary in their own culture. Often, these customary values are connected to a culture’s religious worldview. To be ethical, in the sense of ethos, is to conform to what is typically done, to obey the conventions and rules of one’s society and reli- gion. In this sense, ethics would be identical to ethos. It is fair to say that employees and executives at Barclays were claiming that they were only conforming to the ethos of the British banking community.

Taking its lead from Socrates, philosophical ethics is not content to ac- cept this as an answer to the question of how we should live. We said earlier that each one of us answers ethical questions every day by how we choose to live our lives. For many people, this choice is made implicitly by conform- ing to the ethos and customs of their culture. Philosophical ethics denies that simple conformity and obedience are the best guides to how we should live, as the Barclays fraud case seems to demonstrate. From the very begin- ning, philosophy rejects authority as the source of ethics and has, instead, defended the use of reason as the foundation of ethics. Philosophical eth- ics seeks a reasoned analysis of custom and a reasoned defense of how we ought to live.

Philosophical ethics distinguishes what people do value from what people should value. What people do in fact value is the domain of such social sciences as sociology, psychology, and anthropology. As a branch of philosophy, however, ethics asks us to step back and rationally evaluate the customary beliefs and values that people do hold. Philosophical ethics requires us to abstract our- selves from what is normally or typically done, and refl ect upon whether or not what is done should be done and whether what is valued should be valued. The difference between what is valued and what ought to be valued is the difference between ethos and ethics.

Perhaps this observation helps to explain some of the skepticism surround- ing business ethics. Any philosophical focus on business ethics seems to suggest some dissatisfaction with, or misgivings about, what is normally or customarily done in business. Why step back from what is normally done unless you have reason to doubt that what is being done should be done? But while philosophi- cal ethics is critical in the sense of demanding reasons for each decision, it need not be critical in the sense of rejecting or disagreeing with the customary norms and standards.

As a branch of philosophical ethics, business ethics asks us to step back from our daily decisions, step back from the ethos of business, to refl ect upon how business decisions affect our lives. In what ways do the practices and decisions made within business promote or undermine human well-being? Raising these questions does not imply that what is normally being done is unethical. After examining ethical issues in business, we may end up defending the same values

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Why Study Ethics? 15

and making the same decisions that we would have originally. But what philo- sophical ethics does require is a conscious refl ection and analysis of those beliefs and values upon which we act. Again, to rely on Socratic wisdom, philosophical ethics assumes that “the unexamined life is not worth living.” As we proceed through an examination of business ethics, we are really doing little more than re- fl ecting upon daily events and echoing Socrates’ question: How ought we to live?

1.6 MORALITY, VIRTUES, AND SOCIAL ETHICS

How ought we to live? Each of us might ask this fundamental question of eth- ics individually, or we ask it about ourselves collectively. In this fi rst individual sense, this is a question about how I should live my life, how I should act, what I should do, what kind of person I should be. In the collective sense, this is a question about how a society ought to be structured, about how we ought to live together in community.

This fi rst sense of ethics, the concern with how each of us should live our lives, is sometimes referred to as morality . One part of morality involves examin- ing principles and rules that might help us decide what we should do. Another important part of morality involves an examination of those character traits, or virtues , that would constitute a life worth living. This distinction is sometimes made in terms of deciding how we should act , and deciding the type of person we should be . The second, more collective, area of ethics is sometimes referred to as social ethics and it raises questions of public policy, law, civic virtue, and political philosophy.

Business ethics addresses both kinds of questions. Questions of individual morality will be a major theme throughout this text. One of the most fundamental goals of business ethics is to provide opportunities for students to step back from the immediate concerns of day-to-day life and ask: “What kind of person should I be?” “What should I do?” “What kind of life will I live?” “What would I have done if I worked at Barclays and was responsible for reporting the daily LIBOR rate?

No doubt most of us at most times of our lives are too concerned with more immediate issues such as completing an assigned task, paying our bills, and hav- ing fun, to consciously step back and ask about the meaning and value of what we do. But this is what philosophical ethics demands. Morality takes the larger perspective. Imagine late in your life looking back to refl ect on the kind of life you have led and asking: “Has this life been worth living? Am I proud of my life? Am I proud or ashamed of the person I have been? Has this been a full and meaning- ful life?” These are among the fundamental questions of morality.

