Utilitarianism's fundamental insight is that we should decide what to do by:

2 CHAPTER

Ethical Theory and Business L E A R N N G OBJ E CTIV E S

After reading this chapter, you should be able to:

• Understand the basic concepts and categories of ethics;

• Explain ethical virtues;

• Identify a number of virtues and vices;

• Explain the ethical theory of utilitarianism;

• Explain how utilitarian ethics can provide support for market economics and business policy;

• Explain several challenges to utilitarian ethics;

• Explain an ethics based on principles, rights, and duties.

DISCUSSION CASE: Mylan Pharmaceuticals and the EpiPen

M ylan, Inc. is a U.S. pharmaceutical company that manufactures the EpiPen, an easy-to-use auto-injection medical device. EpiPen delivers the proper dosage of epinephrine, a drug that safely and effectively counteracts anaphylaxis, a severe allergic reaction that can close a person's breathing passages and cause death. EpiPen is especially effective because the proper dosage can be quickly delivered by anyone- the persons themselves, co-workers, teachers, by slanders- by simply placing the device against the skin and pushing a button. Because of the ease of use, EpiPens are especially popular for treating severe allergies in children.

The device itself is simple and inexpensive, costing at most a few dollars to manufacture. The drug epinephrine is also inexpensive, costing less than $1 per dose. But, epinephrine degrades over time, so medical professionals recommend that unused devices be replaced at least once a year. It is not uncommon for some- one susceptible to anaphylaxis to keep several on hand at work, school, or home. Because the EpiPen has been in use and proven its effectiveness for over forty years, the initial investment required to develop the product has long since been recovered.

Mylan purchased rights to the EpiPen in 2007. At the time, EpiPens sold for under $60 each, and annual sales approached $200 million. Mylan invested to

21

22 Chapter 2

improve the design and manufacturing process, but the overall product did not change significantly. Mylan also invested heavily in marketing the product, includ- ing an advertising campaign aimed at increasing public awareness of anaphylaxis and lobbying governments to require institutions like schools to keep EpiPens on hand for emergencies and to protect those institutions from liability for using EpiPens in emergencies. By 2016, it was estimated that EpiPen accounted for over $1.5 billion in revenues for Mylan.

In the following years, a number of public and private decisions lead to major increases in the costs to consumers. Because a portion of anaphylaxis cases require a second dose of epinephrine, medical guidelines were changed in 2010 to recom- mend that patients always have access to two doses. Soon after this recommenda- tion, Mylan began selling EpiPens only in packages of two, effectively doubling the price to consumers. For a variety of reasons, including regulatory roadblocks, busi- ness decisions, and patent protections, competitors have had a difficult time enter- ing and remaining on the market. By 2016, when few competitors remained and Mylan had a 90 percent share of the market, the price for a two-pack of EpiPens had risen to over $600. It was estimated that in 2016, sales of EpiPen produced close to $1.5 billion in revenues. During this same period, Mylan's CEO's pay rose from $2.3 to $19 million annually. In 2016, former CEO Robert Coury was reported to have received over $90 million in compensation from Mylan.

In 2016, Mylan came under serious public criticism for increasing the price of EpiPen. Some critics pointed out that Mylan's CEO, Heather Bresch, was the daughter of former West Virginia governor and present U.S. Senator Joe Manchin. These critics claimed that her political connections helped pave the way for govern- mental regulations, including increased risk warnings for anaphylaxis, encourage- ment to schools to stock EpiPens, and regulations to make EpiPens as publicly available as defibrillators. In October 2016, Bresch was called to testify before the U.S. Congress to defend Mylan's actions.

The criticisms of Mylan can be grouped into three general categories. First, some critics saw the massive profits and excessive executive compensation as another example of out of control corporate and personal greed. Second, others saw Mylan as an example of systemic failures in health care policy and economics that prevent society from providing adequate health care. Finally, some critics charged that Mylan' s actions violate a number of basic ethical principles.

The Mylan hearings took place during a period when affordable health care was at the center of a national political debate. This also occurred at the time when another pharmaceutical company executive, Martin Shkreli of Turning Pharmaceu- ticals, was in the news for raising the price of one of its drugs from $13 to $750 per pill. Shkreli, who the press had named "Pharma-Bro" for his condescending atti- tude toward public criticism, had also been called to testify before Congress, but he refused on the grounds of self-incrimination. During Bresch's testimony to the U.S. House Oversight and Government Reform Committee, Congressman John Duncan told her that "The greed is astounding, it's sickening and disgusting. I'm a very conservative, pro-business Republican, but I am really sickened by what I heard today and by what I've read before about this situation. In my opinion, no one can really earn or deserve $19 million a year."

