Yale university investments office august 2006

1 0 Chapter 1 Ethics and Business

relationship for our coun t ry . . . . Quite apart from the fact that we would have lost thousands, thousands of British jobs.'"^

Some observers may look to the choices made in late 2008 and 2009 by American International Group (AIG), the world's largest insurer, as another example of poor role modeling. One can easily see the impact of those decisions on reputation. In September 2008, AIG was on the brink of bankruptcy. There was a realistic fear that if the company went under the stability of the U.S. markets may have been in serious jeopardy Over a five-month period, the U.S. government bailed out AIG to the tune of $152.2 billion (funded by U.S. tax dollars) in order to keep the company afloat, because AIG arguably was "too big to fail."

While that consequence alone was unforUuiate, it certainly was not unethical. However, m decisions that damaged the reputations of many involved, among other charges, one month after AIG received the first round of bailout money, its executives headed to California for a weeklong retreat at an extremely luxurious hotel, with the company covering the nearly half a million dollar tab with the bailout money. Six months later, these same executives rewarded themselves with bonuses totaling over $100 million. Although President Obama (some say belatedly) derided the executives for their legally-awarded bonuses, many of the bonuses were paid nevertheless because they had been promised through employee contracts before AIG had received any bailout money for the purposes of "retainuig talent."'-'

Wliile it did not reach full congressional hearing, the House even prepared a bill that would impose a 90 percent tax on the bonuses paid to executives by AIG and other companies that were getting assistance from the government of more than $5 million. Instead, the House passed the Grayson-Himes Pay for Performance Act in April 2009, "to amend the executive compensation provisions of the Emergency Economic Stabilization Act of 2008 to prohibit unreasonable and excessive compensation and compensation not based on performance stan- dards."'" This bill would ban future "unreasonable and excessive" compensation at companies receiving federal bailout money. Treasury secretary Timothy Geithner would have the power to define what constitutes reasonable compensation and to review how companies give their bonuses.

The case for business ethics is clear and persuasive. Business must take ethics into account and integrate ethics into its organizational structure. Students need to study business ethics. But what does this mean? What is "ethics," and what is the objective of a class in business ethics?

Business Ethics as Ethical Decision Making As the title of this book suggests, our approach to business ethics will emphasize ethical decision making. No book can magically create ethically responsible people or change behavior in any direct way. But students can learn and practice responsible and accountable ways of thinking and deliberating. We assume that

Chapter 1 Ethics and Business 11

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So what is the point of a business ethics course? On one hand, "ethics" refers to an academic discipline with a cenmries-old history; we might expect knowledge about this history to be among the primary goals of a class in ethics. Thus, in an eth- ics course, sUidents might be expected to leam about the great ethicists of history such as Aristode, John Stuart Mill, and Inimanuel Kant. As in many other courses, this approach to ethics would focus on the informational content of the class.

Yet, according to some observers, ethical theories and the history of ethics is beside the point. These stakeholders, including some businesses looking to hire

OBJECTIVE college graduates, business students, and even some teachers themselves, expect an ethics class to address ethical behavior not just information and knowledge about ethics. After all, what good is an ethics class if it does not help prevent future Madoffs? For our purposes, ethics refers not only to an academic discipline, but to that arena of human life studied by this academic discipline, namely, how human beings should properly live their lives. An ethics course will not change yotu- capacity to think, but it could stimulate your choices of what to think about.

A caution about influencing behavior within a classroom is appropriate here. Part of the hesitation about teaching ethics involves the potential for abuse; expecting teachers to influence behavior could be viewed as pennission for teachers to impose their own views on students. To the contrary, many believe that teachers should remain value-neutral in the classroom and respect a student's own views. Another part of this concern is that the line between motivating students and manipulating students is a narrow one. There are many ways to influence someone's behavior, including tlu'eats, guilt, pressure, bullying, and intimidation. Some of the executives involved in the worst of the recent corporate scandals were very good at using some of these methods to motivate the people who worked for them. Presumably, none of these approaches belong in a college classroom, and certainly not in an ethical classroom.

