Practice Case Assignment
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Chapter 10
Moral Choices Facing Employees
I. Introduction (NIB-p.493) A. Opening Case Comments (NIB-p.493)
1. Shaw and Barry use the opening case dealing with two whistle-blowers, especially George Galatis, to illustrate two central themes in this chapter:
a. First, how do employees determine their moral responsibilities to their employer and others amid a welter of conflicting demands.
b. Second, how does one balance his/her moral obligations with the potential personal costs incurred from living up to one’s obligations.
c. Chapter 10 versus Chapters 8 and 9: Note that Shaw and Barry are still focusing on employment related issues. The main difference is that Chapter 10 focuses on
employee moral obligations whereas Chapters 8 and 9 focused on employer
moral obligations.
2. Chapter 10 examines the following topics: a. Employees’ obligations to the firm, company loyalty, and the problem of
conflicts of interest.
b. Insider trading or use of proprietary data. c. Domestic and foreign bribery, gifts, kickbacks. d. Obligations to third parties and the problem of conflict of duties and divided
loyalties.
e. Whistle-blowing and its morality. f. Self-interest in situations of tough moral choices.
B. Chapter Learning Objectives (NIB-p.494) – After completing this chapter students should be able to:
1. Understand employees’ legal and moral obligations to the firm and appreciate some of the difficult choices with which employees are faced.
2. Identify, avoid, and suggest ways to resolve employment-related conflicts of interest. 3. Understand employees’ obligation to operate within a legal and ethical framework on
behalf of their employers in ways that protect proprietary data, avoid bribes and
kickbacks, and other perceived forms of impropriety.
4. Evaluate the options available to employees who need to challenge their employers, as well as their rights and responsibilities if and when they believe that wrongdoing has
taken place.
5. Distinguish between employees’ obligations to employers and third parties.
II. Obligations to the Firm (p.494) A. Overview (NIB-p.494)
1. The employment contract governs the employer-employee relationship and provides a framework for understanding the respective obligations of employer and employee.
a. As discussed in this chapter, an employment contract means the reciprocal obligations between an employee and employer.
b. It does not have to be a written, express contract; it can be oral or simply implied. c. The respective obligations discussed in this chapter arise from Agency Law.
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2. Agency Law and the Employer-Employee Relationship (NIB) a. An employee is one whose physical conduct is controlled, or subject to control,
by an employer.
1) The key feature is the employer’s right to control the employee in the performance of tasks involved in the employment.
2) Under agency law, two types of employer-employee relationships can exist: The master-servant relationship and the principal-agent relationship.
b. Master/Employer-Servant/Employee Relationship –A master/employer hires a servant/employee to perform certain tasks and duties, but does not authorize
him/her to enter into contracts.
1) This, unfortunately, is also referred to as the employer-employee relationship.
2) It is the narrow definition of the employer-employee relationship. c. Principal/Employer-Agent/Employee Relationship – An employer/principal
hires an employee/agent to perform certain tasks and duties and gives that
employee authority to act and enter into contracts on its behalf.
B. General Legal Obligations Owed by the Agent/Employee Under Agency Law (NIB) 1. Performance – If an agent fails to perform his/her duties, he/she will generally be
liable for breach of contract/agency and may also be liable in tort for careless or
negligent performance.
2. Notification – The employee must use reasonable efforts to notify the employer of all information he/she possesses that is relevant to the subject matter of the agency and
that he/she knows or should know will be imputed to the principal.
3. Loyalty – The agent must act with utmost loyalty and good faith solely for his/her principal’s interest (unless agreed otherwise).
a. Duty Not to Compete – The agent must not compete with the principal. b. Dual Agency – The agent must not represent two principals with conflicting
interests, but the principal may consent to representation by the agent if he/she
has full knowledge of all material facts.
c. Secretly Dealing with the Principal – The agent may not secretly buy or sell from or for him/herself with the principal without permission.
d. Outside Benefits/Secret Profits – The agent may not make secret profits on transactions entered into for the principal.
4. Confidential Information – Proprietary knowledge acquired through an agency relationship is confidential and cannot be used by the agent for his/her personal benefit,
even after the agency relationship is terminated.
5. Obedience – The agent must follow all lawful and explicit instructions of the principal and not act outside his/her authority.
6. Accounting – The agent must account for money or other property received or expended on behalf of the principal and the agent must not commingle his/her own
money or property with money or property received from or for the principal.
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C. The Moral Obligation of Loyalty to the Company (NIB-p.494) 1. As seen in the previous section, the traditional law of agency places employees under a
legal obligation to act loyally and in good faith.
a. But it would be morally benighted to view employees simply as agents of their employers or to expect them to subordinate entirely their autonomy and private
lives to the organization.
b. Morality requires neither blind loyalty nor total submission to the organization. 2. Although some writers disagree, company loyalty is commonplace, and most people
find it a coherent and legitimate concept.
a. Arguably, some moral obligations of loyalty simply come with the job—for example, the obligation to warn the organization of danger, the obligation to act
in a way that protects its legitimate interests, and the obligation to cooperate
actively in the furtherance of legitimate corporate goals.
b. In addition, businesses often expect employees to defend the company if it is maligned, to work overtime when the company needs it, to accept a transfer if
necessary for the good of the organization, or to demonstrate their loyalty and
countless other ways.
