Business Project

Chapters 5 & 6 – Ethics and Ethical Reasoning Businesses are not perceived by the public has having a good track record in the area of business ethics. Every industry and every business discipline seems to be plagued with wrong ethical decisions that have made the news headlines. In Chapters 4 and 5, we discuss business ethics with the goal of giving our students the background necessary to make good ethical business decisions in the future. In these Chapter lecture notes, we will cover the following topics:

What is ethics? Why study ethics? Why do ethical problems occur in business? An example of an ethical business decision Ethical philosophy Ethical reasoning Applications of ethical reasoning Building ethical guidelines into an organization Litmus tests of ethical conduct Additional readings on ethical theories

WHAT IS ETHICS Ethics is the study of rightness and wrongness in human actions and the goodness and badness of motives and ends. A Principle is a fundamental law or doctrine, a guiding sense of the requirements and obligations of right conduct. Ethical principles are guides to good and right behavior. In the United States, ethics is not typically taught in schools. It is usually acquired by individuals from dealings with family, friends, church, role models, groups, and so on. There is no one ethic in the United States. This does complicate the matter of ethics

and ethical behavior in business practices. Everyone has a different idea what is ethical, and everyone has a different background with different experiences that have influenced these ideas. To me, ethics is right and good behavior that is beyond the law. In the United States, federal, state and local communities enact many laws that apply to businesses. Companies are expected to abide by the laws of the communities they serve. Abiding by laws, though ethical, is not what this course is all about when discussing ethics. This course discusses ethical issues and situations that are not covered by current laws but are times when businesses need to make decisions where present legal requirements do not really apply. Business ethics, then, is the application of general guidelines for good and right behavior (that is beyond just obeying the law). WHY STUDY ETHICS Before we actually study ethics, we need to answer the question why should businesses be ethical? There are many reasons why businesses should be ethical.

1) The first one is why not be ethical? Why not study ethics? Is it automatically true that unethical companies make more profits than ethical ones? It is somewhat bizarre to me that many people assume that unethical behavior is the more profitable (over ethical behavior). 2) Ethical behavior enhances trust in employees, shareholders, the public, etc., all of the organization’s stakeholders. Trust is an important commodity that makes business dealings so much easier. 3) If an employee is caught and convicted of doing something criminally illegal, a strong ethics code of conduct in the organization may reduce the jail time imposed on the employee(s). Also, if a firm is caught doing something illegal and needs to pay monetary fines, sincere effort in ethical behavior may help reduce the dollar amount of the fines. 4) Ethical or right behavior minimizes harm to others. I do not think any company wants to cause the death of any of its stakeholders. 5) The added goodwill and more positive corporate image resulting from being known as an ethical company may help the company sell more of its goods and services. It may also give the company an advantage when hiring highly qualified people who are looking for ethical firms to work for.