Business ethics also addresses issues of social ethics and public policy. Understanding this viewpoint can start with the recognition that business in- stitutions are human creations and this fact means that humans cannot avoid responsibility for them. As the discussion case indicates, business institutions have a tremendous infl uence on many lives. We depend on business for our jobs, our food, our health care, our homes, our livelihoods. The public policy perspective invites us to step back from the actual practice of business to ask:

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16 Chapter 1

“How should business be structured?” If we had it all to do over again, how would we arrange business institutions in our society? In this sense, public policy questions ask us to take the point of view of the citizen who is deciding how society—and business institutions are a part of society—ought to be orga- nized and conducted. Many observers would point out that the LIBOR scandal is much more an ethical failure of institutions than of individuals.

When we ask these questions we can see that important ethical questions remain even when the particular decision facing an individual appears clear- cut. As an executive at a mortgage banking fi rm you may choose to pursue a strategy of high-risk, subprime mortgages, but citizens get to decide whether or not to regulate such banking practices, and whether or not to bail out banks that fail as a result. Should such important social goods as mortgages be left in the hands of private corporations and individual traders?

1.7 ETHICAL PERSPECTIVES: MANAGERS AND OTHER STAKEHOLDERS

This focus on questions of morality and public policy also calls attention to the fact that one can take a variety of perspectives when examining issues in busi- ness ethics. A major part of business ethics deals with questions of management. “Business” ethics often is interpreted to mean the ethics of those charged with acting on behalf of a business. What should a business manager do in various situations? In this sense, business ethics can be interpreted as managerial ethics.

But, a decision faced from the point of view of business management raises different issues than those faced from the point of view of employees or owners. Decisions made within the mortgage banking industry were of monumental im- portance to consumers, employees, and the housing industry, as well as to the citizens of every state and, as it turned out, to the entire global economy. This is not to suggest that right or wrong depends on who is asking the question. But it does suggest that the types of questions asked and issues faced will vary from perspective to perspective. Because a reasoned evaluation of any ethical issue demands that all relevant concerns be addressed, this text will regularly ask you to shift perspectives and ask the moral questions from the point of view of management, employees, owners, consumers, suppliers, and citizens. Whether our future interaction with business occurs in the role of CEO or just plain con- sumer, we must examine business decisions from a variety of perspectives.

These observations suggest that all decisions faced by business managers, from fi nance and marketing to ethics and human resources, exist in a social and legal context. This context not only helped create the situation but also deter- mines what alternatives are available. Whatever social arrangements exist, we need to recognize that each of us, in our roles as citizens, is responsible for them. A mature, responsible life requires us to step back and refl ect upon the kind of society we choose to live in, as well as the particular decisions we choose to make.

We can summarize this introduction by saying that business ethics asks us to step back from what is usually and customarily done in the business world to

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Why Study Ethics? 17

ask the essential normative question of ethics: “How should we live? How should I live as an individual, and how should we live in community?” Throughout this text, indeed throughout your life, you should regularly step back to ask: “What kind of person am I choosing to be?” and “What kind of society ought we to create?” To return to our opening question, the study of ethics is relevant to busi- ness because it is essential to living a responsible and meaningful life.

1.8 A MODEL FOR ETHICAL DECISION MAKING

The opening pages of this chapter spoke of the goal of business ethics as involv- ing three components: understanding ethical issues, analyzing them, and be- coming sensitive to the importance of ethics. This chapter has presented a view of ethics not as offering strict rules and moralizing sermons, but as a process of responsible decision making. Deciding how to act, how to live, who to be, are the fundamental challenges of living an ethical life. The following decision- making model can help this process. 4

Making a responsible decision requires that we begin with a fair and accu- rate understanding of the situation. We need to know the facts . Because ethical issues often involve complicated and emotionally charged situations, uncover- ing the facts and attaining an unbiased and complete understanding can be more diffi cult than it sounds.

A second step in responsible decision making is to identify the ethical is- sues at stake. It is not uncommon for people to disagree over whether or not a particular case is an ethical case at all. Oftentimes what one person sees sim- ply as an economic or legal issue will be viewed by others as a major ethical issue. Explaining what makes an issue an ethical issue is a vital step in ethical decision making.

Once the ethical issues have been identifi ed, the next steps are to identify the people who are affected by the situation and understand how they might be affected. Who are the stakeholders in a decision? How will they be harmed or benefi ted? What will the likely consequences be? What is owed to the various stakeholders?

A next step is to consider alternative courses of action. What choices are available? A useful stimulus to this step is to put yourself in another person’s position and imagine how the situation would appear, how it would feel, from his or her perspective. Use what has been called “moral imagination” to explore a wide range of alternative choices and values. Consider how your decision will be interpreted from another perspective.