1) Displaying loyalty in those ways certainly seems morally permissible, even if it is not morally required.
3. However, loyalty requires reciprocity, and workers commonly believe that it is up to the company to earn and retain their loyalty.
D. Conflicts of Interest (p.496) 1. Even the most loyal employees can find that their interests collide with those of the
organization.
a. Sometimes this clash of goals and desires can take the serious form of a conflict of interest.
b. In an organization, a conflict of interest arises when employees at any level have special or private interests that are substantial enough to interfere with their job
duties—that is, when their personal interest lead them, or might reasonably be
expected to lead them, to make decisions or to act in ways that are detrimental to
their employer’s interest.
2. Some Relevant Distinctions (NIB) a. Actual versus Potential Conflicts of Interest:
1) A conflict is actual when a personal interest leads a person to act against the interests of an employer or another person whose interests the person is
obligated to serve.
2) A situation constitutes a potential conflict of interest when there is the possibility that an agent will fail to fulfill an obligation to act in the interests
of the principal but the agent has not yet done so.
b. Personal and Impersonal Conflicts of Interest. 1) Personal conflicts are those where the agent has something to gain. 2) An impersonal conflict arises when the agent is obligated to act in the
interests of two different principals whose interests conflict.
c. Individual and Organizational Conflict. 1) Individual conflicts occur when the agent acts as an individual. 2) Organizational conflicts occur when the agent is an organization.
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3. Managing Conflict of Interest (NIB) a. Conflicts of interest are not necessarily personal failings but are built into the
structure of professions and organizations.
b. The main means for managing conflict of interest are: 1) Objectivity. Codes of ethics for professionals, such as lawyers and
accountants, require that professionals resist the influence of any personal
interest that might be present.
2) Avoidance. People with an obligation to serve the interest of others should avoid acquiring any interest that might interfere with this obligation,
although not all such interests may be anticipated.
3) Rules and Policies. Rules, such as those against accepting gifts or letting contracts without three bids, can prevent the acquisition of adverse interests
or prohibit behavior that would constitute acting in a conflict of interest.
4) Independent Judgment. When conflicts of interest exist, it is often best to refer decisions to an independent, objective third party.
5) Structural Changes. Conflicts that result from providing multiple services can be avoided by forming separate units or organizations to provide each
service.
6) Disclosure. If and only if the above means fail to prevent the conflict, disclosing an adverse interest may eliminate a conflict because the other
party can either break off the relationship or at least be on guard against any
harm.
4. Financial Investments – An example.
III. Abuse of Official Position (p.498) A. Overview (NIB-p.498)
1. Using one’s official position for personal gain—called abuse of official position or more generally abuse of authority—always raises moral concerns and questions
because it is likely to violate one’s obligations to the organization.
2. Example: Using corporate funds for private purposes such health club memberships, extravagant parties, vacation travel, etc.
B. Insider Trading (p.498) 1. Two types of insider trading illegal under the Securities Exchange Act of 1934 (NIB):
a. Section 10(b) insider trading occurs when business “insiders” buy or sell financial securities (e.g., stocks and bonds) on the basis of information that has
not yet been made public and it is likely to affect the price of the security.
1) It is not necessary to show that a profit was made; all that needs to be shown is that the information was likely to affect the price of the security.
b. Section 16(b) insider trading occurs when an officer, director, or stockholder owning 10% or more of a corporation’s outstanding stock makes a profit from
short-swing trading.
1) Short-swing trading occurs when any insider sells such stock within 6 months from the date of its purchase or purchases such stock within 6
months from the date of sale of the stock.
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2) Section 16(b) imposes strict liability on the insider—that is, if the insider makes a profit from short-swing trading, he/she is automatically liable no
matter what the reason.
2. Section 10(b) inside traders defend their actions by claiming that they do not injure anyone.
a. Although it is true that trading on the basis of nonpublic information seldom directly harms anyone, indirect harm occurs in the nature of the transaction itself.
b. Trading on nonpublic information is deceptive and fraudulent and, if left unchecked, would undermine the system as a whole.
3. Outsiders and SEC Rule 10b-5 (NIB) – The traditional insider trading case involves true insiders—corporate officers, directors, and majority shareholders who have access
to (and trade on) inside information. Increasingly, however, liability under Section
10(b) and Rule 10b-5 has been extended to include certain “outsiders”—those who
trade on inside information acquired indirectly. Two theories have been developed
under which outsiders may be held liable for insider trading: the tipper/tippee theory
and the misappropriation theory.
a. Tipper/Tippee Theory – Anyone who acquires inside information as a result of a corporate insider’s breach of his/her fiduciary duty can be liable. This liability
extends to tippees (those who receive “tips” from insiders) and even remote
tippees (tippees of tippees).
