One ethical dilemma that multinational firms must face is _____________.

A N I N T R O D U C T I O N T O

B U S I N E S S E T H I C S

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A N I N T R O D U C T I O N T O

B U S I N E S S E T H I C S

F o u r t h E d i t i o n

J o s e p h D e s J a r d i n s C o l l e g e o f S t . B e n e d i c t / S t . J o h n ’ s U n i v e r s i t y

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AN INTRODUCTION TO BUSINESS ETHICS, FOURTH EDITION

Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Previous editions © 2009, 2006, and 2003. 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.

This book is printed on acid-free paper.

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ISBN: 978-0-07-353581-4 MHID: 0-07-353581-8

Vice President & Editor-in-Chief: Michael Ryan Vice President EDP/Central Publishing Services: Kimberly Meriwether David Editorial Director: Beth Mejia Sponsoring Editor: Mark Georgiev Executive Marketing Manager: Pamela S. Cooper Managing Editor: Meghan Campbell Project Manager: Erin Melloy Design Coordinator: Brenda A. Rolwes Cover Designer: Studio Montage, St. Louis, Missouri Visual Coordinator: Sonia Brown Cover Image: © Digital Vision/Getty Images Buyer: Kara Kudronowicz Media Project Manager: Sridevi Palini Compositor: MPS Limited, A Macmillan Company Typeface: 10/12 Palatino Printer: R. R. Donnelley

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Library of Congress Cataloging-in-Publication Data

DesJardins, Joseph R. An introduction to business ethics / Joseph DesJardins.—4th ed. p. cm. ISBN-13: 978-0-07-353581-4 (pbk.) ISBN-10: 0-07-353581-8 (pbk.) 1. Business ethics. I. Title. HF5387.D392 2011 174’.4—dc22

2010016092

www.mhhe.com

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v

About the Author

Joe DesJardins is Associate Provost and Academic Dean, as well as Professor in the Department of Philosophy, at the College of St. Benedict and St. John’s University in Minnesota. His other books include Business Ethics: Decision Mak- ing for Personal Integrity and Social Responsibility (with Laura Hartman); 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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vii

Contents

Preface xii

Chapter One: Why Study Ethics? 1

Learning Objectives 1 Discussion Case: Bernard Madoff’s Ponzi Scheme 2 Discussion Questions 3 1.1 Why Study Business Ethics? 3 1.2 Values and Ethics: Doing Good and Doing Well 6 1.3 The Nature and Goals of Business Ethics 9 1.4 Business Ethics and the Law 11 1.5 Ethics and Ethos 13 1.6 Morality, Virtues, and Social Ethics 14 1.7 Ethical Perspectives: Managers and Other Stakeholders 15 1.8 A Model for Ethical Decision Making 16 Refl ections on the Chapter Discussion Case 17 Chapter Review Questions 18

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 24 2.3 Modern Ethical Theory: Utilitarian Ethics 29 2.4 Challenges to Utilitarianism 33 2.5 Utilitarianism and Business Policy 35 2.6 Deontological 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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viii Contents

Chapter Three: Corporate Social Responsibility 48

Learning Objectives 48 Discussion Case: Walmart: Socially Responsible and Green? 49 Discussion Questions 53 3.1 Introduction 54 3.2 The Economic Model of Corporate Social Responsibility 54 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 66 3.7 The Stakeholder Model of Corporate Social Responsibility 68 3.8 Strategic Model of Corporate Social Responsibility:

Sustainability 72 3.9 Summary and Review 74 Refl ections on the Chapter Discussion Case 76 Chapter Review Questions 77

Chapter Four: Corporate Culture, Governance, and Ethical Leadership 80

Learning Objectives 80 Discussion Case: Is Steve Jobs Health a Private Matter? 81 Discussion Questions 82 4.1 Introduction 83 4.2 What is Corporate Culture? 83 4.3 Culture and Ethics 85 4.4 Ethical Leadership and Corporate Culture 87 4.5 Effective Leadership and Ethical Leadership 88 4.6 Building a Values-Based Corporate Culture 90 4.7 Mandating and Enforcing Ethical Culture:

The Federal Sentencing Guidelines 93 Refl ections on the Chapter Discussion Case 95 Chapter Review Questions 96

Chapter Five: The Meaning and Value of Work 99

Learning Objectives 99 Discussion Case: Social Enterprises and Social Entrepreneurs 100 Discussion Questions 102 5.1 Introduction 102 5.2 The Meanings of Work 104 5.3 The Value of Work 106 5.4 Conventional Views of Work 109 5.5 The Human Fulfi llment Model 111

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Contents ix

5.6 The Liberal Model of Work 114 5.7 Business’s Responsibility for Meaningful Work 116 Refl ections on the Chapter Discussion Case 118 Chapter Review Questions 118