• •

• •

Ethical Theory and Business 23

The national debate about affordable health care provided the context for much of the broader, systemic criticism of Mylan. The national debate on affordable health care focused on the relative strengths and weaknesses of free markets and government regulation in providing adequate health care. Those who argued for a greater role for free markets, most often Republicans, saw Mylan as a case study for what happens when there is a lack of competition and the market gets controlled by a near monopoly. Mylan was able to exploit this unfair competitive advantage and raise prices almost without consequences. These critics also pointed out that government regulation of the market contributed much to the problem. Govern- mental actions, such as requiring institutions and schools to stock EpiPens and creating regulatory standards that created a barrier for competitors to enter the market, created an economic environment in which Mylan's exploitation could flourish. As a result, the public was denied access to the important good of afford- able health care.

Those who supported greater governmental involvement in the health care sys- tem, most often Democrats, saw Mylan as a case study of what happens when important public goods such as health care are left to the decisions of profit-seeking corporations. These critics argued that Mylan used its political influence, lobbing activities, and marketing campaign to create artificial markets, eliminate competi- tion, and deny the poorest citizens access to needed health care. From this perspec- tive, a managed health care system in which private businesses are regulated by public bodies would provide better overall health care. In particular, they argued that only government regulation could prevent companies from price gouging on prescription drugs and other health care products that consumers need.

Finally, many criticisms of Mylan appealed to fundamental ethical principles and values. These critics pointed out that citizens should have a basic right to health care and that this need should not be sacrificed for the profit of private businesses . Other critics pointed out that the burden of high drug prices fell disproportionately on the poor, and that a basic principle of fairness and equality is violated by a sys- tem in which health care is distributed according to the ability to pay. Still other critics raised questions about the justice of a system in which executives earned tens of millions of dollars a year, while poor, sick people were denied access to the product that generated this wealth. These critics argued that Mylan had a duty to provide the EpiPens at an affordable price.

DISCUSSION QUESTIONS

1. What judgment would you make about Mylan? Did they do anything ethically wrong in their pricing of the EpiPen?

2. Do you think that a pharmaceutical company should be allowed to charge whatever price the market will pay for prescription drugs? Should prescription drugs be treated differently than any other consumer product?

3. Congressman Duncan used the word "greed" when describing Mylan's actions. What is the difference between greed and simply the desire for more money? Is greed always bad? Why or why not?

24 Chapter 2

4. As a citizen, would you support more, or less, government oversight and regulation for the pharmaceutical industry? Why?

5. What duties do pharmaceutical companies have toward customers? 6. When, if at all, is it unfair that a consumer cannot afford a product that he

or she wants or needs? 7. Do you agree that "no one can really earn or deserve $19 million a year"?

How about $90 million?

2.1 INTRODUCTION

The Mylan EpiPen case demonstrates how business activities can raise fundamental questions of fairness, justice, rights, duties, and virtues. It would be impossible to talk about the Mylan case without using the language of ethics. Because the lan- guage of ethics is inextricably a part of business, it makes sense to begin our exam- ination of business ethics with a short introduction to some of the basic concepts, terms, and categories of philosophical ethics. Just as you need to have a familiarity with the language and concepts of economics and management to make responsi- ble business decisions so, too, you need a basic familiarity with ethics. This chapter will show how some of the key concepts of ethics are both relevant and necessary for any study of business.

Chapter 1 introduced ethics as a process of reasoning about what is perhaps the most significant question any human being can ask: How should I live my life? But, of course, this question is not new; every major philosophical, cultural, politi- cal, and religious tradition in human history has grappled with it. In light of this, it would be a mistake to ignore these traditions as we examine ethical issues in busi- ness. Nevertheless, discussion of ethical "theories" and philosophy can seem too abstract to be of much relevance to business. In this chapter, I hope to suggest a more accessible understanding of ethics, one that will shed some light on the prac- tical and pragmatic application to actual problems faced by businesspeople.

An ethical theory, or ethical framework, is nothing more than an attempt to provide a systematic answer to the fundamental ethical question: How should human beings live their lives? Ethical theories attempt to answer the question of how we should live, but they also give reasons to support their answer. Ethics seeks to provide a reasonable justification for why we should act and decide in a particular prescribed way. Anyone can offer advice for what you should do and how you should act, but a philosophical and reasoned ethics must answer the "Why?" question as well.

As a first step, let us reflect upon the reasoning that was offered to support and criticize the actions of Mylan. As described in the discussion case, these reasons fall into three general categories. Some reasons appeal to the personal character of the people involved. Executives were described as "greedy" or uncaring. Other reasons appealed to the consequences of EpiPen pricing and to failures within the political and economic system to serve the public good. Other reasons appealed to certain principles: fairness, justice, rights.