1) The key to liability under this theory is that the inside information must be obtained as a result of someone’s breach of a fiduciary duty to the
corporation whose shares are traded.
b. Misappropriation Theory – Under this theory, an individual who wrongfully obtains (misappropriates) inside information and trades on it for his/her personal
gain is held liable because the individual stole information rightfully belonging to
another.
1) The U.S. Supreme Court endorsed the misappropriation theory of insider trading in U.S. v. O’Hagan.
2) According to the decision, a person commits securities fraud when he/she “misappropriates confidential information for securities trading purposes, in
breach of a fiduciary duty owed to the source of information.”
3) Thus, a person who receives information from an insider and who knows that the insider source is violating a duty of confidentiality would be liable
if he/she made securities trades with this information.
4) However, a person with no fiduciary ties who receives information innocently (e.g., by overhearing a conversation) would still be free to trade.
4. Conflicting Perspectives on Section 10(b) Insider Trading: a. Proponents of allowing insider trading such as Henry Manne argue that insider
information should be covered by private contractual relationships such as those
between corporations and their personnel or between a law firm and its members.
1) They claim it accelerates the flow of positive or negative information about the stock to other shareholders and investors which is healthy for the
market.
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2) They also believe that permitting insider trading can benefit a company by providing employees an incentive to invent new products, put together
deals, or otherwise create new information that will increase the value of a
company’s stock.
b. Opponents of allowing insider trading such as Arthur Levitt, Jr. argue three main reasons for disallowing insider trading:
1) It is unfair. 2) It can injure other investors. 3) It undermines public confidence in the stock market. 4) Executives who do it are putting their own interests before those of their
shareholders, thus violating the fiduciary responsibility that is central to
business management.
C. Proprietary Data (p.501) 1. Proprietary data can be defined as internally generated data or documents that contain
technical or other types of information controlled by a firm to safeguard its competitive
edge.
a. Since such data can give a company a competitive advantage over its competitors, companies often zealously protect this data.
b. Proprietary data may be protected under copyright, patent, or trade secret laws. D. Copyrights (NIB)
1. A copyright is an intangible property right granted by federal statute to the author or originator of a literary or artistic production of a specified type.
2. A copyright protects an original expression of an idea “fixed in a durable medium” from which it can be perceived, reproduced, or communicated.
3. Protection is automatic. Registration is not required for protection. 4. For copyrights owned by individuals, the length of protection from unauthorized use is
for the life of the author plus 70 years; for copyrights owned by corporations such as
publishing houses, the copyright expires 95 years from the date of publication or 120
years from the date of creation, whichever is first.
5. Main Rationale: By allowing an individual or company to copyright an expression of an idea and be granted a limited monopoly on its use, individuals and companies are
more likely to devote scarce resources to create these unique expressions of ideas
which enhances society.
E. Patents (NIB) 1. A patent is a grant from the federal government that gives an inventor the right to
exclude others from making, using, and selling an invention for a statutory period of
years from the date of filing the application for a patent.
2. The most common type of patent called a utility patent is issued for the invention of a new and useful process, machine, manufacture, or composition of matter, or a new and
useful improvement thereof.
3. It generally permits its owner to exclude others from making, using, or selling the invention for a period of up to 20 years from the date of filing the application.
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4. Main Rationale: By allowing an individual or company to patent a new and useful process, machine, manufacture, or composition of matter, or a new and useful
improvement thereof, and be granted a limited monopoly on its use, individuals and
companies are more likely to devote scarce resources to create these unique “things”
which enhances society.
F. Trade Secrets (p.501) 1. A trade secret is protection granted by state law for any unique formula, pattern,
device, or compilation of information which is used in one’s business and which gives
the company an opportunity to obtain an advantage over competitors who do not know
or use it.
2. Generally, trade secrets include customer lists, plans, research and development, pricing information, marketing methods, and production techniques.
3. Main Advantage: Unlike copyright and patents, there is no time limit on trade secret protection—that is, the company enjoys protection from unauthorized use as long as it
can keep the formula, pattern, device, or compilation of information secret.
4. Main Disadvantage: If a competitor legally acquires the formula, pattern, device, or compilation of information, the company loses exclusive use.
5. Economic Espionage Act of 1996 (Federal Law) – The theft of trade secrets constitutes a federal crime.
6. Main Rationale: There are at least three arguments for legally protecting trade secrets: a. Trade secrets are the intellectual property of the company; b. The theft of trade secrets is unfair competition; and c. Employees who disclose trade secrets violate the confidentiality owed to their
employers.
7. Employees Who Join a Competitor – One of the biggest challenges facing an organization can be to prevent its trade secrets and proprietary data from being misused
by employees who leave the company.
a. Although Agency Law forbids agents from revealing confidential information (see Part II.B.4 above), generally businesses attempt to protect their trade secrets
by having all employees who use the process or information agree in their
contracts, or in confidentiality agreements, never to divulge it.
1) Rationale: What constitutes secret information or a violation of confidentiality can be difficult to prove. Specifically spelling out this
information in contracts or confidentiality agreements helps alleviate this
problem.
b. Companies also commonly use non-competition agreements for a variety of reasons, including protection of trade secrets.
