1 page single space. Business Ethics
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Business Ethics Decision Making for Personal Integrity and Social Responsibility
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Business Ethics Decision Making for Personal Integrity and Social Responsibility
Fourth Edition
Laura P. Hartman Boston University
Joe DesJardins College of St. Benedict/ St. John’s University
Chris MacDonald Ryerson University
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BUSINESS ETHICS: DECISION MAKING FOR PERSONAL INTEGRITY AND SOCIAL RESPONSIBILITY, FOURTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014, 2011, and 2008. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the United States.
This book is printed on acid-free paper.
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To Rachel and Emma. —Laura Hartman
To Michael and Matthew. —Joe DesJardins
To Georgia. —Chris MacDonald
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About the Authors Laura P. Hartman Boston University Laura Pincus Hartman is director of the Susilo Institute for Ethics in the Global Economy and clinical professor of business ethics in the department of Organizational Behavior at Boston University. For the past 25 years, Hartman was honored to serve in roles at DePaul University, including associate vice president, Vincent de Paul Professor of Business Ethics at DePaul University’s Driehaus College of Business, and director of its Institute for Business and Professional Ethics. She has been an invited professor at INSEAD (France), HEC (France), and the Université Paul Cezanne Aix Marseille III, among other European universities, and she previously held the Grainger Chair in Business Ethics at the University of Wisconsin–Madison. Hartman cofounded and currently serves as executive director of a trailblazing trilingual elementary school in Haiti, the School of Choice/l’Ecole de Choix. She also cofounded an online micro- development, finance, and education system for people living in poverty in Haiti, called Zafèn. Previously, Hartman served as director of external partnerships for Zynga.org, the charitable arm of social game developer Zynga. Her other books include Rising above Sweatshops: Innovative Management Approaches to Global Labor Challenges, Employment Law for Business, Perspectives in Business Ethics, and The Legal Environment of Business: Ethical and Public Policy Contexts. Hartman graduated from Tufts University and received her law degree from the University of Chicago Law School.
Joe DesJardins College of St. Benedict/St. John’s University Joe DesJardins holds the Ralph Gross Chair in Business and the Liberal Arts and is professor of philosophy at the College of St. Benedict and St. John’s University in Minnesota. His other books include: An Introduction to Business Ethics, Environmental Ethics: An Introduction to Environmental Philosophy, Environmental Ethics: Concepts, Policy & Theory, Contemporary Issues in Business Ethics (coeditor with John McCall), and Business, Ethics, and the Environment: Imagining a Sustainable Future. He has served as president and executive director of the Society for Business Ethics, and has published and lec- tured extensively in the areas of business ethics, environmental ethics, and sus- tainability. He received his BA from Southern Connecticut State University, and his MA and PhD from the University of Notre Dame.
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Chris MacDonald Ryerson University Chris MacDonald is an associate professor and director of the Ted Rogers Leadership Centre at Ryerson University’s Ted Rogers School of Management in Toronto, Canada, and a senior nonresident fellow at Duke University’s Kenan Institute for Ethics. His peer-reviewed publications range across business ethics, professional ethics, bioethics, the ethics of technology, and moral philosophy, and he is coauthor of a best-selling textbook called The Power of Critical Thinking (4th Canadian Edition, 2016). He is cofounder and coeditor of both the Business Ethics Journal Review and the news and commentary aggregator site Business Ethics Highlights. He is perhaps best known for his highly respected blog, The Business Ethics Blog, which is carried by Canadian Business magazine.
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Preface We began writing the first edition of this textbook in 2006, soon after a wave of major corporate scandals had shaken the financial world. Headlines made the com- panies involved in these ethical scandals household names: Enron, WorldCom, Tyco, Adelphia, HealthSouth, Global Crossing, Arthur Andersen, KPMG, J.P. Morgan, Merrill Lynch, Morgan Stanley, Citigroup, Salomon Smith Barney, and even the New York Stock Exchange itself. At the time, we suggested that, in light of such significant cases of financial fraud, mismanagement, criminality, and deceit, the relevance of business ethics could no longer be questioned.
Sadly, though we are now several editions into the publication, these very same issues are as much alive today as they were a decade ago—and decades prior to our original publication. While our second edition was preceded by the financial meltdown in 2008–2009 and the problems faced by such companies as AIG, Countrywide, Lehman Brothers, Merrill Lynch, and Bear Stearns, and of the financier Bernard Madoff, this current edition continues to witness financial and ethical malfeasance of historic proportions and the inability of market mecha- nisms, internal governance structures, or government regulation to prevent it.
But the story is not all bad news. While cases of fraud continue to make head- lines (think of the recent Volkswagen and Wells Fargo scandals), countless small and large firms provide examples of highly ethical—and profitable—business enterprises. The emergence of benefit corporations (see chapter 5 for examples) is only one instance of corporations dedicated to the common good. In this edition, we aim to tell the stories of both the good and the bad in business.
As we reflect on both the ethical corruption and the ethical success stories of the past decade, the importance of ethics is all too apparent. The questions today are less about whether ethics should be a part of business strategy and, by necessity, the business school curriculum, than about which values and principles should guide business decisions and how ethics should be integrated within busi- ness and business education.
This textbook provides a comprehensive, yet accessible introduction to the ethi- cal issues arising in business. Students who are unfamiliar with ethics will find that they are as unprepared for careers in business as students who are unfamiliar with accounting and finance. It is fair to say that students will not be fully prepared, even within traditional disciplines such as accounting, finance, human resource man- agement, marketing, and management, unless they are sufficiently knowledgeable about the ethical issues that arise specifically within and across those fields.
Whereas other solid introductory textbooks are available, several significant features make this book distinctive. We emphasize a decision-making approach to ethics, and we provide strong pedagogical support for both teachers and stu- dents throughout the entire book. In addition, we bring both of these strengths to the students through a pragmatic discussion of issues with which they are already often familiar, thus approaching them through subjects that have already gener- ated their interest.
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While our goal for the fourth edition remains the same as for the first—to pro- vide “a comprehensive yet accessible introduction to the ethical issues arising in business”—readers will notice a few changes. We have retained the same logical structure and chapter organization of previous editions since we have heard from many colleagues and reviewers that this structure works well for a semester-long course in business ethics. But every chapter has been revised to include new and updated material, cases, topics, and readings. Importantly, we continue to provide increased international perspectives, with particular references to Canadian and UK legislation and institutions.
Among the changes to this edition are the following:
New Opening Decision Points for many chapters, including new cases or in- depth discussions on:
▸ The Olympics ▸ Executive compensation versus employee pay (at Gravity Payments) ▸ Benefit corporations ▸ Digital marketing ▸ The business of food ▸ Volkswagen
New cases, Reality Checks, or Decision Points on such topics as:
▸ Stopping corruption ▸ Trust in CEOs ▸ Crony capitalism ▸ Fooling ourselves ▸ Stakeholder engagement at Johnson Matthey ▸ Recognizing the value of stakeholders’ trust (at Volkswagen) ▸ Raising the minimum wage ▸ Regulating car safety ▸ Alternative medicine ▸ Discussion whether all human rights should become legal rights ▸ What people will say about you when you retire ▸ Snapchat ▸ Profits ▸ Strict products liability and risk management ▸ GMO food labeling ▸ Sustainable business ▸ Triple bottom line ▸ Zappos’ Core Values ▸ General Motors ▸ Ethics training programs
New to the Fourth Edition
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▸ Global culture ▸ Culture integration ▸ Timely analyses of the current responses of multinationals to global labor
conditions ▸ Comparison of privacy rights in the United States and Europe
New readings on:
▸ How bad management leads to bad ethics ▸ A diverse perspective on culture ▸ A fresh perspective on Apple’s labor conditions in China ▸ An Asian perspective on sexual harassment ▸ Among others
In addition to this new content, we have updated previous material, including: ∙ Most cases throughout the text ∙ Statistics and global applications including the European Union’s Data
Privacy Accord and the Privacy Shield ∙ Discussion of culture, including national culture, Hofstede, Jim Collins’s
more recent work, and the Zappos’s management reconfiguration ∙ Analysis of the recent legal changes on workplace ethics, including the
legalization of marijuana in some states and the use by employers of social media investigations during recruitment and selection processes
As always, we reviewed and revised the entire text for accessibility, consistency, and clarity.
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A textbook should introduce students to the cutting edge of the scholarly research that is occurring within a field. As in any text that is based in part on the work of others, we are deeply indebted to the work of our colleagues who are doing this research. We are especially grateful to those scholars who graciously granted us personal permission to reprint their materials in this or previous editions:
Acknowledgments
Christine Bader Norm Bowie Michael Cranford Marc Gunther Carl Hausman Avner Levin Dennis Moberg
Richard Moberly Gael O’Brien Tara Radin Bob Tricker Theo Vermaelen Lindsey Wylie
Our book is a more effective tool for both students and faculty because of their generosity. In particular, thanks to Ryerson students Stefania Venneri, Tanya Walia, and Daniel Marotta for their useful suggestions, and to Katrina Myers at Boston University and Summer Brown at DePaul University for their excep- tional research and editing assistance. In addition, we wish to express our deepest gratitude to the reviewers and others whose efforts served to make this manuscript infinitely more effective:
Carolyn Ashe University of Houston Downtown
Rosemary Hartigan University of Maryland University College
Jonathan Krabill Columbus State Community College
Ingemar Patrick Linden New York University
Patrick Murphy University of Notre Dame
Cherie Ann Sherman Ramapo College of New Jersey
Our thanks also go out to the team at McGraw-Hill Education who helped this book come into existence:
Michael Ablassmeir Director
Laura Hurst Spell Senior Product Developer
Necco McKinley Senior Marketing Manager
Christine Vaughan Lead Content Project Manager
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Brief Contents Preface viii
1. Ethics and Business 1 2. Ethical Decision Making: Personal
and Professional Contexts 37 3. Philosophical Ethics and
Business 63 4. The Corporate Culture—Impact and
Implications 107 5. Corporate Social Responsibility 173 6. Ethical Decision Making: Employer
Responsibilities and Employee Rights 223
7. Ethical Decision Making: Technology and Privacy in the Workplace 301
8. Ethics and Marketing 375 9. Business and Environmental
Sustainability 435 10. Ethical Decision Making:
Corporate Governance, Accounting, and Finance 491
Glossary 539
Index 547
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2-2 How Bad Management Leads to Bad Ethics:
When Scandal Breaks, We Prefer Our Corporate
Villains Evil, but the Truth Is Usually More
Complicated 60
Chapter 3 Philosophical Ethics and Business 63 Opening Decision Point: Are CEOs Paid Too
Much, Compared to Their Employees? 64 Introduction: Ethical Frameworks—
Consequences, Principles, Character 65 Utilitarianism: Making Decisions Based on
Ethical Consequences 68 Utilitarianism and Business 70
Challenges to Utilitarian Ethics 74
An Ethics of Principles and Rights 75 Human Rights and Duties 79
Human Rights and Social Justice 80
Human Rights and Legal Rights 82
Challenges to an Ethics of Rights and Duties 83
Virtue Ethics: Making Decisions Based on Integrity and Character 85
A Decision-Making Model for Business Ethics Revisited 89
Readings 93 3-1 The U.N. Guiding Principles on Business and
Human Rights: Analysis and Implementation 93
3-2 The Caux Principles for Responsible
Business 100
3-3 It Seems Right in Theory but Does It Work in
Practice? 102
3-4 Business Decisions Should Not Violate the
Humanity of a Person 104
Chapter 4 The Corporate Culture—Impact and Implications 107 Opening Decision Point: Creating an Ethics
Program 108
About the Authors vi Preface viii
Chapter 1 Ethics and Business 1 Opening Decision Point: Zika Virus and
Olympic Sponsors 2 Introduction: Making the Case for Business
Ethics 3 Business Ethics as Ethical Decision Making 10 Business Ethics as Personal Integrity and Social
Responsibility 12 Ethics and the Law 17 Ethics as Practical Reason 22
Readings 27 1-1 Value Shift 27
1-2 The MBA Oath 32
1-3 The Oath Demands a Commitment to Bad
Corporate Governance 33
