Systemic ethical issues chocolate slavery

BUSINESS ETHICS Seventh Edition

Manuel G. Velasquez Santa Clara University

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C O N C E P T S & C A S E S

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

Contents Preface vi

PART ONE Basic Principles 1

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

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

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

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

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

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

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

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

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

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

PART TWO The Market and Business 149

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

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iv CONTENTS

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

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

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

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

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

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

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

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

ON THE EDGE: Oracle and Peoplesoft 229

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

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

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

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

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

ON THE EDGE: Exporting Poison 286

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

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

CONTENTS v

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

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

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

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

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

PART FOUR Ethics and Employees 345

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

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

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

7.4 Affirmative Action 378

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

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

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

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

8.3 The Caring Organization 446

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

Notes 458 Photo Credits 485 Text Credits 485 Index 488

Preface

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

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

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

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

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

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

■ Study questions at the beginning of each chapter

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

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

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

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

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

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

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

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

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

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

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

New to this Edition

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

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

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

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

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

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

PREFACE vii

viii PREFACE

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

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

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

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

Support for Instructors and Students

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

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

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

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

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

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

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

Acknowledgments

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

Manuel G. Velasquez Aptos, California

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1

PART ONE

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

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

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

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

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

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

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

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

ANALYZING ETHICAL ISSUES IN BUSINESS.

3

What is “business ethics”?

What is corporate social responsibility?

Is ethical relativism right?

How does moral development happen?

What role do emotions have in ethical reasoning?

What are the impediments to moral behavior?

When is a person morally responsible for doing wrong?

Ethics and Business

1

3

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

4 BASIC PRINCIPLES

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

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

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

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

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

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

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ETHICS AND BUSINESS 5

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

There was a potential downside for me personally. I hadn’t been on the job very long and I was still learning how to promote new drug development in a corporate setting. While we had some big innovations in our pipeline, I was still an unproven rookie in the business world. I would be spending a consid- erable amount of company money in a field, tropical medicine, that few of us other than Mohammed Aziz knew very well . . . CEO Henry Gadsden had become worried—with good cause—about Merck’s pipeline of new products, and he had hired me to solve that problem. It was as obvious to me as it was to Mohammed and Bill that even if Ivermectin was successful against river blindness, the drug wasn’t going to pump up the firm’s revenue and make the stockholders happy. So I was being asked to take on some risk for myself and for the laboratories. 2

Vagelos knew he was faced with a decision that, as he said, “had an important ethical component.” Whatever the risk to the company and his career, it was clear that without the drug, millions would be condemned to lives of intense suffering and partial or total blindness. After talking it over with Campbell, Aziz, and other manag- ers, Vagelos came to the conclusion that the potential human benefits of a drug for river blindness were too significant to ignore. In late 1980, he approved a budget that provided the money needed to develop a human version of Ivermectin.

It took seven years for Merck to develop a human version of Ivermectin. The company named the human version Mectizan. A single pill of Mectizan taken once a year could eradicate from the human body all traces of the parasite that caused river blindness and prevented new infections. Unfortunately, exactly as Vagelos had earlier suspected, no one stepped forward to buy the miraculous new pill. Over the next sev- eral years, Merck officials—especially Vagelos who by then was Merck’s chief execu- tive officer (CEO)—pleaded with the World Health Organization (WHO), the U.S. government, and the governments of nations afflicted with the disease, asking that someone—anyone—come forward to buy the drug to protect the 100 million people who were at risk for the disease. None responded to the company’s pleas.

When it finally became clear no one would buy the drug, the company decided to give Mectizan away for free to victims of the disease. 3 Yet, even this plan proved dif- ficult to implement because, as the company had earlier suspected, there were no es- tablished distribution channels to get the drug to the people who needed it. Working with the WHO, therefore, the company financed an international committee to pro- vide the infrastructure to distribute the drug safely to people in the Third World and to ensure that it would not be diverted into the black market to be sold for use on ani- mals. Paying for these activities raised the amount it invested in developing, testing, and now distributing Mectizan to well over $200 million, without counting the cost of manufacturing the drug itself. By 2010, Merck had given away more than 2.5 billion tablets of Mectizan worth approximately $3.5 billion and was providing the drug for free to 80 million people a year in Africa, Latin America, and the Middle East. Besides using the drug to relieve the intense sufferings of river blindness, the company had expanded the program to include the treatment of elephantiasis, a parasitic disease

6 BASIC PRINCIPLES

that often coexists with river blindness which Merck researchers discovered could also be treated with Mectizan. By 2010, over 300 million people had received Mectizan to treat elephantiasis and 70 million more received it the following year.