1) Non-competition agreements prohibit an employee who leaves the organization from working for another company, usually a direct
competitor, for a number of years.
2) These agreements usually take effect after the employer-employee relationship has ended.
c. Moral Problems – When companies try to restrict the flow of information or the ability of an employee to “make a living,” this raises two competing moral issues:
1) First, the individual’s right to seek new employment using skills and
knowledge (i.e., “experience”) gained while employed.
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2) Second, the right of employers to protect legitimate business interests such as trade secret information.
3) Sample Solution – In order to be considered valid, a non-competition agreement must:
a) Be supported by consideration at the time it is signed; b) Protect a legitimate business interest of the employer; and c) Be reasonable in scope, geography, and time.
IV. Bribes and Kickbacks (p.503) A. Overview (NIB-p.503)
1. A bribe is a remuneration for the performance of an act that is inconsistent with the work contract or the nature of assigned task—it can be money, entertainment, gifts, or
preferential treatment.
a. A kickback is a form of bribery that involves a percentage payment to a person who is able to influence or control a source of income.
2. Bribes versus Extortion (NIB) a. In a bribe, the payer of the bribe offers it to the other party. b. In extortion, the receiver of the payment demands the payment from the payer. c. So, while in each case there is a questionable payments, the impetus for the
payment determines whether it is a bribe or extortion.
B. Laws Relating to Bribery (NIB-p.504) 1. General U.S. Law (NIB):
a. The crime of bribery involves offering to give something of value to a person in an attempt to influence that person, who is usually but not always, a public
official, to act in a way that serves a private interest.
1) As an element of the crime of bribery intent must be present and proved. 2) The bribe itself can be anything the recipient considers to be valuable. 3) Realize that the crime of bribery occurs when the bribe is offered—it is not
required that the bribe be accepted.
4) Accepting a bribe is a separate crime. b. Three types of bribery are considered crimes: bribery of public officials,
commercial bribery, and bribery of foreign officials.
1) Commercial bribery involves corrupt dealings between private persons and businesses.
2. Foreign Corrupt Practices Act (FCPA) of 1977 a. The FCPA prohibits U.S. businesspersons from bribing foreign officials to secure
beneficial contracts.
b. The FCPA applies to all U.S. companies and their directors, officers, shareholders, employees, and agents.
c. The FCPA provides stiff fines and prison sentences for corporate officials engaging in bribery overseas and requires corporations to establish strict
accounting and auditing controls to guard against the creation of slush funds from
which bribes can be paid.
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d. The FCPA was extended in 1998 to include bribery by foreign firms on American territory. In addition, the Federal Sentencing Guidelines recommend penalties
stiffer than those originally specified by the FCPA.
1) The Federal Sentencing Guidelines are rules that set out a uniform sentencing policy for those convicted of felonies and serious (Class A)
misdemeanors in the United States federal courts system.
e. The FCPA does not prohibit payment of substantial sums to minor officials whose duties are clerical or ministerial. These payments are often referred to as
“grease,” or facilitating payments. They are meant to accelerate the
performance of administrative services that might otherwise be carried out at a
slow pace.
f. The FCPA makes no distinction between bribery and extortion. A company is extorted by a foreign official if, for instance, the official threatens to violate the
company’s rights, perhaps by closing down a plant on some legal pretext, unless
the official is paid off.
3. Organization for Economic Cooperation and Development (OECD) Anti-Bribery Convention of 1997 – 37 countries, including all the world’s industrialized nations,
have passed domestic legislation implementing the OECD which outlaws bribing
public officials in foreign business transactions and sets up review and monitoring
mechanisms.
4. Arguments against the FCPA – Critics say the FCPA puts U.S. firms at a disadvantage and imposes U.S. standards on foreign countries.
a. A study in 1996 estimated that at least $11 billion in contracts have been lost since 1994 to non-U.S. firms willing to engage in bribery or pay extortion.
b. This argument has been weakened severely by the OECD Anti-Bribery Convention.
5. Arguments for the FCPA – Defenders say that bribery can injure individuals, competitors, and political institutions while hurting economic growth and damaging the
free market system.
a. In addition, permitting U.S. companies to engage in foreign bribery encourages something in other countries that we consider too harmful to tolerate at home.
b. So to allow bribery overseas is to apply a double moral standard.
V. Gifts, Entertainment Expenses, and Related Payments (NIB-p.507) A. Overview (NIB-p.507)
1. Gifts, entertainment expenses, and related payments are familiar in business practices and customer relations worldwide.
a. But they can raise conflict-of-interest problems and can border on bribery. b. Knowing where to draw the line is not always easy.
2. Basic Terminology (NIB): a. Gifts are expressions of personal affection; are created by personal relations to
convey a personal feeling; are able to be acknowledged by the donor as given by
the donee; and are uncoerced and uncoercive.