EVERY BUSINESS DISCIPLINE HAS ETHICAL ISSUES Unfortunately, every business discipline has its share of ethical problems. Accounting has been in the headlines a lot with the scandals of Enron, WorldCom, Arthur Anderson, etc. The financial discipline has also seen its share of headlines with insider trading, mutual fund late trading, stock exchange improper floor trading, etc. Bernie Madoff is one such person in the financial world who has been at the heart of a major financial scandal. Marketing always gets headlines such as pharmaceutical companies offering doctors gifts worth thousands of dollars so that these same doctors will prescribe their medicines for conditions not approved by the FDA. I could go on. But, I think you get the point. There are a lot of ethical issues out there in the real world, and it involves every industry and every discipline. WHY ETHICAL PROBLEMS OCCUR IN BUSINESS Business people are people who operate under the same self-interest model we have been discussing since Chapter 1 of this course. The conflict comes when the self- interest of the employee and the interest of the company may not be the same. And when this interest diverges at the time ethical decisions need to be made, problems can result. Two problem situations can occur here when interests diverge. The individual employee believes that personal gain is more important than corporate guidelines and promotes what will impact positively on his or her position even if it is a possible detriment to the company. But, the reverse can also happen, where companies ask ethical individuals to do something wrong (for the ‘good’ of the company or group). Competitive pressure is often cited as a reason for doing something that is ethically questionable. We need to do it because everyone else is doing it. If we do not do what the rest of the industry is doing, our stock price will go down or, even worse, the company will go bankrupt. Short-term thinking is used with the belief that today is so much more important than tomorrow. We must make our quotas today. We cannot show a decrease in profits this quarter. The United States has been criticized by many countries for our obsession with small deviations in quarterly profits. Thus, when the company tries to smooth out earnings over several quarters, the Securities and Exchange Commission says that these companies are cooking the books. Ethical issues can result from conducting business globally. Some practices that are allowed in one country are not looked on favorable in the U.S. and vice versa. For example, Nike has been accused of out sourcing the manufacturing of their shoes to companies in foreign countries that use sweat-shop labor. Or, U.S. companies aggressively advertise cigarettes to people in other nations of the world when similar practices may not be allowed in the Unites States.

Financial rewards may be based on unethical practices. For example, managers and professionals may be paid more by showing a bottom line that is more attractive to stockholders even though the real financial health of the business is not being represented. Lack of knowledge can cause the wrong decision to be made. At times ethical issues may not appear to be as important as other company issues. Often, little time is put into studying the problem and developing the knowledge needed to make an informed, ethical decision. Example of an ethical business decision: The economy is down and so are profits. You believe that the economy will turn around in the next six months, but you think your stockholders are not willing to wait that long for company profits to turnaround. Do you lay off some of your workforce, now, to lower costs and increase the quarterly profits you report to your shareholders? Or, do you keep your workforce whole, at this time, with no lay offs, because you believe that the economy will pick up soon so that your entire workforce will be busily employed with company work in the near future? A personal example: I think everyone can agree that ExxonMobile (previously named Standard Oil Company, Esso and Exxon) has been a very stable, profitable company for over 145 years (Standard Oil Co. founded in 1870). When I first started working for ExxonMobil, it was known as a cradle-to-grave company. The story told to employees was that, even during the depression of the 1930s, hardworking and loyal employees were not laid off by the company, if at all possible. Employees were viewed as a major asset (a priority) and were kept on, if possible, even during hard times. Quarterly profits went up and down, but employees were not laid off to even out earnings reports. By the time I left ExxonMobil 16 years later, the corporation had completed at least three rounds of lay offs (with some areas of the company workforce reduced as much as 30- 50%). The management and philosophy of the company had changed. In today’s business environment, when times get even slightly rough, it seems to me that employees are the first to go in companies, not the last resort when all other attempts to increase revenue and/or lower costs have failed. Given ExxonMobil’s track record of profits for the past 145 years, I am not sure that the current trend of U.S. corporations laying off hardworking, loyal workers as frequently as they do is the right, ethical thing to do. Remember (as discussed in earlier lecture notes for this class), part of what society is looking for in the corporate form of business is to provide stable jobs for the workforce. What do you think of the current trend of corporate cost cutting to ensure a favorable short-term profit picture?