When asked why the company invested so much money and effort into re- searching, developing, manufacturing, and distributing a drug that makes no money, Dr. Roy Vagelos, CEO of the company, replied that once the company suspected that one of its animal drugs might cure a severe human disease that was ravaging people, the only ethical choice was to develop it. Moreover, people in the Third World “will remember” that Merck helped them, he commented, and will respond favorably to the company in the future. 4 Over the years, the company had learned that such ac- tions have strategically important long-term advantages. “When I first went to Japan 15 years ago, I was told by Japanese business people that it was Merck that brought streptomycin to Japan after World War II to eliminate tuberculosis which was eating up their society. We did that. We didn’t make any money. But it’s no accident that Merck is the largest American pharmaceutical company in Japan today.” 5

Having looked at how Merck dealt with its discovery of a cure for river blindness, let us now turn to the relationship between ethics and business. Pundits sometimes quip that business ethics is a contradiction in terms—an “oxymoron”—because there is an inherent conflict between ethics and the self-interested pursuit of profit. When ethics conflicts with profits, they imply, businesses always choose profits over eth- ics. Yet, the case of Merck suggests a different perspective—a perspective that many companies are increasingly taking. The managers of this company spent $200 mil- lion developing a product that they knew had little chance of ever being profitable because they felt they had an ethical obligation to make its potentially great benefits available to people. In this case, at least, a large and very successful business seems to have chosen ethics over profits. Moreover, the comments of Vagelos at the end of the case suggest that, in the long run, there may be no inherent conflict between ethical behavior and the pursuit of profit. On the contrary, the comments of Vagelos suggest that ethical behavior creates the kind of goodwill and reputation that expand a com- pany’s opportunities for profit.

Not all companies operate like Merck, and Merck itself has not always operated ethically. Many—perhaps most—companies will not invest in a research and develop- ment project that will probably be unprofitable even if it promises to benefit humanity. Every day newspapers announce the names of companies that choose profits over ethics or that, at least for a time, profited through unethical behavior—Enron, Worldcom, Global Crossing, Rite-Aid, Oracle, ParMor, Adelphia, Arthur Andersen, Louisiana- Pacific, and Qwest—are but a few of these. In 2004, even Merck was accused of failing to disclose heart problems associated with its drug Vioxx, and in 2010 the company put $4.85 billion into a fund to compensate patients who said they had suffered heart at- tacks or strokes because they had used Vioxx. (In spite of its significant lapse in regard to Vioxx, Merck has remained committed to operate ethically and has continued to win dozens of awards for its openness and ethically responsible operations.) 6

Although there are many companies that at one time or another have engaged in unethical behavior, habitually unethical behavior is not necessarily a good long-term business strategy for a company. For example, ask yourself whether, as a customer, you are more likely to buy from a business that you know is honest and trustworthy or one that has earned a reputation for being dishonest and crooked. Ask yourself whether, as an employee, you are more likely to loyally serve a company whose ac- tions toward you are fair and respectful or one that habitually treats you and other workers unjustly and disrespectfully. Clearly, when companies are competing against each other for customers and for the best workers, the company with a reputation for ethical behavior has an advantage over one with a reputation for being unethical.

ETHICS AND BUSINESS 7

This book takes the view that ethical behavior is the best long-term business strategy for a company—a view that has become increasingly accepted during the last few years. 7 This does not mean that occasions never arise when doing what is ethical will prove costly to a company. Such occasions are common in the life of a company, and we will see many examples in this book. Nor does it mean that ethical behavior is always rewarded or that unethical behavior is always punished. On the contrary, unethical behavior sometimes pays off, and the good guy sometimes loses. To say that ethical behavior is the best long-range business strategy just means that, over the long run and for the most part, ethical behavior can give a company significant competitive advantages over companies that are not ethical. The example of Merck suggests being ethical is good business strategy, and a bit of reflection on how we, as consumers and employees, respond to companies that behave unethically supports the view that un- ethical behavior leads to a loss of customer and employee support. Later, we will see what more can be said for or against the view that ethical behavior is the best long- term business strategy for a company.

The more basic problem is, of course, that the ethical course of action is not always clear to a company’s managers. In the Merck case, Roy Vagelos decided that the company had an ethical obligation to proceed with the development of the drug. Yet to someone else the issue may not have been so clear. Vagelos notes he would be “spending a considerable amount of company money” in a way that would not “make stockholders happy” and that would put his own career at “some risk.” Don’t the managers of a company have a duty toward investors and shareholders to invest their funds in a profitable manner? Indeed, if a company spent all of its funds on chari- table projects that lost money, wouldn’t it soon be out of business? Then, wouldn’t its shareholders be justified in claiming that the company’s managers had spent their money unethically? And should Vagelos have risked his career, with the implications this had for his family? Is it so clear, then, that Vagelos had an ethical obligation to invest in an unprofitable drug? What reasons can be given for his belief that Merck had an obligation to develop the drug? Can any good reasons be given for the claim that Merck had no such obligation? Which view do you think is supported by the strongest reasons?

Although ethics may be the best policy, then, the ethical course of action is not always clear. The purpose of this book is to help you, the reader, deal with this lack of clarity. Although many ethical issues remain difficult and obscure even after a lot of study, gaining a better understanding of ethics will help you deal with ethical uncer- tainties in a more adequate and informed manner.