As you approach a decision, step back and employ what we might call the “ New York Times test.” What would the public reaction be if your decision was presented in full detail on the front page of the New York Times ? This is a way to ask oneself how a decision will stand up to public scrutiny. Is your decision one that you would be willing to explain and defend openly, or is it a decision that you would just as soon have kept quiet. Transparency is often a good test for responsible decision making.

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18 Chapter 1

Ultimately, one must make a decision. After understanding the facts, con- sidering all stakeholders, and thinking about alternatives, choose a course of action. But even after the decision has been made, responsible decision making requires us to monitor the results and learn from them. Responsible decision making is an iterative process: think–choose–act–think.

To review, a responsible ethical decision involves:

• Understanding the facts; • Identifying the ethical issues involved; • Identifying all stakeholders; • Understanding how those stakeholders will be affected; • Employing moral imagination to understand alternatives; • Considering how others will judge your decision; • Making a decision and monitoring and learning from the results.

REFLECTIONS ON THE CHAPTER DISCUSSION CASE

Refl ecting on the discussion case that opened this chapter can be useful to re- inforce each point. What are the facts of the LIBOR scandal? This chapter pro- vided only a very brief case description. Are there any facts that you would need to know before making a judgment about this case? Are you missing any information?

Next, consider the range of ethical issues involved in the LIBOR case. Barclays cheated millions of people out of their money, they defrauded and stole from them, lied to regulators, and were dishonest. They hurt many innocent people. Traders who sought much-higher-than-normal returns could justifiably be de- scribed as greedy, selfish, cheaters. Government regulators failed in their duties to promote honesty and fairness in financial markets and to protect consumers from fraud. Fraudulent financial markets failed to achieve the common, over- all good for society. Barclays’ apology induced little sympathy among victims, whether that was warranted or not. Most observers thought that Barclays and the other banks involved deserve significant punishment.

Philosophical ethics of the type introduced in the next chapter would ex- amine each of these highlighted concepts in turn. What do we mean by, and why do we value, “fairness”? Why is it important to trust others? What is wrong with breaking promises? Why is greed thought to be wrong? Should victims have sympathy for the perpetrators? When is punishment deserved, and what justifies punishment? What duties does government have toward its citizens? Did investors seeking higher-than-normal returns get what they deserved?

We should also reflect on the wide range of people who were adversely affected by fraudulent LIBOR rates: banking clients, consumers, employees, competitors, governments, and the financial markets themselves. Are there any parties that benefited from their actions? More generally, we should under- stand that the decisions made within business affects the lives and well-being

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Why Study Ethics? 19

of millions of people every day who depend on the decisions made in business as diverse as small family-run firms to the world’s largest corporations.

The LIBOR scandal and the widespread harms caused by that fraud surely can be traced to the ethical corruption of specific individuals who reported fraudulent rates. Arrogant and greedy individuals willing to violate legal and ethical standards can be faulted for many problems in business ethics. Unfor- tunately, such people are all too common. But we should also recognize the failure of the many “gatekeepers,” those people and institutions whose role it is to provide checks on such behavior. Auditors, accountants, attorneys, financial analysts, compliance officers, board members, and government regulators have roles to play within the economic system to ensure the integrity of that system and to prevent fraud and abuse. Another lesson from the LIBOR fraud is that there was a systematic breakdown in this gatekeeping function. Preventing fu- ture cases like this will require steps to be taken at each level: individual em- ployees with higher ethical standards, internal structures within corporations to establish and enforce higher standards, and legal requirements and other regulatory reforms to act as external checks on corporate behavior.

CHAPTER REVIEW QUESTIONS

1. Describe several reasons why ethics is relevant to business. Can a “good business” be an unethical business?

2. What are values? What is the difference between ethical values and other types of values? What is the difference between “value” when used as a verb, and “value” when used as a noun?

3. What is the difference between “ethics” and “ethos”? 4. How is descriptive business ethics different from normative business ethics? 5. This chapter introduced a distinction between morality, virtues, and social

ethics. How would you describe each? 6. How would you answer someone who asked: “Why should I study ethics

if I want to be an accountant?” 7. Other than business managers and owners, which other constituencies

might have a stake in business decisions?

ENDNOTES

1A persuasive case for why this shift has occurred can be found in Value Shift by Lynn Sharp Paine (New York: McGraw-Hill, 2003).

2Built to Last: Successful Habits of Visionary Companies, James Collins and Jerry Porras (New York: HarperCollins, 1994), p. 73.