ETHICAL THEORIES AND REASONING It is a fact that business, at times, is judged by the general standards of society. Since Michael Milken’s (Wharton MBA) brush with the law, people have been very critical about what students are being taught in MBA programs. This criticism has been reinforced with other business scandals such as Enron (e.g. Jeffrey Skilling, Harvard MBA). Though our MBA program includes business ethics topics in many of our courses, we devote significant time in Bus6351 to cover this topic. Everyone seems to have different ideas concerning what is ethical. In this course, our goal is not to push some specific ideas as being more ethical than others. Rather, our goal is to stress material concerning ethical reasoning and the process of making ethical business decisions so that our students are able and willing to make ethical decisions in real life business situations. ETHICAL PHILOSOPHY Over at least the last 3000 years, thoughts and opinions about ethics and ethical reasoning have existed. Ethical reasoning is a process to decide what ‘ought’ or ‘should’ be done. Modern study of ethics typically begins with the Greek philosophers such as Socrates, Plato and Aristotle. An example of an ethical philosophy of that time is the Hippocratic Oath and other writings of Hippocrates (460-377 BC). Probably one of the most famous of Hippocrates’ ethical doctrines is “First, do no harm.” Many religious books and creeds written in the past 3000 years include thoughts on ethics and ethical reasoning. The Golden Rule of “Do unto others as you would have them do unto you” is an example of ethical reasoning. Another example is the Noble Eightfold Path of Buddhism. Religious teachings from all over the globe emphasize virtues and the virtuous life with the idea that virtuous individuals make ethical decisions. Immanuel Kant (1724-1804 AD) used logic to find what he believed are universal, rational and objective ethical principles. He reasoned that there are categorical imperatives and people should live by these imperatives. Kant’s ‘Categorical Imperative I’ states that one should “Act as if the maxim of your action were to become through your will a general natural law.” Kant’s ‘Categorical Imperative II’ states that individuals should “Act in such a way that you always treat humanity… never simply as a means, but always at the same time as an end.” For Kant, an ethical decision is a two-step process: 1) determine whether the principle to be acted on can be made universal; and 2) determine if the action treats individuals involved as ends in themselves, not merely as means. The action must pass both steps to be ethical. Niccolo Machiavelli (1469-1527) basically argued that the end justifies the

means, which is contrary to Kant’s second imperative that the means (process used to obtain an end result) may be as important as the end result. Jeremy Bentham (1748-1832) developed the concept of utilitarianism and this concept was further defined by John Stuart Mill (1806-1873). This doctrine concentrates on the idea that the better ethical choice is the one that delivers the greater good for the greater number of people. John Locke (1632-1704) concentrated on what he believed are the inalienable rights of individuals. See the end of these lecture notes for more readings on Utilitarianism, Kant and rights. ETHICAL REASONING Ethical reasoning can be broken down into a number of approaches. In these notes, we cover three ethical reasoning approaches identified in the text as follows: 1) principles including utilitarian reasoning; 2) human rights; and 3) justice and fairness. Principles A Principle is a fundamental law or doctrine, a guiding sense of the requirements and obligations of right conduct. Ethical principles are guides to good and right behavior. The Hippocratic Oath doctrine of “First, do no harm” can be considered a principle and so can the Golden Rule be considered a principle. There are examples of CEOs standing for principles they feel are important. J. C. Penney opened up his stores in manufacturing towns of the United States to be an alternative source of goods in the ‘company’ town. His goods were usually less expensive than those sold in the ‘company’ store. He was very aware of the average worker’s need for quality goods at a reasonable price. In the 1960s, when credit cards were first introduced, Mr. Penney did not allow the company to accept them since he believed that the use of credit cards would increase the cost of goods sold and, possibly, cause people to buy more than they could afford at that moment. He did not want people to go into debt when purchasing products, even if his company made a profit from the transaction. His guiding principles were to help consumers acquire goods without causing consumers harm by giving those consumers an opportunity to financially over-extent themselves. Eventually, the company board overruled Mr. Penney’s position and introduced credit cards to Penney’s stores. I wonder how many J.C. Penney-type companies there are in today’s business environment, where the world is awash with financial crises at the national, state and household level. ExxonMobil’s not laying-off workers in the depression years, if at all possible, was a guiding principle embraced by many company CEO’s. The principle of helping good, hardworking employees allowed a lot of families to make it through a rough time in U.S.