1-4 The MBA Oath Helps Remind Graduates of
Their Ethical Obligations 34
Chapter 2 Ethical Decision Making: Personal and Professional Contexts 37 Opening Decision Point: Found iPod: What
Would You Do? 38 Introduction 39 A Decision-Making Process for Ethics 39 When Ethical Decision Making Goes Wrong:
Why Do “Good” People Engage in “Bad” Acts? 49
Ethical Decision Making in Managerial Roles 53
Readings 57 2-1 When Good People Do Bad Things at Work: Rote
Behavior, Distractions, and Moral Exclusion
Stymie Ethical Behavior on the Job 57
Table of Contents
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Readings 201 5-1 BP and Corporate Social
Responsibility 201
5-2 Managing for Stakeholders 203
5-3 What’s Wrong—and What’s Right—with
Stakeholder Management 216
Chapter 6 Ethical Decision Making: Employer Responsibilities and Employee Rights 223 Opening Decision Point: American Apparel:
Image Consciousness? 224 Introduction 227 Ethical Issues in the Workplace: The Current
Environment 228 Defining the Parameters of the Employment
Relationship 229 Due Process and Just Cause 230
Downsizing 235
Health and Safety 239
Health and Safety as Acceptable Risk 239
Health and Safety as Market Controlled 242
Health and Safety as Government-Regulated
Ethics 245
Global Applications: The Global Workforce and Global Challenges 247 The Case of Child Labor 252
Rights and Responsibilities in Conflict: Discrimination, Diversity, and Affirmative Action 254 Discrimination 254
Diversity 258
Affirmative Action 262
Readings 278 6-1 Confessions of a Sweatshop Inspector 278
6-2 Polishing Apple: Fair Labor Association Gives
Foxconn and Apple Undue Credit for Labor
Rights Progress 283
6-3 What’s So Bad about Apple’s Factories? 293
6-4 A Tale of Two Agreements 294
6-5 Sexual Harassment: An Asian
Perspective 297
What Is Corporate Culture? 109 Culture and Ethics 115 Compliance and Value-Based Cultures 119 Ethical Leadership and Corporate Culture 121 Effective Leadership and Ethical, Effective
Leadership 126 Building a Values-Based Corporate Culture 127
Mission Statements, Credos, Codes of Conduct, and
Statements of Values 127
Developing the Mission and Code 129
Culture Integration: Ethics Hotlines,
Ombudspersons, and Reporting 131
Assessing and Monitoring the Corporate Culture:
Audits 135
Mandating and Enforcing Culture: The Federal Sentencing Guidelines for Organizations 136
Readings 150 4-1 When Ethical Issues Derive from Cultural
Thinking 150
4-2 Assessment and Plan for Organizational
Culture Change at NASA 153
4-3 Does the Company Get It?—20 Questions to
Ask Regarding Compliance, Ethics, and Risk
Management 155
4-4 Whistleblower Policies in United States
Corporate Codes of Ethics 164
4-5 Greg Smith, Goldman Sachs, and the
Importance of Corporate Culture 169
Chapter 5 Corporate Social Responsibility 173 Opening Decision Point: Benefit
Corporations 174 Introduction 176 Ethics and Social Responsibility 177 Economic Model of CSR 180 Stakeholder Model of CSR 185 Integrative Model of CSR 188
The Implications of Sustainability in the Integrative
Model of CSR 188
Exploring Enlightened Self-Interest: Does “Good Ethics” Mean “Good Business”? 190
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Responsibility for Products: Advertising and Sales 390
Ethical Issues in Advertising 391 Marketing Ethics and Consumer
Autonomy 395 Marketing to Vulnerable Populations 398 Supply Chain Responsibility 402
Readings 407 8-1 The Friendship of Buzz, Blog and Swag 407
8-2 First Analysis of Online Food Advertising
Targeting Children 415
8-3 Fortune at the Bottom of the Pyramid 418
8-4 POM Wonderful 432
Chapter 9 Business and Environmental Sustainability 435 Opening Decision Point: The Business of
Food 436 Introduction 438 Business Ethics and Environmental Values 441 Business’s Environmental Responsibility: The
Market Approach 444 Business’s Environmental Responsibility: The
Regulatory Approach 447 Business’s Environmental Responsibilities: The
Sustainability Approach 449 The “Business Case” for a Sustainable
Economy 453 Principles for a Sustainable Business 455 Sustainable Marketing 457
Product 457
Price 458
Promotion 461
Placement 461
Readings 467 9-1 The Next Industrial Revolution 467
9-2 Getting to the Bottom of “Triple Bottom
Line” 475
9-3 Beyond Corporate Responsibility: Social
Innovation and Sustainable Development as
Drivers of Business Growth 482
Chapter 7 Ethical Decision Making: Technology and Privacy in the Workplace 301 Opening Decision Point: Being Smart about
Smartphones 302 Introduction 303 The Right to Privacy 305
Defining Privacy 305
Ethical Sources of a Right to Privacy 306
Legal Sources of a Right to Privacy 309
Global Applications 311
Linking the Value of Privacy to the Ethical Implications of Technology 315 Information and Privacy 316
Managing Employees through Monitoring 319 Monitoring Employees through Drug Testing 323
Other Forms of Monitoring 327 Business Reasons to Limit Monitoring 328
Balancing Interests 329
Regulation of Off-Work Acts 331 Privacy Rights since September 11, 2001 335
Readings 380 7-1 Drug Testing and the Right to Privacy: Arguing
the Ethics of Workplace Drug Testing 350
7-2 The Ethical Use of Technology in Business 356
7-3 Hiring in a Social Media Age 361
7-4 Genetic Testing in the Workplace 364
7-5 Letter from Lewis Maltby to Senator Chris
Rothfuss (July 26, 2014) 371
Chapter 8 Ethics and Marketing 375 Opening Decision Point: Digital Marketing
and Ethics 376 Introduction 378 Marketing: An Ethical Framework 380 Responsibility for Products: Safety and
Liability 384 Contractual Standards for Product Safety 385
Tort Standards for Product Safety 386
Strict Product Liability 389
Ethical Debates on Product Liability 389
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Conflicts of Interest in Accounting and the Financial Markets 512
Executive Compensation 514 Insider Trading 518
Readings 526 10-1 The Cultural Dependence of Corporate
Governance 526
10-2 Libor and Capitalist Moral “Decay” 529
10-3 How Much Compensation Can CEOs
Permissibly Accept? 531
Glossary 539 Index 547
Chapter 10 Ethical Decision Making: Corporate Governance, Accounting, and Finance 491 Opening Decision Point: Volkswagen’s Diesel
Fraud 492 Introduction 496 Professional Duties and Conflicts of
Interest 497 The Sarbanes-Oxley Act of 2002 505 The Internal Control Environment 507 Going beyond the Law: Being an Ethical Board
Member 508 Legal Duties of Board Members 508
Beyond the Law, There Is Ethics 509
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1Chapter Ethics and Business It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently. Warren Buffett
Ethics is the new competitive environment. Peter Robinson, CEO, Mountain Equipment Co-op (2000–2007)
Without commonly shared and widely entrenched moral values and obligations, neither the law, nor democratic government, nor even the market economy will function properly. Vaclav Havel, 1936–2011
No snowflake in an avalanche ever feels responsible. Voltaire, 1694–1778
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Early in the summer of 2016—just weeks away from the start of the Summer Olympics, scheduled to be held in Rio de Janeiro, Brazil—a group of nearly 200 prominent scientists, physicians, and ethicists signed a letter strongly suggesting that the International Olympic Committee consider moving or postponing the Games. At issue was the ongoing Zika virus epidemic sweeping through parts of Brazil and a couple of dozen other countries, mostly in Latin and South America. Zika virus is carried by mosquitoes (although it can also be spread sexually); it is rarely serious in adults, but pregnant women who are infected can give birth to babies with severe neurological disorders including microcephaly.
The worry, according to these experts, was that the Rio Games would inevitably speed the spread of the virus globally, as some of the anticipated 500,000 athletes and tourists expected to visit Rio during the event would surely become infected and bring the virus home with them.
The letter focused public attention on the International Olympic Committee (IOC) and the advice that the IOC would get in this regard from the World Health Organization (WHO). As the date of the opening ceremonies approached, neither organization seemed moved by the letter.
But the letter addressed to these international organizations failed to mention the role played by another group of powerful organizations, namely the large corporations sponsoring the Games and that effectively make the Olympics possible. For the 2016 Summer Olympics, “Worldwide Olympic Partners” (that is, top-tier sponsors) included Coca-Cola, Bridgestone, McDonald’s, General Electric, Visa, and others. Dozens of other companies were listed as “Official Sponsors,” “Official Supporters,” or “Suppliers.” Becoming a top-tier Worldwide Olympic Partner cost each company more than $100 million. That level of financial commitment presumably brings considerable influence. The question was whether, and how, they would use that influence.
Adding to the confusion was the fact that while many experts were worried, the worry was not unanimous. The head of the U.S. Centers for Disease Control and Prevention (CDC), for example, publicly predicted that the Rio Olympics would not be a factor in spreading the Zika virus.
What should the Olympic sponsors have done? What, if anything, should they have done in light of the concerns expressed in the experts’ letter? Should they have encouraged the IOC to move or postpone the Games? This would presumably have cost them money: Each sponsor no doubt already had spent millions on marketing linked to the Olympics, and much of it would have been linked directly to the August timing and to Rio. Changing the date or the place would have been very costly. But then, what about the social responsibility to help control an epidemic?
1. How much responsibility do sponsoring corporations bear for the outcomes of things like the Olympic Games? All the sponsors are doing is paying money to have their logos featured at Olympic venues and the right to use the Olympic logo in their advertising. The Rio sponsors wouldn’t be directly spreading Zika. Does that indirectness matter, ethically?
Opening Decision Point1 Zika Virus and Olympic Sponsors
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2. One danger is that the decision would not be based on ethics at all, and that the organizations involved would fall prey to a general “the Olympics must go on!” attitude. It’s widely recognized that a “can-do” attitude is what led the National Aeronautics and Space Administration (NASA) to launch the Space Shuttle Chal- lenger in January 1986 despite warnings that doing so could be unsafe. Key decision makers believed that as a high-performance organization engaged in an important mission, NASA simply could not fail. The results of that attitude are notorious: Challenger exploded 73 seconds into its voyage, killing all seven crew members instantly.
3. Does the lack of full agreement between experts absolve Olympic sponsors of blame if the Rio Olympics ended up contributing to the spread of the Zika virus? Would it be ethically correct of the sponsors to say, after the fact, “We didn’t know for sure there would be a problem”?
Source: Adapted from Chris MacDonald, “Should Olympic Sponsors Pull Out over the Danger of Zika Virus?” Canadian Business [Blog], June 2, 2016, www.canadianbusiness.com/blogs-and- comment/should-olympic-sponsors-pull-out-over-the-danger-of-zika-virus/ (accessed June 5, 2016).
Chapter Objectives After reading this chapter, you will be able to:
1. Explain why ethics is important in the business environment.
2. Explain the nature of business ethics as an academic discipline.
3. Distinguish the ethics of personal integrity from the ethics of social responsibility.
4. Distinguish ethical norms and values from other business-related norms and values.
5. Distinguish legal responsibilities from ethical responsibilities.
6. Explain why ethical responsibilities go beyond legal compliance.
7. Describe ethical decision making as a form of practical reasoning.
Introduction: Making the Case for Business Ethics
Even though years have passed and other scandals have occurred, we still refer to the 2001 Enron Corporation collapse as the landmark event in this century’s business ethics news; since that time ethics and values have seldom strayed from the front pages of the press. Recall the 2008 collapse of the invest- ment schemes of former NASDAQ chair Bernie Madoff, the largest fraud of its kind in history with total losses to investors in the billions. When we are referring to scandals such as Canadian publisher Conrad Black’s conviction for fraud and obstruction of justice (related to diverting corporate funds for per- sonal use), the list of leaders that have been involved with legal and ethical
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wrongdoing is, sadly, incredibly long. Reflect for a moment on the businesses that have been involved in scandals or, at least, in flawed decision making since the start of the 21st century: Volkswagen, SNC-Lavalin, Valeant, Siemens, Takata, Enron, Halliburton, AIG, WorldCom, Tyco, Adelphia, Rite Aid, Sun- beam, Waste Management, HealthSouth, Global Crossing, Arthur Andersen, Ernst & Young, ImClone, KPMG, J.P. Morgan, Merrill Lynch, Morgan Stanley, Bear Stearns, Fannie Mae, Countrywide Financial Corp., Citigroup, Salomon Smith Barney, Marsh & McLennan, Credit Suisse, First Boston, Goldman Sachs, AmeriQuest, Deutsche Bank, Bank of America, UBS, Standard & Poor’s, Moody’s, BP Global, Deep Water Horizon, Johnson & Johnson, Pfizer, Firestone Tire and Rubber Co., and even the New York Stock Exchange. Individuals impli- cated in ethical scandals include Kenneth Lay, Jeffrey Skilling, Andrew Fastow, Dennis Kozlowski, Bill McGuire, Bob Nardelli, John J. Rigas, Richard M. Scrushy, Martha Stewart, Samuel Waksal, Richard Grasso, Bernard Ebbers, Angelo Mozilo, Kerry Killinger, Stephen Rotella, David Schneider, Vikrim Pan- dit, and Bernie Madoff. Beyond these well-known scandals, consumer boycotts based on allegations of unethical conduct or alliances have targeted such well- known firms as Nike, McDonald’s, Carrefour, Home Depot, Chiquita Brands International, Fisher-Price, Gap, Shell Oil, ExxonMobil, Levi Strauss, Donna Karan, Kmart, Walmart, Nestlé, Nokia, Siemens, BP, H&M, Target, Timberland, Delta Air Lines, and Chick-fil-A.