3Ibid., p. 67. The Fortune article quoted is “How Philip Morris Diversifi ed Right,” Fortune, October 23, 1989.

4This decision-making model is adapted from a more detailed version offered in Business Ethics: Decision Making for Personal Integrity and Social Justice, by Laura Hartman and Joseph DesJardins (McGraw-Hill, 2nd ed., 2010).

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20

L E A R N I N G O B J E C T I V E S

After reading this chapter, you will be able to:

• Understand the basic categories and concepts of ethical theory; • Identify the errors of ethical relativism; • Explain the ethical theory of utilitarianism; • Explain how utilitarian ethics provides support for market economics and

business policy;

• Clarify several major challenges to utilitarian ethics; • Explain rights- and duty-based ethics; • Explain the basic concepts of virtue ethics.

2 C H A P T E R Ethical Theory and Business

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Ethical Theory and Business 21

DISCUSSION CASE: AIG Bonuses and Executive Salary Caps

In April 2012, Forbes’ magazine began its annual report on executive com-pensation with the following: “Our report on executive compensation will only fuel the outrage over corporate greed. In 2011 the chief executives of the 500 biggest companies in the U.S. . . . got a collective pay raise of 16% last year, to $5.2 billion. This compares with a 3% pay raise for the average American worker. The total averages out to $10.5 million apiece. . . . So much for the moral suasion granted to shareholders last year with the fi rst-ever say-on-pay votes for U.S. public companies.” ( Forbes, April 4, 2012)

Public criticism of executive compensation, especially among top execu- tives of U.S. based public-traded corporations, increased signifi cantly following the economic collapse that began in 2008. For many observers, the magnitude of executive pay, both in absolute terms and relative to average workers, particu- larly needed to be addressed at a time when failed management was at fault for so much public and economic harm.

Perhaps no part of the fi nancial market collapse in late 2008, and the gov- ernment bailout that followed, caused as much public outcry as did the fi nan- cial bonuses and compensation paid to senior executives of failed companies. American International Group (AIG) became the target of much of this criti- cism. Persuaded that AIG was “too big to fail,” the U.S. federal government had committed $180 billion dollars as of March 2009 to rescue AIG from bankruptcy. In early March 2009, AIG announced that it was paying $165 million in bonuses to 400 top executives in its fi nancial division, the very unit that was at the heart of the company’s collapse.

AIG cited two major factors in the defense of these bonuses: they were owed as a result of contracts that had been negotiated and signed before the col- lapse, and they were needed to provide an incentive to retain the most talented employees at a time when these people were most needed.

Critics claimed that the bonuses were an example of corporate greed run amok. They argued that contractual obligations should have been overridden and renegotiated at the point of bankruptcy. They also dismissed the effective- ness of the incentive argument since this supposed “talent” was responsible for the failed business strategy that led to AIG’s troubles in the fi rst place.

As part of the government bailout of AIG, Edward M. Liddy, an associate of Secretary of the Treasury Henry Paulson, was named CEO of AIG in September 2008. Former CEO Martin Sullivan resigned earlier that summer when AIG’s fi nancial troubles intensifi ed, but he did not retire without fi rst securing a $47 million severance package. In comparison, Liddy himself accepted a salary of $1, although his contract held out the possibility of future bonuses.

In testimony before the U.S. Congress soon after being named CEO, Liddy was asked to explain the expense of a recent AIG-sponsored retreat for AIG salespeople. The retreat cost AIG over $400,000 and was, in Liddy’s words, a “standard practice within the industry.” Six months later, when news broke about the $165 million bonus payments, Liddy suggested that the executives

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22 Chapter 2

consider doing “the right thing” and return the bonuses, describing them as “distasteful.”

Within months of taking offi ce, the Obama administration took steps to limit executive compensation at fi rms that accepted signifi cant government bailout money, including the retirement packages of the former CEOs of Citi- group, General Motors, and Bank of America. Announcing this action, Treasury Secretary Timothy Geithner observed that “this fi nancial crisis had many signif- icant causes, but executive compensation practices were a contributing factor.”

Excessive compensation for corporate executives has been a regular news story for more than a decade. Fortune magazine’s cover story on June 15, 2001, was titled “Inside the Great CEO Pay Heist.” This well-respected business maga- zine detailed how many top corporate executives now receive “gargantuan pay packages unlike any seen before.” In the words of Fortune ’s headline, “Execu- tive compensation has become highway robbery—we all know that.” 1 This story documented a phenomenon that had been growing signifi cantly in the 1990s.