history. It obviously did not hurt ExxonMobil, since the company continues to report profits yearly. Today, it seems that companies, when trying to reduce costs, lay off workers first. Is there some logic here that I am missing with today’s first rule of cost cutting is reducing the workforce? Some Whistle-blowers use principles to guide their actions. One example is reporting on how pharmaceutical companies actually market to doctors. Utilitarian Reasoning (a specific principle) One specific principle often used is called Utilitarian Theory. The basic maxim of this theory is to deliver the ‘greater good for the greater number of people.’ This really sounds good. How can this fail as an ethical principle? This sounds like an unbeatable principle. However, it is in the details that this principle may not do it all. Utilitarian theory reasons that one adds up all the pluses and minuses, good and bad, positive and negatives, and picks the alternative that has the most pluses and positives and does the most good. Examples of Utilitarian thinking are:

1) Cost/benefit analysis 2) Environmental impact study 3) Majority rules

To make decisions using Utilitarian Theory, we need to:

1) List all alternatives. 2) List all the consequences to each alternative. 3) List all people affected by each alternative. 4) List criteria by which alternatives and consequences will be assessed (what is good and what is bad). 5) List how each criterion will affect (good or bad) each group of individuals. 6) Rate or rank criteria in order of importance or priority (what is most good, second most good, worst, etc). 7) Calculate each alternative in terms of total goodness and badness and by total of people affected.

8) Find alternative that delivers the greatest good to the greatest number of people affected by decision.

As one can see, the above steps to find the alternative that delivers the greatest good to the greatest number is not an easy task. As we attempt to measure each alternative, we find that there are many problems with the approach including:

1) We try to be as objective as possible when we attempt to evaluate the consequences. However, this may lead to a preference (or bias) toward quantifiable information beyond what is best. This quantifiable bias may lead decision makers to look at problems in a particular way to the exclusion of other possible and equally attractive alternatives. For example, when hiring MBA’s, companies may be more impressed with grade-point average or GMAT scores rather than by equally important but difficult to measure characteristics such as interpersonal skills or loyalty. 2) Since human minds are not infinite in ability, can we actually think up all the alternatives and consequences of our actions and properly place a worth on these alternatives and consequences? In the United States, companies are known to be very short-sighted in their analysis because of the emphasis on quarterly earnings. 3) The principle may actually promote the manipulation of ratings, rankings and priorities placed on criteria. Leaders may have a ‘gut feel’ what the result should be and the analysis is manipulate to give the desired result. This happens, for example, when communities develop environmental impact statements about developments they are already predisposed to want or not want. 4) The Utilitarian principle does not typically recognize the satiation point in humans (a point where more is not necessarily always better). Greed and gluttony can appear to bring more happiness than a life of moderation and self- restraint. Given the more is better philosophy, for example, people eating two hamburgers in a meal is better than one, eating three hamburgers is better than two, eating four is better than three, and so on. But, is it really good for anyone to eat four hamburgers at one meal and is four hamburgers at one time really four times the benefit of eating one hamburger? 5) There is no means to break a tie. Great injustices can result in the distribution of goods. For example, the maximum production of good might be achieved by awarding all or most to one group of people and none or very little to other groups. There is no guiding principle as to how to break ties in this analysis. 6) It is often difficult to convince others that the completed analysis is the best one. Since there are multiple alternatives, multiple consequences and multiple people affected, how do we know that the final analysis is actually the best one

available? In real life, time constraints typically end analyses and force decisions, perhaps before the analysis is fully completed.