This chapter will introduce business ethics as a process of responsible decision making. Simply put, the scandals and ruin experienced by all the institutions and every one of the individuals just mentioned were brought about by ethical failures. If we do, indeed, reflect on those institutions and individuals, perhaps they should remind us of the often-repeated Santayana warning, “Those who cannot remember the past are condemned to repeat it.”2 This text provides a decision-making model that, we contend, can help individuals understand these failures and avoid future business and personal tragedies. As an introduction to that decision-making model, this chapter reflects on the intersection of ethics and business.
Ethical decision making in business is not at all limited to the type of major corporate decisions with dramatic social consequences listed earlier. At some point, every worker, and certainly everyone in a management role, will be faced with an issue that will require ethical decision making. Not every decision can be covered by economic, legal, or company rules and regulations. More often than not, responsible decision making must rely on the personal values and principles of the individuals involved. Individuals will have to decide for themselves what type of person they want to be.
At other times, decisions will involve significant general policy issues that affect entire organizations, as happened in all the well-known corporate scan- dals. The managerial role especially involves decision making that establishes organizational precedents and has organizational and social consequences.
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Hence, both of these types of situations—the personal and the organizational— are reflected in the title of this book: Business Ethics: Decision Making for Per- sonal Integrity and Social Responsibility.
How should we conceive of the relationship between business and market activity, on one hand, and ethical concerns, on the other? This is not a new ques- tion, but one that can be found since the very dawn of modern capitalism. Often considered to be the founding father of laissez-faire economics, the 18th-century philosopher Adam Smith is best known for promoting the virtues of self-interest in The Wealth of Nations. However, in another of his major works, The Theory of Moral Sentiments, Smith suggests that sympathy and benevolence are funda- mental human values. The relationship between these two texts has long puzzled scholars and has come to represent the broader issue of the relationship of eco- nomic and moral values that is addressed in the study of business ethics. As one commentator writes, “The Adam Smith problem—how to reconcile these two great books—is also the challenge of how to order a society in which competition and ethical sensibility are combined.”3
As recently as the mid-1990s, articles in such major publications as The Wall Street Journal, Harvard Business Review, and U.S. News and World Report ques- tioned the legitimacy and value of teaching classes in business ethics. Few disci- plines face the type of skepticism that commonly confronted courses in business ethics. Many students believed that the term business ethics was a contradiction. Many also viewed ethics as a mixture of sentimentality and personal opinion that would interfere with the efficient functioning of business. After all, who is to identify right and wrong, and, if no law is broken, who will “punish” the “wrong- doers”? However, this approach has left business executives as one of the lowest- ranked professions in terms of trust and honesty, according to a 2011 Gallup poll.4
Leaders realize that they can no longer afford this approach in contemporary business. The direct costs of unethical business practice are more visible today than perhaps they have ever been. As discussed earlier, the first decade of the new millennium has been riddled with highly publicized corporate scandals, the effects of which did not escape people of any social or income class. Moreover, we saw the economy take a downward spiral into one of the largest financial crises of the past 80 years, driven significantly by questionable subprime mortgage lending practices at the banks, as well as the widespread trading of risky mortgage-backed securities in the markets. These lending and trading efforts encouraged bad debt to appreciate beyond levels that the market could bear. The inevitable correc- tion caused real estate values in most markets to decline sharply, domestic credit markets to freeze, and the federal government to intervene with a rescue package.
If the key (or not so key) decision makers who contributed to the bubble bursting had acted differently, could these unfortunate consequences have been avoided? It is perhaps enough to point out that it is a bit of a vicious circle. Economic turmoil encourages misconduct; there is a significant bump in observed workplace miscon- duct during times of economic challenges. Some money- saving strategies deployed
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by struggling companies, such as compensation/benefit reductions and hiring freezes, have been found to increase misconduct by more than 35 percent.5 In turn, misconduct based on fraud alone causes an estimated 5 percent loss of annual revenues, equivalent to more than $2.9 trillion of the 2009 gross world product.
Personal retirement accounts, institutional investments like pension funds, gov- ernment employees’ retirement funds, and major insurance companies are heavily invested in corporate stocks and bonds, as well as pooled securities of every size, shape, and order. As a result, the impact of Wall Street failures on Main Street families and businesses become larger and more noticeable by the day.
The questions today are less about why or should ethics be a part of business; they are about which values and principles should guide business decisions and how ethics should be integrated within business. (A persuasive case for why this shift has occurred can be found in Reading 1-1, “Value Shift,” by Lynn Sharp Paine.) Students unfamiliar with the basic concepts and categories of ethics will find themselves as unprepared for careers in business as students who are unfa- miliar with accounting and finance. In fact, it is fair to say that students will not be fully prepared, even within fields such as accounting, finance, human resource management, marketing, and management, unless they are familiar with the ethi- cal issues that arise within those specific fields.
Consider the wide range of decisions faced by individuals and teams in the course of carrying out business in the modern economy. Our choices are restricted by law and institutional rules, but only to certain extents. Beyond those limits, we must rely on ethical judgment to reach decisions that fall squarely within the field traditionally described as business-related. Yet, at the same time, our personal ethics also are challenged. While we will return to this tension in Chapter 2, the concept of a personal standard is paramount, and the readings by both MacDon- ald and Vermaelen examine the potential, for instance, of the MBA Oath as one way to resolve these challenges.
To understand the origins of this shift from whether ethics or values should play a role in business decisions to the almost frantic search for how most effec- tively (and quickly!) to do it, consider the range of people who were harmed by Bernie Madoff’s pyramid investment scheme. The largest security fraud in his- tory, Madoff’s unethical behavior led to cash losses of at least $20 billion for his clients. Though much of the media’s initial attention focused on the big banks, wealthy hedge fund managers, and Hollywood celebrities defrauded by Madoff, the impact of his crimes was felt far beyond this small circle. More than 100 nonprofit organizations—including the New York Public Library, the Children’s Health Fund, and a neurological research center at the Massachusetts Institute of Technology—had invested assets with Madoff’s fund and were forced to reduce or eliminate services as a result of the collapse. The charitable foundation founded by Holocaust survivor and Nobel laureate Elie Wiesel was just one of many non- profits that were wiped out entirely. The scandal led to the financial devastation of pension funds, hospitals, and universities across the globe, as well as to the bankruptcies of several smaller banks. In each case of economic loss, communi- ties of the investing group or individual were negatively affected by the loss, and
OBJECTIVE
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the families of those affected suffered hardship. Many of the individuals directly involved in Madoff’s fund have since suffered criminal and civil punishment, up to and including prison sentences for some. Indeed, it is hard to imagine anyone who was even loosely affiliated with Madoff who was not harmed as a result of the ethical failings there. Multiply that harm by the dozens of other companies implicated in similar scandals to get a better idea of why ethics is no longer dis- missed as irrelevant. The consequences of unethical behavior and unethical busi- ness institutions are too serious for too many people to be ignored.
This description of the consequences of the Madoff Ponzi scheme demon- strates the significant impact that business decisions can have on a very wide range of people. Madoff’s choices dramatically affected the lives of thousands of people: investors, businesses, schools, nonprofit organizations, retirees, and the communities in which these people live. For better or for worse, the deci- sions that a business makes will affect many more people than just the decision maker. As we will discuss throughout this text, in order to sustain the firm, ethi- cally responsible business decision making must move beyond a narrow concern with stockholders to consider the impact that decisions will have on a wide range of stakeholders. In a general sense, a business stakeholder will be anyone who affects or is affected by decisions made within the firm, for better or worse. Fail- ure to consider these additional stakeholders will have a detrimental impact on those stakeholders, on stockholders, specifically, and on the firm’s long-term sus- tainability as a whole. This perspective is articulated effectively by Whole Foods Market’s “Declaration of Interdependence.”
Satisfying all of our stakeholders and achieving our standards is our goal. One of the most important responsibilities of Whole Foods Market’s leadership is to make sure the interests, desires and needs of our various stakeholders are kept in balance. We recognize that this is a dynamic process. It requires participation and communication by all of our stakeholders. It requires listening compassionately, thinking carefully and acting with integrity. Any conflicts must be mediated and win-win solutions found. Creating and nurturing this community of stakeholders is critical to the long-term success of our company. (Emphasis added.)6
Whole Foods has maintained this priority structure over nearly 20 years, during which it has performed extremely well for its shareholders. In fiscal year 2015, the company reported sales of approximately $15 billion and more than 430 stores in the United States, Canada, and the United Kingdom.7
The Reality Check “How Does the Law Support Ethical Behavior?” describes some legal requirements that have been created since the Enron scandal. Beyond these specific legal obligations, organizational survival relies upon ethical deci- sions in a great many ways. Unethical behavior not only creates legal risks for a business, it creates financial and marketing risks as well. Managing these risks requires managers and executives to remain vigilant about their company’s ethics. It is now clearer than ever that a company can lose in the marketplace, go out of business, and its employees go to jail if no one is paying attention to the ethical standards of the firm.
stakeholder In a general sense, a stakeholder is anyone who can be affected by decisions made within a business. More specifi- cally, stakeholders are considered to be those people who are neces- sary for the functioning of a business.
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Moreover, given the declining average life expectancy of firms,8 maintaining an ethical advantage becomes a vital distinction between successful and unsuc- cessful firms. A firm’s ethical reputation can provide a competitive edge in the marketplace with customers, suppliers, and employees. On the positive side, man- aging ethically can also pay significant dividends in organizational structure and efficiency. Trust, loyalty, commitment, creativity, and initiative are just some of the organizational benefits that are more likely to flourish within ethically stable and credible organizations (see the Reality Check “Why Be Good?”). Research demonstrates that 94 percent of workers consider a firm’s ethics critically impor- tant in their choice of employers. In fact, 82 percent of employees say they would prefer a position at lower pay in a firm with ethical business practices compared to a higher-paying job at a company with questionable ethics. Further, one-third of U.S. workers have walked off a job on the basis of their ethics.9 Alternatively, the consumer boycotts of such well-known firms as Nike, McDonald’s, Home Depot, Fisher-Price, and Walmart give even the most skeptical business leader reason to pay attention to ethics.
For business students, the need to study ethics should be as clear as the need to study the other subfields of business education. As discussed earlier, without this background, students simply will be unprepared for a career in contempo- rary business. But even for students who do not anticipate a career in business management or business administration, familiarity with business ethics is just as crucial. After all, it was not only Bernie Madoff who suffered because of his ethi- cal lapses. Our lives as employees, as consumers, and as citizens are affected by decisions made within business institutions; therefore, everyone has good reasons for being concerned with the ethics of those decision makers.
As we emphasize in this text, ethics and the law are not the same. But law and ethics overlap in many ways. Good laws become law precisely because they promote important ethi- cal values. But in some cases, laws are passed to help sup- port ethical behavior in another way, namely by focusing the attention of corporate leaders on the need to work hard to ensure ethical behavior in their organizations. In 2002, for example, the U.S. Congress passed the Sarbanes-Oxley Act to address the wave of corporate and accounting scandals. Section 406 of that law, “Code of Ethics for Senior Financial Officers,” requires that corporations have a code of ethics “applicable to its principal financial officer and comptroller or principal accounting officer, or persons performing similar functions.” The code must include standards that promote:
1. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships.