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b. Tips are remuneration for the work of an employee; are given according to a custom known and consented to by the employer; are given for service; are size
relevant—a very large tip is either a gift or a bribe; and present no conflict of
interest for the employee.
c. Perks or perquisites can be defined as a special right or privilege enjoyed as a result of one’s position. This would indicate that they are much like tips.
d. Entertainment expenses are generally expenses such as meals or special events used by a company to help in the personal selling of their product.
e. Bribes seek to move the bribee to serve the briber’s interest; are usually done in secret and are damaging to both if made public; make the briber and bribee
accountable to only each other, not the public; are intended to reflect or to create
an overriding obligation; and create a conflict of duties.
B. Gifts versus Bribes (NIB-p.508) 1. Determining the morality of giving and receiving gifts in a business situation is not
always easy.
2. Seven factors that a conscientious businessperson should consider: a. The value of the gift. b. Its purpose. c. The circumstances under which it is given. d. The position and sensitivity to influence of the person receiving the gift. e. Accepted business practices in the industry. f. Company policy. g. What the law says.
C. Entertainment Expenses versus Bribes (NIB-p.509) 1. Of all the categories, entertainment expenses are the hardest to distinguish from bribes. 2. The same seven factors used to look at gifts are also relevant to the moral evaluation of
business entertainment expenses:
a. The value of the entertainment expense. 1) Example: Paying for a $50 meal with a client is much more different than
providing Super Bowl tickets and free lodging to a client and his/her spouse
for the weekend.
b. Its purpose. 1) Both entertainment expenses and bribes are designed to try and persuade a
person to do something. However, entertainment expenses are uncoerced
and uncoercive (i.e., there are no “strings attached”). Contrast that with
bribes where the bribee expects the briber’s business.
c. The circumstances under which it is given. 1) Entertainment expenses are not secretive (the agent usually has to provide
receipts to the employer to get reimbursed for the expense and so the
employer can legitimately “write off” the expense) whereas bribes are
secretive.
d. The position and sensitivity to influence of the person receiving the gift. e. Accepted business practices in the industry. f. Company policy. g. What the law says.
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D. Conclusion (NIB-p.509) 1. In each case the ultimate moral judgment hinges largely on whether an objective party
could reasonably suspect that the gift, entertainment expense, tip, or perk might lead
the recipient to sacrifice the interest of the firm for his/her personal gain.
VI. Conflicting Obligations (p.509) A. Obligations to Third Parties (NIB-p.509)
1. Shaw and Barry write that in addition to duties to their employers, employees have specific role-based professional or business responsibilities as well as responsibilities to
friends, family, and co-workers.
a. In addition, they have the same obligations to other people (and society in general) that everyone has: in particular, the obligation not to injure others and to
be truthful and fair.
2. Balancing obligations to employer or organization, friends and coworkers, and outside parties can create conflicts and divided loyalties.
a. To resolve such moral conflicts, one must identify the relevant obligations, ideals, and effects—then decide which area to prioritize.
3. To reduce rationalization in decision making: a. Be willing to publicly defend our moral choice. b. Discuss with others to avoid bias.
VII. Whistle-Blowing (p.512) A. Whistle-Blowing Defined (NIB-p.512)
1. A whistle-blower is a person who informs on another or makes disclosure of corruption or wrongdoing.
2. Whistle-blowing would simply be the act of blowing the whistle by a person. 3. Types of Whistle-Blowing (NIB):
a. Internal versus External: 1) Internal: Made to someone inside the organization. 2) External: Made to someone outside the organization.
b. Governmental versus Nongovernmental: 1) Governmental:
a) Government employees who divulge to a governmental regulatory or investigative bureau unethical practices in their division;
b) Employees within a firm that has government contracts who report fraud or other wrongdoing against the government; or
c) Leaks by government employees to the media. 2) Nongovernmental: Private sector employees even if they end up filing a
complaint with a government agency such as the EEOC.
c. Personal versus Impersonal: 1) Personal: The wrongdoing has been committed against the person doing
the whistle-blowing.
2) Impersonal: The wrongdoing has not been committed against the person doing the whistle-blowing.
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B. What Motivates Whistle-Blowers? (p.513) 1. External whistle-blowers often believe that the public interest morally outweighs their
loyalty to colleagues and their duties to the organization.
2. Other whistle-blowers are motivated by a sense of professional responsibility. 3. Internal, personal whistle-blowers usually just want the wrongdoing against them to
stop.
C. When Is Whistle-Blowing Morally Justified? (p.514) 1. Under the ethical duty of loyalty, organizations have a moral obligation not to harm
which falls primarily on those who manage the organization.
2. Yet other members of an organization are not morally allowed to take part in any immoral activity. Hence, they may not morally take part in any activity that they know
will cause harm.
a. However, do they further have a moral obligation to prevent harm, if they are able to do so?
3. As a general rule, employees have a moral obligation to prevent harm to others if they are able to do so and can do so with little cost to themselves.
a. However, as the cost increases, the obligation decreases. The ethical duty of loyalty is not absolute.