But not aU forms of influencing behavior raise such concerns. There is a major difference between manipulating someone and persuading someone, between threatening (unethical) and reasoning (more likely ethical). This textbook resolves the tension between knowledge and behavior by emphasizing ethical judgment, ethical deliberation, and ethical decision making. In line with the Aristotelian notion that "we are what we repeatedly do," we agree with those who believe that an ethics class should sti'ive to produce more ethical behavior among the students who enroll. But we believe that the only academically and ethically legitimate way to achieve this objective is through careful and reasoned decision making. Our fundamental assumption is that a process of rational decision making, a pro- cess that involves careful thought and deliberation, can and will result in behavior that is more reasonable, accountable, and ethical.

Perhaps this view is not surprising after all. Consider any course within a busi- ness school curriculum. Few would dispute that a management course aims to create better managers. We would judge as a failure any finance or accounting

12 Chapter 1 Ethics ami Business

course that denied a connection between the course material and financial or accounting practice. Every course in a business school assumes a connection between what is taught in the classroom and appropriate business behavior. Classes in management, accounting, finance, and marketing all aim to influence students' behavior. We assume that the knowledge and reasoning skills learned in the classroom will lead to better decision making and, therefore, better behavior within a business context. A business ethics class follows this same approach.

While few teachers think that it is our role to tell students the right answers and to proclaim what students ought to think and how they ought to live, still fewer think that there should be no connection between biowledge and behavior. Our role should not be to preach ethical dogma to a passive audience, but instead to treat students as active learners and to engage them in an active process of think- ing, questioning, and deliberating. Taking Socrates as our model, philosophical ethics rejects the view that passive obedience to authority or the simple acceptance of customary norms is an adequate ethical perspective. Teaching ethics must, in this view, challenge students to think for themselves.

Business Ethics as Personal Integrity and Social Responsibility Another element of our environment that affects our ethical decision making and behavior involves the influence of social circumstances. An individual may have carefully thought through a situation and decided what is right, and then may be motivated to act accordingly. But the corporate or social context surrounding the individual may create serious barriers to such behavior. As individuals, we need to recognize that our social environment will greatly influence the range of options that are open to us and can significantly influence our behavior. People who are otherwise quite decent can, under the wrong circumstances, engage in unethical behavior while less ethically-motivated individuals can, in the right cir- cumstances, do the "right thing." Business leaders, therefore, have a responsibility for the business environment that they create; we shall later refer to this environ- ment as the "corporate culture."The environment can, therefore, strongly encour- age or discourage ethical behavior. Ethical business leadership is precisely this skill: to create the circumstances within which good people are able to do good, and bad people are prevented from doing bad.

The Enron case provides an example. Sherron Watkins, an Enron vice presi- dent, seemed to understand fully the corruption and deception that was occur- ring within the company; and she took some small steps to address the problems within the Enron environment. But when it became clear that her boss might use her concerns against her, she backed ofl̂ . The same circumstances were involved in connection with some of the Arthur Andersen auditors. When some individuals raised concerns about Enron's accounting practices, their supervisors pointed out that the $100 million annual revenues generated by the Enron account provided good reason to back off". The "Sherron Watkins" Decision Point exemplifies the cultiu-e present at Enron during the heat of its downfall.

(concluded) • What facts would you want to know before making a judgment about Watkins? • What ethical issues does this situation raise? • Besides Kenneth Lay, who else might have had an interest in hearing from

Watkins? Who else might have had a right to be informed? Did Watkins have a responsibility to anyone other than Lay?

• Other than her informing Lay, what other alternatives might have been open to Watkins?

• What might the consequences of each of these alternatives have been? • From this section of the memo, how would you characterize Watkins'

motivation? What factors seem to have motivated her to act? • If you were Ken Lay and had received the memo, what options for next steps

might you have perceived? Why might you have chosen one option over another?

• Do you think Watkins should have taken her concerns beyond Kenneth Lay to outside legal authorities?