2. Full, fair, accurate, timely, and understandable disclo- sure in the periodic reports required to be filed by the issuer.
3. Compliance with applicable governmental rules and regulations.
Note: You will see Reality Checks throughout each chapter. Slightly different from Decision Points, these boxes offer practical applications of the concepts discussed during that chapter segment or examples of the ways in which the concepts are implemented in “real” business decision making.
Reality Check How Does the Law Support Ethical Behavior?
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Moreover, as leaders and as emerging leaders, we need to explore how to man- age the ethical behavior of others so that we can improve their decisions and encour- age them to make ethical, or more ethical, decisions. Certainly, unethical behavior continues to occur within organizations today at all levels, and business decision makers—at all levels—must be equipped with the tools, the knowledge, and the skills to confront that behavior and to respond to it effectively. Just imagine the impact in terms of role modeling of this single statement by Prince Bandar Bin Sultan, in connec- tion with accusations that he received secret and personal “commissions” of approxi- mately $240 million each over a 10-year period in connection with a defense contract between the British government and the Saudi arms manufacturer BAE Systems:
“The way I answer the corruption charges is this. In the last 30 years, . . . we have implemented a development program that was approximately, close to $400 billion worth. You could not have done all of that for less than, let’s say, $350 billion. Now, if you tell me that building this whole country and spending $350 billion out of $400 billion, that we had misused or got corrupted with $50 billion, I’ll tell you, ‘Yes.’ But I’ll take that any time.
“But more important, who are you to tell me this? I mean, I see every time all the scandals here, or in England, or in Europe. What I’m trying to tell you is, so what? We did not invent corruption. This happened since Adam and Eve. I mean, Adam and Eve were in heaven and they had hanky-panky and they had to go down to earth. So I mean this is—this is human nature. But we are not as bad as you think!”10
In that case, former British Prime Minister Tony Blair had originally allowed the fraud investigation to be dropped. He offered the following statement, in an effort to explain his reasons for the decision: “This investigation, if it had gone ahead, would have involved the most serious allegations in investigations being made into the Saudi royal family. My job is to give advice as to whether that is a sen- sible thing in circumstances where I don’t believe the investigation incidentally would have led anywhere except to the complete wreckage of a vital strategic relationship for our country. . . . Quite apart from the fact that we would have lost thousands, thousands of British jobs.”11
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
Ethical Systems, a collaboration of academics and busi- ness leaders, takes a thoughtful approach to the question of whether ethics is good for business.
Ethical Systems gives the following list of specific ways in which “ethics pays” for corporations:
• A good reputation is valuable. • Illegal conduct can be extremely costly. • Good governance pays off financially. Source: Ethical Systems, www.ethicalsystems.org/content/ ethics-pays (accessed April 16, 2016).
Reality Check Why Be Good?
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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. mar- kets may have been in serious jeopardy. Over a five-month period, the U.S. gov- ernment 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 unfortunate, it certainly was not unethical. However, in decisions that damaged the reputations of many involved, among other criticisms, one month after AIG received the first round of bailout money, its exec- utives 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) criti- cized the executives for their legally awarded bonuses, many of the bonuses were paid nevertheless because they had been promised through employee contracts for the purposes of “retaining talent” before AIG had received any bailout money.12
Although it did not reach a full congressional hearing, the U.S. House of Representatives even prepared a bill that would impose a 90 percent tax on the bonuses of more than $5 million paid to executives by AIG and other compa- nies that were getting assistance from the government. Instead, the House passed the Grayson-Himes Pay for Performance Act in April 2009 “to amend the execu- tive compensation provisions of the Emergency Economic Stabilization Act of 2008 to prohibit unreasonable and excessive compensation and compensation not based on performance standards.”13 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 rea- sonable 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 empha- size ethical decision making. No book can magically create ethically respon- sible people or change behavior in any direct way, and that’s certainly not our goal here. But students can learn and practice responsible and accountable ways of thinking and deliberating. We believe that decisions that follow from a process of thoughtful and conscientious reasoning will be more responsible and ethical. In other words, responsible decision making and deliberation will result in more responsible behavior.
So what is the point of a business ethics course? On one hand, ethics refers to an academic discipline with a centuries-old history; we might expect knowledge about
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this history to be among the primary goals of a class in ethics. Thus, in an ethics course, students might be expected to learn about the great ethicists of history such as Aristotle, John Stuart Mill, and Immanuel Kant. As in many other courses on other subjects, 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 are beside the point. These stakeholders, including some businesses looking to hire college graduates, business students, and even some teachers, 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 also to that arena of human life studied by this academic discipline, namely, how human beings should properly live their lives. And we believe the tools provided in this book will better equip students to think clearly about such questions. At very least, after taking a course based on this book, you should be better equipped than the average person to think clearly about ethical issues in business, and to offer a reasoned point of view about those issues. Even if an ethics course does not change your capacity to think, we believe that 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 permission 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 threats, 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 university classroom, and certainly not in an ethical classroom.
But not all forms of influencing behavior raise such concerns. There is a big 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 attempt to produce more ethical behavior among the students who enroll. But we believe that the only academically and ethically legit- imate way to achieve this objective is through careful and reasoned decision mak- ing. Our fundamental assumption is that a process of rational decision making, a process 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. Most people would agree that a management course aims to create better managers. And any finance or accounting course that denied a connec- tion between the course material and financial or accounting practice would likely be counted as a failure. Every course in a business school assumes a connection
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ethics Derived from the Greek word ethos, which refers to those values, norms, beliefs, and expecta- tions that determine how people within a culture live and act. Ethics steps back from such stand- ards for how people do act, and reflects on the standards by which peo- ple should live and act. 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 human being can ask: How should we live? Follow- ing from this original Greek usage, ethics can refer to both the stand- ards by which an indi- vidual chooses to live her or his own personal life, and the standards by which individuals live in community with others (see also morality). As a branch of philosophy, ethics is the discipline that systematically stud- ies questions of how we ought to live our lives.
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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 class- room 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 knowledge and behavior. Our role should not be to preach our own ethical beliefs to a passive audience, but instead to treat students as active learners and to engage them in an active process of thinking, questioning, and deliberating. Taking Socrates as our model, philo- sophical ethics rejects the view that passive obedience to authority or the simple acceptance of customary norms is an adequate ethical perspective. Teaching eth- ics 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 circumstances, do the “right thing.” Business leaders, therefore, have a respon- sibility for the business environment that they create; we shall later refer to this environment as the “corporate culture.” The environment can strongly encourage 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.
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 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 norma- tive. 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 norma- tive discipline, ethics seeks an account of how and why people should act a certain way, rather than how they do act. (For an exploration of some of the relevant factors in such a decision, see the Decision Point, “Management and Ethics.”
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normative ethics As a normative disci- pline, ethics deals with norms and standards of appropriate and proper (normal) behavior. Norms establish the guidelines or standards for determining what we should do, how we should act, what type of person we should be. Contrast with descrip- tive ethics.
descriptive ethics As practiced by many social scientists, pro- vides a descriptive and empirical account of those standards that actually guide behavior, as opposed to those standards that should guide behavior. Contrast with normative ethics.
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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 applica- tions of those morals to the decisions themselves. So, an individual could have a moral value of honesty, 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 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 as corporations, ought to be structured 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 structure, and political philoso- phy. In this sense, business ethics is concerned with how business institutions ought to be structured, about whether they have a responsibility to the greater society (corporate social responsibility, or CSR), and about making decisions that will have an impact on many people other than the individual decision maker. This aspect of business ethics asks us to examine business institutions from a social rather than from 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 environment. Thus, our book’s title makes reference to both aspects of busi- ness 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 answers 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. More than 2,000 years ago Socrates gave the philosophical answer to why you should study ethics: “The unexamined life is not worth living.”
morality Sometimes used to denote the phenomena studied by the field of ethics. This text uses morality to refer to those aspects of ethics involving personal, indi- vidual decision making. “How should I live my life?” or “What type of person ought I be?” are taken to be the basic questions of morality. Morality can be distin- guished from questions of social justice, which address issues of how communities and social organizations ought to be structured.
personal integrity The term integrity con- notes completeness of a being or thing. Personal integrity, therefore, refers to individuals’ completeness within themselves, often derived from the con- sistency or alignment of actions with deeply held beliefs.
social ethics The area of ethics that is concerned with how we should live together with others and how social organizations ought to be structured. Social ethics involves questions of political, economic, civic, and cultural norms aimed at promoting human well-being.
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Imagine that you are examining this chapter’s Opening Decision Point in one of your classes on marketing or organizational behavior. What advice would you offer to the Olympics sponsors? What judgment would you make about this case from a financial perspective? Is there any financial risk implied by encouraging the IOC to go ahead with the Rio Olympics as planned? After offering your analysis and recommendations, reflect on your own thinking and describe what values underlie 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?
Decision Point Management and Ethics
To distinguish ethics from other practical decisions faced within business, con- sider two approaches to the Enbridge oil spill scenario in the Decision Point “Eth- ics after an Oil Spill.” This case could just as well be examined in a management, human resource, business law, 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 exploring the factors that led to one decision rather than another or by asking why the man- ager acted in the way that he did.
A second approach to the Enbridge case, from the perspective of ethics, steps back from the facts of the situation to ask what should the manager do? What rights and responsibilities are involved? What good will come from this situa- tion? Is Enbridge being fair, just, virtuous, kind, loyal, trustworthy? This nor- mative 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, and 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 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.
norms Those standards or guidelines that establish appropriate and proper behavior. Norms can be established by such diverse perspectives as economics, etiquette, or ethics.
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In August 2011, it was reported that an oil pipeline, owned by the energy company Enbridge, had sprung a leak near the tiny, remote town of Wrigley in Canada’s Northwest Territories. Not surprisingly, residents were unhappy about the spill, confronting Enbridge with the twin dilemmas of how to clean it up and what to do about the people of Wrigley. More generally, managers at Enbridge had to figure out, in the wake of the leak, what their obligations would be, and to whom those obligations were owed.
Wrigley—slightly farther north than Anchorage, Alaska, but much farther inland—in 2011 had a population of about 165. Most community residents are members of the Canadian aboriginal group known as the Dené. Citizens of the town of Wrigley have very low levels of education—most of the population has received no formal education whatsoever. More than half of the community is unemployed. Poverty and access to the basic amenities of modern life are a serious challenge. At present, there isn’t even a year-round road into the town. They maintain a traditional lifestyle based on hunting, fishing, and trapping, one that leaves them almost entirely dependent on the health of local forests and waterways. Environmental protection isn’t just a question of principle for the people of Wrigley; it’s a matter of survival.
After the spill was discovered, it was estimated that 1,500 barrels of oil had leaked, but company officials said luckily none of the oil had reached the nearby Willowlake River. Locals were skeptical, with some claiming that the water now tasted odd. Immediately after the spill was discovered, the company devised a detailed cleanup plan—a document more than 600 pages long. But locals were not impressed and said the complex technical document was too difficult to understand. When the company offered $5,000 so that the community could hire its own experts to evaluate the plan, locals were offended. How could a rich oil company insult them that way, first polluting their land and then offering such a tiny payment?
For Enbridge, the spill was a significant blow to its ongoing effort to maintain a positive image. Just a year earlier, in the summer of 2010, the company had made headlines when one of its pipelines ruptured in Michigan, spilling more than 20,000 barrels of oil into local rivers. At the time, Enbridge was in the midst of trying to win approval for its proposed Northern Gateway Pipeline project and faced serious opposition from environmental groups and aboriginal communities.
The company faced a number of difficult issues in the wake of the Wrigley spill. The first concern, clearly, would be to clean up the spilled oil. Then there was the issue of remediation—the process of attempting to restore the polluted land back to something like its original state. Further, there was the question of whether and how to compensate the local community for the pollution and loss of use of some of their traditional hunting grounds. All of this was set against a backdrop of controversy surrounding the impact that oil pipelines have on the lands and communities through which they run.
• What do you think motivated the company’s decision to offer the community $5,000 to hire its own expert? Why do you think the community was insulted? If you were the company’s local manager, what would you have done?
• What facts would be helpful to you, as an outsider, in evaluating the company’s behavior after the spill?