4. That leaves us with the following two questions: a. Question #1: What is the obligation of an employee to prevent his or her
organization from harming others (i.e., when is an employee morally required to
become a whistle-blower)?
b. Question #2: If an employee is morally required to become a whistle-blower, does the duty of loyalty dictate that the employee proceed internally or
externally?
5. Governmental Whistle-Blowing – The obligations one has to one’s government are considerably different from obligations that one has to a nongovernmental employer.
a. The reason is that government employees are related to their government both as citizens and employees, and the harm done by governmental employees may have
affects not only on the particular division in which they are employed but also on
the government and country as a whole.
b. Therefore, governmental employees as part of their job duties have a moral obligation to both report harm and prevent harm.
1) The duty of loyalty dictates that the governmental employee first report the problem internally if there is a reasonable expectation that the
governmental entity will act on the problem.
2) If there is no such reasonable expectation or the governmental entity fails to act on the problem, then the governmental employee’s moral obligation is to
report this problem externally.
6. Nongovernmental, Personal Whistle-Blowing – By definition, personal whistle- blowing means that the employee reasonably believes he or she has been or will be
harmed by the organization.
a. Since the duty of loyalty is reciprocal, the aggrieved employee no longer owes a duty of loyalty to the organization because it has or will breach its duty of loyalty
to the employee.
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b. Therefore, the employee is no longer bound to seek internal redress of his or her complaint before going external unless a law provides otherwise.
c. Blowing the whistle is morally permissible here but not morally obligatory. 7. Nongovernmental, Impersonal Whistle-Blowing:
a. Internal Whistle-Blowing – Rather than being an act of corporate disloyalty, internal whistle-blowing is more often than not an act of corporate loyalty.
1) However, it usually does involve disloyalty or disobedience to one’s immediate superior or disloyalty to one’s fellow workers.
2) If done from moral motives, the intent of such whistle-blowing is to stop dishonesty or some immoral practice or act in order to protect the interests
and reputation of the company or to increase a company’s profits, then it is
morally permissible
3) Whether reporting activity that is illegal or causes harm to individuals or serious harm to the company is morally required depends on the severity of
the harm, one’s position within the firm vis-à-vis the perpetrator, the firm’s
general operating procedures, and other pertinent factors.
b. External Whistle-Blowing: 1) There are five conditions that, if satisfied, change the moral status of
internal and external whistle-blowing.
a) If the first three are satisfied, the act of external whistle-blowing will be morally justifiable and permissible.
b) If the additional two are satisfied, the act of external whistle-blowing will be morally obligatory.
2) Condition #1: The firm, through its product or policy, will do serious and considerable harm to employees or the public, whether in the person of the
user of its product, an innocent bystander, or the general public.
a) Note: If this condition is not met, external whistle-blowing is not morally justifiable and permissible because it violates the ethical duty
of loyalty. However, internal whistle-blowing is morally justifiable
and permissible.
3) Condition #2: Once employees identify a serious threat to the user of a product or to the general public, they should report it to their immediate
superior and make their moral concern known. Unless they do so, the act of
external whistle-blowing is not clearly justifiable.
4) Condition #3: If one’s immediate superior does nothing effective about the concern or complaint, the employee should exhaust the internal procedures
and possibilities within the firm. This usually will involve taking the matter
up to the managerial latter and, if necessary—and possible—to the board of
directors.
a) Note: Conditions #2 and #3 make internal whistle-blowing morally obligatory.
b) Also Note: If the organization does nothing effective about the
concern or complaint after internal procedures are exhausted, external
whistle-blowing becomes morally justifiable and permissible. But
this raises the question “when does it become morally obligatory to
externally blow the whistle?”
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5) Condition #4: The whistle-blower must have, or have accessible, documented evidence that would convince a reasonable, impartial observer
that one’s view of the situation is correct, and that the company’s product or
practice poses a serious and likely danger to the public or to the user of the
product.
6) Condition #5: The employee must have good reasons to believe that by going public the necessary changes will be brought about. The chance of
being successful must be worth the risk one takes and the danger to which
one is exposed.
a) Note: Conditions #4 and #5 makes external whistle-blowing morally obligatory.
VIII. Self-Interest and Moral Obligation (p.516) A. Overview (NIB-p.516)
1. There is no clear, unequivocal answer to the question about what weight should be given to considerations of self-interest in resolving cases of conflicting obligations.
2. Moral philosophers and society as a whole distinguish between prudential reasons and moral reasons.
a. Prudential reasons refer to considerations of self-interest, while moral reasons refer to considerations of the interests of others and the demands of morality.
b. Some theorists believe that prudential concerns sometimes outweigh moral ones. c. Other theorists say that nothing can outweigh morality but that morality itself
does not require us to make large sacrifices to right small wrongs.
3. Two further points about the relationship between prudential and moral considerations are pertinent here:
a. First, an evaluation of prudential reasons obviously is colored by one’s temperament and perceptions of self-interest.
1) People often exaggerate the importance of self-interested considerations, and most people have been socialized to heed authority.