At its most basic level, ethics is concerned with how we act and how we live our lives. Ethics involves what is perhaps the most monumental question any

OBJECTIVE human being can ask: How should we live? Ethics is, in this sense, practical, having to do with how we act, choose, behave, and do things. Philosophers often emphasize that ethics is normative, which means that it deals with our reasoning about how we should act. Social sciences, such as psychology and sociology, also examine human decision making and actions; but these sciences are descriptive rather than normative. When we say that they are descriptive, we refer to the fact that they provide an account of how and why people do act the way they do—they describe; as a normative discipline, ethics seeks an account of how and why people should act a certain way, rather than how they do act.

How should we live? This fundamental question of ethics can be interpreted in two ways. "We" can mean each one of us individually, or it might mean all of us collectively. In the first sense, this is a question about how I should live my life, how I should act, what I should do, and what kind of person I should be. This meaning of ethics is based on our value structures, defined by our moral systems; and, therefore, it is sometimes referred to as morality. It is the aspect of ethics that we refer to by the phrase "personal integrity." There will be many times within a business setting where an individual will need to step back and ask: What should I do? How should I act? If morals refer to the underlying values on which our decisions are based, ethics refers to the applications of those morals to the decisions themselves. So, an individual could have a moral value of hon- esty, which, when applied to her or his decisions, results in a refusal to lie on an expense report. We shall return to this distinction in just a moment.

In the second sense, "How should we live?" refers to how we live together in a community. This is a question about how a society and social institutions, such

14

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Imagine that you are examining this chapter's opening scenario in one of your classes on Organizational Behavior or Managerial Finance. What advice would you offer to Sodexo? What judgment would you make about this case from a financial perspective? After offering your analysis and recommendations, reflect on your own thinking and describe what values undedie those recommendations. • What facts would help you make your decision? • Does the scenario raise values that are particular to managers? • What stakeholders should be involved in your advice? • What values do you rely on in offering your advice?

as corporations, ought to be strucn.ired and about how we ought to live together. This area is sometimes referred to as social ethics and it raises questions of justice, public policy, law, civic virtues, organizational stiucture, and political phi- losophy. In this sense, business ethics is concerned with how business institutions ought to be structiu^ed, about whether they have a responsibility to the greater society (corporate social responsibility or CSR), and about making decisions that will impact many people other than the individual decision maker This aspect of business ethics asks us to examine business institutions from a social rather than fi-om an individual perspective. We refer to this broader social aspect of ethics as decision making for social responsibility.

In essence, managerial decision making will always involve both of these aspects of ethics. Each decision that a business manager makes involves not only a personal decision, but also a decision on behalf of, and in the name of, an organization that exists within a particular social, legal, and political environ- ment. Thus, our book's tide makes reference to both aspects of business ethics. Within a business setting, individuals will constantly be asked to make decisions affecting both their own personal integrity and their social responsibilities.

Expressed in terms of how we should live, the major reason to study ethics becomes clear. Whether we explicitly examine these questions, each and every one of us ansM'ers them every day through our behaviors in the course of living our lives. Whatever decisions business managers make, they will have taken a stand on ethical issues, at least implicitly. The actions each one of us takes and the lives we lead give very practical and unavoidable answers to fundamental ethical questions. We therefore make a very real choice as to whether we answer them deliberately or unconsciously. Philosophical ethics merely asks us to step back from these implicit everyday decisions to examine and evaluate them. Thus, Socrates gave the philosophical answer to why you should study ethics more than 2,000 years ago: "The unexamined life is not worth living."

To distinguish ethics from other practical decisions faced within business, consider two approaches to the Enbridge oil spill scenario in the Decision Point, "Ethics After an Oil Spill." This case could just as well be examined in a

15

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(continued)

What facts would be helpful to you, as an outsider, in evaluating the company's behavior after the spill? What values are involved in this situation? How would Enbridge answer that question, internally? How would the people of Wrigley answer that question, if asked?