Decision Point Ethics after an Oil Spill14
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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 decision to study this evening, rather than to play video games. I believe that education is more worthy, or valuable, than playing games. I make the decision to spend my money on groceries rather than on a vacation because I value food more than relaxation. A company’s core values, for example, are those beliefs 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 ethical or unethical 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 pursuit 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 or goals they serve. Financial values serve monetary ends; religious values serve spiritual ends; aesthetic values serve the ends of beauty; legal values serve law, order, and justice; and so forth. Different types of values are distin- guished 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 activity. Thousands of innocent people were hurt by the decisions made by some individuals seeking to boost their own bank accounts or their own egos. This
values Those beliefs that incline us to act or to choose in one way rather than another. We can recognize many different types of values: financial, reli- gious, legal, historical, nutritional, political, scientific, and aesthetic. Ethical values serve the ends of human well-being in impartial, rather than personal or selfish, ways.
• 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 satisfy the company’s obligations to the community?
(concluded)
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example 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 welfare 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 observations. 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 selfish well-being. After all, the Enron and Madoff scandals resulted from many individu- als 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 per- son’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 values— those decision-guiding beliefs—that impartially promote human well-being.
Ethics and the Law
Any discussion of norms and standards of proper behavior would be incomplete without considering the law. Deciding what one should do in business situations often requires reflection on what the law requires, expects, or permits. The law provides an important guide to ethical decision making, and this text will inte- grate legal considerations throughout. But legal norms and ethical norms are not identical, nor do they always agree. Some ethical requirements, such as treat- ing one’s employees with respect, are not legally required, though they may be ethically justified. On the other hand, some actions that may be legally permitted, such as firing an employee for no reason, would fail many ethical standards.
Some people still hold the view, perhaps more common prior to the scandals of recent years than after, that a business fulfills its social responsibility simply by obeying the law. From this perspective, an ethically responsible business decision is merely one that complies with the law; there is no responsibility to do anything further. Individual businesses may decide to go beyond the legal minimum, such as when a business supports the local arts, but these choices are voluntary. A good deal of management literature on corporate social responsibility centers on this approach, contending that ethics requires obedience to the law; anything beyond that is a matter of corporate phi- lanthropy and charity, something praiseworthy and allowed, but not required.
Over the last decade, many corporations have established ethics programs and have hired ethics officers who are responsible for managing corporate ethics pro- grams. Ethics officers do a great deal of good and effective work, but it is fair to say that much of their work focuses on legal compliance issues. Of course, the envi- ronment varies considerably from company to company and industry to industry (see the Reality Check “Business Responsibility to Stop Corruption”). The Sar- banes-Oxley Act created a dramatic and vast new layer of legal compliance issues. But is compliance with the law all that is required to behave ethically? Though we
ethical values Those properties of life that contribute to human well-being and a life well lived. Ethical val- ues would include such things as happiness, respect, dignity, integ- rity, freedom, compan- ionship, and health.
OBJECTIVE
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will address this issue in greater detail in Chapter 5, let us briefly explore at this point several persuasive reasons legal compliance is insufficient, in order to move forward to our discussion of ethics as perhaps a more effective guidepost for deci- sion making. See also the Reality Check “Ethics in the Corporate World.”
1. Believing that obedience to the law is sufficient to fulfill one’s ethical duties raises questions of whether the law, itself, is ethical. Dramatic examples from history, including Nazi Germany and apartheid in South Africa, demonstrate that one’s ethical responsibility may run counter to the law. On a more practi- cal level, this question can have significant implications in a global economy in which businesses operate in countries with legal systems different from those of their home country. For instance, some countries permit discrimina- tion on the basis of gender, but businesses that choose to adopt such practices remain ethically accountable to their stakeholders for those decisions. From the perspective of ethics, a business does not avoid its need to consider ethical responsibilities just by obeying the law.
2. Societies that value individual freedom will be reluctant to legally require more than just an ethical minimum. Such liberal societies will seek legally to prohibit the most serious ethical harms, although they will not legally require acts of charity, common decency, and personal integrity that may otherwise constitute the social fabric of a developed culture. The law can be an efficient mechanism to prevent serious harms, but it is not very effective at promoting “goods.” Even if it were, the cost in human freedom of legally requiring such things as personal integrity would be extremely high. What would a society be like if it legally required parents to love their children, or even had a law that prohibited lying under all circumstances?
3. On a more practical level, a business acting as if its ethical responsibilities end with obedience to the law is just inviting more legal regulation. Consider the dif- ficulty of trying to create laws to cover each and every possible business challenge; the task would require such specificity that the number of regulated areas would become unmanageable. Additionally, it was the failure of personal ethics among such companies as Enron and WorldCom, after all, that led to the creation of the Sarbanes-Oxley Act and many other legal reforms. If business restricts its ethical responsibilities to obedience to the law, it should not be surprised to find a new wave of government regulations that require what were formerly voluntary actions.
4. The law cannot possibly anticipate every new dilemma that businesses might face, so often there may not be a regulation for the particular dilemma that con- fronts a business leader. For example, when workplace e-mail was in its infancy, laws regarding who actually owned the e-mail transmissions (the employee or the employer) were not yet in place. As a result, one had no choice but to rely on the ethical decision-making processes of those in power to respect the appropri- ate boundaries of employee privacy while also adequately managing the work- place (see Chapter 7 for a more complete discussion of the legal implications of workplace monitoring). When new quandaries arise, one must be able to rely on ethics because the law might not yet—or might never—provide a solution.
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5. Finally, the perspective that compliance is enough relies on a misleading under- standing of law. To say that all a business needs to do is obey the law suggests that laws are clear-cut, unambiguous rules that can be easily applied. This rule model of law is very common, but it is not quite accurate. If the law was clear and unambiguous, there would not be much of a role for lawyers and courts.
Consider one U.S. law that has had a significant impact on business decision making: the Americans with Disabilities Act (ADA). This law requires American employers to make reasonable accommodations for employees with disabilities. (In the United Kingdom, the comparable law is called the Equality Act, 2010. In Can- ada, where employment law is a provincial matter, there are laws such as the Ontar- ians with Disabilities Act, 2002, and the Accessibility for Manitobans Act, 2013). But what counts as a disability and what would be considered a “reasonable” accom- modation? Over the years, claims have been made that relevant disabilities include obesity, depression, dyslexia, arthritis, hearing loss, high blood pressure, facial scars, and the fear of heights. Whether such conditions are covered under the ADA depends
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NOTES:
To compile this information, Transparency International interviewed more than 3,000 business executives in 30 countries from around the world. The survey was conducted in May 2011.
Source: Data extracted from Transparency International, Putting Cor- ruption out of Business: Business’ Responsibility, www.transparency.org/ research/bps2011.
Reality Check Business Responsibility to Stop Corruption
Transparency International: Putting Corruption out of Business
Transparency International asked businesses worldwide whether they agreed with this statement: “My company has an ethical duty to fight corruption.” Responses from selected countries are
displayed below.
Country Yes No
Australia 88% 12%
Brazil 98% 2%
Chile 93% 7%
China 77% 23%
Egypt 57% 43%
Ghana 62% 38%
France 83% 17%
Malaysia 49% 51%
Russia 45% 55%
United States 78% 22%
United Kingdom 81% 19%
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on a number of factors, including the severity of the illness and the effect it has on the employee’s ability to work, among others. Imagine that you are a corporate human resource manager and an employee asks you to reasonably accommodate his allergy. How would you decide whether allergies constitute a disability under the ADA?
In fact, the legal answer remains ambiguous. The law offers general rules that find some clarity through cases decided by the courts. Most of the laws that concern business are based on past cases that establish legal precedents. Each precedent applies general rules to the specific circumstances of an individual case. In most business situations, asking, “Is this legal?” is really asking, “Are these circumstances similar enough to past cases that the conclusions reached in those cases will also apply here?” Because there will always be some differences among cases, the question will always remain somewhat open. Thus, there is no unambiguous answer for the conscientious business manager who wishes only to obey the law. There are few situations where a decision maker can simply find the applicable rule, apply it to the situation, and deduce an answer from it.
Without aiming to criticize the legal profession (especially because one of the authors of this text has a legal background!) but merely to demonstrate the pre- ceding ambiguity, it is worth remembering that many of the people involved in the wave of recent corporate scandals were themselves lawyers. In the Enron case,
It’s no secret that a substantial portion of the public has trouble trusting corporate CEOs. Every time another cor- porate scandal makes headlines, chatter increases about the fundamental untrustworthiness of business in general, and of business leaders in particular. But just how little does the public trust CEOs? And how does the public’s trust in CEOs differ from their trust in members of other occupations and professions? In 2014, the Ted Rogers Leadership Centre at Ryerson University (in Toronto, Canada) conducted a national survey to ask Canadians their perceptions of the ethics of political leadership. One question they asked is: “In general, how much do you trust members of the following professions to behave ethically in their roles—that is, to live up to both public and profes- sional standards in fulfilling their duties?”
Here are the percentages of respondents who indi- cated that they trust members of the following professions to behave ethically:
Doctors: 78 percent
Judges: 65 percent
Police officers: 60 percent
Public servants: 36 percent
Journalists: 33 percent
Business CEOs: 22 percent
Union leaders: 20 percent
Political staff: 16 percent
Politicians: 13 percent
Lobbyists: 9 percent
Of course, there are important questions about just how to interpret such data. It is worth noting that these numbers suggest a correlation between how much we trust various professions and how familiar we are with what they do. Most people know and rely on their fam- ily physician, and most people have a pretty good idea of what a judge does. On the other hand, fewer people understand what a CEO does. So what is expressed as a lack of trust may just reflect a lack of understanding. Or it might not! But we should always consider a range of explanations in the face of data such as these.
Source: “Public Perceptions of the Ethics of Political Leadership,” Ted Rogers Leadership Centre, November 5, 2014, www.ethicssurvey.ca (accessed June 6, 2016). The survey was conducted among a nationally representative sample of n = 1,039 Canadians between October 17 and 22, 2014, using an online panel.
Reality Check Ethics in the Corporate World
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for example, corporate attorneys and accountants were encouraged to “push the envelope” of what was legal. Especially in civil law (as opposed to criminal law), where much of the law is established by past precedent, as described earlier, there is always room for ambiguity in applying the law. Further, in civil law there is a real sense that one has not done anything illegal unless and until a court decides that one has violated a law. This means that if no one files a lawsuit to challenge an action, it is perceived as legal.
If moral behavior were simply following rules, we could program a computer to be moral.
Samuel P. Ginder
As some theories of corporate social responsibility suggest, if a corporate manager is told that she has a responsibility to maximize profits within the law, a competent manager will go to her corporate attorneys and tax accountants to ask what the law allows. A responsible attorney or accountant will advise how far the manager can reasonably go before it would obviously be illegal. In this situation, the question is whether a manager has a responsibility to “push the envelope” of legality in pursuit of profits.
Most of the cases of corporate scandal mentioned at the start of this chapter involved attorneys and accountants who advised their clients or bosses that what they were doing could be defended in court. The off-book partnerships that were at the heart of the collapse of Enron and Arthur Andersen were designed with the advice of attorneys who thought that, if challenged, they had at least a reason- able chance of winning in court. In the business environment, this strategy falls within the domain of organizational risk assessment, defined as “a process . . . to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.”15 Accordingly, the decision to “push the envelope” becomes a balance of risk assessment, cost–benefit analysis, and ethics—what is the cor- poration willing to do, willing to risk? Using this model, decision makers might include in their assessment before taking action:
∙ The likelihood of being challenged in court. ∙ The likelihood of losing the case. ∙ The likelihood of settling for financial damages. ∙ A comparison of those costs. ∙ The financial benefits of taking the action. ∙ The ethical implication of the options available.
After action is taken, the responsibility of decision makers is not relieved, of course. The U.S. Conference Board suggests that the ongoing assessment and review process might have a greater focus on the final element—the ethical implications— because it could involve:
∙ Independent monitoring of whistle-blowing or help-line information systems. ∙ Issuing risk assessment reports.
risk assessment A process to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.
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∙ Benchmarking for future activities. ∙ Modifying programs based on experience.16
Because the law is often ambiguous—because in many cases it simply is not clear what the law requires—there is little certainty with regard to several of these factors. Therefore, business managers will often face decisions that will challenge their ethical judgments. To suggest otherwise simply presents a false picture of corporate reality. Thus, even those businesspeople who are committed to strictly obeying the law will be confronted on a regular basis by the fundamental ethical questions: What should I do? How should I live?