In reality, I am not sure businesses often make decisions using utilitarian theory of the greatest good to the greatest amount of people. I am not sure it is even a typical goal of many businesses. Actually, businesses, as we have discussed previously, typically have the goal of maximizing shareholder wealth, which may be in direct conflict with utilitarian reasoning. In most cases, I believe that utilitarian reasoning favors maximizing the benefit considering all stakeholders. Human Rights A right is an entitlement. Human rights means that human beings are entitled to something. What these entitlements are vary from country to country. Certainly in the U.S., society recognizes that human beings are entitled to life, liberty and the pursuit of happiness (the Declaration of Independence, 1776). Other rights that have evolved are stated in the Bill of Rights of the U.S. Constitution (the first 10 amendments to the U.S. Constitution) such as freedom of speech, a speedy trial, due process, and so on. As an example of human rights translated into business ethics, in about 1961, President John Kennedy (JFK) delivered a speech where he summarized what he thought were basic Consumer Rights. These Consumer Rights include the right of safety, right of information, right of choice, and right to be heard (more information on this subject is covered in Chapter 15 of this course). Here consumer is defined as the buyer for the household. There are more than 325 million people in the US and about 115 million households in the United States. Basic survival instincts are behind consumers demanding safe goods and services. Information, or the lack there of, can also be a survival issue. Certainly, people who have severe allergic reactions to certain foods need reliable information to avoid these foods or suffer the consequences. The right to be heard (or ability to sue) is directly from the Bill of Rights (the first ten amendments of the US Constitution). And, choice is the need to be free to choose in an economic exchange (not forced), which can be a business application to the thoughts behind the Declaration of Independence’s right to liberty. Since JFK, as a nation, we have begun looking into what may constitute the rights of patients in health care matters (Patients’ Bill of Rights). Here congress and the country continue to debate what rights patients have concerning medical safety, information, choice and court action. http://www.forbes.com/sites/amino/2016/03/21/heres- everything-you-need-to-know-about-the-patients-bill-of-rights/#22f207867a3e There have also been discussions on a Stockholders’ Bill of Rights.

Many federal, state and local laws have been enacted to foster consumer rights. Often, these laws have come about, unfortunately, when it has been shown that businesses, left to their own devices, may not have provided consumers all that consumers wanted in the areas of safety, information, choice and ability to be heard. Justice and Fairness Human beings are constantly asking whether a situation is fair or just. But, what is fairness? What is justice? John Rawls has an interesting way of determining what is fair and just. His theory of Distributive Justice is not so much a doctrine of what is fair and just, but how to go about finding out what is fair and just. He proposes that all ethical decisions should be made with decision makers in ‘the original position.’ For him, this original position is where people are behind a ‘Veil of Ignorance.’ In this original position behind the ‘Veil of ignorance’, decision makers do not know their gender, race, social class, wealth, age, physical appearance, physical handicaps, parents, country of birth, socio-economic class, etc. In other words, behind the ‘Veil of Ignorance’ one does not know any particulars about oneself. Rawls argues that only in this position can a person make ethical and fair decisions. Here are a couple of examples of Rawls process of deciding what is fair and just. If a person does not know what position he or she holds in life, because of self-interest, that person would not deny the handicap access to buildings or schools. A person behind the ‘Veil of Ignorance’ would not choose discriminatory actions of any kind since the person making the decisions does not know what group he or she belongs to in society. Such a person would not squander precious resources since the person does not know what generation he or she belongs to. In other words, people need to be in a neutral position to make fair and just decisions about others. APPLYING ETHICAL REASONING The authors of the text believe (Figure 4.6) that ethical reasoning should include a review of virtues, principles (utility), rights, and justice. If all four approaches (virtues, principle of utility, rights and justice) lead to the same decision, then the decision is probably ethical. If the approaches lead to different conclusions, then managers need to prioritize the approaches and answers to come to a final conclusion. Note that this conclusion may appear unethical to some stakeholders. If different ethical approaches lead to different conclusions, an ethical dilemma may result. An ethical dilemma is one where the choices are equally unsatisfactory. Sometimes, businesses need to make decisions even when the alternatives are not

satisfactory. In these situations, decisions are made by prioritizing the issues and breaking the tie between the unsatisfactory choices. REFINING ETHICAL DECISIONS Okay, so a company cannot be perfect all the time. What happens when a company’s ethical decisions are questioned? What does a company do? Obtaining information and communicating with stakeholders is an important part of relooking at decisions to determine their effectiveness. This relook should include the following steps:

1) Define the disagreement. 2) Engage in dialogue with stakeholders. 3) Develop good reasons for and against decision. 4) Value differences of the stakeholders. 5) Uncover assumptions of both the company’s position and the stakeholders’ position. 6) Evaluate alternative views. 7) Modify decision if needed.