Chapter Six: Moral Rights in the Workplace 121

Learning Objectives 121 Discussion Case: Electronic Privacy at Work 122 Discussion Questions 123 6.1 Introduction: Employee Rights 123 6.2 The Right to Work 125 6.3 Employment at Will 129 6.4 Due Process in the Workplace 130 6.5 Participation Rights 133 6.6 Employee Health and Safety 136 6.7 Privacy in the Workplace 141 Refl ections on the Chapter Discussion Case 144 Chapter Review Questions 145

Chapter Seven: Employee Responsibilities 147

Learning Objectives 147 Discussion Case: Confl icts of Interests in Subprime Mortgages

and at Enron 148 Discussion Questions 153 7.1 Introduction 154 7.2 The Narrow View of Employee Responsibilities:

Employees as Agents 155 7.3 Professional Ethics and the Gatekeeper Function 159 7.4 Managerial Responsibility and Confl icts of Interests 162 7.5 Trust and Loyalty in the Workplace 165 7.6 Responsibilities to Third Parties: Honesty, Whistle-blowing,

and Insider Trading 168 Refl ections on the Chapter Discussion Case 174 Chapter Review Questions 175

Chapter Eight: Marketing Ethics: Product Safety and Pricing 177

Learning Objectives 177 Discussion Case: Life Cycle Responsibility for Products 178 Discussion Questions 179 8.1 Introduction: Marketing and Ethics 180 8.2 Ethical Issues in Marketing: An Overview 181 8.3 Ethical Responsibility for Products: From

Caveat Emptor to Negligence 183

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x Contents

8.4 Strict Product Liability 188 8.5 Ethics and Pricing 191 Refl ections on the Chapter Discussion Case 195 Chapter Review Questions 196

Chapter Nine: Marketing Ethics: Advertising and Target Marketing 198

Learning Objectives 198 Discussion Case: Predatory Lending: Subprime Mortgages and Credit Cards 199 Discussion Questions 201 9.1 Introduction: Ethics of Sales, Advertising, and

Product Placement 201 9.2 Regulating Deceptive and Unfair Sales and Advertising 204 9.3 Marketing Ethics and Consumer Autonomy 207 9.4 Targeting the Vulnerable: Marketing and Sales 212 Refl ections on the Chapter Discussion Case 216 Chapter Review Questions 218

Chapter Ten: Business’s Environmental Responsibilities 220

Learning Objectives 220 Discussion Case: Sustainable Business 221 Discussion Questions 223 10.1 Corporate Social Responsibility and the Environment 223 10.2 Business’s Responsibility as Environmental Regulation 228 10.3 Business Ethics and Sustainable Economics 229 10.4 Business Ethics in the Age of Sustainable Development 233 10.5 The “Business Case” for Sustainability 237 Refl ections on the Chapter Discussion Case 238 Chapter Review Questions 239

Chapter Eleven: Diversity and Discrimination 241

Learning Objectives 241 Discussion Case: Reverse Discrimination? 242 Discussion Questions 243 11.1 Introduction: Diversity and Equality 243 11.2 Discrimination, Equal Opportunity, and Affi rmative Action 245 11.3 Preferential Treatment in Employment 251 11.4 Arguments Against Preferential Hiring 254 11.5 Arguments in Support of Preferential Hiring 258 11.6 Sexual Harassment in the Workplace 261 Refl ections on the Chapter Discussion Case 265 Chapter Review Questions 266

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Contents xi

Chapter Twelve: International Business and Globalization 268

Learning Objectives 268 Discussion Case: Google and Doing Business in China 269 Discussion Questions 271 12.1 Introduction 271 12.2 Ethical Relativism and Cross-Cultural Values 272 12.3 Cross-Cultural Values and International Rights 275 12.4 Globalization and International Business 277 12.5 Globalization and the Poor 279 12.6 “Race to the Bottom” 281 12.7 Democracy, Cultural Integrity, and Human Rights 283 Refl ections on the Chapter Discussion Case 286 Chapter Review Questions 287

Photo Credits 289 Index 291

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xii

Preface to the Fourth Edition

My overarching goal in the fourth 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 sup- plement 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, accounting, human resources. The book also has been used to provide coverage of business-related topics in

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Preface to the Fourth Edition xiii

more general courses in applied or professional ethics. I take this variety of uses as evidence that the fi rst edition was reasonably successful in achieving its goals.

NEW TO THE FOURTH EDITION

In response to the advice of many friends and colleagues who have been using this book in their own classes, this fourth edition has made the following changes:

• Every chapter begins with a new, or significantly revised and updated, discussion case. All of these changes involve cases that have developed in the years since the previous edition, including cases on Bernard Madoff, AIG, subprime lending, predatory lending, Steve Jobs, and Google in China.