As suggested earlier, whether we step back and explicitly ask these questions, each of us implicitly answers them every time we make a decision about how to act. Responsible decision making requires that we do step back and reflect on them, and then consciously choose the values by which we make decisions. No doubt this is a daunting task, even for experienced, seasoned leaders. Fortunately, we are not alone in meeting this challenge. The history of ethics includes the history of how some of the most insightful human beings have sought to answer these questions. Before turning to the range of ethical challenges awaiting each of us in the world of business, we will review some of the major traditions in ethics. Chapter 3 provides an introductory survey of several major ethical traditions that have much to offer in business settings.
Ethics as Practical Reason
In a previous section, ethics was described as practical and normative, having to do with our actions, choices, decisions, and reasoning about how we should act. Ethics is therefore a vital element of practical reasoning—reasoning about what we should do—and is distinguished from theoretical reasoning, which is reasoning about what we should believe. This book’s perspective on ethical decision making is squarely within this understanding of ethics’ role as a part of practical reason.
Theoretical reason is the pursuit of truth, which is the highest standard for what we should believe. According to this tradition, science is the great arbiter of truth. Science provides the methods and procedures for determining what is true. Thus, the scientific method can be thought of as the answer to the fundamental questions of theoretical reason: What should we believe? So the question arises, is there a comparable meth- odology or procedure for deciding what we should do and how we should act?
The simple answer is that there is no single methodology that can in every situation provide one clear and unequivocal answer to that question. But there are guidelines that can provide direction and criteria for decisions that are more or less reasonable and responsible. We suggest that the traditions and theories of philosophical ethics can be thought of in just this way. Over thousands of years of thinking about the fundamental questions of how human beings should live, philosophers have developed and refined a variety of approaches to these ethical questions. These traditions, or what are often referred to as ethical the- ories, explain and defend various norms, standards, values, and principles that
OBJECTIVE
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theoretical reasoning Involves reasoning that is aimed at establish- ing truth and therefore at what we ought to believe. Contrast with practical reasoning, which aims at determin- ing what is reasonable for us to do.
practical reasoning Involves reasoning about what one ought to do, contrasted with theoretical reasoning, which is concerned with what one ought to believe. Ethics is a part of practical reason.
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The question of whether Olympic sponsors should have encouraged the International Olympic Committee (IOC) to move or postpone the Rio Olympics is a complex one. One complexity has to do with the proper role of a sponsoring organization. Is it the sponsor’s role even to have an opinion on such things, or should it be a neutral supporter of the IOC and whatever it decides? Would it in fact be wrong for a major multinational to “bully” the IOC into changing its mind?
Another complexity has to do with the relevant science. As noted in the Opening Decision Point, in June 2016 there was some disagreement among well-informed experts. The question that arises—in this and many other cases—is what attitude corporations (and the public, for that matter) should adopt when experts disagree. In some cases, decision makers can afford to say, “let’s wait until the experts figure it out.” In other cases, such as this one, to wait essentially is to make a decision— namely a decision to go ahead with the Olympics as planned, regardless of the risks.
A third complexity has to do with our obligations in the face of risk and uncertainty. If it were certain that proceeding with the Olympics would spread Zika virus and result in many birth defects, a number of people would likely have considered it ethically imperative to move or postpone the Rio Olympics. But even the experts who called on the IOC to make that decision did not claim that the danger was a certainty, merely that it was a risk. The ethical question here is what attitude we should take in such situations. Should we err on the side of safety? Always? That’s a tempting conclusion. But always to err on the side of safety can lead to paralysis, and can itself lead us to take precautions and suffer expenses that prevent us from doing other, ethically important things. For example, moving the Rio Olympics would have had a significant impact on employment opportunities for many people in Rio de Janeiro, and in a city with very high levels of poverty that would be an ethically bad outcome.
Business does not exist in a vacuum. For any company to operate, it must play within the rules of the game. Those rules include not just laws, but also a broader set of social values. As social values evolve, so must businesses. Think of how the menus offered by cafeterias in North America differ from those offered just 20 years ago. Twenty years ago, “light” menu items would have been rare, as would foods drawing on the cultural traditions of places such as India, Korea, and Thailand. Now, all of those things are common: Businesses have adapted to changing values. Any company that finds itself too far out of step with the values of its community faces serious trouble, but any company that fails to change with the times risks becoming obsolete.
Finally, there’s a question of responsibility. One factor that might influence sponsors’ reasoning—rightly or wrongly—is the potential outcomes for the sponsors themselves. If the Olympic Games were moved or postponed, sponsors presumably would lose money they had spent on things like scheduled advertising. On the other hand, if the Games were to go ahead and if there was a slight increase in cases of Zika around the world, sponsors have a two-pronged defense: first, “you can’t prove it’s because of the Olympics” (which is probably true), and second, “the CDC and WHO said it was OK” (which they did). So it would be easy for Olympic partners and sponsors to say—and maybe actually believe—that there was no downside to going ahead. Should sponsors think of the situation this way, ethically?
Opening Decision Point Revisited Zika Virus and Olympic Sponsors: No Easy Answers
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contribute to responsible ethical decision making. Ethical theories are patterns of thinking, or methodologies, to help us decide what to do.
The following chapter will introduce a model for making ethically responsible deci- sions. This can be considered as a model of practical reasoning in the sense that, if you walk through these steps in making a decision about what to do, you would certainly be making a decision grounded in sound reasoning. In addition, the ethical traditions and theories that we describe in Chapter 3 will help flesh out and elaborate on this decision procedure. Other approaches are possible, and this approach will not guaran- tee one single and absolute answer to every decision. But this is a helpful beginning in the development of responsible, reasonable, and ethical decision making.
Questions, Projects, and Exercises
1. Questions of ethics and values obviously arise frequently in certain kinds of univer- sity courses—particularly in classes on ethics or social responsibility. Are there other courses in your school’s curriculum that talk about “the right thing to do,” without necessarily using words such as ethics or social responsibility?
2. Why might legal rules be insufficient for fulfilling one’s ethical responsibilities? Can you think of cases in which a businessperson has done something that is legally per- mitted but ethically wrong? What about the opposite—are there situations in which a businessperson might have acted in a way that was legally wrong but ethically right?
3. What might be some benefits and costs of acting unethically in business? Distinguish between benefits and harms to the individual and benefits and harms to the firm.
4. Review the distinction between personal morality and matters of social ethics. Can you think of cases in which some decisions would be valuable as a matter of social policy but bad as a matter of personal ethics? Something good as a matter of personal ethics and bad as a matter of social policy?
5. As described in this chapter, the Americans with Disabilities Act requires firms to make reasonable accommodations for employees with disabilities. Consider such conditions as obesity, depression, dyslexia, arthritis, hearing loss, high blood pressure, facial scars, mood disorders, allergies, attention deficit disorders, post-traumatic stress syndrome, and the fear of heights. Imagine that you are a business manager and an employee comes to you asking that accommodations be made for these conditions. Under what circum- stances might these conditions be serious enough impairments to deserve legal protection under the ADA? What factors would you consider in answering this question? After mak- ing these decisions, reflect on whether your decision was more a legal or ethical decision.
6. Do an Internet search for recent news stories about oil spills. Do any of those stories report behaviors that seem especially wise or unwise on the part of the oil companies involved? Do you think that controversies over big pipeline projects like the Keystone pipeline alter how people evaluate the ethics of oil-spill cleanups?
7. Construct a list of all the people who were adversely affected by Bernie Madoff’s Ponzi scheme. Who, among these people, would you say had their rights violated? What responsibilities, if any, did Madoff have to each of these constituencies?
8. Do “ethical” behaviors need to be grounded in ethical values in order to be consid- ered ethically good? If a business performs a socially beneficial act in order to receive good publicity, or if it creates an ethical culture as a business strategy, has the business
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acted in a less-than-ethically praiseworthy way? Is thinking of ethics as “good for business” misleading or just practical?
9. During the recession of 2008–2009, many reputable companies suffered bankruptcies while others struggled to survive. Of those that did remain, some chose to reduce the size of their workforces significantly. Imagine yourself helping run a company during such a recession. Imagine the company that has been doing fairly well, posting profits every quarter and showing a sustainable growth expectation for the future; however, the general uneasiness in the market has caused the company’s stock price to fall. In response to this problem, the CEO decides to lay off some of her employees, hoping to cut costs and to improve the bottom line. This action raises investor confidence and, consequently, the stock price goes up. What is your impression of the CEO’s decision? Was there any kind of ethical lapse in laying off the employees, or was it a practical decision necessary for the survival of the company?
10. Every year, Ethisphere Magazine publishes a list of the world’s most ethical compa- nies. Go to its website and find and evaluate its rating methodology and criteria. Then engage in an assessment (that is, provide suggestions for any modifications you might make for a more or less comprehensive list, and so on).
Key Terms descriptive ethics, p. 12 ethical values, p. 17 ethics, p. 11 morality, p. 13 normative ethics, p. 12
norms, p. 14 personal integrity, p. 13 practical reasoning, p. 22 risk assessment, p. 21 social ethics, p. 13
After reading this chapter, you should have a clear understanding of the following key terms. For a complete definition, please see the Glossary.
stakeholder, p. 7 theoretical reasoning, p. 22 values, p. 16
1. Decision Points appear throughout each chapter in the text. These challenges are designed to integrate the concepts discussed during that particular segment of the chapter and then to suggest questions or further dilemmas to encourage the reader to explore the challenge from a stakeholder perspective and using the ethical decision- making process. This process will be further described in Chapter 2. Opening Deci- sion Points introduce one of the main themes of the chapters and a conclusion is offered at the end of each chapter.
2. G. Santayana, Reason in Common Sense, vol. 1, The Life of Reason (New York: C. Scribner’s Sons, 1905).
3. D. Willets, “The Invisible Hand That Binds Us All,” Financial Times, April 24, 2011, www.ft.com/intl/cms/s/2/f3e5965e-6e9a-11e0-a13b-00144feabdc0.html#axzz 1ZFr514r8 (accessed December 1, 2011).
4. J. Jones, “Record 64% Rate Honesty, Ethics of Members of Congress Low,” Gallup Poll, December 12, 2011, www.gallup.com/poll/151460/Record-Rate-Honesty-Eth- ics-Members-Congress-Low.aspx (accessed December 14, 2011).
5. Ethics Resource Council, “2009 Business Ethics Survey, Supplemental Research Brief: Saving the Company Comes at a Cost: The Relationship between Belt-Tight- ening Tactics and Increased Employee Misconduct,” February 2010, www.ethics.org/ page/nbes-supplemental-research-briefs (accessed November 23, 2011).
Endnotes
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6. Whole Foods Market IP, LLP, “Declaration of Independence,” www.wholefoodsmarket .com/company/declaration.php, accessed January 15, 2012. See also Knowledge @ Wharton, “Building Companies That Leave the World a Better Place,” February 28, 2007, p. 2, excerpting R. Sisodia, J. Sheth, and D. Wolfe, Firms of Endearment: How World-Class Companies Profit from Passion and Purpose (Philadelphia, PA: Wharton Business School Publishing, 2007), ch. 6.
7. “Whole Foods Market Reports Fourth Quarter Results,” 2015, http://assets. wholefoodsmarket.com/www/company-info/investor-relations/financial-press- releases/2015/4Q15-Earnings-PR.pdf (accessed April 16, 2016).
8. S. Denning, “What the Sale of NYSE Means: The Decline of Management,” Forbes, February 15, 2011, www.forbes.com/sites/stevedenning/2011/02/15/what- the-sale-of-nyse-means-the-decline-of-management/ (accessed January 15, 2012).
9. LRN, Ethics Study: Employee Engagement, 2007, www.lrn.com (accessed July 20, 2012).
10. L. Bergman and O. Zill de Granados, “Black Money,” Frontline, April 7, 2009, www. pbs.org/wgbh/pages/frontline/blackmoney/etc/script.html (accessed July 20, 2012).
11. K. Sullivan, “Saudi Reportedly Got $2 Billion for British Arms Deal,” The Wash- ington Post, June 8, 2007, p. A15, www.washingtonpost.com/wp-dyn/content/arti- cle/2007/06/07/AR2007060701301.html (accessed July 20, 2012).