Also, when discussing ethical issues with stakeholders, a manager should:

1) Be empathetic – Put oneself in the others’ shoes. 2) Show respect – Respecting others is a must in effective human relations and negotiation. 3) Be non-judgmental – Try to understand their point of view even though you may decide against it. 4) Be realistic – The company’s decisions may not really work and need to be changed.

BUILDING ETHICAL GUIDELINES INTO A COMPANY Codes of Conduct are a great way for a company to convey its principles to its stakeholders. It is also a roadmap for employee conduct. In addition, many companies have procedures including mechanisms such as hotlines for reporting ethical and other employee issues and concerns. Ethical training is a must in many organizations. Some firms have appointed ethical officers or ombudspersons to coordinate issues dealing with ethics. The passage laws such as the Sarbanes-Oxley Act may prompt companies to consider developing a comprehensive ethics program. GOING GLOBAL Tackling ethical issues internationally adds another layer of difficulty. Each country has its own value system. Values are emotionally charged priorities of what is worthwhile or desirable. As businesses use the Utilitarian approach to ethical decision making, prioritizing issues is often necessary. Internationally, these priorities may change from country to country. Therefore, understanding what people value in each country a company enters is very important. Though a company can have an international Code of Conduct, organizations need to know the priority people in each country place on the issues included in the Code of Conduct. Cultural risk for the organization, then, is the amount of potential problems that may result from intercultural interactions and differences. In addition, each industry in a country may have its own cultural values. A common practice or priority in one industry may not be the same in another. For example, labor issues may be much more of a priority in heavily unionized industries in the United States rather than in industries that have mostly open-shop labor. LITMUS TESTS FOR ETHICAL CONDUCT In their article (‘Doing the right thing: business ethics and board of directors,’ Director’s Monthly, 1994, Vol. 18, No. 11, p.3), Driscoll and Hoffman summarize what they believe are litmus tests to determine whether conduct is likely ethical.

The Skunk Test – Does the conduct smell bad? Is it questionable behavior? The Child Test – Would I advise my own child (friend, colleague, etc.) to do this? The Newspaper Test – Would I like my board of directors (parents, friends, constituents, etc.) to read about this?

For additional readings concerning material and concepts in Chapters 4 and 5, see the following: (Please note, for the exam, students should know the names of the following philosophers and their major contribution to ethics, which can be found in these lecture notes and the assigned textbook readings. Students are not expected to know the details included in the following links for the exam.) Jeremy Bentham and John Stuart Mill – https://en.wikipedia.org/wiki/Utilitarianism Immanuel Kant - http://en.wikipedia.org/wiki/Categorical_imperative John Locke - http://odur.let.rug.nl/~usa/B/locke/locke.htm John Rawls - http://www.wku.edu/~jan.garrett/ethics/johnrawl.htm Again, please note that I checked the WWW links (URL addresses) included in this course’s lecture notes at the beginning of this semester to determine if they are active. If you find a WWW link in this course that does not work, please email me and I will correct the situation. Thank you, Linda Hayes What do you think? Are the following ethical? Why or why not? 1) Sending unsolicited credit cards in the mail to people with poor credit. 2) Genetically altering food and not placing this fact on the product label. 3) Advertising to youngsters. 4) Over-stating food costs on a business expense account. 5) Downloading music on the Internet without paying a fee. 6) Telling a small untruth in a job interview. Copyright © 2017 by Linda A. Hayes, Ph.D. All rights reserved. Portions of these notes are based on ‘Business and Society: Stakeholders, Ethics, Public Policy,’ Lawrence and Weber, 14th, McGraw-Hill, New York: 2014.