• Sustainability topics have been more widely integrated throughout the text, including a new sustainability section in chapter 5 on corporate social responsibility and a sustainability-focused discussion case on marketing in chapter 8.

• Many new cases include material and topics arising from the recent finan- cial meltdown, making this edition more timely and relevant.

• New sections include a model for ethical decision making, philanthropic CSR, and a business case for sustainability.

Another bit of advice that I received, as consistent as it was challenging, was to add this new material without making the book longer or more cumbersome. It has been gratifying to learn that readers have found the book clearly written and accessible to students unfamiliar with the fi eld. To achieve these goals, I have deleted some outdated cases and worked to improve the clarity of the more philosophical sections, especially within chapter 2’s discussion of ethical theory.

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 decision making rather than on providing answers or promoting a specifi c set of conclusions. To this end, a new 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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xiv Preface to the Fourth 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 commu- nity who deserve special mention and thanks. My own work in business eth- ics 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 peo- ple 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 Cen- tral 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 College; 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.

The fourth edition benefi ted from the thorough and thoughtful reviews by:

• 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

Joseph DesJardins

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1

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.

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

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2 Chapter 1

DISCUSSION CASE: Bernard Madoff’s Ponzi Scheme

One of the largest fi nancial frauds in history came to an end late in 2008 when Bernard Madoff was arrested and charged with operating a major Ponzi scheme through his wealth management company. Madoff pleaded guilty to 11 counts of fi nancial fraud and theft in March 2009 and three months later was sentenced to 150 years in prison. Madoff’s fraud was thought to have cost clients more than $10 billion.

A Ponzi scheme is a fraud that attracts investors with a promise of high returns, which are initially paid out from the investments made by subsequent clients rather than from legitimate profi ts made from the initial investment. The success of these initial investments entices future investors, and in many cases reinvestment from the original investors. Because the returns are based on the ability to attract future investors into the scheme rather than on legitimate earn- ings, the scheme can last only as long as the perpetrator is able to attract an increasing number of investors, all of whom expect higher-than-normal returns. A Ponzi scheme is likened to a house of cards that is destined to collapse when- ever the fl ow of money into the scheme declines. The perpetrator benefi ts either by disappearing with the money before the system collapses or, as in the case of Madoff, living a wealthy lifestyle by skimming money from the signifi cant cash fl ow generated by the fraud.

The size of Madoff’s fraud was only one reason why this case attracted signifi cant media attention. Madoff and his family were also prominent public fi gures—Madoff was former chairman of the NASDAQ stock exchange—and well-known as very generous philanthropists. The fraud also involved his fam- ily; Madoff’s wife, two sons, and brother were all implicated in the case. Many of his victims were also prominent people, many were personal friends, and several charitable organizations lost signifi cant money in the fraud.

Another aspect of this case involved the role, many would say the complete failure, of government regulators. Starting as early as 1992, the Securities and Exchange Commission (SEC) had received complaints and tips about Madoff’s investments. In most cases, the SEC either didn’t investigate or failed to follow through on a cursory investigation. A report issued by the SEC’s own inspector general in September 2009 concluded, “Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff’s trading and never took the necessary, but basic, steps to determine if Madoff was oper- ating a Ponzi scheme.” Coming as it did in the midst of the fi nancial meltdown and recession of 2008–2009, this failure of government regulators was another reminder of the limitations of legal regulations in providing suffi cient oversight to unethical business practices.

Madoff apologized at his sentencing, telling the judge: “I am responsible for a great deal of suffering and pain. I understand that. I live in a tormented state now knowing of all the pain and suffering that I have created. I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren. That’s something I will live with for the rest of my life. . . . That is a horrible guilt to live with. There is nothing I can do that will make anyone

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Why Study Ethics? 3

feel better for the pain and suffering I caused them, but I will live with this pain, with this torment for the rest of my life. I apologize to my victims. I will turn and face you. I am sorry. I know that doesn’t help you. Your Honor, thank you for listening to me.”

DISCUSSION QUESTIONS

1. Identify what ethical issues and questions are involved in the Madoff case. 2. Identify all the people you think may have been harmed, and how they

were harmed, by the Madoff fraud. 3. Do you think that a scandal such as this is the result mostly of unethical

individuals, or are there organizational issues that allowed, encouraged, or were responsible for the harms? To what degree was this case mostly a failure of individuals, or organizational structure, or of government?

4. Can you imagine anything that would have prevented the Madoff fraud?

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. That is, the goal of business 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 intellec- tual capacities: a better understanding of ethical issues, 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 Report 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, Aldelphia, Global Crossing, Health South, Qwest, Merrill

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4 Chapter 1

Lynch, Citigroup Salomon Smith Barney, Parmalat, Marsh and McClennen, Credit Suisse First Boston, and even the New York Stock Exchange itself. Since the last edition of this text was written in 2007, 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 Mutual, and Wachovia.