12. D. Goldman and T. Luhby, “AIG: The Bailout That Won’t Quit,” CNNMoney. com, February 27, 2009, http://money.cnn.com/2009/02/27/news/companies/aig_ bailout/ (accessed July 20, 2012); R. Reich, “The Real Scandal of AIG,” Salon. com, March 16, 2009, www.salon.com/opinion/feature/2009/03/16/reich_aig/ (accessed July 20, 2012); B. Ross and T. Shine, “After Bailout, AIG Execs Head to California Resort,” ABC News, October 7, 2008, http://abcnews.go.com/Blotter/ story?id=5973452&page=1#.UAnfmUQmzQo (accessed July 20, 2012); E. Strott, “Why AIG Matters,” MSN Money, September 16, 2008, http://articles.moneycentral. msn.com/Investing/Dispatch/why-aig-matters.aspx (accessed April 13, 2010).
13. The full text of H.R. 1664, “Grayson-Himes Pay for Performance Act of 2009,” is available at http://opencongress.org/bill/111-h1664/show (accesssed july 20, 2012)
14. See “Wrigley Residents Voice Pipeline Spill Concerns,” CBC News, August 12, 2011, www.cbc.ca/news/canada/north/story/2011/08/11/nwt-wrigley-enbridgemeeting .html (accessed July 19, 2012).
15. Committee of Sponsoring Organizations (COSO) of the Treadway Commission, “Executive Summary,” Enterprise Risk Management—Integrated Framework, September 2004, p. 2.
16. R. Berenbeim, Universal Conduct: An Ethics and Compliance Benchmarking Survey, Research Report R-1393-06-RR (New York: The Conference Board, 2006).
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Readings Reading 1-1: “Value Shift,” by Lynn Sharp Paine Reading 1-2: “The MBA Oath” Reading 1-3: “The Oath Demands a Commitment to Bad Corporate
Governance,” by Theo Vermaelen Reading 1-4: “The MBA Oath Helps Remind Graduates of Their Ethical
Obligations,” by Chris MacDonald
Reading 1-1
Value Shift Lynn Sharp Paine
Business has changed dramatically in the past few dec- ades. Advances in technology, increasing globalization, heightened competition, shifting demographics— these have all been documented and written about extensively. Far less notice has been given to another, more subtle, change—one that is just as remarkable as these more visible developments. What I have in mind is the attention being paid to values in many companies today.
When I began doing research and teaching about business ethics in the early 1980s, skepticism about this subject was pervasive. Many people, in busi- ness and in academia, saw it as either trivial or alto- gether irrelevant. Some saw it as a joke. A few were even hostile. The whole enterprise, said critics, was misguided and based on a naïve view of the busi- ness world. Indeed, many had learned in their col- lege economics courses that the market is amoral.
Back then, accepted wisdom held that “busi- ness ethics” was a contradiction in terms. People joked that an MBA course on this topic would be the shortest course in the curriculum. At that time, bookstores offered up volumes with titles like The Complete Book of Wall Street Ethics consisting entirely of blank pages. The most generous view was that business ethics had something to do with corporate philanthropy, a topic that might interest executives after their companies became finan- cially successful. But even then, it was only a frill—an indulgence for the wealthy or eccentric.
Today, attitudes are different. Though far from universally embraced—witness the scandals of 2001 and 2002—ethics is increasingly viewed as an important corporate concern. What is our purpose? What do we believe in? What principles should guide our behavior? What do we owe one another and the people we deal with—our employees, our customers, our investors, our communities? Such classic questions of ethics are being taken seriously in many companies around the world, and not just by older executives in large, established firms. Manag- ers of recently privatized firms in transitional econ- omies, and even some farsighted high-technology entrepreneurs, are also asking these questions.
Ethics, or what has sometimes been called “moral science,” has been defined in many ways—“the sci- ence of values,” “the study of norms,” “the science of right conduct,” “the science of obligation,” “the gen- eral inquiry into what is good.” In all these guises, the subject matter of ethics has made its way onto man- agement’s agenda. In fact, a succession of definitions have come to the forefront as a narrow focus on norms of right and wrong has evolved into a much broader interest in organizational values and culture. Increas- ingly, we hear that values, far from being irrelevant, are a critical success factor in today’s business world.
The growing interest in values has manifested itself in a variety of ways. In recent years, many manag- ers have launched ethics programs, values initiatives, and cultural change programs in their companies.
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Some have created corporate ethics offices or board-level ethics committees. Some have set up special task forces to address issues such as con- flicts of interest, corruption, or electronic data pri- vacy. Others have introduced educational programs to heighten ethical awareness and help employees integrate ethical considerations into their decision processes. Many have devoted time to defining or revising their company’s business principles, cor- porate values, or codes of conduct. Still others have carried out systematic surveys to profile their com- pany’s values and chart their evolution over time.
A survey of U.S. employees conducted in late 1999 and early 2000 found that ethics guidelines and training were widespread. About 79 percent of the respondents said their company had a set of written ethics guidelines, and 55 percent said their company offered some type of ethics training, up from 33 percent in 1994. Among those employed by organizations with more than 500 members, the proportion was 68 percent.
Another study—this one of 124 companies in 22 countries—found that corporate boards were becom- ing more active in setting their companies’ ethical standards. More than three-quarters (78 percent) were involved in 1999, compared to 41 percent in 1991 and 21 percent in 1987. Yet another study found that more than 80 percent of the Forbes 500 companies that had adopted values statements, codes of conduct, or corporate credos had created or revised these documents in the 1990s.
During this period, membership in the Ethics Officer Association, the professional organization of corporate ethics officers, grew dramatically. At the beginning of 2002, this group had 780 mem- bers, up from 12 at its founding 10 years earlier. In 2002, the association’s roster included ethics offic- ers from more than half the Fortune 100.
More companies have also undertaken efforts to strengthen their reputations or become more responsive to the needs and interests of their vari- ous constituencies. The list of initiatives seems endless. Among the most prominent have been initi- atives on diversity, quality, customer service, health and safety, the environment, legal compliance,
professionalism, corporate culture, stakeholder engagement, reputation management, corporate identity, cross-cultural management, work–family balance, sexual harassment, privacy, spirituality, corporate citizenship, cause-related marketing, sup- plier conduct, community involvement, and human rights. A few companies have even begun to track and report publicly on their performance in some of these areas. For a sampling of these initiatives, see Reading Figure 1.1.
To aid in these efforts, many companies have turned to consultants and advisors, whose num- bers have increased accordingly. A few years ago, BusinessWeek reported that ethics consulting had become a billion-dollar business. Though per- haps somewhat exaggerated, the estimate covered only a few segments of the industry, mainly mis- conduct prevention and investigation, and did not include corporate culture and values consulting or consulting focused in areas such as diversity, the environment, or reputation management. Nor did it include the public relations and crisis management consultants who are increasingly called on to help companies handle values-revealing crises and con- troversies such as product recalls, scandals, labor disputes, and environmental disasters. Thirty or 40 years ago, such consultants were a rare breed, and many of these consulting areas did not exist at all. Today, dozens of firms—perhaps hundreds, if we count law firms and the numerous consultants spe- cializing in specific issue areas—offer companies expertise in handling these matters. Guidance from nonprofits is also widely available.
What’s Going On? A thoughtful observer might well ask, “What’s going on?” Why the upsurge of interest in ethics and values? Why have companies become more atten- tive to their stakeholders and more concerned about the norms that guide their own behavior? In the course of my teaching, research, and consulting over the past two decades, I have interacted with execu- tives and managers from many parts of the world.
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READING FIGURE 1.1 Values in Transition
CORPORATE INITIATIVES––A SAMPLER
Internally Oriented:
Reputation management programs Corporate identity initiatives Corporate brand-building initiatives Stakeholder engagement activities Societal alignment initiatives Nonfinancial-performance reporting initiatives
Externally Oriented:
Diversity initiatives Sexual harassment programs Work–family initiatives Workplace environment initiatives
(A P
P LY
IN G
T O
A LL
A C
TI V
IT IE
S A
N D
F U
N C
TI O
N S
)
Employee Oriented:
Product and service quality initiatives Customer service initiatives Product safety initiatives Cause-related marketing
Customer Oriented:
Supplier conduct initiativesSupplier Oriented:
Corporate governance initiativesInvestor Oriented:
Environmental initiatives Corporate citizenship initiatives Community involvement initiatives Strategic philanthropy
Community Oriented:
Electronic privacy Human rights initiatives Anticorruption programs Biotechnology issues
Issue Oriented:
Ethics programs Compliance programs Mission and values initiatives Business principles initiatives Business practices initiatives Culture-building initiatives Cross-cultural management programs Crisis prevention and readiness
C O
M P
R EH
EN S
IV E
(A P
P LY
IN G
T O
P A
R TI
C U
LA R
IS S
U ES
O R
C O
N S
TI TU
EN C
IE S
)
FO C
U S
ED
In discussing these questions with them, I have learned that their motivating concerns are varied:
∙ An Argentine executive sees ethics as integral to transforming his company into a “world-class organization.”
∙ A group of Thai executives wants to protect their company’s reputation for integrity and social responsibility from erosion in the face of inten- sified competition.
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∙ A U.S. executive believes that high ethical standards are correlated with better financial performance.
∙ An Indian software company executive sees his company’s ethical stance as important for building customer trust and also for attracting and retaining the best employees and software professionals.
∙ A Chinese executive believes that establishing the right value system and serving society are key components in building a global brand.
∙ The executives of a U.S. company see their efforts as essential to building a decentralized organiza- tion and entrepreneurial culture around the world.
∙ Two Nigerian entrepreneurs want their company to become a “role model” for Nigerian society.
∙ A Swiss executive believes the market will increasingly demand “social compatibility.”
∙ An Italian executive wants to make sure his company stays clear of the scandals that have embroiled others.
∙ A U.S. executive believes that a focus on ethics and values is necessary to allow his company to decentralize responsibility while pursuing aggressive financial goals.
∙ A U.S. executive answers succinctly and prag- matically, “60 Minutes.”
These responses suggest that the turn to values is not a simple phenomenon. Individual executives have their own particular reasons for tackling this difficult and sprawling subject. Even within a sin- gle company, the reasons often differ and tend to change over time. A company may launch an ethics initiative in the aftermath of a scandal for purposes of damage control or as part of a legal settlement. Later on, when the initiative is no longer necessary for these reasons, a new rationale may emerge.
This was the pattern at defense contractor Mar- tin Marietta (now Lockheed Martin), which in the mid-1980s became one of the first U.S. companies to establish what would later come to be called an “eth- ics program.” At the time, the entire defense industry was facing harsh criticism for practices collectively
referred to as “fraud, waste, and abuse,” and Con- gress was considering new legislation to curb these excesses. The immediate catalyst for Martin Mariet- ta’s program, however, was the threat of being barred from government contracting because of improper billing practices in one of its subsidiaries.
According to Tom Young, the company presi- dent in 1992, the ethics program began as damage control. “When we went into this program,” he explained, “we didn’t anticipate the changes it would bring about. . . . Back then, people would have said, ‘Do you really need an ethics program to be ethical?’ Ethics was something personal, and you either had it or you didn’t. Now that’s all changed. People rec- ognize the value.” By 1992, the ethics effort was no longer legally required, but the program was contin- ued nonetheless. However, by then it had ceased to be a damage control measure and was justified in terms of its business benefits: problem avoidance, cost containment, improved constituency relationships, enhanced work life, and increased competitiveness.
A similar evolution in thinking is reported by Chumpol NaLamlieng, CEO of Thailand’s Siam Cement Group. Although Siam Cement’s emphasis on ethics originated in a business philosophy rather than as a program of damage control, Chumpol recalls the feeling he had as an MBA student—that “ethics was something to avoid lawsuits and trou- ble with the public, not something you considered a way of business and self-conduct.” Today, he says, “We understand corporate culture and environment and see that good ethics leads to a better company.”
Siam Cement, one of the first Thai companies to publish a code of conduct, put its core values into writing in 1987 so they “would be more than just words in the air,” as one executive explains. In 1994, shortly after the company was named Asia’s “most ethical” in a survey conducted by Asian Business magazine, Chumpol called for a thorough review of the published code. The newly appointed CEO wanted to make sure that the docu- ment remained an accurate statement of the com- pany’s philosophy and also to better understand whether the espoused values were a help or hin- drance in the more competitive environment of the
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1990s. In 1995, the company reissued the code in a more elaborate form but with its core principles intact. The review had revealed that while adher- ing to the code did in some cases put the company at a competitive disadvantage, it was on balance a plus. For example, it helped attract strong partners and employees and also positioned the company, whose largest shareholder was the Thai monarchy’s investment arm, as a leader in the country.