2) It follows, then, that each individual has an obligation to perform a kind of character or personality audit to combat the all-too-human tendency to stack
the deck in favor of prudential reasons whenever they are pitted against
moral ones.
b. Second, all people have an interest in encouraging people to act in non-self- interested ways.
1) But this often brings with it severe penalties. 2) Business and society should protect those, such as whistle-blowers, who do
the right thing, thus weakening the potential conflict between morality and
self-interest.
IX. How Selected Federal Laws Protect Those Who Do the Right Thing (NIB) A. False Claims Act of 1863 (a.k.a.: The Lincoln Law)
1. The law includes a “qui tam” provision that allows people who are not affiliated with the government to file actions on behalf of the government.
a. In common law, a writ of qui tam is a writ whereby a private individual who
assists a prosecution can receive all or part of any penalty imposed.
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2. Persons filing under the Act stand to receive a portion (usually about 15–25 percent) of any recovered damages.
3. It imposes liability on persons and companies (typically federal contractors) who defraud governmental programs.
4. It protects an employee filing a claim under the Act from termination. a. It was amended by the Fraud Enforcement and Recovery Act of 2009 to also
protect contractors and agents.
B. The Whistleblower Protection Act of 1989 1. It protects federal whistle-blowers, who work for the government and report agency
misconduct.
a. A federal agency violates the Whistleblower Protection Act if agency authorities make (or threatens to take) a personnel retaliatory action with respect to any
employee or applicant because of any disclosure of information by the employee
or applicant.
b. Whistle-blowers may file complaints that he or she reasonably believes evidences a violation of a law, rule or regulation; gross mismanagement; gross waste of
funds; an abuse of authority; or a substantial and specific danger to public health
or safety.
2. The Act does not always protect federal workers. a. The U.S. Supreme Court, in Garcetti v. Ceballos (2006), stated that First
Amendment protection for free speech does not apply to situations that fall within
the scope of the job description associated with the employment of each
individual government worker.
b. The Supreme Court decision means that government management may discipline government employees that disclose crime and incompetence under certain
circumstances.
c. The Supreme Court ruling excludes whistle-blower actions covered in the job description for federal workers. Job related issues must go through the hierarchy
of the organization.
d. In other words, external whistle-blowing is not protected; instead, the employee must go through internal channels.
C. Sarbanes-Oxley Act of 2002 1. Overview of the Act
a. The legislation creates a web of complementary provisions designed to protect and encourage whistle-blowers and prevent retaliation against them.
b. The statute requires public companies to adopt a code of business ethics and to establish an internal apparatus to receive, review and solicit employee reports
concerning fraud and/or ethical violations.
c. The teeth of the statute can be found in an enforcement scheme that includes administrative, civil and criminal enforcement mechanisms and provides for both
corporate and individual liability.
2. Covered Persons a. The statute primarily pertains to public companies and their officers, employees,
contractors, subcontractors and agents.
b. Individuals, including officers and employees of covered companies, are subject
to liability in their personal capacities.
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c. Depending on how the terms eventually are defined, certain sections of the Act also appear to apply to companies and their agents that do business with publicly
traded companies, such as contractors and subcontractors, even if those
companies are not publicly traded.
d. The Act places quasi-whistle-blower disclosure burdens on in-house attorneys at public companies, and perhaps outside lawyers as well.
e. Both public and privately held companies have obligations under Section 1107 of the Act.
3. Protected Activity a. Section 806 creates a new civil cause of action in favor of employees of public
companies who are retaliated against for their covered disclosures concerning
fraud against shareholders, including accountancy violations, violations of SEC
rules and related matters.
b. Section 1107 protects employees of both public and private companies who make truthful reports to a “law enforcement officer,” where such disclosures relate to
the possible commission of a federal offense.
c. A protected employee under either §806 or §1107 may not be discharged, demoted, suspended, harassed or discriminated against in any other way because
of a protected disclosure. This statute prohibits not only the potential retaliatory
actions by the publicly traded corporate employer, but also such actions by any
officer, employee, contractor, subcontractor or agent of such company.
d. Section 1107 must be distinguished from Section 806 of the Act, which is both more limited (applies to “covered” activities of employees at public companies)
and more expansive.
1) Section 806 is triggered not just by reports to law enforcement, but also by reports of wrongdoing to members or committees of Congress and internal
reports to company personnel with supervisory or investigative authority.
2) Section 1107 also appears to apply to reports of wrongdoing involving any federal law, not just fraud against shareholders.
3) The overriding distinction between Sections 806 and 1107 is the potential for prison time.
a) A retaliatory action becomes a criminal matter under §1107 if the employee provides information to a law enforcement officer
concerning the commission of any federal offense.
b) Employers and their agents may be fined, imprisoned for not more than 10 years, or both if they intentionally retaliate against employees
who provide information or otherwise assist law enforcement in a
wide variety of investigations that relate to a wide variety of federal
“offenses.”
e. The Act does not protect employee complaints to the news media. Such reports, by themselves, do not constitute whistle-blowing under the Act.