• •

• •

Ethical Theory and Business 25

As it turns out, the three major traditions of ethics that we shall rely on in this text are reflected in these three categories. This should be no surprise, since ethical traditions in philosophy reflect common ways to think and reason about how we should live and what we should do. Ethics of personal character, of overall social consequences, and of principles, are the traditions that we will rely on for much of this text.

This chapter will introduce three ethical traditions that have proven influen- tial in the development of business ethics and that have a very practical relevance in evaluating ethical issues in contemporary business . Virtue ethics directs us to consider the moral character of individuals and how various character traits can contribute to, or obstruct, a worthy and good human life. Reasoning that criticizes excessive executive pay or price gouging as greedy, or as motivated by selfishness, is language that comes from a virtue-based perspective on ethics. The implication is that a greedy person who does distasteful and selfish things will not lead a fulfilling and good human life . The other pharmaceutical executive described in the opening case, Martin Shkreli, or the "pharm-bro," was described as arrogant, condescending, disdainful and lacking the virtues of modest, compassion, and humility.

Virtue ethics is especially focused on the ethics of personal morality and indi- vidual character: Is this a good person? Is this person honorable? What type of person am I? What type of person do I wish for my children to be? Virtue ethics speaks a language of personal character. The virtues, or character traits, are such qualities as honesty, integrity, trustworthiness, compassion, humility, friendliness, kindness, and loyalty. The opposite of virtues, identified as vices, include describ- ing someone as greedy, selfish, arrogant, condescending, deceitful, a hypocrite.

A second ethical tradition is utilitarianism, which holds that ethical decisions are determined on the overall social consequences of an act. Utilitarianism judges an act that produces greatest beneficial consequences as the ethically right thing to do. While utilitarianism can apply to personal morality and individual decisions (I should do whatever produces the greatest overall benefits), it most appropri- ately applies to social and policy decisions . Thus, in the Mylan case, utilitarians might debate whether more rather than fewer government regulations, more rather than less reliance on the free market, would produce the greatest overall social benefit .

Finally, an ethical tradition based on the importance of ethical principles and rights directs us to decide on the basis of moral principles such as every person should have a right to an equal and fair chance at living a healthy life, that some individuals should not benefit excessively at the expense of vulnerable other, and that we all have a duty to meet human needs before pursuing business profits. Principles, promises, justice, fairness, rights, and duties are concepts that are at the heart of principle-based ethics.

We will examine these arguments in more depth later in this chapter. For now, the crucial thing to recognize is the inescapability of the language of ethics. Debates surrounding the Mylan case were fundamentally debates about ethics: What do people deserve? What produces beneficial overall consequences? What is one's duty? What is fair or unfair, just or unjust? What is wrong with being greedy?

26 Chapter 2

2.2 VIRTUE ETHICS

As already described, virtue ethics focuses on the ethics of personal character. Virtue ethics is a tradition within philosophical ethics that seeks a full and detailed description of those character traits, or "virtues," that would make a human life, a good, meaningful, well-lived life. When we describe someone as an honest per- son, a loyal friend, a helpful neighbor, a caring and generous citizen, or when we say that someone is a person of integrity, or that an employee is reliable, trust- worthy, diligent and disciplined, we are speaking the language of virtues. When someone is described as greedy, as happened in the discussion case that opened this chapter, we are also speaking language of virtues or, in the case the opposite of virtues, the vices. A person described as selfish, mean-spirited, arrogant, nar- cissistic, untrustworthy, dishonest, or immodest is lacking virtue and living an unethical life.

We'll find the language of virtue ethics at several points in this book, most notably in discussions of leadership and corporate culture. Consider how you would answer the question: What makes a good leader? Words like decisive, transparent, honest, integrity, visionary, fair, empowering, respectful, inspirational, and coura- geous come to mind. Each of the words describes a human virtue, traits that others can rely on because they are deeply ingrained within the person's character. Virtues are not characteristics that a person adopts one day, but forgets about and drops the next. They are enduring because they describe who that person truly is. Bad leaders not only lack such characteristics, they might also be described by such vices as self-centered, egoistic, mean-spirited, timid, unreliable, and undisciplined.

Similarly, consider how you might describe a good, ethical employee. Again, virtue words come to mind, characteristics such as trustworthy, loyal, creative, hard-working, motivated, reliable, honest. Bad employees might be characterized as lazy, dishonest, unreliable, or easily distracted.