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 exag- geration to say that ethical failures have been responsible for some of the most dramatic business failures in the last decade, and that these business failures in turn can jeopardize the economic well-being of the entire country.

On a smaller scale, consider the people who were harmed by the Madoff Ponzi scheme. Investors lost tens of billions of dollars. Hundreds of innocent employees lost their jobs, their retirement funds, and their health care benefi ts. Innocent charities suffered when they lost their endowments or were asked to return donations made by the Madoffs in a legal process to recover funds for his victims. The wider New York community was also hurt by the loss of a major community benefactor. Families of employees and investors were also hurt. Many of the individuals directly involved will themselves suffer criminal and civil punishment, including jail sentences for some. Indeed, it is hard to imagine anyone who was even loosely affi liated with Madoff who did not suffer harm as a result of his ethical failings. 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 ethical standards of their organizations. Perhaps the most straightforward rea- son 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

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Why Study Ethics? 5

corporations have a code of ethics “applicable to its principal fi nancial offi cer and comptroller or principal accounting offi cer, or persons performing similar functions.” 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 managers 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 marketing 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, or disadvantage, 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, loyalty, 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.

In 2003, Deloitte polled 5,000 directors of the top 4,000 publicly traded companies and reported that 98 percent believed that an ethics and compliance program was an essential part of corporate governance. Over 80 percent had developed formal codes of ethics beyond those required by Sarbanes-Oxley, and over 90 percent included statements concerning the company’s obliga- tions to employees, shareholders, suppliers, customers, and the community at large in their corporate code of ethics.2 In practice, if not yet in theory, corporate America has adopted the stakeholder model of corporate social responsibility. Contemporary business now takes seriously its ethical responsibilities to a variety of stakeholders other than its shareholders.

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 Bernard Madoff himself who suffered because of his unethi- cal behavior. Our lives as employees, as consumers, as citizens are effected 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 ethics into account and integrate ethics into its organizational structure. Students

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6 Chapter 1

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 Bernard Madoff, that unethi- cal behavior can lead directly to business failure. But is the opposite true? Does good ethics mean business success?

As described in their best-selling book, Built to Last: Successful Habits of Vi- sionary Companies, authors James Collins and Jerry Porras researched dozens of very successful companies looking for common practices that might explain their success. These companies not only outperformed their competitors 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 enduring com- panies 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.” 3

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 nan- cial, religious, historical, nutritional, political, scientifi c, and aesthetic values. Individuals can have their own personal values and, importantly, institutions also have values. Talk of a corporation’s “culture” is a way of saying that a cor- poration 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

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Why Study Ethics? 7

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 as saying “I see nothing morally wrong with the [tobacco] business. . . . I see nothing wrong with selling people products they don’t need.” 4

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 ethical 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. Consider again the harm attributed to the ethical failures of Bernard Madoff. Thousands of innocent people were hurt by the decisions made by some indi- viduals seeking their own fi nancial and egotistical aggrandizement. This exam- ple reveals two important elements of ethical values. First, 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. Controversy 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 autonomy 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

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8 Chapter 1

part of business ethics. The prosmoking values of Philip Morris, for example, allegedly 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 decisions 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 infor- mational content.

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 companies 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 tex- tile manufacturing. The textile industry was born in the nineteenth century 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 manufacturer 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

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Why Study Ethics? 9

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 cover- age until they could be brought back to work. For this, Feuerstein became fa- mous. 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 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 suffi cient fi nancing. In October of 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 workers 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. 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 un- ethical 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 articu- late and defend the ones that ought 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.

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10 Chapter 1

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 common goals, concepts, principles, and frameworks of business ethics. There is a growing body of scholarly literature in business ethics, and, in an aca- demic 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 Ac counting Principles (GAAP) for accountants, there are a set of principles, standards, concepts, and values common to business ethics. Chap- ter 2 will 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 daunt- ing gap between ethical judgment and ethical behavior. From at least the time of Plato and Aristotle, Western philosophy has acknowledged a real disconti- nuity 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 Bernard Madoff.

A more modest and judicious goal for business ethics is to focus on the cog- nitive 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 confronting 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 informa- tion to a passive audience, but to treat students as active learners and engage them in an active process of thinking and questioning. 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, on 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

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Why Study Ethics? 11

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 the other. A common goal for most courses in business ethics navigates this diffi culty by emphasizing the process of ethical reasoning. Business ethics is concerned more with reason- ing than 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 pursue the logical analysis of each issue fully and with intellectual rigor. Business 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 relativ- ism. With this process, we are best prepared to avoid the dilemma of dogma- tism and relativism.