A very different evolution in thinking is reported by Azim Premji, chairman of Wipro Ltd., one of India’s leading exporters of software services and, at the height of the software boom in 2000, the coun- try’s largest company in terms of market capitaliza- tion. Wipro’s reputation for high ethical standards reflects a legacy that began with Premji’s father, M.H. Hasham Premji, who founded the company in 1945 to make vegetable oil. The elder Premji’s value system was based on little more than personal conviction—his sense of the right way to do things. Certainly it did not come from a careful calculation of business costs and benefits. In fact, his son noted, “It made no commercial sense at the time.”
When his father died in 1966, Azim Premji left Stanford University where he was an undergraduate to assume responsibility for the then-family-owned enterprise. As he sought to expand into new lines of business, Premji found himself repeatedly having to explain why the company was so insistent on hon- esty when it was patently contrary to financial inter- est. Over time, however, he began to realize that the core values emphasized by his father actually made for good business policy. They imposed a useful dis- cipline on the company’s activities while also help- ing it attract quality employees, minimize transaction costs, and build a good reputation in the market- place. In 1998, as part of an effort to position Wipro as a leading supplier of software services to global corporations, the company undertook an intensive self-examination and market research exercise. The result was a reaffirmation and rearticulation of the core values and an effort to link them more closely with the company’s identity in the marketplace.
Managers’ reasons for turning to values often reflect their company’s stage of development.
Executives of large, well-established companies typically talk about protecting their company’s reputation or its brand, whereas entrepreneurs are understandably more likely to talk about building a reputation or establishing a brand. For skeptics who wonder whether a struggling start-up can afford to worry about values, Scott Cook, the founder of soft- ware maker Intuit, has a compelling answer. In his view, seeding a company’s culture with the right val- ues is “the most powerful thing you can do.” “Ulti- mately,” says Cook, “[the culture] will become more important to the success or failure of your company than you are. The culture you establish will guide and teach all your people in all their decisions.”
In addition to company size and developmen- tal stage, societal factors have also played a role in some managers’ turn to values. For example, executives in the United States are more likely than those who operate principally in emerging markets to cite reasons related to the law or the media. This is not surprising, considering the strength of these two institutions in American society and their rela- tive weakness in many emerging-markets coun- tries. Since many ethical standards are upheld and reinforced through the legal system, the linkage between ethics and law is a natural one for U.S. executives. In other cases, executives offer reasons that mirror high-profile issues facing their industries or countries at a given time—issues such as labor shortages, demographic change, corruption, envi- ronmental problems, and unemployment. Antonio Mosquera, for example, launched a values initiative at Merck Sharp & Dohme Argentina as part of a general improvement program he set in motion after being named managing director in 1995. Mosquera emphasized, however, that promoting corporate eth- ics was a particular priority for him because corrup- tion was a significant issue in the broader society.
Despite the many ways executives explain their interest in values, we can see in their com- ments several recurring themes. Seen broadly, their rationales tend to cluster into four main areas:
∙ Reasons relating to risk management. ∙ Reasons relating to organizational functioning.
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∙ Reasons relating to market positioning. ∙ Reasons relating to civic positioning.
A fifth theme, somewhat less salient but never- theless quite important. . . , has to do with the idea simply of “a better way.” For some, the rationale lies not in some further benefit or consequence they are seeking to bring about but rather in the inherent worth of the behavior they are trying to encourage. In other words, the value of the behavior resides
principally in the behavior itself. For these execu- tives, it is just better—full stop—for companies to be honest, trustworthy, innovative, fair, responsible, or good citizens. No further explanation is neces- sary any more than further explanation is required to justify the pursuit of self-interest or why more money is better than less.
Source: From Value Shift, by Lynn Sharp Paine, Copyright © 2004, The McGraw-Hill Companies. Reproduced by permission of the publisher.
As a business leader I recognize my role in society.
∙ My purpose is to lead people and manage resources to create value that no single individ- ual can create alone.
∙ My decisions affect the well-being of individu- als inside and outside my enterprise, today and tomorrow.
Therefore, I promise that: ∙ I will manage my enterprise with loyalty and
care, and will not advance my personal interests at the expense of my enterprise or society.
∙ I will understand and uphold, in letter and spirit, the laws and contracts governing my conduct and that of my enterprise.
∙ I will refrain from corruption, unfair competition, or business practices harmful to society.
∙ I will protect the human rights and dignity of all people affected by my enterprise, and I will oppose discrimination and exploitation.
Reading 1-2
The MBA Oath ∙ I will protect the right of future generations to
advance their standard of living and enjoy a healthy planet.
∙ I will report the performance and risks of my enterprise accurately and honestly.
∙ I will invest in developing myself and others, help- ing the management profession continue to advance and create sustainable and inclusive prosperity.
In exercising my professional duties according to these principles, I recognize that my behavior must set an example of integrity, eliciting trust and esteem from those I serve. I will remain account- able to my peers and to society for my actions and for upholding these standards.
This oath I make freely, and upon my honor.
Source: This is the current, revised version of the MBA Oath and makes use of slightly different wording than that referred to by the two commentaries that follow [Readings 1-3 and 1-4]. It is available at MBAoath.com. (The version reproduced here was retrieved August 9, 2012.)
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I don’t believe that the MBA oath is a good idea, for three reasons. First, some parts of the pledge are inconsistent with fiduciary duties and ethical stand- ards. Second, the oath is a misplaced response to the financial crisis. Third, I don’t believe in pledges as an instrument to guide people’s behaviour.
In many countries, board members and, as a con- sequence, managers have a fiduciary duty to maxi- mize the wealth of shareholders. Even in countries where the corporate governance code insists on promoting maximizing “stakeholder” value, none of these codes would accept that managers promote “social and environmental prosperity worldwide” as the MBA oath requires. Externalities such as the consequences of business decisions for the envi- ronment have to be dealt with by the government, unless, of course, a business case can be made that shareholder value is increased by taking care of these externalities.
A second problem is that the oath assumes that the financial crisis was caused by unethical MBAs. For example, in a recent working paper, The Ethi- cal Roots of The Financial Crisis, Wharton profes- sor Thomas Donaldson argues that the financial crisis was caused by bad ethics, by bankers who were gambling with other people’s money. This accusation ignores the facts.
New research on the crisis shows that banks where the CEO held a lot of stock were also the banks with the biggest losses. So they were not losing other people’s money, they lost their own money. They apparently believed in their strat- egy. Moreover, we know that 81 percent of the mortgage-backed securities purchased by bankers for their own personal accounts were AAA-rated. These securities turned out to be the most mis- priced securities: They produced lower returns than the lower-rated tranches.
Reading 1-3
The Oath Demands a Commitment to Bad Corporate Governance Theo Vermaelen
Finally, my INSEAD colleague, Harald Hau, and his co-author Marcel Thum have shown that the largest bank losses in German banks were expe- rienced by banks with board members who were least educated in finance.
So the evidence is that bankers have made mis- takes and board members may have been ignorant, but they are not crooks. They believed rating agen- cies, which in turn made their forecasts of financial distress based on extrapolating historical data. Rating agencies behaved no differently than climate-change scientists who base their doomsday forecasts of man- made global warming on extrapolation of historical data. If, for example, it turns out that 30 years from now we enter a period of global cooling, will we then accuse climate-change activists of greed and unethi- cal behavior? Presumably not. Forecasting and mod- eling is a tricky business. So the solution is not more ethics or pledges, but more finance education and better forecasting and risk management models.
The idea that the next crisis will be avoided simply because we sign an oath seems exces- sively naive. The donkey does not walk because he pledges to walk, but because of the carrot and the stick. Signing the oath doesn’t cost anything and is therefore not a credible commitment. Even if Bernie Madoff had signed the HBS oath, he would not have acted any differently. Rather than focus- ing on pledges, businesses should make sure that managers comply with their fiduciary and ethical responsibility to maximize the wealth of the people who pay their salaries—i.e., the shareholders.
The MBA oath aims to achieve exactly the oppo- site. It pushes the stakeholder value maximization idea to its extreme by including the whole world as a stakeholder. If this oath indeed would be imple- mented, then the resulting erosion of shareholder property rights would prevent the development of
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capital markets and undermine economic growth. As I interpret the oath as a commitment to bad cor- porate governance, companies that employ those who sign the oath as top executives should disclose this on the first page of their website. In this way, investors are warned that investing in these compa- nies can be “dangerous to your wealth.”
If MBA students insist on taking an oath that pro- motes shareholder-friendly corporate governance, I
would propose the following: “I pledge to maxi- mize the wealth of the people who pay my salary— i.e., the shareholders, unless the shareholders tell me in advance that they want me to do something else. I will do my best to learn how to do this by taking the relevant courses.”
Source: “The Oath Demands a Commitment to Bad Corpo- rate Governance,” Canadian Business, October 2010, p. 83.
In response to the economic crisis, in 2009 a group of graduating Harvard MBAs proposed that all MBA students sign an oath of professional con- duct. It pledges, among other things, to “contribute to the well-being of society” and to “create sustain- able economic, social and environmental prosper- ity worldwide.”
The oath has since been taken by students at more than 250 schools around the world, and while it is not a revolutionary thing, not a perfect thing, it is definitely a good thing. Of course, not everyone thinks so. The MBA oath has been assailed by three kinds of critics: ones who say it is too demanding, ones who say it is not demanding enough, and ones who say it shouldn’t be necessary in the first place. Each group is, in its own way, badly off-target.
First, consider the critics who say the oath is too demanding. To them, the oath embodies a radical departure from the tenets of economic theory and the requirements of corporate law. There is, after all, a clause under which MBAs promise to protect the planet, and implicitly to do so even when that’s not in the best interest of shareholders. But such critics are being perversely literal. Nothing in the MBA oath exhorts MBAs to turn their backs on their fiduciary duties to shareholders, nor even to push in that direc- tion beyond the minimal expectations of decency.
Reading 1-4
The MBA Oath Helps Remind Graduates of Their Ethical Obligations Chris MacDonald
Second, there are critics who say the oath requires too little. Follow the law? Obey contracts? Pay a lit- tle attention to the consequences of your actions? Is that all MBAs aspire to? How about a real commit- ment to social and economic justice? And besides, how much can really be accomplished by a voluntary code, absent any form of enforcement? These critics, too, are off-target. To begin, they ignore the poten- tial impact of getting ethical concerns explicitly onto the business executive’s agenda. But perhaps more important, they underestimate the depth of legiti- mate debate over the way even public-minded MBAs ought to put their values into action when at work. The ethical obligations of business executives are not, despite what the critics say, obvious and easy.
The third group of critics says an oath should not be necessary in the first place. After all, should anyone really need to be told to be ethical? More particularly, shouldn’t people who have graduated from an MBA program already know just what is expected of them, ethically, in the environments for which they’ve been so extensively and expen- sively trained? Again, the criticism is off-base. For the point of an oath such as this is not to remind the MBA of the details of his or her ethical obli- gations. It is an affirmation that the MBA intends, in the face of competing pressures, to keep those
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ethical obligations firmly in mind—something that all available evidence suggests is harder than it sounds. So the MBA who signs the oath signals that, for him or her, ethics wasn’t just a compulsory course to pass and then forget about.
None of this is to say that the MBA oath is per- fect. It arguably has too little to say about princi- pal agent problems, and about how MBAs ought to handle the conflicts that will inevitably arise between the oath’s various injunctions. Note also that the oath insists on the duty to avoid “business practices harmful to society,” which is so painfully vague it borders on the vacuous.
But overall, the main problem with the MBA oath isn’t really a problem with the oath at all—it’s a problem with people’s expectations. Dismissive critics say that no oath will solve the deep and abid- ing moral problems that beset the world of business. That’s surely true, but no one could seriously have
thought otherwise. It’s trite, but also true, to say that the world of business is increasingly complex. The ethical demands on business are higher than ever. In particular, business executives are called upon with increasing regularity to account for their actions and their policies, and to justify them to an increasing range of stakeholders. Add to that the enormous, lingering cultural rift regarding the proper role of corporations and markets. The MBA oath is of course not going to solve all of the ethical chal- lenges that arise in such a context. Nor is it going to ensure that none of its signatories ever crosses the line into regrettable or disreputable or even dis- graceful behaviour. But if given half a chance, the MBA oath might just turn out to play a small but not insignificant role in keeping the discussion alive.
Source: “The MBA Oath Helps Remind Graduates of Their Ethical Obligations,” Canadian Business, October 2010, p. 82.
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