From its earliest days, virtue ethics has grappled with two fundamental chal- lenges: one practical and one critical. The practical challenge, one that Plato himself asked, is "Can virtue be taught?" How do people become honest, trustworthy, reli- able, kind? Why do some people become mean-spirited and others kind, some self-centered and others altruistic? Is this something that can be taught and, if so, how? These questions have arisen in business ethics as businesses seek ways to encourage ethical behavior and discourage unethical behavior. As mentioned in the discussion case from chapter 1, many critics charge that Wells Fargo's corporate culture created an environment in which the virtue of honesty was discouraged and the vice of greed was the norm. The question of how virtuous and ethical behavior can be encouraged within business will be examined in chapter 4's focus on the idea of a corporate culture, the social environment that establishes corporate expec- tations, behaviors, and norms.

The critical challenge asks why be virtuous? Why should one be honest, kind, hard-working, rather than selfish, unreliable, lazy? This is a philosophical challenge that seeks a rational justification of the virtues. According to critics, without a ratio- nal justification that provides reasons for being virtuous, virtue ethics amounts to little more than name calling or what logicians would call an ad hominem attack.

• •

• •

Ethical Theory and Business 27

Both of these challenges have found a sympathetic audience among some in business. These challenges often arise from a particular view of human nature, a view that is as much at home in economics than it is in philosophy. That view, identified as psychological egoism, posits that human beings are, by nature, selfish. If this is true and all humans always act out of self-interest, then there would be a significant challenge for anyone hoping to teach people to be otherwise. How can one teach someone to be altruistic, kind, generous, and helpful if those behaviors go against human nature? Further, how can you provide a reason for someone to act against their own self-interest if, in fact, that would be to go against human nature?

Long traditions in both philosophical ethics and economics have developed out of this perspective. In ethics, the social contract tradition holds that ethical respon- sibilities and duties to others must be based on a social contract, an agreement that essentially says that I will be ethical toward you-help you and not hurt you-as long as you agree to do the same to me. Thus, ethical duties are based upon self-interest and what may appear to be acting for the interests of another actually is acting for your own self-interest. In economic theory, defenders of free markets argue that because human nature is self-interested, economic systems should be arranged to channel that self-interest toward the overall social interest. In a tradition that reaches as far back as Adam Smith, some economists argue that competitive mar- kets, freedom from coercion and fraud, and freedom from governmental control will, "as if lead by an invisible hand," turn self-interested behavior toward social good. Both the social contract tradition and the free market view in economics will be in the background of many of the debates we examine throughout this text. In particular, the free market economic view is deeply embedded in one of the major theories of corporate social responsibility that we examine at length in the next chapter .

But the virtue ethics tradition has experienced something of a revival in recent years and it is perhaps no coincidence that this has occurred as psychological ego- ism has gone out of favor. As philosophers and psychologist have always known, human motivation is more complex than is portrayed by psychological egoism. The entire field of behavioral economics grew out of this recognition that human beings seldom behave in ways that conform to the narrow self-interest predicted by abstract, mathematical model of economics. Certainly, some people are motivated only by selfish reasons, but many others are not. Some people are motivated by a deep care for others, by compassion, sympathy, and respect. Most of us behave both selfishly and charitably at different times. Importantly, as every parent would recog- nize, such motivational factors can be taught and learned. Human beings are no more naturally selfish and greedy than they are naturally kind and compassionate. Human beings have the capability of being both selfish and kind.

Once we recognize this fact (and philosophers from at least the time of Plato and Aristotle have recognized this), we can begin to separate those motivations that are likely to lead us to a good and happy life from those motivations that are likely to lead us to a life of unhappiness. The first set of motivation or character traits are called virtues, the latter are vices. An ethics of virtue seeks to develop the character traits and habits that will lead us to live a meaningful and happy human life.

28 Chapter 2

By connecting the virtues to a happy, good human life, virtue ethicists answer the critical question of justification as that raised earlier. You should be honest, kind, friendly, and so on because by doing so you will live a better, happier, more fulfilled human life.

For virtue ethics, how these traits are acquired, which would be an answer the practical challenge described above, becomes an important task for ethics. Can we teach people to be honest, trustworthy, loyal, courteous, moderate, respectful, and compassionate? While this might be difficult, it is not, as the psychological egoist would claim, impossible. Virtue ethicists turn to such fields as psychology, educa- tion, organizational behavior, and sociology to gain insight about how to teach virtue.

Parents confront this question every day. I know my children will lead happier and more meaningful lives if they are honest, respectful, cheerful, moderate and not greedy, envious, gloomy, arrogant, and selfish. Yet, simply telling my children to be honest and to avoid greed is insufficient. I cannot remain passive and assume that these traits will develop naturally. Instilling these character traits and habits is a long-term process that develops over time.

Business institutions also have come to recognize that character formation is both difficult and unavoidable. Employees come to business with certain character traits and habits, and these can get shaped and reinforced in the workplace. Hire a person with the wrong character traits, and there will be trouble ahead. Designing a workplace, creating a corporate culture, to reinforce virtues and discourage vice is one of the greatest challenges for an ethical business.