This text aims to clarify the ethical issues that you may face when you work in a business and perhaps, become part of a company’s management team. This does not mean that it is designed to give you moral advice nor that it is aimed at persuad- ing you to act in certain “moral” ways. The main purpose of the text is to provide you with a deeper knowledge of the nature of ethical principles and concepts along with an understanding of how you can use this knowledge to deal with the ethical choices you will encounter in the business world. This type of knowledge and skill should help you steer your way through ethical decisions like the one Vagelos had to make. Everyone in business is confronted with decisions like these, although usually not as significant as deciding whether to pursue a potential cure for river blindness. Before you even start working for a company, for example, you will be faced with ethical decisions about how “creative” your resume should be. Later, you may have to decide whether to cut corners just a little in your job, or whether to give your rela- tive or friend a company contract, or whether to put a little extra into the expenses you report for a company trip you made. Or maybe you will catch a friend stealing from the company and have to decide whether to turn him in, or you will find out

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your company is doing something illegal and have to decide what you are going to do about it, or maybe your boss will ask you to do something you think is wrong. Ethical choices confront everyone in business, and this text hopes to give you some ways of thinking through these choices.

The first two chapters will introduce you to some methods of moral reasoning and some fundamental moral principles that can be used to analyze moral issues in business, as well as some of the obstacles that can get in the way of thinking clearly about ethical issues. The following chapters apply these principles and methods to the kinds of moral dilemmas that confront people in business. We begin in this chapter by discussing three preliminary topics: (1) the nature of business ethics and some of the issues it raises, (2) moral reasoning and moral decision-making, and (3) moral re- sponsibility. Once these notions have been clarified, we devote the next chapter to a discussion of some basic theories of ethics and how they relate to business.

1.1 The Nature of Business Ethics

According to the dictionary, the term ethics has several meanings. One of the mean- ings given to it is: “the principles of conduct governing an individual or a group.” 8 We sometimes use the term personal ethics , for example, when referring to the rules by which an individual lives his or her personal life. We use the term accounting ethics when referring to the code that guides the professional conduct of accountants.

A second—and for us more important—meaning of ethics according to the dic- tionary is this: Ethics is “the study of morality.” Just as chemists use the term chemistry to refer to a study of the properties of chemical substances, ethicists use the term ethics to refer primarily to the study of morality. Although ethics deals with morality, it is not quite the same as morality. Ethics is a kind of investigation—and includes both the activity of investigating as well as the results of that investigation—whereas mo- rality is the subject matter that ethics investigates.

Morality

So what, then, is morality? We can define morality as the standards that an individual or a group has about what is right and wrong, or good and evil. To clarify what this means, let’s consider another case, one that is a bit different from the Merck case.

Several years ago, B. F. Goodrich, a manufacturer of vehicle parts, won a military contract to design, test, and manufacture aircraft brakes for the A7-D, a new light airplane the U.S. Air Force was designing. To conserve weight, Goodrich managers guaranteed that their compact brake would weigh no more than 106 pounds, contain no more than four small braking disks or “rotors,” and be able to repeatedly stop the aircraft within a specified distance. The contract was potentially very lucrative for the company and so its managers were anxious to deliver a brake hat “qualified,” that is, that passed all the tests the U.S. Air Force required for the A7-D.

An older Goodrich engineer, John Warren, designed the brake. A young engi- neer named Searle Lawson was given the job of determining the best material to use as the brake lining and testing the brake to make sure it “qualified.” Searle Lawson was in his twenties. He had just graduated from school with an engineering degree and Goodrich had only recently hired him.

Lawson built a “prototype”—a working model—of the small brake to test lining materials. He found that when the brake was applied, the linings on the four rotors heated up to 1500 degrees and began disintegrating. When he tried other linings and

morality The standards that an individual or a group has about what is right and wrong or good and evil.

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got the same results, Lawson went over Warren’s design and decided it was based on a mistake. By his own calculations, there was not enough surface area on the ro- tors to stop an airplane in the required distance without generating so much heat the linings failed. Lawson went to Warren, showed him his calculations and suggested Warren’s design should be replaced with a new design for a larger brake with five rotors. Warren rejected the suggestion that his design was based on a mistake that a “green kid” just out of engineering school had discovered. He told Lawson to keep trying different materials for brake linings until he found one that worked.

But Lawson was not ready to give up. He went to talk with the manager in charge of the project and showed him his calculations. The project manager had repeat- edly promised his own superiors that development of the brake was on schedule and knew he would probably be blamed if the brake was not delivered as he had promised. Moreover, he probably felt he should trust Warren who was one of his best engineers, rather than someone just out of engineering school. The project manager told Law- son that if Warren said the brake would work, then it would work. He should just keep trying different materials like Warren told him to do. Lawson left the project manager feeling frustrated. If he did not have the support of his superiors, he thought, he would just keep working with the brake Warren designed.