4. Section 307 and its implementing guidelines establish new rules of conduct for any attorney who appears or practices before the SEC.
a. Covered attorneys must report “evidence of a material violation of securities law”
or “breach(es) of fiduciary dut(ies)” or “similar violation(s)” to a corporation’s
“chief legal counsel” or “chief executive officer.”
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b. If these reports do not properly resolve an attorney’s concerns, an attorney is required to further report his or her concerns to a company’s audit committee or a
similar committee.
c. Under the whistle-blower provisions, all such reports would likely be considered protected activity.
5. The Act contains a provision making clear that the statute does not preempt state and federal law. Therefore, employees can file actions making multiple claims, including
public policy and state statutory claims, in conjunction with a claim under Sarbanes-
Oxley.
X. Precluding the Need for Whistle-Blowing (NIB) A. Introduction
1. The need for moral heroes shows a defective society and defective organizations. 2. It is more important to change the legal and organizational structures that make
whistle-blowing necessary than to convince people to be moral heroes.
a. First, since it is easier to change the law than to change the practice of all corporations, it should be illegal for any employer to fire an employee, or to take
any punitive measures, against an employee who satisfies the aforementioned
conditions and blows the whistle on an organization.
b. Second, the law can mandate that the individuals responsible for the decision to proceed with a faulty product or to engage in a harmful practice be penalized.
c. A third possibility is that every company of a certain size be required by law to have an inspector general, and internal operational auditor, an ethics officer, or
some comparable person whose job it is to uncover immoral and illegal practices.
d. This is exactly what is happening now. Plus, remember how I opened this presentation by asking you to identify “positive” words regarding whistle-
blowers.
B. Organizational Steps to Preclude the Necessity of Whistle-Blowing 1. Create an Open-Door Policy for Reports of Corporate Fraud – Policies will need to be
reviewed, revised or created to reflect the focus of the Act on accounting and auditing
matters. A company must ensure that it has a confidential, anonymous complaint
procedure that is capable of receiving and acting on complaints. Many companies have
ethics hotlines in place, which may be modified to address the new mandates under the
Act.
2. Establish a Complaint and Investigation Protocol – The company must investigate allegations of corporate fraud and other ethical breaches. A protocol, designed to
assure competent and independent investigation and review of relevant facts, and for
determining who should investigate, is essential. Common sense must be used to
avoid conflicts of interest. Do not ask someone to investigate his or her boss or events
in which they themselves have a stake. In order to assure compliance, the process
must not only be fair, but it also must have the appearance of fairness.
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3. Create an Ethics and Conflict-of-Interest Policy – Although the Act focuses on senior financial management, these policies are advisable for all employees. Employers
should consider adopting a broader ethics policy than that which is required under the
Act. Customization of the policy to take into account the particular business and
culture is advisable. An effective ethics and compliance program also can assist in
reducing fraud and eliminating or reducing criminal sentences under the Federal
Organizational Sentencing Guidelines.
4. Publicize Policy Prohibiting Retaliation – This message must be communicated to employees in writing and through training. As with other forms of protected conduct
such as complaints of discrimination or harassment, employees who complain of
corporate fraud must be protected from retaliation.
5. Create or Amend Your Document Retention Policy – Companies must implement a document retention policy or ensure that their existing policy addresses the
requirements of the Act. Documents should not be destroyed in contemplation or in the
midst of a federal investigation, official proceeding or Chapter 11 bankruptcy
proceeding. Make certain that all appropriate documents and document keepers are
covered.
6. Train Employees About Complaint Procedures and Company's Anti-Retaliation Commitment – Policies are meaningless unless employees know about them. Make
certain that employees understand that the stakes are high, with personal criminal
penalties looming. Training will be particularly important for those employees who
have the authority to terminate, demote or reassign employees. These employees must
be trained on the type of conduct that would violate the Act and the type of
documentation that might help a company from being wrongly accused or convicted.
In proving that an employee's termination was unrelated to his or her complaint about
company practices, documentation of the real reason for discharge is key.
Contemporaneous documentation is most advantageous. Where documented work-
related problems predate any protected activity by the employee, the employer may be
able to prevail on a causation defense.
7. Monitor Compliance – Consider designation of a well-trained compliance officer responsible for implementing the program and overseeing compliance matters.
Consider internal compliance audits performed on a regular basis beyond those
required by law. Consider annual written certifications by employees that they have
reviewed, understood and will comply with applicable compliance policies. Review
hiring policies to assure that the company conducts reasonable due diligence to avoid
hiring employees prone to fraud.
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8. Check Insurance Coverage – In addition to the above, employers should review insurance policies to determine whether officers and agents are covered under existing
coverage for allegations of whistle-blower violations or interference with employment
violations. Consider whether the company needs special employment practice liability
insurance. This coverage may provide some degree of protection defending against
whistle-blower and retaliation claims when the company already has established
policies and procedures. Be cautious, however, before accepting a policy that
interferes with the right to select counsel and/or the right to decide whether to settle
non-meritorious claims. There may be consequences to settlement or how a claim is
handled, beyond the normal "cost-benefit" analysis performed by an insurance
company.
XI. Study Corner (p.520)