• Did Enbridge have obligations that went beyond cleaning up the area directly affected by the spill from the company's pipeline? Was it obligated to offer the $5,000? Consider the suggestion made by a member of the community, that Enbridge should donate money to build a swimming pool or hockey arena for local kids. Would a donation of this kind help to satisfy the company's obliga- tions to the community?

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management, human resources, or organizational behavior class as in an ethics class. The more social-scientific approach common in management or business administration classes would examine the situation and the decision by explor- ing the factors that led to one decision rather than another or by asking why the manager acted in the way that he did.

A second approach to Enbridge, from the perspective of ethics, steps back from the facts of the situation to ask what should the manager do, what lights and fesponsihilities are involved? What good will come from this situation? Is Enbridge being fait; just, virtuous, kind, loyal, trustworthy? This normative approach to business is at the center of business ethics. Ethical decision making involves the basic categories, concepts, and language of ethics: shoulds, oughts, rights and responsibilities, goodness, fairness, justice, virtue, kindness, loyalty, trustworthiness, and honesty.

To say that ethics is a normative discipline is to say that it deals with norms: those standards of appropriate and proper (or "normal") behavior. Norms estab- lish the guidelines or standards for determining what we should do, how we should act, what type of person we should be. Another way of expressing this point is to say that norms appeal to certain values that would be promoted or attained by acting in a certain way. Normative disciplines presuppose some underlying values.

To say that ethics is a normative discipline is not to say that all normative dis- ciplines involve the study or discipline of ethics. After all, business management

OBJECTIVE and business administration are also normative, are they not? Are there not norms for business managers that presuppose a set of business values? One could add accounting and auditing to this list, as well as economics, finance, politics, and the law. Each of these disciplines appeals to a set of values to establish the norms of appropriate behavior within each field.

These examples suggest that there are many different types of norms and values. Returning to our distinction between values and ethics, we can think of values as the underlying beliefs that cause us to act or to decide one way rather than another Thus, the value that I place on an education leads me to make the

17

1 8 Chapter 1 Ethics and Business

decision to shady rather than play video games. I believe that education is more Etllics worthy, or valuable, than playing games. 1 make the decision to spend my money : on groceries rather than on a vacation because 1 value food more than relaxation. A company's core values, for example, are those beliefs and principles that provide the ultimate guide to its decision making.

Understood in this way, many different types of values can be recognized: financial, religious, legal, historical, nutritional, political, scientific, and aesthetic. 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 corporation has a set of identifiable values that establish the expectations for what is "normal" within that firm. These norms guide employees, implicitly more often than not, to behave in ways that the firm values and finds worthy. One important implication of this guidance, of course, is that an individual's or a corporation's set of values may lead to either ethiccd or unethiccd results. The corporate culture at Enron, for example, seems to have been committed to pushing the envelope of legality as far as possible in order to get away with as much as possible in puisuit of as much money as possible. Values? Yes. Ethical values? No.

One way to distinguish these various types of values is in terms of the ends they serve. Financial values serve monetary ends; religious values serve spiritual ends; aesthetic values serve the end of beauty; legal values serve law, order, and justice, and so forth. Different types of values are distinguished by the various ends served by those acts and choices. How are ethical values to be distinguished ; from these other types of values? What ends do ethics serve?

Values, in general, were earlier described as those beliefs that incline us to act or choose in one way rather than another Consider again the harms attributed to the ethical failures of Bernie Madoff~and those who abetted his fraudulent activ- ity. Thousands of iimocent people were hurt by the decisions made by some indi- viduals seeking their own financial and egotistical aggrandizement. This example i reveals two important elements of ethical values. First, ethical values serve the ends of human well-being. Acts and decisions that seek to promote human wel- fare are acts and decisions based on ethical values. Controversy may arise when we try to define human well-being, but we can start with some general obser- vations. Happiness certainly is a part of it, as are respect, dignity, integrity, and meaning. Freedom and autonomy surely seem to be necessary elements of human well-being, as are companionship and health.

Second, the well-being promoted by ethical values is not a personal and self- ish well-being. After all, the Enron and Madoff scandals 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 welfare is 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 impartially promote human well-being. i

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